New York Attorney General Eric Schneiderman filed a civil lawsuit against JPMorgan Chase Oct. 1, in which he alleged widespread fraud within the bank’s Bear Stearns unit in the sale of mortgage-backed securities, The Wall Street Journal reported.
The case is the first to be brought under the aegis of the Residential Mortgage-Backed Securities Working Group, which was created by President Obama in January and is made up of federal and state prosecutors and regulators. Schneiderman is co-chair of the RMBS Working Group.
The lawsuit also utilized New York’s Martin Act, which does not require prosecutors to prove a firm intended to defraud investors in order to win a case.
The lawsuit seeks unspecified damages related to “astounding” losses of more than $22 billion suffered by investors in securities issued by Bear Stearns in 2006 and 2007, before the New York investment bank was taken over by JPMorgan Chase in March 2008. The lawsuit alleged that Bear Stearns defrauded investors by packaging and selling mortgages that it knew or should have known were likely to default, the Journal reported.
This lawsuit differs from recent suits filed by federal regulators because it targeted alleged fraud across the firm, rather than restricting the allegations to a single deal.
JPMorgan Chase spokesman Joseph Evangelisti told the Journal that the bank will contest the allegations, and that it is “disappointed” that Schneiderman “decided to pursue its civil action without ever offering us an opportunity to rebut the claims.” Evangelisti also noted that the allegations pertained to activities before JPMorgan Chase purchased Bear Stearns.
The RMBS Working Group expects to use this lawsuit as a blueprint for other situations in which it can target firm-wide fraud. “We intend to follow up with similar actions against other sponsors and underwriters of residential mortgage-backed securities,” the attorney general's office told the Journal.