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.

Where the SEC Puts the JP Morgan-Bear Stearns Settlement Matters

JP Morgan disclosed they reached an agreement with the SEC today for the double-dipping scheme run by Bear Stearns mortgage traders. This was where the traders under Tom Marano kept billions of dollars that were supposed to go back to RMBS investors when resi-loans defaulted in the first 90 days. The SEC hasn’t officially accepted the deal yet and a court still has to approve it so we have ZERO info on how much Jamie Dimon’s bank has to pay and if there are any punitive damages.

Unfortunately with SEC settlements the bank doesn’t admit any wrong doing. So what’s important to watch here is where the SEC slots the funds. Will they place millions in their general fund or will the money go into something called a ‘fair fund’. Sarbanes-Oxley actually gave the SEC a mechanism to create a fund for aggrieved investors so they can get some restitution dollars back. In all fairness any money the SEC gets out of JP Morgan should be put back into the RMBS trust and paid out according to the waterfall for each security. It would be a little complicated to do but hey it’s the SEC and I’m sure they can hire a forensic accountant to sort it out. If that happens then the state and federal judges ruling on $140 billion of rmbs civil suits against the bank (it went up $20 billion in Q3 according to their 10-Q filing) could see it as an admission of guilt, which would really bolster the civil suits with fraud claims who are subject to triple damages.

Sadley we are not expecting JP Morgan to be fined by the SEC anywhere near the billions they should be. The bank’s 10-Q shows they only added $700 million to their litigation reserves in Q3 for a total of up to $6bn over what they have already expensed.

A few naive reporters have written stories today that the SEC settlement shows JP Morgan is getting out of the woods from its rmbs fraud and putback suits but it’s actually the opposite. The SEC’s suit doesn’t affect the billions the NY AG is trying to suck out of JP Morgan for the same crimes—he did sue for around $22 billion. But JPM’s real worry comes in the hefty payout they will have to pay when they settle with the monolines, institutional investors, and even the FHFA who sued for Fannie Mae and Freddie Mac. JP Morgan has been fighting some of these rmbs fraud cases for five years now and a few are set for trial next year.

Today’s news is really about Jamie Dimon finally admitting Bear Stearns traders did something really wrong to its own investors and JP Morgan is going to have to pay a lot for it.

Update 11-13-12: The WSJ is still running PR for Jamie Dimon and yesterday tried to tell readers that Bear Stearns executives won’t and shouldn’t be charged criminally. This is beyond embarrassing for the WSJ reporters as viewers of RT’s Keiser Report know I’ve been explaining for two years how much evidence the DOJ would have if they wanted to charge Tom Marano and his team. Nick Verbitsky, documentary film maker of the Bear Stearns movie ‘Confidence Game‘ even commented on the absurd reporting by the WSJ. It’s clear we are not going to get any decent reporting or analysis out of the WSJ but Reuters legal columnist, Alison Frankel has a great analysis on why JP Morgan is likely to pay billions in RMBS putbacks because of Bear’s fraud. Read it and you’ll see why setting aside even $6 billion in litigation reserves isn’t enough for $JPM.

Told You So: SEC Wants JP Morgan to Pay for Bear Stearns Sins

Last night the Financial Times broke news Jamie Dimon is willing to admit that maybe the Bear Stearns mortgage traders really did break securities laws and he should settle with the Securities & Exchange Commission. What the FT forgot to mention was I was the lone reporter in late January 2011 who reported JPM was under SEC investigation for this. A story I continued to report and warned on for the last two years at DealFlow Media and on RT’s top financial news show Keiser Report.

Most of my peers in the financial press have been afraid to report on this story. Even when JP Morgan admitted in their own 1st quarter filling this year that they’d received a wells notice –which means their regulator told them they are going to be sued if they don’t settle. Once again a series of my reporting on a financial institution committing fraud was proven right. The only thing I don’t know is how many millions the SEC will accept as settlement for these crimes against Bears own investors. The amount of dollars JPM pays the SEC isn’t that important though because the simple fact that they are willing to admit it wasn’t ok for Bear Stearns traders, under Tom Marano, to steal billions from their own clients gives the $100 billionish in civil rmbs fraud suits, filed by investors, a huge negotiating advantage.

