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October 04, 2012

Task Force Files Lawsuit against JPMorgan Chase
    by Robert Kropp

The Residential Mortgage-Backed Securities Working Group, a state-federal task force, announces its first legal action, charging the bank for fraudulent misrepresentations of mortgage­-backed securities by Bear Stearns & Co. -- The Residential Mortgage-Backed Securities (RMBS) Working Group, formed in November, 2009 as part of the Financial Fraud Enforcement Task Force, announced its first legal action this week, filing a lawsuit against JPMorgan Chase alleging that the bank made "fraudulent misrepresentations and omissions to promote the sale of residential mortgage­-backed securities (RMBS) to investors."

The lawsuit, filed by New York Attorney General and RMBS Working Group co-chair Eric Schneiderman, claims that "defendants deceived investors as to the care with which they evaluated the quality of mortgage loans packaged into residential mortgage-backed securities prior to Bear Stearns & Co's collapse in early 2008, incurring losses that have totaled approximately $22.5 billion to date." While Bear Stearns "led its investors to believe that the quality of the loans in its mortgage-backed securities had been carefully evaluated and would be continuously monitored…it systematically failed to evaluate the loans, largely ignored defects that its limited review did uncover, and kept its investors in the dark about the inadequacy of the review procedures and defects in the loans."

In March, 2008, JPMorgan acquired Bear Stearns "for a song," Bloomberg reported, "paying $10 a share, or $1.5 billion for a company with more than $11 billion in common equity."

The Bush administration "sweetened the deal," according to Bloomberg, "by agreeing to purchase $30 billion of Bear's risky mortgage assets."

Meanwhile, "top executives were able to pocket large amounts of performance-based compensation," Harvard law professor Lucien Bebchuck wrote in a 2009 paper examining the effects of compensation packages on excessive risk-taking. "The top executive teams of Bear Stearns…derived cash flows of about $1.4 billion…from cash bonuses and equity sales during 2000-2008."

The RMBS Working Group is a state-federal task force, consisting of representatives from the US Attorney General's office, the Securities and Exchange Commission (SEC), Housing and Urban Development (HUD), and the Federal Housing Finance Agency (FHFA), among others.

"This lawsuit will bring accountability for the misconduct that led to the crash of the housing market and the collapse of the American economy," Schneiderman said. "We need real accountability for the illegal and deceptive conduct in the creation of the housing bubble in order to bring justice for New York's homeowners and investors."

Furthermore, "We believe that this is a workable template for future actions against issuers of residential mortgage-backed securities that defrauded investors and cost millions of Americans their homes," he said.

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