Quinn Emanuel Urquhart & Sullivan breached one more line of defense in the Federal Housing Finance Agency’s campaign against the banks at the heart of the subprime crisis.

On Monday, six months after she rejected a bid to dismiss the litigation on timeliness grounds, U.S. District Judge Denise Cote in Manhattan (See Profile) refused to dismiss the FHFA’s common law fraud claims against JPMorgan Chase and four other defendants. The ruling in Federal Housing Finance Agency v. JPMorgan Chase & Co., 11-cv-6188, is a big blow to the banks in the second-to-last round of dismissal motions still to be decided before discovery gets underway in all 16 consolidated cases, which allege federal securities violations and assorted flavors of fraud.

The FHFA was created by Congress as the conservator for Fannie Mae and Freddie Mac in 2008, after Fannie and Freddie’s enormous holdings of residential mortgage-backed securities lost billions in value. Last fall the agency hired Quinn Emanuel and Kasowitz Benson Torres & Friedman to sue 18 banks for allegedly misrepresenting the quality of loans underpinning more than $190 billion in RMBS they sold to Fannie and Freddie. Sixteen of the cases were consolidated before Cote.

One case (against Royal Bank of Scotland) is pending in Connecticut, and the FHFA’s case against Bank of America and Countrywide Financial was consolidated with other Countrywide MBS litigation in Los Angeles, where the agency survived a motion to dismiss last month.

The first big breakthrough for the FHFA and its lawyers came in May, when Cote rejected a bid by UBS AG to dismiss all 16 cases as time-barred. In June UBS’s lawyers at Skadden, Arps, Slate, Meagher & Flom persuaded the judge to allow an immediate appeal to the U.S. Court of Appeals for the Second Circuit, which agreed to hear the case in August.

According to Cote’s scheme for adjudicating pretrial issues in the sprawling litigation, the latest round of motions to dismiss were filed by JPMorgan and five other banks (including Deutsche Bank AG, Merrill Lynch & Co., and Morgan Stanley) that face common law fraud and aiding and abetting claims related to alleged misstatements in MBS offering documents. The FHFA’s complaint against JPMorgan also targets MBS underwriters Citigroup Inc.; Credit Suisse; Goldman Sachs & Co.; and RBS Securities, and alleges that the defendants duped Fannie and Freddie into believing that the loans underlying $33 billion in RMBS met certain underwriting standards.

The JPMorgan ruling is the first to come down in the most recent phase of briefing, and its certainly not the result the bank and its lawyers at Sullivan & Cromwell were hoping for. Cote refused to dismiss the FHFA’s core fraud and aiding and abetting fraud claims, though she did toss a claim that the underwriter defendants violated the Virginia Securities Act. She also dismissed fraud allegations related to owner-occupancy and loan-to-value assessments on MBS that JPMorgan underwrote.

The ruling doesn’t directly resolve motions to dismiss pending in the other five fraud cases, but it doesn’t bode well for them either. JPMorgan’s defense team, led by Pennyy Shane of Sullivan & Cromwell, had argued that the evidence presented by FHFA wasn’t tied concretely enough to the specific securities the bank either sponsored, underwrote, or originated. They also argued that FHFA was simply alleging “fraud by hindsight” when it put forth as evidence of fraud the subsequent downgrade of the securities by ratings agencies and the heightened level of delinquencies and defaults in the underlying mortgages. Those arguments are echoed in the undecided motions to dismiss filed by the other fraud defendants, and they didn’t go over very well with the judge.

Cote ruled that the massive downgrades of the ratings on the mortgage-backed securities cited by the FHFA, rather than being “fraud by hindsight,” suggested that the market collapse was among the “telltale signs of defects that were present in securitizations all along, albeit unbeknownst to the purchasing public.”

“FHFA may be wrong, of course; a jury will decide,” the judge wrote. “But the claim is not an implausible one.”

FHFA counsel Philippe Selendy of Quinn Emanuel didn’t respond to requests for comment. One of JPMorgan’s lead lawyers at Sullivan & Cromwell, Sharon Nelles, also wasn’t immediately available. The underwriter defendants in the JPMorgan case are represented by Cravath, Swaine & Moore (for Credit Suisse); Simpson Thacher & Bartlett (for RBS); Sullivan & Cromwell (for Goldman); and Paul, Weiss, Rifkind, Wharton & Garrison (for Citi). Motions to dismiss in the nine remaining cases will be fully briefed by the end of this week. Discovery is scheduled to conclude at the end of next year with trial expected in mid-2014.