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Ben Hallman, reports JPMorgan Chase Lawsuit: New York Attorney General's Suit Is First For Task Force

The New York Attorney General sued JPMorgan Chase on Monday, alleging that Bear Stearns, the troubled investment bank it bought in 2008, "kept investors in the dark" about the quality of the mortgage-backed bonds it was selling as the market started to sour.

The lawsuit is the first legal action against a Wall Street bank to come from a joint federal and state task force announced by President Barack Obama during his State of the Union address in January. It alleges civil fraud violations, which means that potential penalties will be measured in dollars, not jail terms. Nevertheless, the JPMorgan Chase lawsuit qualifies as one of the more significant actions taken by a law enforcement agency to date against a Wall Street bank.

According to the lawsuit, filed in Manhattan federal district court, Bear promised a "robust and intensive" review process for selecting loans for sale to investors. But Bear didn't do that, according to the complaint. In order to continue the securitization machine -- the packaging and sale of home loans to investors -- the bank increasingly placed risky loans into the bonds, even as an outside contractor it had hired to evaluate those loans was warning the bank about their poor quality.

The outside contractor was Clayton Homes, who identified one batch of loans as having a 17% defective rate, but Bear Sterns continued to package and sale the loans without informing investors.

This paragraph come from the lawsuit filing:

"Defendants systematically failed to fully evaluate the loans, largely ignored the defects that their limited review did uncover, and kept investors in the dark about both the inadequacy of their review procedures and the defects in the underlying loans," the lawsuit says. "Furthermore, even when Defendants were made aware of these problems, they failed to reform their practices or to disclose material information to investors."

The losses suffered by investors. so far, total approxiamately $22.5 billion, about a quarter of their original "purported" value.

It well past time to start holding banks, other financial organizations, and their officers liable for unethical and illegal behavior committed during the speculative bubble that lead to the financial collapse of 2008. Let's hope this is just the first of many more indictments that may start to restore confidence in our financial and justice systems.  

4:07 PM PT: I should have mention the name of the hero of this story, New York Attorney General Eric Schneiderman, and the special task force, the Residential Mortgage-Backed Securities Working Group who  "was frustrated that more had not been done to hold accountable the Wall Street banks that packaged and sold the mortgage-backed bonds that imploded, nearly bringing down the U.S. economy."

4:20 PM PT: Here's a confirmation and more information skipping over their general introduction for some extra details.

The New York Times

A spokesman for Mr. 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 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,” said Joseph Evangelisti, the bank’s spokesman. He added that the allegations all predate JPMorgan’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 lost a round in one of these battles when Jed S. 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 Washington Mutual, another institution taken over by JPMorgan during the credit crisis.

5:23 PM PT: My computer hard disk just  had a fatall crash putting me out of action.  I leaving this message via my phone.  Sorry,  I'll try to get a new computer ASAP.  

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