How the NY AG built his RMBS case against JP Morgan for Bear Stearns Sins

This story has been updated

One documentary film maker, one investigative journalist, and one law firm willing to take a risk led to the lawsuit the New York Attorney General just filed against JP Morgan for a system wide effort to defraud mortgage investors by Bear Stearns.

My readers and viewers of RT’s The Keiser Report know they first learned about Bear Stearns fraud back in 2010 after I was the first journalist to report for The Atlantic Bear Stearns whistleblowers were on the record saying they were directed to make up loan level detail for the mortgage bond raters. From there I broke news again at The Atlantic in January 2011 detailing how Bear’s own internal documents showed the RMBS traders, under Tom Marano, were literally stealing billions from the clients they’d sold the mortgage bonds to via a double dipping scheme.

The documents to outline the double dipping by Bear traders was discovered by PBWT attorney Eric Haas – who also has an accounting background. It was this evidence that enabled him to add a fraud claim, that survived a motion to dismiss, to Ambac’s suit and year and a half later JP Morgan had to admit in their regulatory filings for shareholders that they were now looking at $120 billion in possible RMBS fraud and putback suits. These additional suits filed by the FHFA for the GSE’s and tons of other mortgage investors would have never happen if PBWT hadn’t been first to do the gritty research and detail to build their claims against $JPM/$BS/$EMC.

While this is likely the most impactful reporting of my career it couldn’t have happen with out one documentary film maker, Nick Verbitsky of BlueChip Films. He was first to find former EMC/Bear analyst to go on camera and detail the methods of deceit and fraud by the billions. It was Verbitsky’s unedited interviews that led to my first The Atlantic story. And it was that story to helped open up research for attorneys at Paterson Belknap for their client Amabc.

I remember getting a call notifying me the NY AG’s office had read my reporting and wanted to reach filmmaker Nick Verbitsky to get these unedited whistleblower tapes last year. And then we watched AG Schneiderman slowly start to interview the Bear Stearns whistleblowers which I reported multiple times on RT’s The Keiser Report. A program that was bold enough to trust my reporter instincts, go up against one of the world’s most powerful banks, JP Morgan, and know it was a good idea to warn viewers the bank is going to get their asses sued and it could affect the financial health of the company.

The NY AG also got a push from New York State Assemblyman Morelle who asked him to investigated Bear/JP Morgan for insurance fraud using New York State insurance laws. I first reported the NY AG was beginning his investigation in April 2011 for DealFlow Media’s The distressed Debt Report. Today we see copy cat New York Times reporter Gretchen Morgenson source that people familiar with the AG’s investigation told her he began in the Spring of 2011. In reality Gretchen read my original reporting and the The Atlantic’s mention of it back in April 2011 and I find it absurd that she can’t properly credit where she learned about it first. I have to wonder if Assemblyman Morelle, who chairs the insurance committee, is satisfied with the NY AG only bringing civil fraud charges against JP Morgan – if he’s not will he push the DOJ’s Southern District of New York office to carry the ball over the line and actually charge individual bank traders with criminal wrong doing? You can see a slew of likely illegal actions the Bear traders did that the NY AG left out of his suit in a story I wrote for DealFlow Media last August.

Today’s one of those days when it feels good to be an independent financial journalist and I want to thank my editors at DealFlow Media and The Atlantic along with Max Keiser and his producer Stacy Hebert at RT for publishing all my original reporting on this crime. To my fellow journalist just catching up on the story don’t forget to credit those who were the catalyst for action.

What’s next – I think PBWT and other Big Law firms, who have copied their suit and sued $JPM, are going start taking some serious settlement offers from $JPM and I expect it to be in the billions. I mean look at all additional whistleblowers that came forward from other firms Bear Stearns hired to help them sell mortgage bonds.

As far as JP Morgan shareholders go, if the bank’s payout to settle rmbs fraud and putback claims is in the double-digit billions then I’d expect lawyers to start filing class actions suits against JP Morgan for not disclosing enough rmbs putback risk. This is an issue I wrote about in May. There is also the fact that the SEC went to $JPM back in 2010 and told them they are not holding enough capital for putbacks – I reported this on Max Keiser’s show in November 2010. So why did the SEC allow this big bad bank to under-reserve for the last two years and report higher earnings? That’s a question we’d all like answered but are not likely to get.

Editors Note: Verbitsky’s doc film about Bear Stearns, Confidence Game, is showing at the Bruce Museum on Thursday night in Greenwich,CT. I am a panel guest, along with Roddy Boyd and William Cohan who will be speaking with Veribitsky after the movie. Come see it and hear first hand how we uncovered this fraud and how regulators came to us help build their case.

