SEC Tells JP Morgan Enforcement Action Coming over Bear’s Mortgage Backed Securities Violations

Fallout from JP Morgan trading losses, which led to rater Fitch downgrading their debt yesterday, aren’t the only financial worries the banking behemoth is facing. Nestled in that shocking 10-Q filed Thursday is an admission that their regulator, the Securities and Exchange Commission, thinks some of the details that lead to the explosive Ambac mortgage security fraud suit against the naughty stepchild of JPM, Bear Stearns/EMC, are worthy of an enforcement action. Yep- the SEC is giving or finally gave them a Wells Notice, which means according to their 10-Q (and their 10-K) in January 2012 the SEC’s investigation into the sins of Bear’s Mortgage team run by Tom Morano, Jeff Verschleiser, Mike Nierenberg and the subsequent cover up by JPM was worthy of a civil suit along with some penalties.

JPM’s 10-Q states “In January 2012, the Firm was advised by SEC staff that they are considering recommending to the Commission that civil or administrative actions be pursued arising out of two separate investigations they have been conducting… In both investigations, the Firm has submitted responses to the proposed actions.”

We see JP Morgan admit one of the Wells notices relates to the fraud actions first brought forward in the Ambac suit with this line from the 10-Q, “The second involves potential claims against Bear Stearns entities, JPMorgan Chase & Co. and J.P. Morgan Securities LLC relating to settlements of claims against originators involving loans included in a number of Bear Stearns securitizations.”

They are talking about a phrase I first coined called the ‘double dipping scheme’.

It’s black letter law that Wells submissions to the SEC are discoverable in civil litigation. So lawyers in the monoline suits against JPM/BEAR will surely be trying to get a copy of the wells notice via discovery.

I first reported the SEC started an investigation into these alleged securities violations (and possible criminal actions) after I saw the securities regulator approach the lawyers and whistleblowers in my Bear Stearns investigative report at The Atlantic the day after the story came out. Now a year later it appears all the ‘shitty deal’ emails, internal Bear Stearns documents, and over thirty whistleblowers who’ve come forward in the monoline suits lead by the New York office of law firm PBWT was enough to get the SEC to stand up to JPM and hopefully say ‘what you did violated securities laws and harmed investors’. Talk about another wave that could lead to tsunami style damage to Jamie Dimon’s ‘fortress balance sheet’.

How many billions in damages JP Morgan will have to pay out is not yet determined but inside their Mortgage-Backed Securities and Repurchase Litigation note on the 10-Q the bank tells us “There are currently pending and tolled investor and monoline claims involving approximately $120 billion of such securities.”

WOW that means investors think there was a heck of a lot of very bad mortgage securities that were packaged and sold and they want their money back along with some fines and are willing to spend a few million to pay expensive lawyers to sue for it. When I first reported on the Ambac case and went on RT’s The Keiser Report to explain what kind of financial trouble JPM could be in the damages in the monoline suits against Bear were only around $1.2bn. I told Max Keiser if fraud claims survived the suit that means punitive damages get lobbed on and who knows many billions JPM will have to pay out because allegedly emails showed Bear mortgage traders stole billions from their own damn clients. I threw out a number, $10bn, that JPM could be looking to pay. Now according to JPM’s latest SEC filings there are now “seven pending actions commenced by bond insurers that guaranteed payments of principal and interest on approximately $5 billion of certain classes of 21 different MBS offerings.”

The face value amount of securities tied to the monoline suits against JPM are significant because there was a recent ruling in a Countrywide RMBS suit that ruled if plaintiffs can prove there were miss-representations in the bonds then the entire amount of the bond has to be bought back…not just the amount that defaulted or caused a loss. Reuters legal columnist Alison Frankel explains the judge’s decision and impact here. It has a lot to do with the way insurance laws are structured in New York State, which is where all the monolines suing have headquarters.

