JPMorgan Hit With Fraud Lawsuit Over Bear Stearns Securities

JPMorganNEW YORK -- The New York attorney general's office has hit JPMorgan Chase & Co. with a civil lawsuit, alleging that investment bank Bear Stearns -- prior to its collapse and subsequent sale to JPMorgan in 2008 -- perpetrated massive fraud in deals involving billions in residential mortgage-backed securities.

The lawsuit is the first to be filed under the auspices of the RMBS Working Group, which was set up by President Barack Obama to investigate and prosecute alleged misconduct that contributed to the financial crisis.

New York-based JPMorgan said it intends to contest the allegations. Spokesman Joseph Evangelisti noted that the lawsuit relates solely to alleged actions by Bear Stearns prior to its takeover by JPMorgan in May 2008.

In the lead-up to the financial crisis, subprime mortgages were sold to people with less-than-ideal credit. Many of them defaulted on their loans when the housing bubble burst and their introductory "teaser" interest rates skyrocketed.

Because many of those mortgages had been sliced and repackaged as securities that could be bought and sold -- known as RMBS -- the mass defaults led to huge losses at large U.S. banks and other financial firms, helping fuel the global economic meltdown.

New York Attorney General Eric T. Schneiderman is alleging that Bear Stearns led its investors to believe that the loans in its RMBS portfolio had been carefully evaluated and would be continuously monitored. Bear Stearns failed to do either, resulting in investors buying securities backed by mortgages that borrowers couldn't repay and defaulted on in huge numbers, Schneiderman alleges.

The complaint further alleges that even when Bear Stearns executives were made aware of the problems, the firm failed to correct its practices or disclose material information to investors. The executives routinely overlooked negative findings and continued to package the loans into securities for sale to investors, it says.

Investors have so far lost $22.5 billion on more than 100 subprime securities that Bear Stearns issued in 2006 and 2007, according to the complaint. That's over one-quarter of the original principal balance of $87 billion. The lawsuit seeks injunctive relief, damages and payment of restitution to investors for "fraudulent and deceptive acts."

"We're disappointed that the NYAG 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," JPMorgan's Evangelisti said in a statement.

"We will nonetheless continue to work with members of the president's RMBS Working Group and are fully cooperating with their inquiries," he added.

Bear Stearns teetered on the verge of bankruptcy in early 2008 after its two hedge funds imploded, costing investors $1.8 billion and kicking off the domino effect that led to the 85-year-old bank's demise. With the backing of the New York Federal Reserve, JPMorgan bought the ailing investment bank for about $2.3 billion.


Increase your money and finance knowledge from home

Basics Of The Stock Market

Stock Market 101 - everything you need to know but were afraid to ask!

View Course »

Introduction to Preferred Shares

Learn the difference between preferred and common shares.

View Course »

Add a Comment

*0 / 3000 Character Maximum

16 Comments

Filter by:
Max

As usual the 1% who hold the world's wealth are at it again. This is a precursor to the dynamics of a pyramid scam. Within a single hour the world's 1% will transfer there money to another currency and watch as Europeans and Americans are left holding a full bag of worthless paper money. Chairman Ben S. Bernanke is doing his job well by printing more American money to destablize American and European economy. From all that I have read, I believe that China's currency will skyrocket in its value and that's where the 1% will all be after the hour of there money tranfser. Believe it or not! I was correct about the Euro since the year 2000 to 2012.

October 05 2012 at 11:48 PM Report abuse rate up rate down Reply
lion20r2

Chase wil ask Geithner and Paulson to testify.

October 02 2012 at 5:13 PM Report abuse rate up rate down Reply
lion20r2

Chase wil ask Geithner and Paulson to testify.

October 02 2012 at 5:11 PM Report abuse rate up rate down Reply
Frierson

The sub-prime mortgages were "sold" to people who couldn't really qualify for afford them??? Are the borrowers not at least partially to blame for this mess? Let's include realtors, mortgage brokers,Fannie Mae, investment bankers the Community Reinvestment Act AND borrowers in assessing blame.

October 02 2012 at 5:02 PM Report abuse +1 rate up rate down Reply
Frierson

The sub-prime mortgages were "sold" to people who couldn't really qualify for afford them??? Are the borrowers not at least partially to blame for this mess? Let's include realtors, mortgage brokers,Fannie Mae, investment bankers the Community Reinvestment Act AND borrowers in assessing blame.

October 02 2012 at 5:02 PM Report abuse +1 rate up rate down Reply
danno

redistribution of wealth..thats all it isfrom the banks pockets to the gov pockets...

October 02 2012 at 3:40 PM Report abuse rate up rate down Reply
danno

Another obama "extortion case"..now one a week of sueing for any reason as most of these banks will pay out the cash rather than fight it in court..Bank of America settled on a law suit of all things that consisted of borrowers proving there clients were dis-abled after checking the dis-abled box on there loan application...

October 02 2012 at 3:39 PM Report abuse +1 rate up rate down Reply
gjohn411

Nothing will happen, wall street own government

October 02 2012 at 12:42 PM Report abuse rate up rate down Reply
Doug Click

What a SHAM. Chase does the goverment a favor and is force fed Bear Stearns. Now they are being sued by the same goverment for the misdeads of Bear Stearns. Whats the angle on flesing the tax payers on this one.

October 02 2012 at 12:20 PM Report abuse +1 rate up rate down Reply
lamdrm

I read an article about this lawsuit in the newspaper this morning, which mentioned a similar suit against Goldman Sachs had been dropped. No mention of that in this article. My question would be, why?

October 02 2012 at 12:18 PM Report abuse rate up rate down Reply