In his role as co-chair of the Residential Mortgage-Backed Securities Working Group, Attorney General Eric T. Schneiderman announced a Martin Act lawsuit against J.P. Morgan Securities (formerly known as Bear Stearns), JP Morgan Chase Bank, and EMC Mortgage (formerly known as EMC Mortgage Corporation) for making fraudulent misrepresentations and omissions to promote the sale of residential mortgage-backed securities (RMBS) to investors.
According to Schneiderman’s lawsuit, these defendants deceived investors as to the care with which they evaluated the quality of mortgage loans packaged into residential mortgage-backed securities prior to Bear Stearns’s collapse in early 2008, incurring losses that have totaled approximately $22.5 billion to date.
Schneiderman’s lawsuit is the first legal action from the RMBS Working Group, a state-federal task force created by President Obama earlier this year to investigate those responsible for misconduct contributing to the financial crisis through the pooling and sale of residential mortgage-backed securities.
According to Schneiderman’s complaint, Bear Stearns led its investors to believe that the quality of the loans in its mortgage-backed securities had been carefully evaluated and would be continuously monitored. In fact, Bear Stearns did neither. Instead, it systematically failed to evaluate the loans, largely ignored defects that its limited review did uncover, and kept its investors in the dark about the inadequacy of the review procedures and defects in the loans. Even when Bear Stearns executives were made aware of these problems, the company failed to reform its practices or disclose material information to investors. As a result, the loans in Bear Stearns’s mortgage-backed securities included many that had been made to borrowers who were unable to repay the loans, were very likely to default, and ultimately did default in large numbers.
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