The WSJ wrote today that people close to the SEC settlement talks told them the investigation was over, “whether Bear Stearns got compensation from lender for bad loans it had purchased to bundle into mortgage-backed securities, but then failed to pass that money on to investors by putting it into the trust managing the securities.” The WSJ actually learned about this when I first went on Max Keiser’s show last year, multiple times, and told his millions of viewers this is what the SEC was investigating. Then the WSJ read my story in May about JPM getting a Wells Notice.

A sad fact to the state of journalism in covering this story is Tom Marano, Mike Nierenberg, and Jeff Verschielser’s attorneys have done a good job of keeping their names out of the press. The day I broke my first story on the subject at The Atlantic we actually reported an update to the story that the SEC was investigating. That’s because I was able to confirm the SEC called people involved in the situation and started to interview them the day I reported the story. It ran for about 24 hrs and then I watched a pr man from Bank of America, where Nierenberg is head of mortgages, run interference with The Atlantic’s top editors and the SEC update was taken down. A pathetic reaction by the senior editors at The Atlantic.

Max Keiser at international TV network RT trusted my reporting and printed on his website the SEC was now investigating for all the illegal actions I’d just reported. Then my editors at DealFlow Media encouraged me to continue to report out the Bear Stearns traders story at their trade publication The Distressted Debt Report. Jody Shenn at Bloomberg copied some of my reporting on the subject but then dropped off the story. In fact it was really only me and a talented legal columnist at Retuers, Alison Frankel, who continued to report on the impact of the rmbs fraud litigation against JP Morgan.

Still we have no criminal charges filed against Tom Marano’s team and they keep beating motions to add them individually as defendants in civil litigation. I remember feeling a little shocked when I first called Mike Nierenberg’s pr people at BofA to tell them about all the dirty emails and whistleblower testimony I had showing how Mike and Jeff executed this fraud and Mike came back saying ‘I’m not worried about it’. Yep that’s the mindset of Wall Street’s top mortgage executives — it just a cost of doing business and the bank will have to pay for their sins.

JP Morgan was Bear Stearns clearing agent before they bought the bank in March 2008. That means they saw all the toxic rmbs Bear was selling – so I don’t buy the argument that it’s not fair for JP Morgan to pay for Bear’s bad boys. Remember JP Morgan had the chance to settle with the monolines who’d sued for only a little over one billion dollars when they bought Bear in 2008 but choose to rack up millions in legal cost for the last five years and fight these charges. Even after Bear had previously told the monolines ‘ok you kind of caught us’ so we’ll pay back what we stole at cost. Seriously read the Ambac complaint and you’ll see this spelled out. So Jamie Dimon crying wolf that he’s a victim of the US government forcing him to buy Bear Stearns is line of total BS and any reporter who prints that line is only writing pr statements for the nation’s largest bank. Why is it so hard for my peers in the financial press to admit these guys did something really really wrong?

What Bear Stearns Whistleblowers told the SEC: New Details of RMBS Fraud & Cover Up

Remember all those whistleblowers the monolines found in their RMBS fraud litigation against Bear Stearns and JP Morgan? The ones JPM’s lawyers tried to publicly out their names so they’d be afraid to testify in the monoline’s case. Well the bank’s dirty legal tactic didn’t work and newly released whistleblower testimony from people who worked for third-party due diligence firms, hired by Bear to get the mortgage security insurers to back their bonds, shows a whole another layer of orchestrated deceit. One so bold it borders on mafia like RICO actions.

Filed in Connecticut state court at the end of August by monolines lawyers at Patterson Belknap is a motion to enforce a New York subpoena that calls for RMBS due dilly firm, Clayton Holdings, to turn over the historical loan review reports that were sent to Bear Stearns. The motion is on behalf of Ambac; the RMBS insurer who first brought the explosive fraud suit against Bear Stearns traders for stealing billions from their own clients. You know the one that led to JP Morgan, Bears’ successor, telling investors last quarter they now have at least $120 billion of possible mortgage security putback suits they could be forced to pay out. Well it looks like Abmac wants the public to know more of the dirt they have on Bear/JP Morgan because in exhibits with the motion they filed there’s some nasty whistleblower sworn testimony.

Clayton Holdings along with a firm called Watterson Prime were the main third-party firms Bear hired to do re-underwriting due diligence. According to the monoline suits this extra level of inspection was designed to prevent defective loans getting packed into the security in the first place. In the heyday of the mortgage boom there was so much competition to get the RMBS bonds insured and sold Bear came up with a novel ideal of paying for ‘independent reviews’ that the monolines use to do themselves before they got so busy picking which bonds to insure. It was a process Bear claimed would add a level of integrity. But new sworn testimony by whistleblowers from Clayton and Watterson Prime shows this was just a ‘veneer of control’ instead of a practiced method to fret out defective loans.

