MBIA agreed to insure a $1.16 billion pool of mortgages without its employees reading a report the bond insurer now claims was altered to hide flaws in the loans, JPMorgan Chase’s lawyers told a judge.
Lawyers for JPMorgan asked New York Supreme Court Justice Alan D. Scheinkman in White Plains to throw out MBIA’s lawsuit accusing the bank’s Bear Stearns unit of inducing the insurer to back the pool by removing information from a report showing underwriting and compliance problems with the loans in the pool. JPM denied the allegations last year in an answer to the complaint.
JPMorgan yesterday asked Scheinkman for a pretrial ruling dismissing the complaint, saying that MBIA employees didn’t read the report, which was prepared by third-party underwriting firm Mortgage Data Management, until a week after they decided to insure the pool in September 2006.
“MBIA simply did not rely on this report,” Richard A. Edlin, an attorney for JPMorgan with Greenberg Traurig in New York, told the judge yesterday in a hearing. “Only three MBIA employees received the report and not one of them read or relied on it.”
The case is one of many still pending against banks over alleged misrepresentations in the packaging and sale of mortgages that helped bring on the 2008 financial crisis. Suits such as MBIA’s may be aided by JPMorgan’s acknowledgment in its record $13 billion deal this month with the U.S. government to end probes into mortgage-bond sales, said Minal Mehta, founder of San Francisco-based Sunesis Capital, which has invested in bond insurers doing battle with banks over bad mortgages.
With its Justice Department settlement, JPMorgan, the biggest U.S. bank, sought to end one of the largest legal uncertainties it faced without providing fodder to private litigants. The firm is still the subject of Justice Department probes into its energy-trading business, recruiting practices in Asia and its relationship with Ponzi scheme operator Bernie Madoff.
In the statement of facts that JPMorgan agreed to as part of the settlement, the New York-based bank acknowledged its employees and those of two firms it acquired -- Bear Stearns and Washington Mutual Inc.’s bank unit -- knew some of the loans included in mortgage bonds didn’t meet underwriting guidelines and the banks didn’t share that with investors. That doesn’t mean JPMorgan misled investors and the bank acknowledged the statement without admitting to violations of the law, according to Chief Financial Officer Marianne Lake.
“It’s difficult to imagine how a judge would give summary judgment to JPMorgan or dismiss pending lawsuits when the civil Department of Justice settlement required JPMorgan to acknowledge the very facts they are being sued over,” Mehta said. “The statement of facts is an enormous boon for private litigations and should lead to quick out-of-court settlements. If these cases go to trial, I can only imagine plaintiff lawyers salivating at the prospect of reading the Department of Justice statement of facts to the jury.”
Legal bills fueled the bank’s first quarterly loss under Chief Executive Officer Jamie Dimon, and he has told investors the disputes will continue. Dimon, 57, had led the New York- based company to three years of record profit, including $21.3 billion for 2012, the most of any U.S. bank.
At the time it sued JPMorgan, which bought Bear Stearns in 2008, MBIA was awaiting a ruling in a lawsuit brought by Bank of America and Societe Generale SA in state court in Manhattan seeking to reverse the approval of the insurer’s $5 billion restructuring in 2009.
The insurer was also preparing for a trial in a suit it filed against Bank of America’s Countrywide seeking to force it to buy back faulty loans included in residential mortgage-backed securities it insured.
Justice Barbara Kapnick upheld the insurer’s restructuring in March, and MBIA and Bank of America reached a $1.7 billion accord in May that gave the lender a 5 percent stake in the bond insurer and ended a five-year battle over soured mortgage debt.
MBIA sued GMAC Mortgage, the originator of the more than 17,000 loans in the pool, for fraud and breach of contract in state Supreme Court in Manhattan in April 2010, accusing the company of making false representations and warranties that it says it relied on before deciding to back the loans in September 2006. That case was stayed after GMAC Mortgage, a unit of Ally Financial Inc., filed for bankruptcy in May 2012.
All On Wall Street articles are archived after 7 days. REGISTER NOW for unlimited access to all recently archived articles, as well as thousands of searchable stories. Registered Members also gain access to exclusive industry white paper downloads, web seminars, blog discussions, the iPad App, CE Exams, and conference discounts. Qualified members may also choose to receive our free monthly magazine and any of our daily or weekly e-newsletters covering the latest breaking news, opinions from industry leaders, developing trends and growth strategies.