US government sues JPMorgan over Bear Stearns ‘fraud’

Oct 2, 2012

Bear Stearns, bought by JPMorgan in a 2008 rescue, allegedly defrauded investors, says NY attorney general

Getty Images

THE US government is suing JPMorgan Chase for allegedly defrauding investors who lost more than $20bn on mortgage-backed securities written by Bear Stearns, the investment bank JPMorgan acquired in 2008.

Eric Schneiderman, New York attorney general, said Bear Stearns had “committed multiple fraudulent and deceptive acts in promoting and selling” the controversial securities. The indictment alleges Bear Stearns “systematically failed to evaluate the loans” that were packaged into mortgage-backed securities, reports The Financial Times.

As one of the first major prosecutions brought in connection with the 2008 financial crisis, the case is likely to turn on what bankers knew about the securities they were selling to investors.

According to the New York Times, the complaint contends that Bear Stearns and its lending unit, EMC Mortgage, misrepresented the quality of the loans in the securities. When the loans turned out to be bad, the bank demanded cash payments from the lenders (that it did not pass on to investors) instead of forcing the lender to buy them back as it should have done.

JPMorgan disputes the allegations, saying it bought Bear Stearns over a weekend in a rescue arranged at the “behest of the US government”.

The bank notes the government's case, which will be formally unveiled today in New York, was “entirely about historic conduct” of Bear Stearns.

It says it is "disappointed" to be prosecuted without being given an opportunity to contest the claims, and contends the government is relying on "recycled claims already made by private plaintiffs”.

Many believe the timing of the suit is politically motivated, coming a little over a month before the election. Obama has little support on Wall Street so there is greater electoral benefit in appearing tough on banks and white collar crime than hoping for support from the financial services industries.

The case against JPMorgan might be the first of several. Lawyers say regulators may be using the case to raise more aid for distressed homeowners.

Sign up for our daily newsletter