MBIA Inc. 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 & Co.’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 Corp., 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 LLP 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 Manal Mehta, founder of San Francisco-based Sunesis Capital LLC, 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 Corp. 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.
Documents produced in that case show that Bear Stearns, which served as underwriter on the loans, removed results from the Mortgage Data report showing that about 85 of 150 random sample loans in the pool didn’t comply with underwriting standards or applicable laws, according to MBIA, which said it has paid more than $180 million in claims on the securities.
One of the three employees who received the report, who was traveling to Minneapolis from New York on the day the deal was completed, testified that it was common practice for her to review such reports before signing off on the deal, Richard I. Werder Jr., an attorney for the insurer with Quinn Emanuel Urquhart & Sullivan LLP, told the judge.
Scheinkman questioned how the court would know MBIA had reviewed the report if nobody had testified to that fact, and wondered how he could know the insurer had read the document without such testimony.
“It just so happens that the report came in when she was out of pocket,” Scheinkman said. “How do we know whether she plausibly followed her own practices?”
Werder said it didn’t matter whether MBIA relied on the report because Bear Stearns was required to pass on the document unaltered.
“We can go to the jury even if it was conceded, which it is not, that nobody cracked open the attachment,” Werder said.
Pools of home loans securitized into bonds were a central part of the housing bubble that helped send the U.S. into the biggest recession since the 1930s. The housing market collapsed, and the crisis swept up lenders and investment banks as the market for the securities evaporated.
The six biggest U.S. banks, led by JPMorgan and Bank of America have piled up more than $100 billion in legal costs since the financial crisis, a figure that exceeds all of the dividends paid to shareholders in the past five years, according to data compiled by Bloomberg.
The case is MBIA Insurance Corp. v. J.P. Morgan Securities LLC, 64676/2012, New York State Supreme Court, Westchester County (White Plains).