The criminal investigation of JPMorgan Chase & Co.’s mortgage-backed securities practice is evidence a U.S. Justice Department task force set up to investigate causes of the financial crisis is finally getting some traction against banks blamed for ruining the economy.
The probe, disclosed this week in the bank’s quarterly filing, is the latest enforcement effort to emerge from the Residential Mortgage Backed Securities Working Group. It was set up last year on orders of President Barack Obama to coordinate prosecutions of fraudulent underwriting activity by banks that contributed to the financial crisis.
The JPMorgan probe, which is also looking at possible civil violations, grew out of the working group’s efforts, said Lauren Horwood, a spokeswoman for U.S. Attorney Benjamin Wagner in Sacramento, who is leading the investigation and is a member of the group’s parent, the Financial Fraud Enforcement Task Force.
“Over the last year and a half, the RMBS Working Group members have been aggressively investigating multiple cases across the country and the public is only beginning to see the results,” Associate Attorney General Tony West, the No. 3 ranking official at the Justice Department, said in an e-mail.
The JPMorgan Chase investigation, which may not lead to criminal charges, follows parallel civil lawsuits filed earlier this week by the U.S. Securities and Exchange Commission and the U.S. Attorney Office in Charlotte, North Carolina. U.S. officials claim Bank of America Corp. failed to disclose risks embedded in $850 million in mortgage-backed securities issued in 2008.
In February, as the government’s financial fraud task force started what would become a series of financial crisis-related cases, the Justice Department filed a civil suit against Standard & Poor’s, a ratings company, alleging that the firm committed fraud by blessing a series of mortgage-backed securities with top-quality ratings in 2007. Federal and state investigators alleged S&P should have known that the securities were well below investment grade. The government has asked the firm to repay $5 billion in losses.
Last October, New York Attorney General Eric Schneiderman brought the first case on behalf of the RMBS working group, accusing JPMorgan Chase of fraud stemming from the actions of its Bears Stearns Cos. subsidiary.
“The President’s Working Group continues to meet and make progress in its efforts to hold banks accountable for the crash of the housing market and the collapse of the American economy,” Schneiderman, who co-chairs the working group, said in a statement Aug. 7.
The RMBS group’s director is Geoff Graber, who was also the lead Justice Department lawyer in the investigation of New York-based McGraw Hill Financial Inc.’s S&P unit. More than 200 federal and state attorneys, investigators and analysts have played a role in the group’s work, according to the Justice Department.
Graber’s coordinating team, composed of eight members, is based in Washington and made up of criminal prosecutors, civil attorneys and analysts. As part of its work, it conducts day-long meetings every two months, the most recent of which occurred on July 12, according to the Justice Department.
The meetings, which include staff from the SEC, Justice Department, representatives of Schneiderman’s office and other state attorneys general and the FHFA’s inspector general, are centered on current investigations, identifying new targets and coordinating strategies.
The group has faced criticism from lawmakers and consumer advocates for its failure to live up to the promises President Obama made when he announced its establishment in his January 2012 State of the Union address. The pace of the group’s work drew early complaints from lawmakers, including California Representative Maxine Waters, now the top Democrat on the Financial Services Committee.
It took the group nearly four months to create a website, name its executive director and hire a staff of attorneys, analysts and FBI investigators. The group didn’t announce its first action until October 2012, when Schneiderman filed his suit against JPMorgan over misrepresentations related to RMBS put together by Bear Stearns.
The group took on a mix of continuing civil and criminal investigations and new probes into misrepresentations by securities originators and underwriters on the quality of mortgages backing the securities, failures to repurchase problematic loans and failures to transfer ownership of collateral into the securities in question.
The group has a broad mandate to investigate “any harm suffered by American consumers” related to misrepresentations or failures in agreements related to the securities, according to a Jan. 27, 2012, memo by Attorney General Eric Holder.
The uptick in the group’s work has mostly been on the civil side, as the department’s attorneys have begun to focus on and use a 1989 statute that allows the government to seek civil penalties for losses to federally-insured financial firms that occurred as long as a decade ago. Standard securities-fraud cases need to be brought within five years.
The Bank of America suit was brought under that law and the civil charges being weighed by prosecutors against JPMorgan are being crafted through that statute too.
“This is the RMBS Working Group’s most recent legal enforcement targeting misconduct in the RMBS market, but it will not be our last,” said West, who is also vice-chairman of the task force’s steering committee.
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