By Bernard Vaughan
NEW YORK (Reuters) - The Justice Department has promptly capitalized on a court victory to bolster a case before another federal judge, citing a ruling on Wednesday that endorsed the agency's use of a little known financial fraud law to prosecute bank actions during the financial crisis.
In a letter made public on Thursday, the agency told District Judge Jesse Furman on Wednesday that the ruling is one reason why its mortgage-fraud case against Wells Fargo & Co should not be dismissed.
U.S. District Judge Lewis Kaplan made that ruling in a lawsuit against Bank of New York Mellon , which the Justice Department accuses of overcharging clients for trading currencies.
The government's cases against Wells Fargo and BNY Mellon and a third lawsuit against Bank of America Corp rely in part on the Financial Institutional Reform, Recovery and Enforcement Act of 1989 (FIRREA).
The law addressed fraud during the savings and loan crisis of the 1980s and 1990s, in which hundreds of U.S. thrifts failed and prompted a multibillion dollar government bailout.
In recent years, U.S. authorities have turned to the law to pursue cases arising from the latest financial crisis because it carries a low burden of proof while providing broad investigative powers and a long statute of limitations.
In an 81-page ruling, Kaplan in Manhattan on Wednesday ruled that the Justice Department can proceed with the lawsuit against BNY Mellon. The judge said it was "entirely consistent with the text and purposes of the statute to hold the institution liable for its conduct."
Filed in October, the lawsuit against Wells Fargo accused the bank of certifying thousands of mortgage loans for Federal Housing Administration insurance despite knowing that it hadn't adequately assessed borrowers' ability to make payments.
"In the course of his ruling, Judge Kaplan rejected Bank of New York Mellon's argument-the same argument asserted by Wells Fargo Bank in this litigation," lawyers with the office of Manhattan U.S. Attorney Preet Bharara wrote in the letter.
The letter followed a hearing last week in which lawyers for Wells Fargo argued the government was misusing the law, which permits it to pursue civil penalties against anyone who commits a fraud that is "affecting a federally insured financial institution."
The government is essentially alleging that Wells Fargo engaged in a fraud that put itself at risk, an attorney for Wells Fargo argued.
As Bharara noted, Kaplan rejected a similar argument from BNY Mellon in an 81-page opinion on Wednesday.
U.S. District Judge Jed Rakoff is set to hear arguments on April 29 on the government's use of the law in a case accusing Bank of America Corp of unloading more than $1 billion in losses from toxic mortgage loans onto Fannie Mae and Freddie Mac.
A spokesman for Wells Fargo did not immediately provide a comment.
The case is United States of America v. Wells Fargo Bank, N.A., U.S. District Court, Southern District of New York, No. 12-07527.
(Reporting by Bernard Vaughan; additional reporting by Nate Raymond and Aruna Viswanatha)