Clayton Holdings LLC, Wall Street’s largest due-diligence firm, should turn over to the U.S. Justice Department data and e-mails that may be used to determine how many cases the government brings against banks for actions leading to the financial crisis, a magistrate judge said.
Clayton failed to show that the government’s request for three years’ worth of client work and communications was overly broad and burdensome, U.S. Magistrate Judge Donna Martinez in Hartford, Connecticut, said yesterday in a recommended ruling. The U.S. is seeking the information as part of its probe into the packaging and sale of mortgage bonds before the 2008 financial meltdown.
“The government’s investigation into abuses in the residential mortgage-backed securities market is broad and extensive,” Martinez wrote. “The government maintains that Clayton’s due diligence reports, which provided its clients with qualitative information regarding the loans it reviewed, are relevant and within the scope of the government’s investigation.”
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. reached a tentative $13 billion agreement with the U.S. to settle multiple mortgage-bond probes.
Marc Rothenberg, a lawyer for Clayton at Blank Rome LLP, declined to comment on the judge’s recommendation.
Rothenberg said during an Oct. 3 hearing that 16 banks were on a list of targets the government gave his client in June. The department is focusing on about half of them, a person familiar with the matter has said. Rothenberg and the government refused to publicly identify the banks.
U.S. Attorney General Eric Holder has been following the case since it was filed and is “encouraged” after being briefed on yesterday’s decision, said Brian Fallon, a spokesman for the Justice Department.
“The Justice Department will remain aggressive in investigating behavior that may have compromised our financial markets,” Fallon said in an e-mail. “We will pursue every lead necessary to get to the bottom of any potential misconduct.”
Martinez’s ruling can be challenged before the U.S. district judge who referred the case to the magistrate for pretrial matters.
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.
The subpoena was issued under the 1989 Financial Institutions Reform, Recovery and Enforcement Act, which the government is using to pursue RMBS cases against Wall Street banks.
It seeks due diligence reviews, all communications between its employees and clients for whom it performed the reviews from 2005 to 2007, and Clayton’s database that was used to prepare the due diligence reports.
The case is U.S. v. Clayton Holdings LLC, 13-mc-00116, U.S. District Court, District of Connecticut (New Haven).