JPMorgan Chase & Co. (JPM) was subpoenaed by the U.S. Securities and Exchange Commission over failed mortgages, a person familiar with the investigation said, as the agency probes banks sued for allegedly boosting their profits by failing to share refunds from sellers of faulty debt.
Credit Suisse Group AG (CSGN) also received a subpoena from the SEC last week, bond insurer MBIA Insurance Corp. said in a filing today in a lawsuit against three of that Zurich-based bank’s units. The agency asked New York-based JPMorgan for information after a court in January unsealed allegations made about Bear Stearns Cos.’ practices in another suit, said the person, who declined to be identified because the matter isn’t public.
U.S. investigators have been scrutinizing companies involved in the mortgage business after the worst collapse in home prices since the Great Depression. Bond insurers MBIA and Ambac Assurance Corp. have said Credit Suisse and Bear Stearns, which JPMorgan bought in 2008, demanded refunds from originators that sold the banks the loans that they packaged into bonds, and then failed to use those settlement amounts to fulfill their own contractual promises on the debt.
“We’re really starting to finally get into evidence that suggests blatant fraud,” said Isaac Gradman, a San Francisco- based litigation consultant and formerly a lawyer at Howard Rice Nemerovski Canady Falk & Rabkin.
Jennifer R. Zuccarelli, a spokeswoman for New York-based JPMorgan, declined to comment. Steven Vames, a Credit Suisse spokesman in New York, declined to comment on MBIA’s statement about an SEC investigation. John Nester, an SEC spokesman, declined to comment.
Law Firm Subpoenaed
Kevin Brown, a spokesman for MBIA, said that Patterson Belknap Webb & Tyler LLP as counsel for the bond insurer was also subpoenaed by the SEC, seeking documents related to the Credit Suisse matter.
U.S. agencies have been seeking evidence of wrongdoing across the mortgage industry from before the market collapsed in 2007.
The Justice Department sued Deutsche Bank AG this week for more than $1 billion, saying the firm lied about its process for checking the quality of loans granted federal insurance.
Credit Suisse knowingly packaged bad loans into bonds, MBIA said in a court filing. The insurer included an exhibit in its suit composed of e-mails related to a “stated income” loan sought by a stripper in Charlotte, North Carolina, whose reported monthly pay of $12,000 was questioned by some bank employees.
MBIA Insurance Corp., the bond insurance unit of Armonk, New York-based MBIA Inc. (MBI), disclosed Credit Suisse’s SEC subpoena and the exhibit in a filing in New York State Supreme Court. The document, dated April 29, was filed yesterday.
“Credit Suisse is now the subject of an investigation by the Securities and Exchange Commission, which issued a subpoena this week seeking the same types of documents as MBIA seeks,” the insurer said.
MBIA alleges in its lawsuit that Credit Suisse failed to repurchase soured mortgages out of a 2007 securitization as it was contractually obligated to do. Earlier, the bank made demands similar to MBIA’s to recover funds from the originators of the loans — money it didn’t share with the securities’ buyers, MBIA said.
The allegations echo claims made in January in a suit brought by Ambac Assurance against the defunct investment bank Bear Stearns and JPMorgan. Ambac first sued in 2008 in federal court in Manhattan. The insurer filed a separate lawsuit over the issues in New York State Supreme court in February.
“Ambac is a large, sophisticated insurance company that is trying to blame others for risks it knowingly took and was paid for taking,” Zuccarelli said earlier this year. “We do not believe Ambac’s claims are meritorious and intend to defend Bear vigorously.”
Credit Suisse, in a filing in MBIA’s case on April 29, said contracts for its mortgage-bond transaction didn’t call for the bank to repurchase loans simply because they became delinquent within a few months or involved borrower fraud. That differed from contracts between mortgage originators and Credit Suisse, the bank said.
Credit Suisse cited e-mails between its employees and MBIA officials before the deal closed, which the bank argued had stated explicitly that those so-called representations and warranties wouldn’t be made. Representations and warranties are contractual promises that loans meet certain characteristics or will perform in certain ways.
The loan originators’ commitments to Credit Suisse “are different from — and materially broader than — Credit Suisse’s representations and warranties” tied to the securitization transaction, the bank said in court filings.
“MBIA is entitled to what its contracts with CS provide, and not more,” Vames, the Credit Suisse spokesman, said today in an e-mail.
MBIA said in today’s court filing that Credit Suisse in some cases cited the same issues as it later did to reach settlements with lenders, and that any early loan defaults should have been seen as “red flags” for further reviews of its obligations.
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