JPMorgan
Chase Lawsuit: New York Attorney General's Suit Is First For Task Force
01
October 2012
The New York Attorney General sued JPMorgan Chase on
Monday, alleging that Bear Stearns, the troubled investment bank it bought in
2008, "kept investors in the dark" about the quality of the
mortgage-backed bonds it was selling as the market started to sour.
The lawsuit is the first legal action against a Wall
Street bank to come from a joint federal and state task force announced by
President Barack Obama during his State of the Union address in January. It
alleges civil fraud violations, which means that potential
penalties will be measured in dollars, not jail terms. Nevertheless, the
JPMorgan Chase lawsuit qualifies as one of the more significant actions taken
by a law enforcement agency to date against a Wall Street bank.
JPMorgan
Chase acquired Bear Stearns in March 2008 in a deal brokered and supported
by the federal government.
According to the lawsuit, filed in Manhattan federal
district court, Bear promised a "robust and intensive" review process
for selecting loans for sale to investors. But Bear didn't do that, according
to the complaint. In order to continue the securitization machine -- the
packaging and sale of home loans to investors -- the bank increasingly placed
risky loans into the bonds, even as an outside contractor it had hired to evaluate
those loans was warning the bank about their poor quality.
That vendor, Clayton Homes, sampled the quality of the
loans Bear wanted to package and sell. At one point the vendor identified 17
percent of the loans in a bond as defective. Nevertheless, Bear put half of
those loans in a mortgage-backed security.
"Defendants systematically failed to fully evaluate
the loans, largely ignored the defects that their limited review did uncover,
and kept investors in the dark about both the inadequacy of their review
procedures and the defects in the underlying loans," the lawsuit says.
"Furthermore, even when Defendants were made aware of these problems, they
failed to reform their practices or to disclose material information to investors."
Largely as a result of these delinquencies and defaults,
the lawsuit claims, the mortgage bonds have suffered tremendous losses. The
current cumulative realized losses on over 100 subprime and Alt-A
securitizations in the years 2006 and 2007 total approximately $22.5 billion,
or approximately 26 percent of the original principal balance of approximately
$87 billion, the lawsuit says.
The lawsuit is the first to describe systemwide misconduct
at one of the banks. Other cases, such as the Securities
and Exchange Commission's allegations against Goldman Sachs that led to an
earlier $550 million settlement, focused on alleged fraud in the sale of one
product.
The task force -- officially, the
Residential Mortgage-Backed Securities Working Group -- was formed at the
urging of New York Attorney General Eric Schneiderman, who was frustrated that
more had not been done to hold accountable the Wall Street banks that packaged
and sold the mortgage-backed bonds that imploded, nearly bringing down the U.S.
economy.
Schneiderman co-leads the task force, along with Robert
Khuzami, the enforcement director of the SEC; Lanny Breuer, the head of the
criminal division at the Justice Department; Stuart Delery, the head of
Justice's civil division; and John Walsh, the U.S. Attorney for the District of
Colorado.
UPDATE 6:49 p.m. -- In a statement,.... To Read this
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