So far we haven’t seen JPM settle any of these mortgage putback suits including the government’s housing regulator’s whopper of a suit filed this winter against a bunch of banks including JPM. The government’s outside counsel who filed the FHFA suit literally copied the fraud and breach of contract claims Ambac had laid out against JPM and since then we’ve seen a multiple of big boy institutional investors file similar suits. Thus the alarming $120bn number of possible rmbs repurchase litigation damages JPM was forced to detail in their recent 10-Q. A number which accompanies a series of motions their expensive lawyers at Sullivan & Cromwell and Greenberg Traurig have filed to slow down discovery and deny, deny, deny these aggressive fraud claims in the triple digit billions.

And now that the SEC is about to come out and stamp a ton of merit to these civil investor lawsuits via an enforcement action that hopefully says – you guys broke the law, abused free markets, and seriously broke investor trust — then it’s looking harder and harder for JPM not to settle these investor lawsuits in the mega billions. Just think if Ambac actually got to trial and a main street jury who’s pissed very few bankers have gone to jail for the financial crisis heard some of the whistleblower testimony about senior Bear executives telling underlings to make up mortgage info for the raters. Or the third-party due diligence reports Bear got them to fudge – reports investors relied on as due diligence rubber stamping the quality of the rmbs securities. I’d image punitive damages up the yin-yang would be awarded.

But the most telling sign JPM will have to payout big time is that HUGE jump in litigation reserves they snuck in this week. In the bank’s first quarter earnings press release, filed on April 13th, JPM told investors they were adding $2.5bn to existing litigation reserves for mortgage-related suits. And then three weeks later while all my jurno peers are focused on writing stories about what JPM’s trading screw up means to their reputation, their master public relations spin machine figures lets thrown in all the bad news we can cause we know the market will punish our stock. So they added on another $1.7bn in litigation reserves for a total hit to income of $4.2bn in Q1 2012.

On top of that I’ve seen top housing analyst Mark Hanson tell hedges funds they might want look at how JPM repurchase risk will affect net income and thus the stock price. Francine McKenna, former Big 4 auditor and influential columnist for American Banker told me this is just the first phase. Accounting rules allow JPM to slowly add each quarter to litigation reserves and take smaller hits to net income than waiting for a big money suit to finalize and wipe-out a whole year’s earnings. Some financial editors like Joe Weisenthal at Business Insider allowed his team to write the $4.2bn addition to litigation reserves was due to trading loss but that’s not what the 10-Q explains. Number one these are reserve additions for events up to March 31st and JPM worrisome trading loss began in April. Number two the bank has to explain all the litigation that gets to that reserve number and there is not a word about suits from trading losses in their 10-Q litigation notes. Nope this big jump was from progress being made by rmbs plaintiffs and a looming SEC action which you see if you know how to read the litigation notes.

McKenna, founder of www.retheauditors.com says, “Banks tend to account in one lump litigation reserve number what they think they will have to payout from a suit but that’s really a disguise so that no one across the table from the litigation can see what they might be willing to settle for.”

There is another dirty accounting trick JPM is possibly playing with here. McKenna told me in an interview this week reserves are like a cookie jar, banks can increase and decrease this balance sheet number each quarter which shows up as a loss or earning to net income. So let’s say Jamie Dimon thinks the mark-to-market loss of $800 million he just took for the trading screw up is going to be a lot more when they are done unwinding the trade. The bank they could lower their litigation reserves and boom that trading loss doesn’t look so bad on next quarter’s net income. Then going into Q3, when say maybe they settle with the SEC and the rest of the Street wakes up to how many billions they will have to pay out for the sins of Bear Stearns RMBS fraud, JPM can just re-up the litigation reserves. Now of course their Big 4 auditor has to allow them do this by signing off on the SEC financial filings but part of the Abmac suit filed last January showed PricewaterhouseCoopers tried to stand up to JPM/Bear accounting tricks before and the bank just ignored it. A detail the lawyers at PBWT discovered for us. In that case it would be up to the SEC to say ‘Hey JPM your RMBS repurchase risk is more than you are accounting for and you’d better represent a more realistic number.” This in turn hurts JPM’s income and also can lead to additional downgrades by the raters, so an accounting scolding by the SEC on top of an enforcement action might not be something they’ll man up to. But clever analyst and hedge funds will see it and the result could be free market participants take a club to the CEO, who the financial press once hailed America’s angle banker, all on their own.

