Investment Banking and Brokerage

JPMorgan to face US class action in $10 billion MBS case

A man walks past JP Morgan Chase's corporate headquarters on August 12, 2014 in New York City.
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A federal judge on Tuesday said JPMorgan Chase & Co must face a class action lawsuit by investors who claimed the largest U.S. bank misled them about the safety of $10 billion of mortgage-backed securities it sold before the financial crisis.

U.S. District Judge Paul Oetken in Manhattan certified a class action as to JPMorgan's liability but not as to damages, saying it was unclear how investors could value the certificates they bought, given how the market was "not particularly liquid." He said the plaintiffs could try again to certify a class on damages.

Oetken ruled 10 months after JPMorgan reached a $13 billion settlement to resolve U.S. and state probes into the New York-based bank's sale of mortgage securities.

The class consists of investors before March 23, 2009 in certificates issued from nine of 11 trusts created by JPMorgan for the April 2007 offering. The other two trusts attracted only a handful of investors, and are the subject of other lawsuits.

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Oetken named the Laborers Pension Trust Fund for Northern California and Construction Laborers Pension Trust for Southern California as lead plaintiffs, and their law firm Robbins Geller Rudman & Dowd as lead counsel.

A JPMorgan spokesman did not immediately respond to a request for comment. The plaintiffs' lawyer did not immediately respond to a similar request.

The lawsuit said that JPMorgan misled prospective investors about the underwriting, appraisals and credit quality of the home loans underlying the certificates.

It said that by the time the litigation began in March 2009, six months after Lehman Brothers Holdings failed, the certificates were worth at most 62 cents on the dollar.

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Oetken rejected JPMorgan's arguments that the case could not be a class action because it was based on the practices of many originators and more than 8,000 underwriting guidelines, some investors were more sophisticated than others, and the MBS had evolved too rapidly during the two-year class period.

He also said he had no basis to accept JPMorgan's request that he disqualify Robbins Geller because one of what the judge called the firm's "confidential sources" for the lawsuit, a former employee at a loan originator, later withdrew his testimony - something the bank said had occurred in other cases handled by the firm.

The case, whose caption names a different plaintiff, is Fort Worth Employees' Retirement Fund v. JPMorgan Chase & Co, U.S. District Court, Southern District of New York, No. 09-03701.