What’s worse is when Clayton or Watterson Prime due dilly workers actually found the bad loans and coded them in the system (called CLAS for Clayton) their supervisors would change the coding to reflect the loans were ok. This enabled the Bear Stearns traders working under Tom Marano to hide the fact loans they’d bought, from the banks like Greenpoint or Countrywide, were garbage but still went into the security because allegedly Bear traders didn’t want to spend the time or money to go back to the originators and buy quality loans. If the courts find the whistleblower statements are true, it’s a clear violation of the monoline rmbs insurance contracts along with possible insurance fraud and violations of the Martin Act.

The whistleblowers names are redacted in the filing but they swore they worked for both Clayton and Watterson prime as freelance due diligence consultants on loan file reviews for Bear Stearns mortgage securities. Their job was to take the original loan files EMC had used to pick which loans would go into a security and make sure it fit Bear’s underwriting standards. Their testimony says they’d find a file with borrower documents they thought were fraud, report it to their supervisor (such as Mr. Weeks at Watterson Prime) and the supervisor would say just move it along and overlook the documents.

“Usually the instruction were just go ahead and keep it moving, enter the information, we will take care of that with the seller or we will try and get correcting documents later,” states one whistleblower talking about working at Watterson Prime in court filings. “Once a lot of the documents were missing or it was prevalent that we don’t have these documents, we were told to ignore, ignore and grade them as normal.”

But it’s wasn’t just ignoring missing documents that was encouraged. The loan reviewers also stated they’d find W-2’s in the files that were logged at ‘stated loans’ (this mean the borrower just claims his income without documentation) and the W-2’s would contradict what the borrower had stated. Meaning the loan clearly had fraud in it.

The whistleblower says when they told their boss at Clayton or Watterson Prime this they were told to “pull out those documents”.
“We would put them in a pile and either they shredded them or they disappeared. They were destroyed but it was not by the underwriter,” said the whistleblower as he testified to how the due dilly firms covered up Bears bad loans for them.

Another whistleblower said at Clayton they were berated in front of their team if they didn’t rate the loan files as normal and feared not getting more contract work if they didn’t find creative ways to make the loans look ok. One method was in the case of couples getting a mortgage; they used the income of one and the credit rating of the other to make the quality rating match up as normal. This process was known as ‘finding compensating factors”.

“When loans did have deviations from loan to value ratios Bear had set as a standard we were told to find compensating factors and approve the loan anyway. On many jobs our team leaders gave us a cheat sheet of compensation factors to make it easier for us to find them,” says another whistleblower in sworn testimony.

In over 50 pages of testimony we learn the team leaders at Clayton Holdings and Watterson Prime were getting this direction from people on the mortgage team at Bear Stearns. According to people familiar with the suit the Securities and Exchange Commission has already interviewed some of these whistleblowers. And the whistleblowers named names regarding who at Bear Stearns was directing the third-party due dilly firms to change loan files and rate them better quality than they really were. One Bear Stearns executive that showed up in court filings directing the due dilly team to basically lie in their reports was John Mongoluzza.

I was told the SEC interviews were done before JP Morgan announced in their last quarterly financial statements the SEC had them given them a Wells Notice saying they were considering suing them for mortgage security violations relating to Bear Stearns.

Former New York Attorney General Andrew Cuomo told the media a few years ago he’d given Clayton immunity for helping with his investigation into possible criminal wrong doing by banks like Bear Stearns. But no charges were brought by Cuomo before he became Governor and it’s unclear what NY’s new AG will do with Clayton.

Ambac’s latest motion filed in Connecticut state court says Clayton is still playing favs with Bear/EMC/JP Morgan by eagerly assisting their lawyers and ignoring a compulsory subpoena to produce documents to Ambac. Clayton who claims they don’t have files Ambac is asking for magically found one of the whistleblowers personnel files that Bear’s lawyer ended up using to cross examine the whistleblower.

So here we have Clayton handed a get out of jail card from NY’s AG and they uses it to help the alleged criminal (JPM/Bear) hide evidence to possibly avoid losing a mega-billion fraud suit?

