There will be no perp walks, or got that matter even arrests, in the civil suit against JP Morgan Chase for flawed mortgage-backed securities issued by Bear Stearns that was filed late Sunday night by Eric Schneiderman, New York State’s Attorney General. It’s the first lawsuit filed by Residential Mortgage-Backed Securities Working Group that was formed in January following President Barack Obama’s State of the Union address.
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 task force’s 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.
The lawsuit, however, is not Federal and relies on NY state banking law:
The decision to pursue civil charges under New York’s Martin Act means that the state’s attorney general will not have to prove fraudulent intent, only that the firm was negligent in making any false or misleading disclosures. While easier to prove, that also indicates that the evidence to prove fraud was not strong enough to bring more serious charges.
Like so many cases related to the financial crisis, no individuals are named in the complaint. Nor does it appear that any criminal charges will emerge this long after Bear Stearns was pushed into the arms of JPMorgan by the federal government in a transaction routinely described as a fire sale.
Yves Smith is skeptical about any large fines:
It looks like Eric Schneiderman is living up to his track record as an “all hat, no cattle” prosecutor. Readers may recall that he filed a lawsuit against the mortgage registry MERS just on the heels of Obama’s announcement that he was forming a mortgage fraud task force. Schneiderman’s joining forces with the Administration killed the attorney general opposition to the settlement, allowing the Administration to put that heinous deal over the finish line. The MERS filing was a useful balm for Schneiderman’s reputation, since it preserved his “tough guy” image, at least for the moment, and allowed his backers to contend that he had outplayed the Administration. [..]
Schneiderman has churned out another lawsuit that the Obama boosters and those unfamiliar with this beat might mistakenly see as impressive. It’s a civil, not criminal suit against JP Morgan he conduct of Bear Stearns in originating and misrepresenting $87 billion of mortgage backed securities (the link takes you to the court filing). And also notice no individuals are being sued. Being a banker apparently means never having to be responsible for your actions.
This suit appears just in time for an “October Surprise” and right before the first debate that will focus on domestic policies. This looks like more campaign PR.