N.Y. AG calls Bear Stearns mortgage securities oversight ‘a sham’

WASHINGTON -- Promises made to investors by Bear Stearns & Co. about the quality of mortgage-backed securities during the subprime housing boom were “a sham,” New York Atty. Gen. Eric Schneiderman said Tuesday in detailing the first suit by a task force investigating misconduct by banks in the run-up to the financial crisis.

The securities fraud suit “goes to the heart of the misconduct that created the housing bubble and caused the crash of 2008,” Schneiderman told reporters a day after filing a securities fraud suit related to the sale of mortgage bonds by Bear Stearns & Co., which was later acquired by JPMorgan Chase & Co.

The suit against JPMorgan alleged that Bear Stearns misled investors that the bank had carefully evaluated the quality of mortgages it packaged into securities from 2005-2007 and that it had monitored the originators of those loans to make sure they were following guidelines designed to ensure that borrowers could repay the loans.

“Defendants in fact had no legitimate basis for any of their numerous representations about the quality of loans in their securities because their systems for assuring loan quality were a sham,” Schneiderman said.

JPMorgan has criticized the suit, saying it repeats allegations in private lawsuits and that Bear Stearns problems took place before JPMorgan acquired it in 2008.

The New York suit is the first from the Residential Mortgage-Backed Securities Working Group, a task force of federal and state officials launched this year by President Obama to investigate and prosecute financial fraud during the subprime market boom.

Schneiderman co-chairs the task force and filed the civil suit under New York’s Martin Act, which allows the prosecution of fraud cases without demonstrating that the defendant intended to defraud.

The suit alleged that Bear Stearns knew that many of the loans it was selling to investors in securities were defective. It quotes an internal email from one Bear Stearns executive referring to a security as “a dog” and another email calling a security a “sack of s---” and a “s--- breather.”

Prosecutors and regulators have been criticized for not taking more action against financial executives for their conduct leading up to the financial crisis. The statute of limitations prevented criminal prosecutions in the case, Schneiderman said.

“It would be tough for us to bring criminal charges which is why we’re bringing a broad civil complaint,” he said.

Schneiderman said he expected JPMorgan to try to assert that the statute of limitations had expired for a civil suit as well. But he said his office has a so-called tolling agreement with the bank allowing civil cases after the statute of limitations expired and that courts also have granted leeway when the alleged misconduct also concealed the activity.

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