A recent Abmac filing says they reviewed 5,000 loan files valued at around $2 billion and 85% of the loans had deficiencies problems that Bear should have known were there and thus never put the loan in the security in the first place. Last week Reuters legal columnist Alison Frankel found a new lawsuit filed with similar allegations against Bear/JPM by the RMBS trustee for pension fund investor Baupost. The suit claims after they reviewed Bear/EMC loan files they found an alarming 88% breach rate of the loans in the mortgage securities. So now we have monoline insurers AND investors finding similar malfeasance in the methods of creating and selling RMBS by Bear Stearns.

The examples of cover up described in the recently filed whistleblowers testimony runs deep. Now that I’ve confirmed the SEC has interviewed these whistleblowers we have to wonder if JP Morgan is aggressively negotiating for a settlement or if the SEC is waiting to file suit because it doesn’t want to publicly shame JP Morgan with a securities violation charge before the election. Just think if Bear’s insurers or investors had been given the chance to see Clayton or Watterson Prime due dilly reports that weren’t manipulated – would they have ever bought billions of RMBS from Bear and helped traders under Tom Marano’s team earn millions and go on to run mortgage divisions at Goldman Sachs and Bank of America? It’s those questions investors in Bear’s toxic rmbs hope the SEC doesn’t wait forever on the sidelines to answer.

The case was filed August 24th in Milford,CT Superior Court. Ambac Assurance vs. Clayton Holdings. Ambac’s motion against Clayton asks a CT judge to force Clayton to produce reports reflecting the rate at which Bear Stearns overrode Clayton’s finding with respect to due diligence conducted during the securitization process.

More Bear Stearns Executives get off without Paying Millions in Shareholder Settlement Cost

Bear Stearns lawyers at Paul Weiss are slapping them self on the back today after stockholders and pension funds who sued Bear executives for misleading them about the health of the company months before it failed agreed to a cash settlement of only $275 million on Wednesday. The suit’s settlement lead by Michigan’s retirement fund, who lost $61 million in the collapse of Bear’s stock in March 2008, is being hailed as the 5th largest class action suit by bank shareholders. But considering the evidence that has come out in the last for years regarding what Bear executives like Tom Marano and Alan Schwartz knew about the health of the firm in late 07 early 08 while they were pushing shareholders to buy more stock this settlement number and the terms tied to it is a joke!

Beside the fact that the Bear executives named in the suit didn’t have to admit guilt neither do they have to take a hit to their fat wallets. According to a person familiar to the settlement the Directors and Officers Insurance Bear held is picking up the whole damn tab. But even if JP Morgan, Bear’s successor owner, wanted to encourage the insurance company to pass on any settlement payment responsiblity to the likes of Tom Marano, Alan Schwartz, Jimmy Cayne, Sam Molinaro, & Ace Greenberg they can’t.

“At the time of the Bear Stearns merger with JP Morgan the Bear bylaws were changed so that the Bear executives have indemnification rights from JP Morgan,” says securities attorney Brett Sherman.

Some of the most damaging evidence about who at Bear knew what and when came out in the Monoline suits against Bear/JPM, led by attorneys at PBWT, for rmbs fraud and the FCIC report.

“It’s the scam that never ended” wrote Sherman on Wall St. Law Blog. “As late as October 2007, Bear mortgage chief Tom Marano bragged at the firm’s investor day that Bear had a ‘mortgage franchise for all seasons’. Remember that, mostly due to mortgages, Bear Stearns took a write-down of nearly $2 billion about a month later, and in December 2007, the company announced an $850 million loss for the quarter.”

An amended complaint filed by monoline Assured Guaranty against Bear/JPM last year showed Marano was shorting the stock of some institutional investors buying the very Bear issued RMBS because he knew the mortgage securities market was tanking and they’d be stuck with billions of worthless securities. Meanwhile lawsuits outline Marano was telling institutional investors that the Bear traders were invested in these securities also when in fact they were selling out of them.

In the case of Bear’s CEO Alan Schwartz the legal argument isn’t really about what he knew or didn’t know. The point is he had an obligation to know and instead went on TV (CNBC) to do damage control. Bear’s COO of fixed income describes it best in William Cohen’s book House of Cards – Paul Friedman on liquidity (remember that Schwartz was on CNBC wed):

“I had spent the first part of the week, Monday, Tuesday, open till Wednesday noon, almost every waking minute, talking to customers and lenders… I could take them through our whole liquidity profile.

