On 1st October 2012, roughly four years after the global financial meltdown in 2008, Eric Schneiderman, the New York Attorney General, has filed a civil fraud lawsuit against JPMorgan Chase & Co relating to mortgage-backed securities sold by Bear Stearns before it was acquired by JPMorgan.
The lawsuit is in respect of loans based on residential mortgage-backed securities. It is claimed investors in these loans lost about US$23 billion (circa 25% of their original value) because those involved in packaging/selling the loans were (according to Reuters) allegedly involved in “systematic abandonment of underwriting guidelines” in order to increase the volume of securities that could be sold.
The lawsuit has been cunningly brought under the 1921 Martin Act (New York State law) although most of the investigations were apparently handled by federal authorities. Importantly, the Martin Act does not require the prosecutors to prove any “intent to deceive”.
The federal authorities involved comprise a task force from the Justice Department, the SEC, the IRS and the Department of Housing and Urban Development which forms the Residential Mortgage-Backed Securities Working Group. The Group was established by President Obama to investigate dodgy sales of iffy securities backed by dicey sub-prime mortgages etc that led to the global financial meltdown in 2008.
Many more similar lawsuits are expected over the course of the next year or so against those involved in the creation of the US sub-prime mortgage crisis. They include banks, auditors and credit rating agencies to name but a few professions that will feel the full force of the litigation to come. Thus the drought of litigation pursuant to the sub-prime crisis that brought about the financial turmoil from 2008 onwards may become a flood.
The financial mayhem caused by, and the consequential flood of litigation yet to ensue from, the sub-prime mortgage backed debacle and what we termed the securitisation of car boot sale left overs was predicted by us in the fall of 2007 as noted elsewhere on our website.
Perhaps it is the expectation of swathes of litigation that is the reason why the regulators around the world have been shoring up banks’ reserves and yet banks have stubbornly failed to increase their lending? Perhaps that is why rumours are rife about the elaborate arrangements current and retired partners in the Big 4 and other accounting firms have established to avoid the consequences of any impending litigation.
More details of this lawsuit are available from news sites such as Reuters and the Wall Street Journal. To get an idea of the scale and “evil” of the sub-prime mortgage debacle a good a place to start as any is an article published by Bloomberg written by Mark Pittman nearly four years ago.
This article was first published on 2ndOctober 2012.
On 5th November 2012 Bloomberg reported on the first successful case against a ratings agency in relation to ratings awarded by Standard & Poor’s (“S&P”) in respect of certain securities issued by ABN Amro Bank NV. According to Bloomberg, in an Australian Federal Court case S&P were found to have been “misleading and deceptive” in its ratings of two packages of purportedly AAA securities in 2006 which later lost 90% of their value. S&P has already stated that it will appeal against the judgement.
This is the first such judgement in a case against a rating agency. A tsunami of similar lawsuits against rating agencies is now expected.