JPMorgan Asks Judge to Keep Draft U.S. Fraud Suit Secret

JPMorgan Chase & Co. had a hearing behind closed doors with a Pennsylvania judge in its bid to keep secret a draft of a government lawsuit related to its $13 billion settlement with the U.S. as well as the identity of an employee who cooperated in a federal probe.

The company is fighting an Oct. 17 order by Judge Stanton Wettick in Pittsburgh that it release the document and the employee’s name to lawyers for the Federal Home Loan Bank of Pittsburgh, who say the material may provide a more detailed account of the U.S. Justice Department probe of JPMorgan that could be used in their lawsuit against the New York-based bank.

“FHLB has not set forth any facts supporting why it needs the draft DOJ complaint or what admissible evidence it might glean from the allegations of a complaint,” Deborah Little, a lawyer for JPMorgan, said in a court filing. “FHLB has not demonstrated any nexus between the DOJ’s investigation and the subject matter of this case.”

Prior to the start of a hearing today, Wettick closed the courtroom to the public. Lawyers on both sides declined to comment after the hearing.

The FHLB lost $2.3 billion on mortgage-backed securities it purchased from JPMorgan. The losses aren’t covered by the record U.S. settlement resolving allegations that the bank misled buyers about the soundness and risks of the investments.

JPMorgan, the biggest U.S. lender by assets, is paying the record settlement to resolve Justice Department probes into the bank’s sale of mortgage bonds that officials said helped feed the financial chaos of 2008.

FHLB’s Case

The conduct and deals at issue in the settlement are the same ones at the heart of the FHLB’s case, David Beehler, an attorney for the Pittsburgh bank, said in court filings.

JPMorgan acknowledged the settlement’s statement of facts without admitting violations of law, Chief Financial Officer Marianne Lake said on a Nov. 19 conference call. In the statement, the official narrative of events leading to the infractions, the bank acknowledged that from 2005 to 2007 its subsidiaries securitized subprime and Alt-A mortgages loans and sold the resulting mortgaged-backed securities to investors while failing to disclose that the loans didn’t meet underwriting standards.

The statement doesn’t refer to specific employees, documents or events. It also doesn’t provide any details about the loan programs or vendors.

The Pittsburgh bank is suing JPMorgan and credit rating companies including Moody’s Investors Service over mortgage-backed securities it bought in 2006 and 2007.

Draft Complaint

FHLB attorneys persuaded Wettick in October to order JPMorgan to turn over the draft civil fraud complaint prepared by U.S. Attorney Benjamin Wagner in Sacramento, California. The lawsuit alleged violations of the Financial Institution Reform, Recovery and Enforcement Act of 1989, known as FIRREA, according to court filings in the case.

The law allows the government to sue an individual or group, rather than charge them with a crime, for fraud that affects a federally insured financial institution.

FHLB agreed to give the bank until Nov. 22 to provide the document at the request of Justice Department lawyers who said the agency was close to a settlement, according to court filings.

The accord was announced Nov. 19, and three days later JPMorgan attorneys notified the FHLB that it would seek to block Wettick’s order, according to the filings.

‘Fraudulent Conduct’

“Given JPMorgan’s apparent deep desire to prevent it from ever seeing the light of day, it would not be at all surprising if the draft complaint is a much more detailed account of JPMorgan’s fraudulent conduct, and as such, far more enlightening than the statement of facts,” according to the filing.

JPMorgan said the draft complaint was provided to it by the Justice Department as a “confidential settlement communication” and it agreed to use it solely for the purpose of settlement negotiations, according to a court filing. Allowing the document to be turned over to the FHLB would violate state and federal law and “chill the use of such materials in future settlement negotiations,” JPMorgan said.

Moody’s Case

In its case against Moody’s, the Pittsburgh bank is seeking to question Jerome Fons, a former executive of the ratings company who criticized credit graders to U.S. lawmakers in 2009.

Lawyers for the FHLB have asked Wettick to allow them to question Fons on his testimony in a case against Morgan Stanley and other banks in federal court in Manhattan. That testimony, under seal after the case was voluntarily dismissed, was given to plaintiff lawyers in Pittsburgh. Moody’s argued in court papers filed Nov. 20 that a deposition of Fons would “provide no evidence relevant to this action and will only place undue burden on Moody’s.”

Fons “has no firsthand knowledge of any Moody’s structured finance analyst ever allowing market share pressure to impact a particular rating,” lawyers for Moody’s said, citing sections of the sealed testimony transcript.

House Committee

Fons told the U.S. House Oversight and Government Reform Committee in October 2008 that originators of structured securities typically chose the agency with the lowest standards, “engendering a race to the bottom in terms of rating quality.”

The plaintiffs allege Moody’s and other rating companies assigned the highest possible ratings to mortgage-loan pools so they could be sold to institutional investors all the while knowing the certificates were actually junk bonds, according to court papers.

Fons, formerly a Moody’s managing director for credit, left the firm in August 2007. Until his departure, he helped set criteria for how the firm rated the debt of corporations, financial institutions and countries.

“The truth is that the rating agencies did not have sufficient and reliable information to place a triple-A rating on the securities,” the Pittsburgh bank said in court papers. “The rating agencies and other defendants knew they were feeding false information into their predictive models and that those models could not predict the losses on the loans in the mortgage pools.”

The case is Federal Home Loan Bank of Pittsburgh v. J.P. Morgan Securities LLC, GD09-016892, Court of Common Pleas of Allegheny County, Pennsylvania (Pittsburgh).

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