The U.S. Department of Justice’s mortgage task force has filed its first lawsuit against a unit of JP Morgan Chase in connection with alleged widespread misconduct in the sales and packaging of mortgage-backed securities from 2005 to 2007. The suit targets Bear Sterns & Company, which was acquired by JP Morgan following its collapse in 2008. The complaint asserts that the lending unit made material misrepresentations about the quality of the pooled loans that were sold to investors. It also alleges that even when the loans began failing in large numbers, Bear Sterns did not insist that the originators buy the loans back, which originators were obligated to do. Rather, the originators were allowed to settle the repurchase claims by making cash payments for a small portion of the repurchase price.
The lawsuit, which challenges institution-wide practices rather than specific transactions, was brought in New York State Supreme Court by the New York State Attorney General, who serves as chair of the task force. The lawsuit was brought under New York’s Martin Act, which allows the Attorney General to bring fraud claims without having to prove scienter, or the intent to defraud. The suit seeks restitution for defrauded investors and disgorgement from the bank as a result of the fraud, but does not seek specific damages. (“JPMorgan Unit Is Sued Over Mortgage Securities Pools,” The New York Times, October 1, 2012).