BofA questions judge's impartiality as it appeals big fraud verdict

By Jonathan Stempel and Nate Raymond

NEW YORK (Reuters) - Bank of America Corp (BAC.N) on Wednesday asked a federal appeals court to toss a $1.27 billion (0.84 billion pound) penalty imposed in a mortgage fraud case, and in a rare move asked that the prominent Manhattan judge who oversaw its trial be replaced if the case were to continue.

In a filing with the 2nd U.S. Circuit Court of Appeals, the second-largest U.S. bank faulted U.S. District Judge Jed Rakoff for several public comments he made about the mortgage crisis, including the need to pursue bank executives more aggressively, while the case was pending.

The Charlotte, North Carolina-based bank said Rakoff did this as he was "pressing the government to seek greater penalties, under theories the government had decided not to pursue, and then awarding an amount far greater than the government had initially requested."

"Should the court remand this case to the district court for any reason, the bank defendants respectfully request that the case be reassigned," the bank said. "Reassignment is appropriate where the facts might reasonably cause an objective observer to question the judge's impartiality."

A clerk for Rakoff said he was unavailable for comment. Bank of America spokesman Lawrence Grayson declined to comment.

Rakoff imposed the civil penalty after a federal jury in October 2013 found the bank liable for the sale by the former Countrywide Financial Corp of shoddy loans to Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB).

The government sued over a programme nicknamed "Hustle," which it said rewarded employees for volume over quality, and resulted in Fannie Mae and Freddie Mac being lied to about the quality of loans they bought. Bank of America bought Countrywide in July 2008.

Calling Hustle a "brazen fraud," Rakoff said the $1.27 billion penalty was appropriate under a federal law adopted after the 1980s savings and loan scandal that allows penalties for fraud "affecting" federally insured financial institutions.

Bank of America said the penalty should have been capped at $1.1 million, and that Rakoff should not have allowed liability on the theory that the bank's fraud was "affecting" itself.

Former Countrywide executive Rebecca Mairone, who was also found liable and ordered to pay $1 million, is also appealing.

The case was not Rakoff's first encounter with Bank of America. In 2009, he rejected its $33 million settlement with the U.S. Securities and Exchange Commission over the purchase of Merrill Lynch & Co. Rakoff later approved a $150 million accord.

(Reporting by Jonathan Stempel in New York)