The indictment would have marked the justice department’s second attempt to prosecute James, an elected Democrat, after a previous case was dismissed in November when US district judge Cameron McGowan Currie found that the prosecutor who secured the indictment, Lindsey Halligan, was unlawfully appointed.
The grand jury’s rejection of the case is the latest legal stumble by the justice department in its efforts to pursue figures who have criticised Trump or led investigations into him.
“Prosecutors plan to try again to seek a new indictment,” the two sources said.
A justice department spokesman declined to comment.
James’ attorney, Abbe Lowell, said in a statement that any effort to continue the case would be “a shocking assault on the rule of law and a devastating blow to the integrity of our justice system”.
Prosecutors rarely struggle to obtain indictments from grand juries given that the government alone presents evidence and must only show probable cause that a crime was committed, a lower legal bar than to secure a conviction at trial.
Grand juries have rejected several proposed indictments during Trump’s second term, but James is the most high-profile rejection yet.
“As I have said from the start, the charges against me are baseless,” James said in a statement.
“It is time for this unchecked weaponisation of our justice system to stop,” she said.
James faced mortgage charges
James is one of three high-profile Trump critics hit with federal criminal charges in recent months, along with former FBI Director James Comey and John Bolton, a former Trump national security adviser.
Currie also dismissed the case against Comey, which was led by Halligan, ruling that her appointment as interim US attorney for the Eastern District of Virginia was impermissible.
Bolton has pleaded not guilty to federal charges brought in Maryland.
James had pleaded not guilty to charges of bank fraud and lying to a financial institution in the initial indictment, which accused her of misleading statements on mortgage documents to secure more favorable loan terms for a home she owns in Norfolk, Virginia.
Trump has long assailed James over a civil fraud case her office brought against him and his family business, which resulted in a more than US$450 million penalty after a judge found in 2024 that Trump fraudulently overstated his net worth to dupe lenders.
Trump, who campaigned in part on a vow of retribution, has for years railed against James and called for her prosecution, claiming the case was brought to damage him politically.
A New York state appeals court in August threw out the penalty, which had grown to more than half a billion dollars with interest, but upheld the trial judge’s finding that Trump was liable for fraud.
Both Trump and James’ office are appealing to the state’s highest court.