Due Dilligence Problems at JP Morgan Securities: Pension Report Snafu

Due diligence appears to be lacking at JP Morgan Securities. I reported today for Growth Capitalist the mega-bank’s clearing business was using valuation reports from a notorious hedgie manager who has been sued for fraud by regulators and outed from his fund. The inaccurate reports then went to pension investors.

JPM Clearing manages the asset valuation reports Hedge Funds have to file for investors who used IRA pension dollars to join a hedge fund. There are all kinds of special tax treatments this type of investor gets so banks like JP Morgan often act as custodians between investors and the hedge fund managers. Except in this case JP Morgan forgot to do a simple google search to learn Long Island hedgie Corey Ribotsky, of NIR Group, hasn’t had the rights to send any info on the value of the investments in his AJW funds since January.

NIR Group was a large investor in the PIPE space and at its height boasted around $800 million of fund assets. But investors had a rude awakening last month when I reported the court appointed liquidator, PwC, was sending out reports showing the funds had lost 97% of their value. So it’s kind of troubling to see Ribotsky out there trying to get JP Morgan to spin a story for him, by having them deliver reports with inaccurate valuations, during the same week the Liquidator is trying to tell these poor investors they are only getting pennies back.

There is a bunch of great details about other tax related errors (possible manipulations to avoid the IRS knowing taxes should be collected) the hedge fund manager did with JPM Clearing; so go read the story at Growth Capitalist while registration is still free.

Whistleblowers say Bear Stearns lied to Raters like Mizhuo Bank- Where are the Charges?

A Japan bank, Mizuho Securities, was hit with an enforcement action and fine from the SEC today for not telling the mortgage security raters the truth about the quality of the loans they were rating on a $1.6 billion CDO.

The Security & Exchange Commission says Mizuho rushed to sell a 2007 CDO called Delphinus at the same time S&P made a change in the formula they used to measure prime v. subprime loans. With the subprime valuation rating change the CDO filled with subprime rmbs likely wouldn’t have received the needed rating to convince investors to buy. The SEC claims the Japanese bank used an industry method know as packing the CDO with ‘dummy assets’ to get the security rated by S&P in a short amount of time. The problem is Mizuho didn’t actually package the CDO with mortgage bonds that had the high quality collateral they told the rating agency would be in the CDO. Delphinus 2007-1 closed on July 19th 2007 and six months later it started to default. As a result of this mortgage security fraud the SEC now gets $127.5 million in fines on a CDO the bank only earned $10 million on.

And guess what – Bear Stearns mortgage division run by Tom Marano and it’s mortgage packing team at EMC did the same thing on BILLIONS of mortgage securities but the SEC hasn’t sued or lobbed a settlement with the American bank now owned by JP Morgan. News of internal EMC whistleblowers falsifying mortgage info to get a 20 minute AAA rating from S&P was first reported by me at The Atlantic in May 2010. Since then most of the monoline insures and a ton of RMBS investors have sued JP Morgan/Bear Stearns for rmbs fraud. In fact JP Morgan admitted in recent financial fillings they are being sued for up to $120 billion of mortgage securities. In New York, lying to a rater and getting an insurance company to invest in and insure the mortgage security based on a false rating is criminal Insurance Fraud. Which is what investor lawsuits and over 30 whistleblowers have alleged Bear Stearns did.

The SEC has plenty of evidence available to sue JP Morgan/ Bear Stearns for sins it says Mizuho Securities executed. They can read emails from an EMC whistleblower cited in the Assured Guarantee amended complaint starting on paragraph 78 that describes how EMC rmbs analyst were directed to mislead raters by Bear Stearns management. Assured’s lawyers at PBWT have all kinds of internal documents and signed whistleblower testimony the SEC can get its hands on. There is even a documentary film about Bear Stearns now showing at film festivals across Europe and the U.S. called, Confidence Game, that actually has real live people on camera describing how they used ‘dummy assets’ and lied to raters. In fact, I’m pretty sure the filmmaker Nick Verbitsky of Blue Chip Films would even send them a copy of the DVD and his unedited tape for free. Last year I reported for The Distressed Debt Report the NY AG asked Verbitsky to see his whistleblower tapes and was actively interviewing some of the whistleblowers with hope of charging the Bear mortgage traders with the Martin Act. The SEC has even told JP Morgan earlier in the year they want to sue them for Bear Stearns mortgage sins via a Wells Notice but still NOTHING has been done.

Mizuho doesn’t have to admit guilt when they settle with the SEC and neither will JP Morgan if they settle for similar actions. Unfortunately it looks like the SEC even had to downplay the actions of the three individuals from Mizuho to get a settlement from the bank. The traders who no longer work for Mizuho received short-term bans (6mns-1yr) from the industry and were labeled negligent, instead of knowingly, in misleading clients. It will take a DOJ securities fraud charge or NY AG arrest to officially state these bank traders have committed criminal fraud against the investment community. An event I know many from Main Street to Wall Street are waiting to see – the question is when will our authorities have the political will to execute this kind action against an American Bank.

