My sincere congratulations go to the Securities and Exchange
Commission and the Justice Department for the mortgage-backed securities settlements announced Friday afternoon. In the Sec's
long-awaited deal with JPMorgan Chase, the bank agreed to pay $297.5 million to resolve two different claims, one that
JPMorgan misrepresented the delinquency rate of loans underlying
a $1.8 billion MBS offering that the bank underwrote in 2006;
the other that Bear Stearns failed to hand over the proceeds of
put-back deals with mortgage originators to MBS trusts. Credit
Suisse, meanwhile, agreed to pay $120 million to resolve similar
allegations of keeping put-back money for itself as well as
claims that it deceived MBS investors about the terms of its
"first default payment" provision, which was supposed to protect
noteholders from underlying loans that went into default
quickly.
If you're feeling ungenerous, you can find plenty of reasons
to carp about the SEC cases, even aside from the relatively
small size of the settlements. No individuals were charged, for
instance. In a conference call with reporters Friday afternoon,
Enforcement Director Robert Khuzami said that similar decisions
not to charge individual defendants in MBS cases recently filed
by New York Attorney General Eric Schneiderman and U.S. Attorney Preet Bharara of Manhattan show that it's very
difficult to single out specific people who misrepresented
structured finance products to investors. The SEC cases also
don't assert intentional wrongdoing, even though Bear Stearns's
practice of hoarding put-back money allegedly involved more than
6,000 loans in 156 trusts, for which Bear received proceeds of
almost $138 million. Credit Suisse allegedly retained put-back
money that should have gone to investors in 75 MBS deals over a
five-year time span. Despite the Sec's assertions of repeated
misconduct, the banks were accused only of negligence-based
fraud, not intentional fraud.
Neither bank was required to admit liability, as Khuzami
said is still standard in SEC cases. But the agency needn't
worry about a U.S. district court judge like Jed Rakoff kicking
up a fuss about the terms of its settlement with Credit Suisse,
which was filed as an administrative proceeding and doesn't
require a district court judge's approval. (The JPMorgan suit
was filed in federal district court in Washington.)
I'm choosing, however, to regard the MBS enforcement glass
as half-full. The SEC settlements, like the complaint that the
New York AG filed last month, are a signal to MBS investors --
and the broader market -- that regulators haven't abandoned them
after all. Indeed, Khuzami said the Sec's recoveries from
JPMorgan and Credit Suisse will go back to MBS investors
victimized by the banks' practices. John Walsh, the Colorado
U.S. Attorney who is the co-chair of the Justice Department's
Mortgage Fraud Task Force, promised reporters on Friday's call
that these cases are a harbinger of more to come against the
banks involved in issuing and underwriting mortgages-backed
securities. That's surely welcome news to investors.
The SEC thanked a long list of lawyers from both its
structured and new products unit and its trial unit for working
on the JPMorgan and Credit Suisse cases. I'm sure all of them
deserve the credit. But the point of this piece is to cite
another group of lawyers -- those who actually originated the
theories and evidence underlying the Sec's allegations. That
distinction goes to the private plaintiffs' bar, which began
litigating mortgage-backed securities cases on behalf of bond
insurers and MBS investors three years before the mortgage fraud task force was even formed.
In particular, the SEC cases owe a huge debt of gratitude to
Patterson Belknap Webb & Tyler, which represents not only Ambary
and MBIA in litigation against Credit Suisse but also Ambary,
Assured Guaranty and Syncopate in cases against JPMorgan and Bear Stearns. The bulk of the Sec's settlement with JPMorgan,
for example, comes from the claim that Bear didn't turn over
put-back money to the trusts. (JPMorgan is paying $222.4 million
in disgorgement, interest and penalties to resolve that charge
and $74.5 million on the delinquency misstatements.) Those
so-called double-dipping allegations, which are also prominently
featured in the New York AG's New York State Supreme Court suit
against JPMorgan, first surfaced in voluminous Patterson Belknap complaints all the way back in February 2011.
The firm also documented Credit Suisse's practice of
retaining put-back money it received from originators in early
2011. A brief filed that March in MBIA New York State Supreme
Court case against Credit Suisse described the bank's alleged
habit of reaching bulk settlements with mortgage originators who
sold the bank deficient loans to securitized and then failing to
turn the put-back settlement money over to MBS trusts. In fact,
according to the MBIA brief, investors were twice victimized by
this alleged practice: once when they didn't get the put-back
funds they were contractually due, and again when Credit Suisse
supposedly failed to assert additional put-back claims against
mortgage originators it had settled with.
We know from previous disclosures that the feds subpoenaed
the discovery Patterson Belknap obtained in some of its bond
insurer cases, so you can be sure the mortgage fraud task force
benefited from the firm's work. Will Patterson Belk nap's
clients, in turn, benefit from the Sec's settlements with
JPMorgan and Credit Suisse? Years after the firm's bond insurer
cases began, they are all still deep in litigation, with no end
in sight. The SEC deals didn't involve an admission of
liability, so there's no direct impact from the settlements to
the bond insurers that alleged the same conduct. But judges
don't live in a bubble. The SEC settlements may color their view
of the bond insurers' allegations. Moreover, Credit Suisse and
JPMorgan have been notoriously intransigent in MBS and put-back
litigation. The mere fact that they've settled with the SEC
offers hope to everyone else litigating against them.
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