Probe of mortgage securities prompts suit against Chase
The civil suit against Bear Stearns, now a unit of JPMorgan Chase, contends that Bear Stearns and its lending unit EMC Mortgage defrauded investors who purchased mortgage securities packaged by the companies from 2005 through 2007.
The New York Times
NEW YORK — The federal mortgage task force that was formed in January by the Justice Department filed its first complaint against a big bank Monday, citing a broad pattern of misconduct in the packaging and sale of mortgage securities during the housing boom.
The civil suit against Bear Stearns, now a unit of JPMorgan Chase, was brought in New York State Court by Eric Schneiderman, the state attorney general. Schneiderman is also a co-chairman of the task force, known as the Residential Mortgage-Backed Securities Working Group.
The complaint contends that Bear Stearns and its lending unit EMC Mortgage defrauded investors who purchased mortgage securities packaged by the companies from 2005 through 2007.
The firms made material misrepresentations about the quality of the loans in the securities, the lawsuit said, and ignored evidence of broad defects among the loans that they pooled and sold to investors.
Moreover, when Bear Stearns identified problematic loans that it had agreed to purchase from a lender, it was required to make the originator buy them back.
But Bear Stearns demanded cash payments from the lenders and kept the money, rather than passing it on to investors, the suit contends.
Unlike many of the other mortgage-crisis cases brought by regulators such as the Securities and Exchange Commission, the action does not focus on a particular deal that harmed investors or an individual who was central to a specific transaction.
Rather, the suit contends that the improper practices were institutionwide and affected numerous deals during the period.
A spokesman for Schneiderman declined to comment on the filing.
A representative of JPMorgan, which acquired Bear Stearns in a fire sale in March 2008, said it would contest the allegations.
“We’re disappointed that the New York AG 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,” said Joseph Evangelisti, the bank’s spokesman.
He added that the allegations all predate JPMorgan Chase’s acquisition.
To be sure, the allegations in the suit against Bear and EMC are not new.
The task-force complaint closely echoes legal arguments made in recent years by numerous private litigants trying to recover losses in mortgage securities.
Most of these cases continue to inch their way through the courts.
Late last week, for example, JPMorgan Chase lost a round in one of these battles when Jed Rakoff, a federal judge in Manhattan, rejected the bank’s request to dismiss a complaint brought by Dexia, a Belgian-French bank.
The European bank had bought $1.6 billion in mortgage securities issued by Bear Stearns and Seattle-based Washington Mutual, another institution taken over by JPMorgan during the credit crisis.
Nevertheless, some lawyers who are battling the large banks and investment firms on behalf of mortgage investors said they welcomed the action by the task force.
Jerry Silk, a lawyer at Bernstein Litowitz Berger & Grossmann in New York, said, “The government’s action represents a complete validation of the cases brought by investors who were duped by the fraudulent sale of mortgage-backed securities by JPMorgan, WaMu and Bear Stearns.”