New York Attorney General Eric Schneiderman filed a civil fraud lawsuit against JPMorgan Chase & Co. last month over mortgage-backed securities packaged and sold by Bear Stearns. It was the first action to come out of a working group created by President Barack Obama earlier this year to go after wrongdoing that led to the financial crisis. JPMorgan, which bought Bear Stearns for $10 a share in March 2008, has said that it would contest the allegations in the suit.
The suit accuses Bear Stearns of failing to ensure the quality of loans underlying residential mortgage-backed securities it packaged and sold in 2006 and 2007. Investors lost more than $22.5 billion on more than 100 of those securities, or one-quarter of their original value. It’s alleged in the lawsuit that there were “serious long-standing concerns” about the quality of reviews done by Bear Stearns, and that defects uncovered among the loans sold to investors were largely ignored. The due diligence process was compromised, according to the suit, “in order to increase their volume of securities.”
It’s also alleged in the suit that a “systematic abandonment of underwriting guidelines” existed. JPMorgan noted in its statement that the allegations concern actions by Bear Stearns before the investment bank was acquired by JPMorgan. The statement said:
The NYAG civil action relates to Bear Stearns, which we acquired over the course of a weekend at the behest of the U.S. Government. This complaint is entirely about historic conduct by that entity.
New York State has a very strong securities fraud law, the “Martin Act.” The Attorney General’s lawsuit, filed in New York State Supreme Court in Manhattan, was based on this law. The Martin Act doesn’t require proof of intent to deceive. It’s believed similar cases will be filed against other banks under this law. This is not the first time Bear Stearns has emerged as a central figure in the financial crisis. In June 2008, two former Bear Stearns hedge fund managers were charged by federal prosecutors with lying to investors about the financial health of their funds, which had invested heavily in mortgage securities backed by subprime loans.
The managers were acquitted in a case that still stands as one of the few criminal prosecutions against Wall Street bankers to emerge from the financial crisis. This lawsuit comes in a pretty rough year for JPMorgan and Chief Executive Jamie Dimon. Federal authorities are currently investigating a nearly $6 billion trading loss in JPMorgan’s chief investment office. U.S. power regulators asked the bank recently to demonstrate that it did not violate federal regulations by submitting misleading information and omitting facts in dealings with the regulator and California’s electricity grid operator. As we have mentioned in previous issues, the Residential Mortgage-Backed Securities Working Group was formed to probe the pooling and sale of risky mortgages in the run-up to the 2008 financial crisis.
Source: Chicago Tribune
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