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JPMorgan Settlement Could Pose Legal Risk

usatoday.com | November 24, 2013

By Kevin McCoy

Banks' packaging of risky mortgages into securities and selling them to investors was a key factor that led to the nation's financial crisis.

The admissions JPMorgan Chase agreed to under its record $13 billion settlement with the Department of Justice could represent a new legal liability in ongoing litigation faced by the nation's largest bank.

According to the statement of facts, unidentified employees of the bank or its subsidiaries received information that some mortgage-backed securities they marketed and sold in 2005-2007 "did not comply with underwriting guidelines." Yet the workers "did not disclose this to securitization investors."

The statement focused on the practice of buying bundles of residential mortgages and packaging them into securities sold to investors — a procedure that Attorney General Eric Holder said "helped sow the seeds of the mortgage meltdown" that sparked the financial crisis in 2008.

For instance, JPMorgan didn't alert investors that one employee wrote a letter "memorializing her concerns" that one package of mortgage loans was too risky to buy or bundle into securities sold to investors, the statement said.

An employee at Bear Stearns, the investment bank JPMorgan bought in 2008, similarly questioned packaging and selling mortgages bought from "poorly graded sellers" who sometimes sold loans that "experienced high rates of default."

"The candor with which JPMorgan was forced to admit wrongdoing is unprecedented," said Elizabeth Nowicki, a former Securities and Exchange Commission attorney who has served as an expert witness in securities lawsuits. Describing the statement as legally risky, Nowicki said "it would certainly give encouragement to plaintiff attorneys."

In a regulatory filing last month, JPMorgan said the bank is defending itself and Bear Stearns against three purported class-action lawsuits involving allegations about their underwriting of mortgage-backed securities. "Motions to dismiss have largely been denied in these cases," that filing said.

Among the lawsuits filed against JPMorgan and Bear Stearns is a New York federal court case in which the lead plaintiffs are the New Jersey Carpenters Health Fund and the Public Employees' Retirement System of Mississippi. The suit, which seeks class-action status, alleges the banks "misrepresented the quality of the process purportedly used to originate the mortgage loans" securitized and sold to them. As a result, the investments "were far riskier than represented," the lawsuit charged.

Attorneys at Cohen Milstein, the law firm that's co-lead counsel in the case, are "carefully reviewing the statement of facts," said media spokeswoman Pam Avery.

Jeffery Harte, an equity research principal who tracks the financial industry at Sandler O'Neill & Partners, raised the legal risk issue during a conference call.

JPMorgan CEO Jamie Dimon stressed that the bank did not "admit to a violation of law," which would have posed an even greater risk for the outcome of other cases. Noting that each lawsuit is different, he said plaintiffs would have to surmount numerous legal hurdles to prevail in class-action cases.

"We're prepared to negotiate if it makes sense and fight if it makes sense," said Dimon.

 

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