JP Morgan Sued over Bear Stearns RMBS Activity

The Justice Department (DOJ) taskrnforce formed to pursue past offenses in the creation, sale, and servicing ofrnresidential mortgage-backed securities (RMBS) filed its first suit yesterday,rncharging that Bear Stearns and its mortgage subsidiary EMC Mortgage defraudedrninvestors who purchased the company’s RMBS between 2005 and 2007.</p

The suit, of course, was not broughtrnagainst Bear Stearns itself, but against Bear Stearns as a subsidiary of JPrnMorgan Chase which bought the failing firm in 2008 reportedly at the behest ofrnthe Treasury Department which did not wish to see it file bankruptcy.</p

The suit was brought in the New YorkrnState Supreme Court by Eric T., Schneiderman, New York’s attorney general whornis also co-chairman of the RMBS Working Group, under New York’s Martin Actrnwhich allows the attorney general discretion to bring fraud cases withoutrndemonstrating intent to defraud.  The latitudernafforded under laws in several states but not available to the federalrngovernment was one reason the Working Group was formed. </p

The suit charges that Bear Stearnsrnexhibited a broad pattern of misconduct in the packing and sale of mortgage securitiesrnduring the housing boom including materially misrepresenting the quality ofrnloans in the securities and assuring investors it was conducting stringentrnreviews of the loans it was bundling. rnThe suit also contends that when the company identified problems inrnloans it had purchased and demanded the originator repurchase, it then kept thernmoney rather than passing it on to the ultimate investors. </p

The suit does not identify arnspecific deal or investors or individuals that were harmed but rather points tornwhat it terms institution-wide improprieties that affected a number ofrntransactions during the subject period.  Thernaction asks that the company be made to pay an undisclosed amount of damagesrn’caused, directly or indirectly, by the fraudulent and deceptive acts.'”</p

According to Bloomberg, “The current cumulative realized losses on morernthan 100 subprime and Alt-A securitizations that the defendants sponsored andrnunderwrote in 2006 and 2007 total about $22.5 billion, or about 26 percent ofrnthe original balance of about $87 billion.”</p

The RMBS Working Group was createdrnearlier this year.  It was intended tornconsolidate the efforts of Schneiderman’s office with fraud investigations byrnthe Departments of Justice and Housing and Urban Development, the Securitiesrnand Exchange Commission, the inspector general of the Federal Housing FinancernAgency, and the Federal Bureau of Investigation.</p

Joseph Evangelisti, a spokesman forrnJP Morgan said, “We’re disappointed that the New York A.G. decided to pursuernits civil action without ever offering us an opportunity to rebut the claimsrnand without developing a full record – instead relying on recycled claims alreadyrnmade by private plaintiffs,”. He added that the allegations predate JPMorgan’srnacquisition and that the bank intends to defend against the charges. </p

A statement from the Working Grouprnsaid that its actions show “that it is not too late for justice.”

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