(Bloomberg News) JPMorgan Chase & Co., the biggest U.S. bank, was sued by New York Attorney General Eric Schneiderman, who alleged that the Bear Stearns business the bank took over in 2008 defrauded mortgage-bond investors.
Investors were deceived about the defective loans backing securities they bought, leading to "monumental losses," Schneiderman said in a complaint filed yesterday in New York State Supreme Court.
"Defendants systematically failed to fully evaluate the loans, largely ignored the defects that their limited review did uncover, and kept investors in the dark about both the inadequacy of their review procedures and the defects in the underlying loans," Schneiderman's office said.
Schneiderman in January was named co-chairman of a state- federal group formed to investigate misconduct in bundling of mortgage loans into securities leading up to the financial crisis. The group includes officials from the U.S. Justice Department, the Securities and Exchange Commission, the FBI and other federal and state officials.
Joe Evangelisti, a JPMorgan spokesman, said the New York- based bank would contest the complaint, which is "entirely about" conduct by Bear Stearns. JPMorgan acquired Bear Stearns in 2008.
"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," Evangelisti said in an e-mail.
The state's complaint names J.P. Morgan Securities, JPMorgan Chase Bank and JPMorgan's EMC Mortgage unit as defendants.
Schneiderman said they failed to abide by claims that they were ensuring the quality of loans backing the securities and "routinely overlooked defective loans" identified during due diligence reviews. The misconduct in due diligence and quality control "constituted systemic fraud on thousands of investors," the attorney general said.
According to the complaint, the current cumulative realized losses on more than 100 subprime and Alt-A securitizations that the defendants sponsored and underwrote in 2006 and 2007 total about $22.5 billion, or about 26 percent of the original balance of about $87 billion.
Schneiderman seeks an order for the bank to disgorge all money it obtained in connection with the fraud or as a result of it.
The case is People of the State of New York v. J.P. Morgan Securities, 451556-2012, New York State Supreme Court (Manhattan).