New York Attorney General Eric Schneiderman has filed a lawsuit against JP
Morgan Securities (formerly Bear Stearns & Co), JP Morgan Chase and
Bear Stearns lending unit EMC Mortgage for making "fraudulent
misrepresentations and omissions" over the sale of Bear
Stearns mortgage­-backed securities to investors. JP Morgan has said it
intends to contest the allegations.

According to the lawsuit, the defendants deceived investors regarding
the care with which they evaluated the quality of mortgage loans
packaged into residential mortgage-backed securities before Bear
Stearns' collapse in early 2008, incurring losses that have totaled some
$22.5 billion to date.

The lawsuit is the first legal action from the Residential
Mortgage-Backed Securities Working Group, of which Attorney General
Schneiderman is also co-chair. The group was created this year by
President Obama to investigate those responsible for misconduct
contributing to the financial crisis.

In an emailed statement, JP Morgan argued
that the complaint is "entirely about historic conduct by that [Bear
Stearns] entity" - that the civil action relates to Bear Stearns,
which the bank acquired over the course of a weekend "at the behest of
the US Government."

 "We’re disappointed that the NYAG decided to pursue
its civil action without ever offering us an opportunity to rebut the
claims and without developing a full record – instead relying on
recycled claims already made by private plaintiffs," JP Morgan said. "We
will none-the-less continue to work with members of the President’s
RMBS Working Group and are fully cooperating with their inquiries."

Securitzations that "turned sour"

According to the lawsuit, at present there remains a further $30
billion in unpaid principal on mortgages. The Attorney General seeks
investor damages to recover losses, as well as other equitable relief.

“This lawsuit will bring accountability for the misconduct that led
to the crash of the housing market and the collapse of the American
economy,” Attorney General Schneiderman said in a statement yesterday.
“Our lawsuit demonstrates that there is one set of rules for all – no
matter how big or powerful the institution may be – and that those rules
will be enforced vigorously.

"We believe that this is a workable template for future actions
against issuers of residential mortgage-backed securities that defrauded
investors and cost millions of Americans their homes," he added.

It is alleged that Bear Stearns "systematically failed" to evaluate
the loans and ignored defects which its "limited review" uncovered. The
bank also shielded the inadequacy of the review procedures and defects
in the loans.

"Even when Bear Stearns executives were made aware of these problems,
the company failed to reform its practices or disclose material
information to investors," the statement continues. "As a result, the
loans in Bear Stearns’s mortgage-backed securities included many that
had been made to borrowers who were unable to repay the loans, were very
likely to default, and ultimately did default in large numbers.