JP Morgan Pays Off Ambac for Full Amount of RMBS Fraud Claim

I once told millions of RT’s Keiser Report viewers JP Morgan was going to pay at least $1 billion dollars to mortgage insurer Ambac for Bear Stearns committing system wide mortgage-back securities fraud and then trying to cover it with accounting tricks. Last night that report came true when JPM settled with Ambac for $995 million over a lawsuit, filed in 2008, asking for mega millions in damages resulting from breach of contract and fraud.

Sadly it’s taken one day and five years after I first reported an explosive story at The Atlantic, with on the record former Bear Stearns employees detailing how Bear Stearns stole billions from their own clients, to get JP Morgan to pay Ambac the money Bear Stearns owed them. It reads like a move by the bank to avoid a summary judgment decision from Judge Ramos, who could have ruled Bear Stearns committed fraud by lying to Ambac about the quality of the loans in the RMBS and also lying about how Bear Stearns ran it’s own due dilly operations. The fraud claim would have tripled the damages instead of just a breach of contract claim that usually only awards actually damages.

On July 14, 2015 in front of New York state Judge Ramos, in Manhattan Supreme Court, Ambac’s attorney Erik Haas argued during a partial summary judgment motion on the issue of justifiable reliance. The bank’s big law lawyers at Sullivan Cromwell had moved for Judge Ramos to rule before the case got in front of a jury on JPM/Bear Stearns’s fraudulent misrepresentation. The central argument is: was Ambac fraudulently induced to insure billions of residential mortgage backed securities packaged and sold by Bear Stearns. Team JPM thought Ramos was going to rule in their favor and if you were listening to the beginning of the hearing Judge Ramos sure sounded like he didn’t think the fraud claim should go to a jury. But during oral argument attorney Eric Haas appears to have convinced Judge Ramos to see why Ambac thought they had the evidence to prove Bear Stearns/JP Morgan’s culpability in the fraud and felt so good about their legal argument winning that they asked Judge Ramos to rule right then from the bench.

Attorney Haas detailed some of the fraud they found during discovery to Judge Ramos at the July hearing saying,” And further still, in the transaction that came after that, they said, Oh, don’t worry. Don’t worry. We now have a seller monitoring program in place and it shows that only 3 percent of all of these loans come from terminated sellers. That was a lie. 14 percent, up to 14 percent of them came from terminated sellers and almost 50 percent of the loans in the transaction came from sellers that were downgraded and that had material credit risk. They lied.” The hearing transcript also says Bear Stearns didn’t even set up a ‘seller monitoring program’ till late 2006 and lied to Ambac before late 2006 that they had the program. A program which could have helped figured out if Bear was putting already defaulting 2nd lien loans into the transaction Ambac was insuring.

JP Morgan argued at the hearing that because Ambac didn’t do a loan by loan due diligence of their own, where they might have discovered that Bear Stearns was lying before they insured it, that Ambac shouldn’t be able to bring a fraud claim. Ambac’s response was that wasn’t practical or normal course of business in these transaction because they relied on what Bear Stearns told them about what was in the security and on the due diligence reports Bear paid a third party to do for insurers. Ambac said, Bear Stearns wasn’t a fly by night bucket shop that needed its work to be checked and rechecked but a bulge bank with years of reputation and transactional trust built into the market.

Ramos said in court that he would reserve ruling and not make a decision right from the bench. But after he thought about the hearing, for the first time in seven years, he told JPM and Ambac it’s time to settle. JP Morgan clearly dragged out negotiations and chose to announce the near billion dollar payout after their year-end 2015 earnings were released earlier this month. Unfortunately, as a result of the settlement Judge Ramos never got to officially rule on the summary judgment hearing or if the fraud claim should go to trial.

The bank’s lawyers were also working the court system to drag out this litigation so when they settled enough time had passed the statute of limitations for Bear Stearns stockholder lawsuits so they couldn’t use this case to prove Bear Stearns executives committed fraud.

The original Ambac lawsuit, filed December 2008, asked for $900 million in damages for problems in second lien loans. Then Erik Haas of Paterson Belknap, the pioneering attorney who discovered the deep level of fraud at JPM and Bear Stearns, added on another suit for first lien loan fraud. It’s the 2nd lawsuit that forced JPM to pay additional millions for a total payout to Ambac of $995 million. A number Ambac’s CEO said Tuesday will greatly impact their earnings. Unfortunately, the win for Ambac investors is five years overdue.

Yesterday JP Morgan was telling investors in public filings the $1 billion payout won’t have a significant impact to earnings in the following quarter. That’s because they have a few billion set aside in legal reserves to payout lawsuits like this. But if JPM knew it could afford to payoff Ambac then why waste their investors money on millions in legal fees fighting these fraud charges since they took over the Bear Stearns in 2008. Why after the DOJ forced the bank to pay $13 billion in 2013 for this rmbs fraud did they drag out the Ambac case and force Ambac to spend more big dollars on attorney fees thus delaying dollars the insurer desperately needed to fund its operations. (Ambac had to file for bankruptcy in 2010 which it has now come out of) And why, as Frontline’s doc film The Untouchables pointed out, have the men that allegedly spearheaded the Bear Stearns fraud, Tom Marano, Mike Nierenberg and Jeff Verschleiser never been charged with a crime?

My peers and editors call the five years of my reporting on these crimes successful ‘Impact Reporting’ because I spoke out in print and on TV consistently proving factually how the fraud was committed and not letting the market forget JP Morgan and Bear Stearns crimes. But until at least one of the Bear Stearns executives is criminally charged the investing public doesn’t have their full impact result.

This story has been update with details from the summary judgment hearing now that the court transcripts are public


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  1. While the Ambac suit was the result of conduct JP Morgan’s investment management division, when it comes to mortgage-backed securities, the bulk of the litigation against the bank relates to the pre-crisis conduct of Bear Stearns.

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