NYAG Eric Schniederman Announces First Fraud Task Force Target: J.P. Morgan Chase


Last January, President Obama announced in his State of the Union Address that a joint effort between state and federal authorities would aim to bring Wall Street’s ass to court for civil fraud violations. Although the frustrated liberal base wanted jail time for the 2008 financial crisis, this legal move sought to collect fines from some of downtown Manhattan’s top dogs. And to lead this bank justice team? None other than Governor Andrew Cuomo’s successor, New York Attorney General Eric Schneiderman.

Since the speech in January, talk of the populist program essentially disappeared until the AG mentioned at the beginning of September that he would be shooting subpoenas at private equity firms, including Mitt Romney’s Bain Capital. We reported on this at the time, making the point that other targets were some of the Presidential candidate’s largest donors; many of whom we profiled in our ‘Mitt Loves N.Y.’ series.
However, yesterday, the first major lawsuit from what has come to be known as the Residential Mortgage-Backed Securities Group arrived from Schneiderman’s desk: an accusation at financial titan J.P. Morgan Chase for its acquisition of Bear Stearns, the bank that sank in the Implosion of 2008 and later bought by J.P. Morgan for $2 a share – a deal moderated and cheered by the federal government at the time. According to the lawsuit, Bear Stearns had “kept investors in the dark” about seemingly everything that was going on pre-financial-meltdown.
Aside from the $550 million SEC settlement with Goldman Sachs, it is, arguably, the largest action taken by a governmental agency towards what happened Downtown during those fateful months that brought the global economy to its knees.
Now, that should get a few people’s attention.
The main drama behind Mr. Schneiderman’s accusation involves those pesky mortgage-backed bonds that consumed Wall Street and the housing market before everything went to shit. The AG’s task force is suing Bear Stearns on the notion that it willingly did not inform investors in the build-up to 2008 that they were buying what would later be deemed “risky” bonds.
As a result, buyers lost a total of $22.5 billion with just more than 100 of these investments after the bank went under. For comparison of loss, this value is one quarter of the original balance sheet, which had the loans listed as being worth $87 billion. At that point, the endless digits just blur into an enormous mess of numbers and money.
So the matter at hand here is an act of reckless negligence on behalf of Bear Stearns. And Mr. Schienderman has found his argument in the Martin Act, a New York State fraud bill that states that proof of an intent to deceive the customer is not necessary for a government lawsuit. It also gives a six-year window of opportunity for the government to sue with civil fraud cases. With that in hand, Albany, with help from Washington, is given extensive powers to go after banking practices that they deem “fraudulent” to the general welfare.
In response to the lawsuit, J.P. Morgan Chase is arguing that it bought Bear Stearns after all of this shady business went down. “The NYAG civil action relates to Bear Stearns, which we acquired over the weekend at the behest of the U.S. government. This complaint is entirely about historic conduct from that entity,” the bank said in its statement. Nonetheless, the bank will fight Mr. Schnienderman in court over the whole situation.
Let the court battle (of the Great Recession) begin.