The Justice Department (DOJ) task
force formed to pursue past offenses in the creation, sale, and servicing of
residential mortgage-backed securities (RMBS) filed its first suit yesterday,
charging that Bear Stearns and its mortgage subsidiary EMC Mortgage defrauded
investors who purchased the company's RMBS between 2005 and 2007.
The suit, of course, was not brought
against Bear Stearns itself, but against Bear Stearns as a subsidiary of JP
Morgan Chase which bought the failing firm in 2008 reportedly at the behest of
the Treasury Department which did not wish to see it file bankruptcy.
The suit was brought in the New York
State Supreme Court by Eric T., Schneiderman, New York's attorney general who
is also co-chairman of the RMBS Working Group, under New York's Martin Act
which allows the attorney general discretion to bring fraud cases without
demonstrating intent to defraud. The latitude
afforded under laws in several states but not available to the federal
government was one reason the Working Group was formed.
The suit charges that Bear Stearns
exhibited a broad pattern of misconduct in the packing and sale of mortgage securities
during the housing boom including materially misrepresenting the quality of
loans in the securities and assuring investors it was conducting stringent
reviews of the loans it was bundling.
The suit also contends that when the company identified problems in
loans it had purchased and demanded the originator repurchase, it then kept the
money rather than passing it on to the ultimate investors.
The suit does not identify a
specific deal or investors or individuals that were harmed but rather points to
what it terms institution-wide improprieties that affected a number of
transactions during the subject period. The
action asks that the company be made to pay an undisclosed amount of damages
'caused, directly or indirectly, by the fraudulent and deceptive acts.'"
According to Bloomberg, "The current cumulative realized losses on more
than 100 subprime and Alt-A securitizations that the defendants sponsored and
underwrote in 2006 and 2007 total about $22.5 billion, or about 26 percent of
the original balance of about $87 billion."
The RMBS Working Group was created
earlier this year. It was intended to
consolidate the efforts of Schneiderman's office with fraud investigations by
the Departments of Justice and Housing and Urban Development, the Securities
and Exchange Commission, the inspector general of the Federal Housing Finance
Agency, and the Federal Bureau of Investigation.
Joseph Evangelisti, a spokesman for
JP Morgan said, "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,". He added that the allegations predate JPMorgan's
acquisition and that the bank intends to defend against the charges.
A statement from the Working Group
said that its actions show "that it is not too late for justice."