Articles Tagged with Residential Mortgage Backed Securities Fraud Working Group

HSBC will pay a $765M penalty over claims involving its packaging, marketing, and sale of residential mortgage-backed securities prior to the 2008 economic crisis. According to the US Attorney Bob Troyer, from the beginning HSBC employed a due diligence process that it knew was ineffective, “chose” to place faulty mortgages in deals, and disregarded these problems even as it sold the RMBSs to investors. As a result, contends the US government, investors, including federally-insured financial institutions that bought the HSBC Residential Mortgage-Backed Securities that were backed by faulty loans, sustained “major losses.”

HSBC had touted using a proprietary model that would choose 20% of the riskiest loans for further examination and another 5% that would be randomly chosen. The government, however, claims that the financial firm’s trading desk exerted undue influence on which loans would be securitized and sometimes failed to employ a random sample. Outside vendors then studied the chosen loans.

The US alleges that even when a number of loans were marked as low grade, HSBC “waived” them through or regraded them, and concerns about loans that had defaulted right away were purportedly disregarded. The bank even allegedly continued to buy loans from an originator who was found to likely be providing loans that were fraudulent.

NY Attorney General Eric Schneiderman is suing J.P. Morgan Chase & Co. (JPM) over MBS fraud that was allegedly committed by its Bear Stearns unit. This is the first securities lawsuit to be brought under the sponsorship of the Residential Mortgage-Backed Securities Working Group, which is made up of prosecutors and regulators and was formed by President Barack Obama. The action is seeking damages that were either a direct or an indirect result of “fraudulent and deceptive acts.”

The group is contending that investors sustained $22.5 billion in losses involving Bear Stearns Cos.-issued securities before the investment bank almost failed in 2008 and JP Morgan ended up taking it over. Mortgage securitizations involving subprime and Alt A mortgages from between 2005 and 2007 are at the center of the case.

According to the MBS fraud lawsuit, Bear Stearns committed financial fraud against investors when it packaged and sold mortgages that it knew (or should have known) had a good chance of defaulting. The lawsuit even quotes messages and emails supposedly sent internally at Bear Stearns showing that bank employees knew the investments they were selling were of poor quality. Schneiderman is alleging that the mortgage unit “systematically failed” when assessing loans, disregarded defects that were found, and failed to inform investors about review procedures or problems involving the loans.

Rather than focusing on a single transaction, the New York securities fraud lawsuit is claiming financial fraud across the firm. It also is applying New York State’s Martin Act, which doesn’t mandate that in order to win the case prosecutors must prove that a financial firm meant to commit the alleged fraud. The task force intends to use this case to bring other claims on a firm-wide basis. Schneiderman said that the group is “looking at tens of billions of dollars” in damages and not just by one financial firm.

Federal and state regulators have been working hard since 2008 to find out whether banks just made poor decisions or actually broke securities laws related to the mortgage securities that failed in the economic crisis. Recent victories against large firms include Bank of America Corp. (BAC) consenting to pay $2.43 billion to settle class action securities allegations accusing it of misleading investors about the Merrill Lynch & Co. (MER) acquisition. However, the bank settled without admitting or denying wrongdoing.

Regarding this New York MBS case against JP Morgan Chase, a spokesperson for the financial firm said it was “disappointed” with the civil action while making it clear that the alleged activities in question occurred before it bought Bear Stearns.

JP Morgan Sued on Mortgage Bonds, The Wall Street Journal, October 1, 2012

NY Attorney General Says More Suits Will Follow JPMorgan, Bloomberg, October 2, 2012

Residential Mortgage-Backed Securities Working Group Members Announce First Legal Action,, October 2, 2012

Residential Mortgage Backed Securities Fraud Working Group

Martin Act (PDF)

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Morgan Keegan Settles Subprime Mortgage-Backed Securities Charges for $200M, Stockbroker Fraud Blog, June 29, 2011

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Class Action MBS Securities Lawsuit Against Goldman Sachs is Reinstated by 2nd Circuit, Institutional Investor Securities Blog, September 14, 2012 Continue Reading ›

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