Editors Note: When my fellow financial reporters figure out I’ve reported JPM got a Wells Notice for mortgage securities no-no’s becuase of the Ambac ‘double dipping suit’ I’d like to remind them jurno standards mean you need to credit Teri Buhl for reporting this. Thanks in advance to Matt Taibbi at Rolling Stone and Max Keiser at RT who always link and mention the Bear RMBS fraud cheating their own clients news created a whopper of a problem for JPM, was a result of my original reporting at The Atlantic. Here is a shout out thanks from me to Daniel Indiviglio, my editor at The Atlantic, who understood the importantence of impact to the market in this story back in May 2010 and made sure it got published. And most important I’d like to recognize Nick Verbitsky, doc film maker of Confidence Game, a move now playing about the greed and fraud that lead to the downfall of Bear Stearns, for finding the first whistleblowers to speak out against the Bear Mortgage executives. Awareness of how these Wall Street titans cheated and stole damaging free markets was a result of investigative journalism and the PBWT attorneys not our regulators figuring it out first.

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Comments

  1. J.A.Goodman says:

    Ms Buhl,
    As a regular follower of Keiser Report, I saw the interview you reference above, so I was aware of some of the background to this story.
    At this point I can only say that I am amazed and thrilled to witness the brilliance of your investigative skills. I’m also very grateful for the invaluable contribution you are making in this fight for justice, as Wall Street’s chickens finally come straggling home to roost!
    Carry on, and Godspeed.

  2. TheGilliom says:

    It’s about time the bankers start to get some punishment for all of their fraud, manipulation, and corruption. Why not start with the biggest of them all. How are those massive silver short positions doing JPM?

    Thanks for breaking this information Teri.

  3. philipmax says:

    Teri, Great expose.
    Would it be too much of a bad news avalanche if you also expose the dirty tricks that JPM played in the WAMU bankruptcy and especially the DIMEQ scandalous larceny that was pulled off in that infamous case?

  4. I could only hope the SEC does half of what they should.

    What I really hope for is the average saver/investor to understand just half this stuff.

    I also have a dream…

    NO USURY ON CURRENCY
    IAMSLATTERY

  5. Fantastic. Thank you very much for your hard work in bringing this to light.

    I have a suggestion. I’ve read that Wall Street firms blow big bucks illegally on prostitutes, but the government aren’t willing to pursue cases. If you got evidence on lower level staff breaking the law this way, you may be able to leverage evidence on some of the main players, and shame the government into taking action.

    I know it is shitty to try to take these people down “Al Capone” style. But, in the end, this may be the only thing we can get them for. It could also put pressure on them as they try to defend themselves over financial fraud allegations. If they drop the ball there, that would be great for us 99%.

  6. Norm at Cheers says:

    Great job, Teri.

  7. muyuan51 says:

    Howdy, Teri,

    finally i had to stumble across your exceptional well researched and written news report ! Congrats !

    For your writing the plain truth you should be nominated the Pulitzer’s ( just think about Kirsten Grind in her very beginning in the case WAMU ) !(sarcasm)

    This is leading to my question.

    I was reading a little deeper into your older works and never mentioned one word about the WAMU case, representing for me the biggest crime and theft in american banking history! Whenever i read about this i come across institutions and persons like FDIC, SEC, OTC, DOJ, FED, JP Morgan, Jamie Dimon, Sheila Bair, Hank Paulson, Timothy Geithner, Alan Greenspan, Tim Bernanke, Rothschildt, some say Bilderberg and o lot of others …. so, i’m asking myself, wouldn’t the WAMU saga have been a topic worth for you to write about ??? …. perhaps it’s not too late to do so now ???

    Heartily greetings from Austria and have a good time, for me you have the AAA rating for writing !!!

    muyuan51

  8. So what happens to these Bear 3 ?

    • Teri Buhl says:

      Good Q: There is still an active NY AG investigation into them meaning he could charge them with the Martin Act–this would be a criminal charge. I went on the Keiser Report to talk about this in September…Likely NY AG would wait for SEC to act first. It\’s a 50/50 they get charged. For now they are still earning millions working for other banks.

