JPMorgan sued over alleged $20bn fraud

The New York Attorney General has announced his office is filing a civil lawsuit against investment bank JPMorgan, one of the biggest in the country.

On Monday, Eric Schneiderman charged Bear Stearns – a bank bought by JPMorgan in March 2008 – with civil fraud for failing to ensure the quality of mortgage-backed securities it packaged and sold.

Specifically, Schneiderman accused the bank of leading its investors to believe that the loans in its residential mortgage-backed securities (RMBS) portfolio had been carefully evaluated and would be continuously monitored.

Investors lost more than $22.5bn on more than 100 types of the securities, said the lawsuit – more than one-quarter of the initial balance of $87bn.

As Bear Stearns neared insolvency in 2008, the government brokered a fire sale of the 85-year-old bank to JPMorgan for $10 a share. The New York lawsuit is the first to emerge from the Residential Mortgage-Backed Securities Working Group, created by President Barack Obama to prosecute wrongdoing related to the financial crisis.

Allegations

The lawsuit said there were “serious long-standing concerns” about the quality of reviews done by Bear Stearns, and that
defects uncovered among the loans sold to investors were largely ignored.

The complaint also alleged that the due diligence process was compromised “in order to increase their volume of securities”, and that there was a “systematic abandonment of underwriting guidelines”.

JPMorgan said it would challenge the attorney general’s allegations, and noted that the allegations concern actions by Bear Stearns before the investment bank was acquired by JPMorgan. 

“The NYAG civil action relates to Bear Stearns, which we acquired over the course of a weekend at the behest of the US Government. This complaint is entirely about historic conduct by that entity,” a statement said.

Schneiderman, who is a co-chair of the working group, said he expected federal authorities to take action as well, according to the Reuters news agency.

People familiar with the matter said a federal-state announcement was planned for Tuesday, and Schneiderman’s filing
the case on Monday appears to have irked his federal colleagues. Two federal officials familiar with the investigation said
that while the lawsuit was brought under New York State law, much of the investigation was handled at the federal level.

The attorney general called for the court to force disgorgement of earnings and benefits on the sales of the securities, to pay restitution to investors, and to order defendants to pay unspecified damages.

JPMorgan and its CEO, Jamie Dimon, have had a rollercoaster of a year: federal authorities are investigating a $6bn trading loss incurred by JPMorgan’s chief investment office, and US power regulators have asked the bank to show that it did not violate federal regulations by submitting misleading information and omitting facts in dealings with the regulator and California’s electricity grid operator.