New York Attorney General Eric Schneiderman, in conjunction with the newly-formed Residential Mortgage-Backed Securities Working Group—created by President Obama to hold Wall Street agencies accountable for misconduct related to the nation’s financial crisis—has filed a civil lawsuit against JPMorgan Chase & Co. today. The suit alleges that Bear Stearns, which was acquired by JPMorgan as the former was on the verge of bankruptcy in 2008, committed billions of dollars in fraud in its residential mortgage-backed securities dealings.
“This lawsuit will bring accountability for the misconduct that led to the crash of the housing market and the collapse of the American economy,” said Schneiderman. “Our lawsuit demonstrates that there is one set of rules for all—no matter how big or powerful the institution may be—and that those rules will be enforced vigorously. We believe that this is a workable template for future actions against issuers of residential mortgage-backed securities that defrauded investors and cost millions of Americans their homes. We need real accountability for the illegal and deceptive conduct in the creation of the housing bubble in order to bring justice for New York’s homeowners and investors.”
Prior to the 2008 financial crisis, subprime mortgages were commonly lent to borrowers with mediocre credit. However, many of said borrowers later defaulted on their mortgages when the housing bubble burst and their adjustable interest rates increased dramatically. Many of the defaulted mortgages had been repackaged by firms such as Bear Stearns as securities known as RMBS and sold to investors. When the massive influx of defaults occurred, investors suffered huge losses, which only increased the global recession. To date, investors in the former Bear Stearns have lost $22.5 billion on more than 100 subprime securities issued in 2006 and 2007.
Schneiderman alleges Bear Stearns defrauded its investors into the misbelief its RMBS portfolio had been carefully evaluated and would continue to be monitored to ensure the mortgages it encompassed were of solid value. Records indicate Bear Stearns did neither, however, and its investors suffered enormous losses after purchasing securities backed by mortgages that borrowers could not repay.
The suit also alleges Bear Stearns executives were made aware of the issues with its mortgages and still did not disclose the information to investors, while continuing to package the at-risk loans into securities that were sold to investors. Furthermore, when Bear Stearns identified at-risk loans and sold them back to the lender, it took cash payments and kept the money, rather than transferring the funds to investors.
JPMorgan Chase plans to contest the allegations, according to a spokesman.
“We’re disappointed that the New York A.G. decided to pursue its civil action without ever offering us an opportunity to rebut the claims and without developing a full record—instead relying on recycled claims already made by private plaintiffs,” JPMorgan representative Joseph Evangelisti said. “We will nonetheless continue to work with members of the president’s RMBS Working Group and are fully cooperating with their inquiries.”
The suit against JPMorgan is cited under New York’s Martin Act, a state law which allows the attorney general to attest fraud without demonstrating the defendant intended the fraud. Although the suit does not seek a specific amount in damages, it does ask investors be awarded restitution for the losses suffered because of the deceptive practices and fraud in which Bear Stearns engaged.
The case is the first suit brought forth by the RMBS working group, formed in January. The group encompasses the Justice Department, the Securities and Exchange Commission, the New York Attorney General’s Office and the Federal Housing Administration Inspector General. Scheiderman warned in a news conference the suit against JPMorgan would not be the last.
“There are more cases to come,” he said. “We’re investigating the misconduct of folks… that brought about the crash of 2008.”
Additional cases will likely be brought sooner rather than later. The statute of limitations on similar fraud cases is five years. Effective Jan. 1 2013, the task force will no longer be able to pursue action against securities sold in 2007.