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

Lanny Breuer: Frontline’s The Untouchables Gets a Remake

Lanny Breuer told the world he’s removing himself from the office of the DOJ criminal division this week. Only a week after an explosive Frontline film, The Untouchables, made him look like kind of silly on camera for his explanation of why no Wall Street Bankers have been charged criminally. To honor Breuer a reader and great blogger I know, Jaime Falcon, has made this remake of Breuer’s interview with filmmaker Martin Smith.

It’s a must click and be prepared to laugh out loud in public like I did – at least five times.
Jaime calls it the – Liar Liar version. I think it has to be nominated for an Emmy.

Lanny Breuer Frontline Interview – Liar Liar Version

ps. The journalist Martin is asking Breuer about is referring to me and Nick Verbitsky.

NY AG Schneiderman Tells Frontline A Few Things that Just don’t Add Up

NY Attorney General, Eric Schneiderman, sat down in a rare interview with Martin Smith for his Frontline film The Untouchables. A lot of that interview didn’t make into the PBS documentary film so the transcript of his entire interview has been released. The NY AG pumps up Obama’s mortgage task force as a vehicle that really helped him bring his civil fraud suit against JP Morgan for the sins of Bear Stearns RMBS trading group. I don’t think that’s what happen — in fact I know it’s not.

As the only journalist who published the first Bear Stearns/EMC on the record whistleblower in May 2010 for The Atlantic I was able to get a unique behind the scenes look at how every regulator and private litigator was or was not involved in figuring out how Tom Marano, Jeff Verschleiser and Mike Nierenberg orchestrated the double-dipping putback scheme the NY AG sued over. At some point they all called me. This is one of the reason’s Martin Smith approached me in July to help him learn about who the players in the fraud were and how the suit was built while he was choosing which Wall Street fraud stories would make it into his Frontline film. He told me the Bear Stearns double dipping scheme looked like the case with the most evidence that has escaped criminal prosecution and I agreed. He was equally interested in the battle it took just to get the series of stories I reported on the actions of Bear Stearns and JP Morgan and their lawyers published.

Martin did a great job getting tough and focused questions in front of the NY AG. It’s an accomplishment he even got him to sit down for an interview and talk about an ongoing case. It’s also too bad more of the interview didn’t make it into the film so I think it’s really important to talk about what the NY AG said or didn’t say.

First off the NY AG did not figure out the Bear double dipping scheme that is part of his civil fraud suit against JP Morgan. When I reported the story at The Atlantic in January 2011 the scheme had already been laid out in sealed court documents by the lawyers at Paterson Belknap in mid 2010. The law firm, known as PBWT, represented three monoline clients with initial losses of just over one billion. These details were discovered before the NY AG EVER took office.

Martin Smith tries to ask Schneiderman about this here:

MS: Were you drawn for any particular reason to the monoline (PBWT’s Work) cases? Did they offer an opportunity to get at the documentation inside or the due diligence work that had gone on?

NY AG: Well, some. We started our own investigation in the spring of 2011, and we’ve reviewed millions of pages of documents and interviewed dozens of witnesses and taken depositions. So it was really a supplement to that.

But we looked at those cases and we looked at other cases. We subpoenaed records, and there’s a big, fat spreadsheet of cases that have been brought by various players out there against these institutions. But you have to keep in mind, individual firms or investors can only sue for their damages. They can sue for the particular deals they worked on, or they bought shares in.

And what we’ve put together is a platform case, which is really much broader. It’s about the systemic pattern of conduct, because, as we allege in our complaints, no investor during this period of time would have purchased any mortgage-backed securities if they had realized that the due diligence process was a sham, that the quality control process was a sham, and that the representations about underwriters meeting standards and originators meeting standards was really not being followed through.

To me supplement means the NY AG would have come up with some new evidence in his suit or charged the Bear executives individually. He didn’t do that. His suit has paragraphs literally copied out of the Ambac v. JPM/ Bear suit that PBWT did the leg work on. His suit even got the name of the audit firm wrong who told Bear’s senior executives that the practice of the RMBS traders keeping dollars from mortgage putbacks and not passing them back to the security was ‘not industry practice’ (nice way of saying it’s wrong).Francine McKenna who writes for Forbes and American Banker figured this out and questioned the NY AG’s office about it who had to admit they made a mistake in the suit. Mistakes like that are made when you copy other lawyers work. Instead the only thing new the AG came up with was a fancy legal term ‘ the PLATFORM case’ to describe his lawsuit filed off of the private sectors work.

He sued for over $20bn in rmbs issued by the bank which is more than the monoline suits sued for but if he settles and gets less than a billion from JP Morgan then he’s fined them less than the actual damages of the total monoline suits. I guess that’s what the NY AG means by supplement?

The NY AG – unlike the DOJ who did not contact any of the Bear whistleblowers during my three years of reporting of the fraud – did at least interview whistleblowers used in my reporting. He also made the effort to contact Nick Verbitsky, doc film maker who had EMC whistleblowers on camera for his film, and ask for all his unedited tape – which I reported for DealFlow Media in mid 2011. Basically he just did a Fact Check for his role in his JP Morgan/Bear suit and clearly found that the work of reporters and lawyers at PBWT was enough to bring a fraud suit. Except he falls down on his sword and sues civilly without charging any individuals or charging a bank with criminal wrong doing.

PBWT’s suit named-names like Tom Marano, Mike Nierenberg, Jeff Verschleiser – that’s because internal Bear emails and over 30 whistleblowers gave them evidence to name these names. A judge eventually ruled out the Bear individuals as defendants but at least they tried.