  9. SnakeEater says:

    Better stop FB from IPO before all the FIAT $100 Bilions digits further dwarf the loss of JPM $10 billions

  10. I hope they’ll be no much changes in the prices of precious metals. I am looking forward to buy more silver next friday with this low price…

  11. john irving says:

    This sound all well and good but excuse me for believing it when I see it. SEC isn’t exactly known for harsh inforcment.
    What’s stopping JPM from negoitiating a sweetheart deal with the SEC? It’s all in the follow through that counts.

    • Teri Buhl says:

      John – the size of the SEC fine won\’t matter it\’s about what they get them to admit to and how the enforcement action reads because this will push New York State judges to 1)move the investors civil suits forward 2) allow more fraud claims in the breach of contract suits. When investors can add a fraud claim then that\’s when their chances for damages gets really high.

      So right now JP Morgan is likely really working hard with the SEC lawyers to get softer language in their enforcement actions. I see the SEC trying issue harder enforcements lately but you are right history shows us there have been a lot of sweetheart deals for the big banks.

  12. LadyLiberty says:

    He has nothing to fear

    THE CHICAGO WAY: JUSTICE FOR SALE AT HOLDER’S DOJ

    http://www.breitbart.com/Big-Government/2012/05/07/justice-for-sale-holder

    JPMorgan’s trading debacle: why $2 billion is just the start

    http://finance.fortune.cnn.com/2012/05/11/jpmorgan-2-billion-just-start/

    Dumb and dumber: Avoid the big banks

    http://money.cnn.com/2012/05/11/markets/thebuzz/index.htm?iid=HP_LN

  13. Rumcajs says:

    Thanks for the story. Hopefully more people with the means to dissemiate it will pick it up.

  14. JonnyJames says:

    (Saw this on MK website.)
    Thank you Teri for the informative article, I learned some important info.
    While the institutional corruption and cronyism will continue, this has the potential to be not only embarrassing and financially damaging to JPM, but also a political “hot potato” in an election year (if any more bailouts or Fed “easing” SEC sweetheart deals, special treatment etc.)

    It doesen’t matter who “wins” the so-called election, the discourse that is sneaking through the cracks will hopefully wake some up to the fact that the political and economic system is corrupt to the core and the D/R duopoly represents the exact same interests.

  15. It’s sad what they did to “Washington Mutual” a part of
    America was stolen$ Almost like the “Holacost”
    The right people didn’t care!

    Dogggg

  16. Greg Beykirch South Africa says:

    Are we going back to 2008?
    What about the rest of the big banks or are they squeaky clean?

  17. Brilliant investigative journalism

  18. Interesting there is virtually zero coverage of this Wells notice anywhere within the vanilla press who seem to be latching onto the CIO trading story only

  19. Dave in Denver says:

    It’s simple, think like a criminal:

  20. Steve P. says:

    Great piece. Ambac has been flying under litigation radar since MBI took lead. The question I have relates to EMC successor liability. Wasn’t JPM, under initial terms of agreement, limited to first loss position of 2bb and if so, the UST would be on the hook for anything in excess. Also, the settlement between Ambac and IRS has taken longer than most observers have come to expect. Considering the recent strength of the DISC’s since the JPM filing in your report, seems like a possibility.

    • Teri Buhl says:

      No those loss you are thinking of are about assets that sat in the Fed\’s Madien Lane book. Fed took first $28bn of loss and JPM would have to pay the rest. There was a story on 2010 that losses where more than the $28bn and JPM had to be pay more. It doesn\’t relate to the rmbs in this monline litigation. But it\’s a good questions so thanks for asking.

      JPM did get about $10bn for legal expenses when the deal went down but they\’ve blown through that.

      The news event that really got my attion was how much they increased their litgation reserves from the time they issued a Q1 press release to the time they filed the 10-Q ($1.7bn in three weeks is significant).

  21. I have read so many articles or reviews about the blogger lovers however this is truly a nice article, keep it up.

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