Ten months ago, the U.S. Department of Justice announced that it would team with state attorneys general to share resources and plot strategy in potential legal action against banks involved in the mortgage crisis.
The effort, the Residential Mortgage-Backed Securities Working Group, was designed to put more ammunition in the legal arsenals of federal and state prosecutors. And since its formation, 200 state and federal officials have been taking part.
On Monday night — with the New York attorney general’s suit against JP Morgan Chase & Co — they fired their first shot. The suit targets JPMorgan unit Bear Stearns & Co. as well as EMC Mortgage, a Bear Stearns lending unit, alleging deceptive practices in the packaging and sale of residential mortgage-backed securities.
On Tuesday in Washington, New York Attorney General Eric Schneiderman and Acting Associate Attorney General Tony West touted the joint efforts at a news conference. Schneiderman said U.S. attorneys offices had helped conduct 40 interviews across the country. “It is a case brought by our office, but as we’ve all indicated, it came out of a large and ongoing collective effort,” Schneiderman said. “Every part of the working group has been essential to us being able to move the investigation forward this quickly to bring a complaint of this breadth.”
Though New York is the sole plaintiff, West, the U.S. DOJ’s third in command, said the suit against JPMorgan is part of the federal government’s effort “to ensure that the people of our nation are not victimized by fraud and, if they are, that we bring the perpetrators to justice.”
West, Schneiderman and other officials, including Assistant Attorney General Lanny Breuer and Shaun Donovan, the Housing and Urban Development secretary, touted the collaboration of the special mortgage fraud unit.
“It’s enabled us to move forward more quickly and more aggressively than we would have to bring our…case,” Schneiderman said. “We’re looking forward to more cases and to working with our colleagues to take advantage of the combination of jurisdiction, of resources and of skill that is unique to this working group.”
For private lawyers representing banks, the combined firepower of the feds and state prosecutors is a potentially chilling prospect. One Washington lawyer, who spoke on condition of anonymity because he represents banking clients that may be sued, said “the Justice Department acting alone would never bring a case like this without giving a company an opportunity to present its side of the story. The department would also be sensitive to timing, which in this instance seems very peculiar.”
One of five officials co-chairing the working group, Schneiderman was a natural choice to launch the first attack. New York prosecutors have been working on their investigation since spring 2011. And Schneiderman has a powerful weapon to punish Wall Street — the state’s Martin Act.
The law gives “gives an immense amount of power to the New York attorney general,” said David Reiss, a Brooklyn Law School professor who has written about mortgage markets, predatory lending and housing policy. Under the Martin Act, the state has a lower burden of proof than proceeding with a similar suit in federal district court, Reiss said. “It makes New York courts an attractive vehicle to push certain issues,” he said. (Schneiderman drew laughter Tuesday when he said “we have an extraordinary judiciary in the state of New York” — a nod to the home court advantage the law gives him.)
The JPMorgan case has a “well-worn path” in the New York state courts, said Robert Kurucza, a partner in Goodwin Procter in Washington and former director of the Securities and Corporate Practices Division of the Office of the Comptroller of the Currency.
Successive state attorneys general have used the breadth of the Martin Act to pursue civil claims that might otherwise fall within the jurisdiction of federal financial regulators, and the JP Morgan suit is “carrying on the tradition,” Kurucza said.
“Given the subject matter and magnitude of it, we can anticipate actions by the New York attorney general are likely to continue,” Kurucza said. “Clearly, the banking industry is trying mightily to put these cases behind them.”
Schneiderman on Tuesday said additional suits would be forthcoming. He didn’t elaborate on timing, and he didn’t say whether subsequent cases would end up in federal district court.
The JPMorgan suit alleges “multiple fraudulent and deceptive practices” in the promotion and sale of residential mortgage-backed securities from 2005 to 2007. The complaint alleges that the defendants “systematically failed to evaluate the loans” and ignored defects uncovered in limited review. The suit said loans were made to borrowers “who were unable to repay, were highly likely to default and did in fact default in large numbers.”
“This was some of the most flagrant patterns of misrepresentations to investors we’ve seen in a long time,” Schneiderman told reporters Tuesday. “It was major misconduct.”
JPMorgan said in a statement that the civil suit applies to conduct at Bear Stearns, which the company acquired at a fire sale at the request of the U.S. government in 2008.
“We’re disappointed that the NYAG decided to pursue its civil action without ever offering us an opportunity to rebut the claims and without developing a full record — instead relying on recycled claims already made by private plaintiffs,” the statement said. “We intend to contest these allegations.”
JPMorgan pledged its cooperation with state and federal investigators. Schneiderman on Tuesday described the discussions with the firm over the past few months as a “lively interchange.”
JPMorgan had not filed a response to the suit as of press time Tuesday night. A JPMorgan spokeswoman declined to discuss outside counsel. But on October 3, after this story was originally filed, a spokeswoman for Debevoise & Plimpton confirmed that the firm was handling JPMorgan’s response to the civil suit. According to firm spokeswoman Fallon Kortmann, Debevoise partners Andrew Ceresney and Mary Jo White, who also represented JPMorgan in a mortgage servicing and foreclosure settlement with DOJ earlier this year, are taking the lead in the matter. The two lawyers didn’t respond to a request for comment.
West defended the timing of the lawsuit, which was announced as President Barack Obama and Republican presidential candidate Mitt Romney prepare for their first debate, scheduled for October 3.
“We have been working as a group since it was formed earlier this year,” West said at the press conference. “We have been working on collective efforts on many different cases. When cases are mature and ready to be brought, we bring them.”
Obama in his State of the Union speech in January asked Holder to create a team of prosecutors to “expand our investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis.”
That month, when he announced the formation of the working group, Holder fought back against criticism that the Justice Department had taken a slow approach to confront financial industry abuses that led to the financial meltdown in 2008. He also noted that reckless or unethical behavior isn’t necessarily criminal.
“The notion that there has been inactivity over the course of the last three years is belied by a troublesome little something called facts,” Holder then told reporters. “We have been doing a great deal.”
Schneiderman on Tuesday said additional cases will “ultimately do a great deal to reassert the principle that no one is above the law and that the folks who brought down the American economy will face justice.”
Todd Ruger contributed to this report. Mike Scarcella can be contacted at firstname.lastname@example.org.