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.

Why Does JP Morgan Want This Fraud Suit Sealed?

How Can They Do This?

JP Morgan is being sued by Ambac for allegedly selling the insurance company hundreds of millions of mortgage back securities while knowingly packing them full of loans they knew were bad. The loans stem from MBS created by Bear Stearns that JP Morgan took control of after they bought the failed bank in 2008. While this might sound like an ailing mortgage insurer trying to pass off blame for buying a financial product that didn’t work out, if we could look inside the lawsuit we’d likely see otherwise.

The problem is the bank, who’s known to have close ties to Obama’s administration, has somehow convinced a judge in the Southern District of New York to seal the complaint. Combing through the legal documents filed before the seal was ordered, we get a glimpse of what has JP Morgan so worried – although because the lawsuit is sealed we still don’t get to see how Ambac can claim these violations of securities laws were started.

Ambac accuses JP Morgan (NYSE:JPM) and the Proposed Individual Defendants of:
(i) “accounting fraud”
(ii) implementing a “bad faith” strategy to reject without justification insurers’ and investors’ demands for the repurchase of breaching loans
(iii) “arbitrarily” denying demands by investors and insurers to repurchase loans
(iv) “manipulating” its accounting reserves
(v) “obscene compensation” and “reckless pursuit of fees”
(vi) “encourag[ing]” the acquisition of defective loans

Talk about accusing them with the kitchen sink of bank fraud. Now here is what I find a weak excuse for why the investors in a publicly traded company (or anyone else who’s interested) shouldn’t be allowed to see this complaint. JP Morgan’s argument is because Abmac was able to get sworn testimony, about how they broke the law, from people working inside the mortgage security packaging division; that this information should be considered a trade secret. On top of that, JP Morgan argues that because ex-employees of these alleged financial criminals are testifying exactly who at the bank told them to skirt the law, this information must be suppressed because it might damage top JPM executives’ reputations.

Sound fishy? This week I went on financial TV journalist Max Keiser’s show to tell his international audience just what JP Morgan was up to. It drew hundreds of comments packed with fans of The Keiser Report screaming this shows just how connected JP Morgan is to a Federal government known to play favorites with American’s bulge banks.

Yet what’s going on behind the scenes is even more alarming. Abmac was able to add testimony to its complaint after I broke news at TheAtlantic.com about Bear Stearns falsifying some of the mortgage details they supplied the raters. You know — to get a better rating so firms like Ambac would buy and insure their mortgage securities. One of the ex-Bear employees quoted in my story, Matt Van Leeuwen, then offered to tell Ambac’s lawyers even more about the misconduct and fraud he witnessed. These Ambac lawyers were also able to see unpublished taped interviews in Nick Verbitsky’s upcoming documentary film ‘The Confidence Game’, which added more clues to who and how Bear Stearns was building RMBS with loans they knew were already in default. But eight days before Van Leeuwen was schedualed to appear in depositions he’d been lawyer’ed up by JP Morgan; claiming because he received a severance when he left the bank they had to represent him. Then according to Van Leeuwen’s deposition transcript, he testified that he’d embellished what he told the documentary film maker in a hour long interview and that some of the information he gave me for my The Atlantic story was taken out of context or only offered on background.

Wow talk about a bait and switch. Of course Verbitsky and I had interviewed other co-workers of Van Leeuwen who corroborated most of his original testimony. So to see him try and swear under oath that he made it up was not only shocking but a clear sign of how influential JP Morgan can be when someone wants to whistleblow. As for Van Leeuwen, he’s suddenly found the funds to attend Law School at the University of Texas; the Ambac lawyers are looking into possible payoffs to get him to change his testimony. They’ve also been granted a court order to get copies of emails from Van Leeuwen and the journalist he gave interviews with in an attempt to prove he lied under oath about not being a willing participant in our stories.

Luckily Van Leeuwen isn’t their only star witness; they have near half a dozen more insiders willing to speak out. Since my story at The Atlantic came out, the Financial Crisis Inquiry Commission got Verbitsky to show them his unpublished taped insider interviews, including – Van Leeuwen’s, and there is a chance they will subpoena Van Leeuwen to testify.

Ambac lawyers now wait for the good graces of a New York federal judge to let them submit their evidence in an amended complaint. A decision is expected by the end of the year. Although the American public, along with investors in JP Morgan, might be kept in the dark about who did what and how they did it, if a media company doesn’t pay to sue and unseal the case.

The Case is: AMBAC v EMC Mortgage Et Al New York Fed – USDC Southern District of New York – 110508 091754 – 08 CV

EMC was a wholly-owned sub mortgage company of Bear Stearns and is now owned and controlled by JP Morgan.