Eric Schneiderman, the Attorney General of the State of New York, filed a 31-page complaint against JPMorgan Chase (NYSE:JPM) on October 1. Schneiderman is accusing the bank of failing to review residential mortgage-backed securities with due diligence, and systemically misleading investors about both the quality of their checks and the securities.
“At the heart of Defendants’ fraud was their failure to abide by their representations that they took a variety of steps to ensure the quality of the loans underlying their RMBS,” the complaint reads. The result was investors losing a quarter of the value of their purchases — $22.5 billion.
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This complaint has an edge on previous suits filed by the Federal Housing Finance Agency against banks like Goldman Sachs (NYSE:GS) and Citigroup (NYSE:C) because, instead of targeting a specific deal, it targets an institutionalized behavior. The complaint is not against individual RMBS sales, but cites a pattern of negligence and intentional deception.
“Defendants failed to disclose to investors the defects in the loans that they purchased and the deficiencies in their due diligence process,” the complaint reads.
The complaint is addressed specifically to Bear Stearns, which was bought by JPMorgan in March 2008 during the financial crisis for $10 a share. Reuters is reporting that a person familiar with the lawsuit expects similar cases against other banks to follow. On September 28, Bank of America (NYSE:BAC) agreed to pay $2.43 billion in a shareholder class-action settlement regarding claims that the bank misled investors about the acquisition of Merrill Lynch.
“Defendants’ misconduct in connection with their due diligence and quality control processes constituted a systemic fraud on thousands of investors,” the complaint reads. JPMorgan denies wrongdoing and has said that it will fight the charges.