Allstate Corp., the largest publicly traded U.S. home and auto insurer, has accused Bank of America (BofA) and its lending unit, Countrywide Financial, of misrepresenting the risk associated with mortgage-backed securities it bought from them beginning 2005, and is suing them for more than $700 million.

Allstate has filed a lawsuit in a federal court in Manhattan on Dec. 27, alleging that it suffered significant losses after Countrywide misled it into believing the mortgage-backed securities, purchased from March 2005 to June 2007, were safe and the quality of home loans backing them was high.

Allstate said that starting in 2003, Countrywide decided to boost its market share and by approving toxic mortgage products that a competitor was willing to offer, it ignored its own underwriting standards.

By mixing and matching the worst features of mortgage products from different competitors, Countrywide's composite product offering became very aggressive within the industry, Allstate said in the 150-page complaint filed on Monday.

Countrywide, Allstate said, then offloaded the risk onto Allstate and other institutional investors that purchased securities backed by pools of its mortgages.

The defendants knew the loans offloaded onto Allstate were a toxic mix of loans given to borrowers that could not afford the properties, and thus were highly likely to default, the complaint said.

Countrywide misled investors about its underwriting guidelines, the rate at which mortgaged properties were owner-occupied, the value of the mortgaged homes and the widespread use of exceptions to the underwriting process to circumvent guidelines, Allstate said in the complaint.

The lawsuit alleges that securities were sold pursuant to registration statements and prospectuses that contained untrue statements and omissions of material facts violating the laws and common-law fraud and negligent misrepresentation.

The suit claims that the Countrywide defendants knew their representations were fraudulent.

The lawsuit also names former Countrywide officials as defendants, including longtime CEO Angelo Mozilo, David Sambol, Eric Sieracki, Ranjit Kripalani, Stanford Kurland, David A. Spector, N. Joshua Adler and Jennifer Sandefur, among others.

Incidentally, Mozilo agreed in October to a $67.5 million settlement of a U.S. Securities and Exchange Commission civil fraud lawsuit. The market watchdog had accused Mozilo of misleading investors about Countrywide's health and risk-taking, and generating roughly $140 million of improper gains from insider stock sales.

BofA, which acquired Countrywide Financial Corp. for $4.2 billion in July 2008, had agreed to cover two-thirds of Mozilo's penalty. Mozilo did not admit wrongdoing in agreeing to the SEC accord.

Reuters quoted David Siegel, a partner at Irell & Manella LLP who represents Mozilo, as saying in an email that Allstate has retread allegations with no merit and certainly no basis to name Mozilo other than to try to capture publicity.

We are still reviewing the complaint, but this unfortunately appears to be a situation where a sophisticated investor is looking for someone to blame for a downturn in the economy and losses on an investment it made, Bloomberg quoted Bill Halldin, a spokesman for BofA as saying in a statement.

In 2008, BofA reached an $8.4 billion settlement with 12 states over Countrywide's lending practices. The company also agreed in August to pay $600 million to end a class-action case from former Countrywide shareholders.

In its most recent quarterly report filed with the SEC, BofA said it, Countrywide and its Merrill Lynch unit have been named as defendants in suits related to the sales of more than $375 billion in mortgage-backed securities.

Allstate has alleged fraud, negligent misrepresentation and violation of U.S. securities laws and is seeking unspecified damages. It hopes for an award of rescission and recovery of the consideration paid for the securities with interest and monetary losses including loss of market value from the damages sustained as a result of the defendants' wrongdoing.

The case is Allstate Insurance Co et al v. Countrywide Financial Corp et al, U.S. District Court, Southern District of New York, No. 10-09591.