The NY AG went on to tell Martin Smith that he’s not ruling out brining future charges against individuals – that is if more whistleblowers come forward. OK well how about going out to find some whistleblowers on your own like the DOJ had done in insider trading cases. Arrest one – I’d start with the Bear Stearns desk traders Jeff and Mike who were on the frontline of the double dipping scheme and see if they flip on bigger players like Marano or even Warren Spector his boss.

The NY AG is also racing against a time clock – which he points out in his Frontline interview – because of statute of limitations. Now if he tried to use civil RICO as a charge he could buy himself time.

The NY AG’s brag about coming up with a ‘platform case’, that shows this was a systemic problem, is a deviation to something former DOJ chief, Larry Thompson, put out in 2003 called the Thompson Memo. This memo told prosecutors how to negotiate with intuitions when deciding to sue or make plea deals in cases where their employees committed crimes. The heart of the directive was to find the individuals to charge criminally because by charging the whole bank, who has tons of employees who did NO harm, the effect of punitive justice is diminished by job and net worth loss to innocent people. Thompson was involved in the litigation that brought down Enron and saw Arthur Anderson destroyed as a result. The Thompson memo got watered down as new DOJ heads came in and I’d be scared to death to see what a Lanny Breuer (current head of DOJ criminal division) memo would look like.

The take away from Smith’s Frontline film was: The American people still don’t have a good reason for not going after bankers individually for financial crimes. And the excuse Lanny Breuer gave about worrying if it would crack the US financial system is making people want to scream even louder about serious problems in the leaders of our Justice departments.

Martin Smith interviewed me about where Tom, Jeff, and Mike went after Bear Stearns (all have million jobs at other big bank institutions) but none of that material made it into the film. Likely because he’d need another half an hour just to show all the evidence against this crew of former Bear traders. Until the NY AG charges these men with a crime that could cost them jail time or sues them so they lose their securities license and personally bankrupts them – his platform case is another way of saying I haven’t used the unique powers my job enables me to do yet.

Frontline: The Untouchables – Exposes how Wall Streeters Commit Fraud but Escape Jail

UPDATE 1-23-13 5pm: The Washington Post is reporting the DOJ’s Lanny Breuer, who was highlighted in The Untouchables, is stepping down. Now reporters had heard he was on his way out for a bit so WAPO could be reporting old news but it sure makes the Frontline film and my reporting seem to have made quite a stink at the DOJ today. Is this a case were great investigative journalism actually went to work for the American people?

1-23-13: There is a live chat with The Untouchables film maker Martin Smith today. I’d ask him if he thinks DOJ’s Lanny Breuer should still have his job.

Original Text
Tom Marano and his team of bandits at Bears Stearns mortgage trading desk took Wall Street for a ride in the last decade. I first broke news about them stealing billions from their own clients, which included pension funds, in January 2011 for The Atlantic. Tonight you’ll see how widespread their action went in a Frontline documentary film called The Untouchables.

Emmy winning documentary film maker Martin Smith contacted me this summer about my reporting on the Bear Stearns traders and the saga it entailed for JP Morgan. A bank who is now facing a Civil fraud suit by the NY AG, has $140 billion in civil RMBS fraud suits against them, and has setteled with the SEC for the double dipping scheme that attorney Eric Haas at Paterson Belknap first figured out.

When I first came about this story in early 2010 Reuters and Fortune, who asked me to pitch them, passed on it because they said the topic was too complicated. But it took only 24 hours for Dan Indivilgo (who is now writing for Reuters BreakingViews) to figure out this was a blockbuster piece of reporting and as a business editor at The Atlantic he convinced them to buy it. I only made $150 selling the story to The Atlantic instead of the few thousand dollars I’d make if I had sold it to a trade publication behind a paywall but I knew this story just had to printed online for the world to read. And they did.

Hundreds of Wall Streeters started to email or call me after they read it. People who might have never read my byline at the New York Post or Hearst Newspapers were calling to see what else I had on the outright fraud these financial titans committed. Their big takeaway was “I knew those Bear traders were always making too much money but I could not figure out how.” And the civil securities lawyers who called just wanted to play catch up to the sordid details the lawyers at Patterson Belknap had already figured out for their clients the mortgage bond insurers. Even the FHFA had an analyst call me to find out behind the scenes info and then copied Patersons Belknap’s suit when then filed for around $22 billion in civil fraud against JP Morgan.

You can see whistleblowers on camera tonight telling details I first reported about the level of due diligence Bear (and other banks) hired to mask the level of out right fraudulent loans the traders were aware of before they even put them into the mortgage securities they sold to the public.

Yet still we saw the NY AG only sue for civil fraud and not criminal fraud. Filmmaker Martin Smith got people to admit the DOJ was afraid if they actually charged these Wall Street bad boys with criminal fraud it would rock the financial system. An absurd notion for the DOJ to even consider. They are not bank regulators or butt boys for the banks like Tim Geithner. They are suppose to go after crime regardless of how it effects an industry. I consider this fraud against the American people– the DOJ didn’t do their job when the evidence was handed to them by reporters like me and Nick Verbitsky and sharp lawyers like the team at Patterson Belkanp.

But the real want-to-make-me-throw-up moment in the film came when I saw the DOJ’s Lanny Breurer tell Martin Smith he didn’t think journalist had found any whistleblowers who the DOJ hadn’t already interviewed. That’s was either an out right lie or he’s really in denial because as Nick Verbitsky said in the film he knows his unnamed whistleblowers were never contacted by the DOJ even though the lawyers at Paterson Belknap eventually got some them on the record for their civil suit against Bear Stearns/ JP Morgan. I second that…the DOJ has flat out not tried to reach a single whistleblower in my series of reporting on Bear Stearns/ EMC / JP Morgan.

The failure of the DOJ is the real crime we should never forget.

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