But by Wednesday, I couldn’t do it with a straight face and feel I wasn’t breaking the law, and so I had a series of conference calls set up for Wednesday afternoon and I just canceled them all.”

Emails found in discovery have shown a mirror of double talk by multiple senior levels of executives at Bear. You can see some of this behavior in Nick Verbitsky’s documentary film, Confidence Game, about the failure of Bear Stearns that is currently being played on the international film festival circuit.

The crux of theses shareholders suits is really that Bear’s business model – which revolved around manufacturing and selling fraudulent mortgage bonds – was a sham. Because the revenues generated by this business model were a fraud, everything from Bear’s public statements about its risk-appetite to its financial condition were materially misleading to Bear shareholders. Securities attorneys point out the essence of securities fraud is that you cannot deprive investors of the right and ability to make informed decisions about whether to buy or sell stocks.

“When the main revenue driver of your business is a charade, how can investors possibly make informed decisions? They can’t. And that is fraud,” says Sherman.

The likes of Michigan Retirement Services fund might be willing to fold for pennies on the dollar in a toothless class action suit but keep in mind there is still an active SEC securities fraud suit/investigation against Bear. If there was an enforcement action lobbed on some of the players involved, who currently still make millions working on the Street (Schwartz is at Guggenheim Capital, Marano at ResCap/Alley Bank) the individual shareholders suing who opted out of a class action suit and are litigating Bear for selling a totally bogus image of the firm to the public could have a better recovery than what we’ve seen today.

Keep in mind a New York federal judge will still have to approve the settlement so it’s not a done deal yet.

According to Sherman, managing attorney of The Sherman Firm, “former Bear shareholders unwilling to participate in low-ball the class settlement are not stuck. They still have the right to opt-out of the settlement and pursue claims on their own.”

But for now the lawyers for Bear execs at Paul Weiss basically earned their clients another get of jail free card this week.

The case is: Bear Stearns Companies Inc Securities, Derivative and ERISA Litigation, U.S. District Court, Southern District of New York, No. 08-md-01963

Analyst says: JP Morgan could be in worse shape than Bank of America

Investors who bought billions of residential mortgage securities from Bear Stearns have woken up to the fraud machine I’ve been reporting on at Bear and EMC all year. On Friday, a Texas legal firm made famous for negotiating an $8.5 billion settlement with Bank of America for rmbs investors, made a similar move on JP Morgan. Gibbs and Burns, who represents clients like Blackrock and PIMCO, sent a nasty warning letter to five banks who act as trustees for JP Morgan owned RMBS. They called for an investigation into breach of contracts and substandard servicing of these mortgage bonds.

The news hit every major paper because the number of bonds in question was $95 billion. And this was the first time we saw blind investors figure out who the other was to get a quorum together to fight JP Morgan. You see to get the trustee to actually do their job and make sure the loans in the mortgage security are what the bank said they are; you need at least 25% of the investors to complain. Well that’s happen now and as a result we see top mortgage industry analyst like Mark Hanson, sending warning notes out to clients about JP Morgan facing a mega billion payout over the sins of Bear’s Mortgage team run by Tom Marano.

Hanson wrote to clients yesterday:

“on the JPM $95bb MBS inquiry because I feel it will turn out unlike anything we have seen to date in MBS suits and settlement. In short, the various smaller monoline suits are blazing the way for the much larger MBS suits. My views seem draconian in nature relative to what we know in the Gibbs and Bruns / BAC $8.5bb settlement. But I think those using GSE or BAC math coming up with a few of billion dollars for JPM/Bear/WM MBS fraud will be disappointed.’

Anyone reading my reporting detailing things like EMC analyst being told to make up loan level detail to the raters — to newer news that outside due diligence firms like Clayton were told to ‘not find any bad loans’ when they prepared reports for Bear RMBS investors, knows the level of outright fraud was blatant. I agree with Hanson that $JPM can’t be compared to $BAC when trying to estimate how many billions of RMBS they will have to buy back because this isn’t a case of irresponsible underwriting from the likes of Countrywide – with Bear we have former EMC employees coming forward alledging out right cheating and lying.

Of the $95 billion of JP Morgan RMBS the trustees have to inspect, 47% were originated by Bear Stearns. In the monoline suits against Bear/JPM they’ve shown on average 50 percent of the loans were an early payment default and should be bought back. And then there is the issue of loans already in default before mortgage bonds were even sold. Securities like PRIME 2005 / PRIME 20007 are packed with loans from Puerto Rico. This is interesting because in August I reported a story at DealFlow Media detailing how EMC loan analysts went to their superior, David Hamilton, to complain the $500 million of loans Bear bought from a Puerto Rico bank were already in default. The story explains Hamilton sent the findings up to Tom Marano’s mortgage trading team at Bear and they said “don’t worry about it we’ll just swap them out latter.”

