A multibillion-dollar civil suit filed by the New York State Attorney General’s office against JPMorgan Chase over mortgage-backed securities could become a template for state and federal officials seeking accountability for the 2008 financial crisis, according to sources close to the case.
The lawsuit, filed in New York State Supreme Court in Manhattan on Monday, is the highest profile effort yet by a mortgage-backed securities working group first announced by President Barack Obama in his State of the Union address in January.
The group includes officials from multiple federal agencies, as well as 10 state attorneys general, including New York’s Eric Schneiderman, who has broad powers to prosecute financial fraud under a state law known as the Martin Act.
While it was Schneiderman’s office that ultimately brought the suit, a federal official familiar with the investigation told CNBC 11 U.S. prosecutors, as well as three attorneys from the Justice Department’s Civil Division, helped develop the case. The official says the interagency cooperation is a model for future cases, but would not say whether similar suits are imminent against other Wall Street firms.
A spokeswoman for Schneiderman also declined to comment about ongoing investigations.
The lawsuit filed Monday alleged “a systemic fraud on thousands of investors” in mortgage-backed securities sold by Bear Stearns, which was taken over by JPMorgan Chase as part of a government rescue package during the financial crisis in 2008.
“Defendants committed multiple fraudulent and deceptive acts” in promoting and selling the securities, the lawsuit said. The securities, made up of pools of residential mortgages, were at the heart of a global financial meltdown after the housing bubble burst in 2008.
The suit alleged that Bear Stearns had told investors it did extensive due diligence on the mortgages when in fact the bank was focused on originating and securitizing mortgages in massive numbers.
JPMorgan plans to fight the lawsuit, which it said involved conduct at Bear Stearns well before the takeover.
“The New York Attorney General civil action relates to Bear Stearns, which we acquired over the course of a weekend at the behest of the U.S. government,” spokesman Joe Evangelisti wrote in an email to CNBC. “We are 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.”
The lawsuit alleged that as early as 2006, Bear Stearns knew the loans it was originating and packaging as securities were risky, but it continued to aggressively market the securities with claims of “prudent” and “extensive” due diligence. But in fact, the suit claims, Bear Stearns became a “securitization machine.”
“To accommodate this massive volume of loans, defendants’ due diligence process abandoned certain basic inquiries,” the suit alleged. It quoted an email from a team leader at a firm hired by Bear Stearns to evaluate mortgages: “Have 1,594 loans to do in 5 days. Sound like fun? NOT!”
—By CNBC’s Scott Cohn; Follow Him on Twitter @ScottCohnCNBC