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."
