The Residential Mortgage-Backed Securities Working Group, a federal task force formed by the Department of Justice, filed a lawsuit against a JP Morgan unit on Monday, for an alleged massive fraud in the packaging and selling of mortgage securities at the time when the housing market was booming.
The case against Bear Stearns & Company, a JP Morgan Chase unit, was filed by New York attorney general and federal task force co-chairman Eric T. Schneiderman.
The firm and its lending unit have been accused of defrauding investors who bought mortgage securities that they packaged starting from 2005 until 2007.
They misrepresented the quality of the mortgage loans in the securities, based on the lawsuit, and disregarded proof of extensive flaws among the pooled mortgage loans that were sold to investors.
Furthermore, when Bear Stearns discovered faulty loans that it had decided to obtain from a lender, it was supposed to require the lender or loan originator to buy them back. However, Bear Stearns allowed them to avert this responsibility by providing more attractive alternatives. For instance, Bear Stearns offered large concessions to loan originators to maintain their business relationships with them and to make sure that the flow of loans continue.
Compared to other mortgage crisis lawsuits filed by the Securities and Exchange Commission, the action of the federal task force does not center on a specific transaction that compromised investors or a key person to a particular transaction. Instead, the case asserts that their unlawful tactics were institution-wide and affected a number of deals throughout the period.
The lawsuit was filed under New York’s Martin Act, which grants the attorney general extensive leeway to file fraud cases without proving the defendant’s intention to defraud. The lawsuit seeks restitution for the investors who were victims of misleading practices.
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