New York Attorney General Eric Schneiderman sued JPMorgan Chase Monday, alleging widespread fraud in the sale of mortgage-backed securities by the defunct Bear Stearns before the financial crisis.
JPMorgan, which bought Bear Stearns for $2 a share in March 2008, said in a statement it would contest the allegations, Reuters reported.
The case is the first brought by the Residential Mortgage-Backed Securities Working Group, which was formed by President Barack Obama in January to pursue alleged wrongdoing related to the financial crisis, the Wall Street Journal reports.
More cases from the unit are expected.
"We intend to follow up with similar actions against other sponsors and underwriters of RMBS," said an official in the attorney general's office.
The allegations relate to billions of dollars of subprime securities issued by Bear Stearns before the troubled firm collapsed in 2008. The suit alleges that losses on residential-mortgage securities issued by Bear Stearns in 2006 and 2007 alone were "astounding," totaling $22.5 billion, or more than a quarter of the original principal balance. The action asks that the company be made to pay an undisclosed amount of damages "caused, directly or indirectly, by the fraudulent and deceptive acts."
The lawsuit alleged there were "serious long-standing concerns" about the quality of reviews done by Bear Stearns and that its due diligence process was compromised "in order to increase their volume of securities."
It also alleged a "systematic abandonment of underwriting guidelines."
Unlike many of the other mortgage crisis cases brought by regulators such as the Securities and Exchange Commission, the task force’s action does not focus on a particular deal that harmed investors or an individual who was central to a specific transaction, the New York Times noted. Rather, the suit contends that the improper practices were institutionwide and affected numerous deals during the period.
In its statement, JPMorgan pointed out that the allegations concern actions by Bear Stearns before it was acquired.
"The NYAG civil action relates to Bear Stearns, which we acquired over the course of a weekend at the behest of the U.S. government. This complaint is entirely about historic conduct by that entity," the statement said.
Schneiderman, a co-chairman of the task force, told Reuters Sept. 20 that his office would take action shortly and that he expected his federal counterparts on the task force to do so as well.
People familiar with the matter told Reuters a federal-state announcement was planned for Tuesday and Schneiderman's lawsuit on Monday appears to have irked his federal colleagues. Two federal officials familiar with the investigation said that while the lawsuit was filed under New York state law, much of the investigation was handled at the federal level.
Schneiderman's lawsuit, filed in New York State Supreme Court in Manhattan, was based on the Martin Act, New York's state's powerful securities fraud statute, which does not require proof of intent to deceive.