E-mail and other data held by Wall Street’s largest due diligence firm may determine how many cases the government brings against banks and other entities for actions leading to the financial crisis, a U.S. prosecutor said.
Assistant U.S. Attorney Edward Newman, in a hearing yesterday in federal court in Hartford, Connecticut, urged a judge to compel Clayton Holdings LLC to turn over due diligence reviews, as well as all communications between its employees and clients for whom it performed the reviews from 2005 to 2007 as part of the Justice Department’s probe into residential mortgage backed securities.
“Clayton is part of the puzzle,” Newman said. “Clayton can serve as the jumping off point for the United States to determine where else its inquiry may go.”
The fight over the subpoena underscores the Justice Department’s push to file civil claims against the largest U.S. banks in connection with mortgage-backed securities. The department sued Bank of America Corp. in August as New York-based JPMorgan Chase & Co. disclosed criminal and civil investigations. Bank of America, based in Charlotte, North Carolina, has denied wrongdoing and said it will fight the suit.
Clayton, based in Shelton, Connecticut, was a “major provider of third-party due diligence services” to the Wall Street firms that packaged mortgages into bonds for sale to investors, according to the Financial Crisis Inquiry Commission’s 2011 report.
Clayton describes its due diligence work as evaluating the quality of the mortgages to be packaged against the customers’ credit standards. Clayton said it didn’t do any independent investigation of the underwriting of those loans, which constituted a sampling provided by their clients.
Marc Rothenberg, a lawyer for Clayton at Blank Rome LLP, said Clayton has cooperated with U.S. authorities over the past six years and routinely provides documents and witnesses to aid in RMBS probes.
He argued that the Justice Department’s subpoena, issued in July, was overly broad and an attempt by the government to establish a repository of information on Clayton’s almost 200 clients that prosecutors can use at their convenience.
Rothenberg said the subpoena should be limited to the 16 financial institutions the department told him in June were under investigation.
Newman said the government’s probe wasn’t limited to 16 firms, though he asked U.S. Magistrate Judge Donna Martinez to order Clayton to immediately produce any due diligence reports the company had completed for those institutions.
“The United States is looking at any entity that might have been the source of the financial meltdown caused by residential mortgage backed securities,” he said.
Private and government plaintiffs, among them the Federal Housing Finance Agency and New York Attorney General Eric Schneiderman, have previously used information from Clayton to bolster suits against banks including JPMorgan, Bank of America Credit Suisse Group AG and Citigroup Inc. An internal report of Clayton’s released by the financial crisis commission showed that securitizers frequently allowed into bond deals mortgages the firm had flagged for failing to meet credit standards.
The subpoena was issued under the 1989 statute called the Financial Institutions Reform, Recovery and Enforcement Act, or FIRREA, which the government is using to pursue RMBS cases against Wall Street banks.
The law, enacted in response to the savings-and-loan crisis of the 1980s, allows the government to seek civil penalties for losses to federally insured financial companies for as long as 10 years.
Newman argued yesterday that the law gives the government broad authority to subpoena “books, papers and other records” that the attorney general deems relevant or material to its RMBS probe.
“Clayton does not get to decide what advances the United States’ investigation,” Newman said. “Under the clear wording of FIRREA, the attorney general does.”
Newman also said the government has concerns about who had access to Clayton’s RMBS database. He said the U.S. learned that Clayton’s clients had some ability to go into the database and make changes.
Robert Harris, Clayton’s general counsel, said clients had “read only” access for much of the database and were limited to inputting comments or waiving a score in a due diligence report, according to an affidavit.
Martinez, who didn’t rule on the request yesterday, told Rothenberg during the hearing that the government probably has the authority to get “a good portion” of the data it’s seeking.
The case is U.S. v. Clayton Holdings LLC, 13-mc-00116, U.S. District Court, District of Connecticut (New Haven).