JP Morgan faces lawsuit over subprime mortgage securities

New York’s top prosecutor is suing US banking giant JP Morgan, alleging that its Bear Stearns unit defrauded investors by selling billions of dollars worth of securities backed by mortgages they knew – or should have known – were highly likely to default.

The case filed by Attorney General Eric T. Schneiderman late Monday is the first action to be brought by the task force set up by President Barack Obama in January to investigate and prosecute alleged misconduct that contributed to the 2008 global financial crisis, the Associated Press reported today.

If successful, it could pave the way for action against other investment banks involved in issuing subprime mortgage bonds.

“This is a workable template for future actions against issuers of residential mortgage-backed securities that defrauded investors and cost millions of Americans their homes,” Schneiderman said in a statement cited by Bloomberg.

“We need real accountability for the illegal and deceptive conduct in the creation of the housing bubble in order to bring justice for New York’s homeowners and investors.”

Reuters reported the civil lawsuit accuses Bear Stearns – which JP Morgan acquired in a fire sale in March 2008 – of "deceiving investors by leading them to believe that the quality of loans in the mortgage-backed securities had been carefully evaluated," which they had not been.

The defective loans led to “monumental losses” for investors when the US housing market collapsed, triggering huge numbers of defaults across the country, Bloomberg reported.

Investors are out of pocket $22.5 billion so far.

JP Morgan said it would challenge the accusations, the New York Times reported.

"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," Joseph Evangelisti said in a statement.

"We will nonetheless continue to work with members of the president's RMBS Working Group and are fully cooperating with their inquiries.”

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