Then there is this little issue I reported on also at DealFlow this summer:

“In 2004, Bear decided to tap the short-term debt market for capital to expand its mortgage operations. To do this, Bear has to set aside some of the mortgages it already had booked as collateral in the RMBS, Van Leeuwen said.

“When the company first did this, it was a little hairy because a couple of times I remember a loan that would be designated for the funding, call is master funding, that was set aside as collateral for the sort-term debt was also sold into a security, so it was in two places at once”, he said. “But because it’s not regulated and nobody is really watching, you can do it quietly.

If Bear couldn’t cover the short-term debt payments, the servicer would have been in a mess trying to figure out who really owned the collateral.

Eventually, the decision from Marano’s mortgage group in New York was to forego the due diligence of wholesale loans that Bear was buying from banks like Countrywide and Wells Fargo, Van Leeuwen said.

Towards the end of 2005, Bear decided to buy the loans and then review them later. If there were problems, Bear would take the most obviously troubled loans out later, which, at least into the 2006 era, kept them from running afoul of customers. Yes, as Van Leeuwen argues, this also helped inflate the value of the MBS that Bear was selling.”

Now when the trustee goes back to ask JP Morgan about this it will be interesting to see if they can wiggle their way out of this apparent breach of reps and warranties. All the trustee has to do is start reading the discovery by New York law firm PBWT in the Ambac, Syncora, and Assured cases. It’s a dotted line to the fraud at Bear Stearns and even details some of the cover up JP Morgan has been doing since they realized they were sitting on a mountain of rmbs putback liability after they bought Bear Stearns.

But what’s really scary for JP Morgan is a loss causation motion in a RMBS putback suit against Bank of America. It’s in New York state court right now and Alison Frankel at Thomson Reuters legal news has written about its possible effects. If the New York Judge decides in the favor of the investors suing it could mean all they have to prove is a bank lied about some aspect of the collateral in the RMBS and that lie, weather it actually caused a loss, means the investors can argue they never would have bought the security. There are already quite a few documented lies in the putback lawsuits against Bear/JPM, which is why Mark Hanson is warning clients that every one of these inquiries and cases are unique and based on the monoline cases against Bear, they made Bank of America look like petty thieves.

SEC Thinks Bear Stearns Mortgage Traders Need Investigating

It appears the Securtities and Exchange Commission has been reading my reporting on Bear Stearns mortgage traders cheating their clients out of bilions and double dipping on profits. Today, Jody Shenn at Bloomberg reports he’s heard J.P. Morgan received subpoenas asking for information on how Bear Stearns mortgage team sold back failed loans to mortgage originators and didn’t pass the monies back to the investors in their mortgage bonds.

J.P. Morgan won’t confirm the SEC subpoena for Bloomberg but I can confirm the regulator has been investigating the actions of the bank since I first broke news on the problems at TheAtlantic on Jan 25th. I even reported the SEC’s actions to Max Keiser the day my news broke after I received calls from people familar with the case saying the SEC office in Colorado had reached out to them because they wanted to know what kind of documents and whistleblowers they had accumlated to prove their accusations.

No charges have been filed against JP Morgan or the Bear Traders, now making millions at other banks, but let’s not forget they also have the Manhattan D.A. on their tail.

TheAtlantic’s Dan Indiviglio, a terrifc editor who worked on my Bear Stearns coverage, said it best :

As I stated before, these fraud allegations should actually be fairly easy to prove or disprove — unless evidence has been destroyed. If a double-dipping scheme took place or if securities provided were different than indicated, the process either did or did not violate deal covenants. There’s not a great deal of gray area allowed when actual money changes hands. We aren’t merely talking about insurers claiming they didn’t have all the information they needed; we’re talking about insurers claiming that deal documents specified that funds should have been provided to them that these Bear execs kept for their bank, or that the securities sold did not adhere to the criteria deal documents specified.

Unfortunately, I don’t see the Bear traders, led by Tom Marano, sweating these investigations until a federal regulator actually shows the strength to charge them for what most of you who write me think is very clear criminal fraud.