Eric Schneiderman Will Have to Do Better Than This

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By Jonathan Weil

Is this the best that Eric Schneiderman has got?

Yesterday, the New York attorney general filed a thoroughly unimpressive lawsuit against JPMorgan Chase & Co. over allegedly fraudulent sales of subprime mortgage bonds by Bear Stearns, the securities firm that JPMorgan bought in 2008 with help from the federal government.

The allegations track those previously made in private litigation by former Bear Stearns customers suing for losses, including Dexia SA, the French-Belgian bank that got a government bailout last year. No individual who worked at Bear Stearns was named as a defendant in the civil lawsuit. There were no new revelations. Schneiderman’s office seems to have done little of its own investigative work.

Some of the allegations in the 31-page complaint look like a clip job, including quotes taken from the Financial Crisis Inquiry Commission’s report in January 2011. Nor does the complaint accuse JPMorgan itself of engaging in any misconduct after completing its purchase of Bear Stearns.

You have to wonder why Schneiderman -- one of five co- chairmen of a Justice Department working group on mortgage- bond fraud -- bothered at this late date. It would surprise nobody to learn that Bear Stearns committed fraud before its near-collapse in 2008. But this suit doesn’t seem to be about accountability. If it were, it would have named some individuals as defendants. You can’t have a fraud without fraudsters.

The Federal Housing Finance Agency also has sued JPMorgan over the same sorts of claims in its capacity as conservator for Freddie Mac and Fannie Mae. (Schneiderman’s complaint cites facts obtained by reading the FHFA’s lawsuit, too.) Perhaps if Schneiderman’s office extracts a settlement someday, some money eventually will go to customers who got ripped off and figured it wasn’t worthwhile to try suing on their own. They shouldn’t get their hopes up, though. These sorts of cases usually settle for pennies on the dollar.

What’s especially worrisome: One section of the complaint, about advice rendered to Bear Stearns by the accounting firm PricewaterhouseCoopers, is sloppy to the point of inaccurate. It says: “Defendants’ external auditor, PricewaterhouseCoopers, in August 2006, advised defendants to stop asserting EPD claims against sellers on securitized loans before determining whether a breach of representations and warranties of securitization agreements also existed.” The complaint then goes on to describe related advice that Pricewaterhouse provided to Bear Stearns that year.

The problem with that section is Pricewaterhouse wasn’t the external auditor for Bear Stearns in 2006. Deloitte & Touche was. (Pricewaterhouse is JPMorgan’s longtime auditor. But remember, JPMorgan didn’t buy Bear Stearns until 2008.)

The distinction makes a big difference. If Pricewaterhouse had been Bear Stearns’s auditor, it probably wouldn’t have been allowed to provide that kind of management-consulting advice at the time because of federal auditor-independence rules. A Pricewaterhouse spokeswoman, Caroline Nolan, said the accounting firm performed no audit work for Bear Stearns and that the complaint is wrong.

A spokeswoman for Schneiderman’s office, Melissa Grace, had no immediate comment about the flub.

(Jonathan Weil is a Bloomberg View columnist. Follow him on Twitter.)

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-0- Oct/02/2012 19:00 GMT