The government unit pursuing those responsible for the financial crisis of 2008 filed its first lawsuit on Tuesday, against JPMorgan, asserting that the Wall Street investment bank Bear Stearns helped to perpetrate a multibillion-dollar fraud involving mortgage-backed securities before it was acquired by JP Morgan.
The Residential Mortgage-Backed Securities Working Group, headed by New York Attorney General Eric Schneiderman, announced the suit, which alleges that Bear Sterns engaged in huge fraud schemes in 2006 and 2007, resulting in billions dollars of losses to its investors.
The lawsuit alleges that investors bought securities backed by mortgages that borrowers couldn’t repay and eventually defaulted on in droves. It also says Bear Sterns led investors to believe that the loans were being evaluated but evaluations did not occur. The RMBS working group is a section of the larger Financial Fraud Enforcement Task Force, which Obama formed in 2009. The working group was created in January.
In sum, investors have lost $22.5 billion, according to the lawsuit. JPMorgan bought the bank for $2.3 billion in 2008. JPMorgan has said it will contest the allegations and that they are confined to alleged actions by Bear Stearns leadership before it was bought out.
The suit marks the first major enforcement action brought by the mortgage working group. It has faced flak from industry experts and lawmakers who have said the government is unwilling to go after the banking giants for alleged crimes that lead to the financial crisis. Former bank regulator William Black told the Wall Street Journal that the suit shows “a continuation of the failure of leading prosecutors to bring a criminal case against any of the elite players.”
The Justice Department hosted a news conference on the lawsuit against JPMorgan, with Schneiderman, Acting Associate Attorney General Tony West, Colorado U.S. Attorney John Walsh, Urban Development Secretary Shaun Donovan all speaking. Lanny Breuer, Justice Department Criminal Division chief; Stuart Delery, acting Civil Division chief; , Federal Housing Finance Agency Inspector General; Robert Khuzami, Securities and Exchange Commission Enforcement Division chief, were also at the news conference.
“Let there be no doubt — preventing and prosecuting financial fraud in all its forms is a top priority of the Financial Fraud Enforcement Task Force, its RMBS Working Group, and the Department of Justice,” West said. “We follow the facts and the law wherever they lead, and if we uncover evidence of fraud or other illegal conduct, we pursue that conduct aggressively.”
Walsh broke down the amount of effort the task force put forth in the matter. He said at the news conference that 11 assistant U.S. attorneys from offices across the country interviewed a number of market participants. In addition, three civil lawyers and a financial analyst from Main Justice’s Civil Division, two analysts from the working group and a paralegal from the U.S. Attorney’s office for the District of Eastern Texas reviewed scores of deposition transcripts. What’s more, he said, the Justice Department dispatched 12 analysts to review millions of pages of documents, he said.
“By dedicating attorneys, agents and analysts in support of New York’s investigation, and by offering expert advice regarding the often-complicated financial products at issue in these investigations, the Department of Justice, FHFA-OIG, and the SEC strongly supported New York’s investigation, and helped contribute to yesterday’s filing,” Walsh said. “Today we are all proud of the work accomplished so far — but not satisfied. Much work on many investigations remains to be done. We look forward to more announcements from the Working Group in coming months.”