By Jody Shenn, Shannon D. Harrington and Karen Freifeld
May 6, 2011
JPMorgan Chase & Co. (JPM) received a subpoena from the U.S. Securities and Exchange Commission over failed mortgages, a person familiar with the investigation said, as the agency probes banks including Credit Suisse Group AG (CS) for allegedly failing to share refunds from sellers of faulty debt.
Credit Suisse received a subpoena from the SEC last week, bond insurer MBIA Insurance Corp. said in a filing yesterday in a lawsuit against three of that Zurich-based bank's units. The agency asked New York-based JPMorgan for information after a court in January unsealed allegations made about Bear Stearns Cos.' practices in another suit, said the person, who declined to be identified because the matter isn't public.
U.S. investigators have been scrutinizing companies involved in the mortgage business after the worst collapse in home prices since the Great Depression.
Bond insurers MBIA and Ambac Assurance Corp. have said Credit Suisse and Bear Stearns, which JPMorgan bought in 2008, demanded refunds from originators that sold the banks the loans that they packaged into bonds, and then failed to use those settlement amounts to fulfill their own contractual promises on the debt.
"We're really starting to finally get into evidence that suggests blatant fraud," said Isaac Gradman, a San Francisco- based litigation consultant and formerly a lawyer at Howard Rice Nemerovski Canady Falk & Rabkin.
Jennifer R. Zuccarelli, a spokeswoman for New York-based JPMorgan, declined to comment. Steven Vames, a Credit Suisse spokesman in New York, declined to comment on MBIA's statement about an SEC investigation. John Nester, an SEC spokesman, declined to comment.
Kevin Brown, a spokesman for MBIA, said that Patterson Belknap Webb & Tyler LLP as counsel for the bond insurer was also subpoenaed by the SEC, seeking documents related to the Credit Suisse matter.
U.S. agencies have been seeking evidence of wrongdoing across the mortgage industry from before the market collapsed in 2007. JPMorgan said in a regulatory filing today it's in "advanced discussions" with the SEC to resolve an investigation into collateralized debt obligations, which package assets such as mortgage bonds into new securities.
The Justice Department sued Deutsche Bank AG this week for more than $1 billion, saying the firm lied about its process for checking the quality of loans granted federal insurance.
Credit Suisse knowingly packaged bad loans into bonds, MBIA said in a court filing. The insurer included an exhibit in its suit composed of e-mails related to a "stated income" loan sought by a stripper in Charlotte, North Carolina, whose reported monthly pay of $12,000 was questioned by some bank employees.
MBIA Insurance Corp., the bond insurance unit of Armonk, New York-based MBIA Inc. (MBI), disclosed Credit Suisse's SEC subpoena and the exhibit in a filing in New York StateSupreme Court. The document, dated April 29, was filed yesterday.
"Credit Suisse is now the subject of an investigation by the Securities and Exchange Commission, which issued a subpoena this week seeking the same types of documents as MBIA seeks," the insurer said.
MBIA alleges in its lawsuit that Credit Suisse failed to repurchase soured mortgages out of a 2007 securitization as it was contractually obligated to do. Earlier, the bank made demands similar to MBIA's to recover funds from the originators of the loans -- money it didn't share with the securities' buyers, MBIA said.
The allegations echo claims made in January in a suit brought by Ambac Assurance against the defunct investment bank Bear Stearns and JPMorgan. Ambac first sued in 2008 in federal court in Manhattan. The insurer filed a separate lawsuit over the issues in New York State Supreme court in February.
"Ambac is a large, sophisticated insurance company that is trying to blame others for risks it knowingly took and was paid for taking," Zuccarelli said earlier this year. "We do not believe Ambac's claims are meritorious and intend to defend Bear vigorously."
Credit Suisse, in a filing in MBIA's case on April 29, said contracts for its mortgage-bond transaction didn't call for the bank to repurchase loans simply because they became delinquent within a few months or involved borrower fraud. That differed from contracts between mortgage originators and Credit Suisse, the bank said.
Credit Suisse cited e-mails between its employees and MBIA officials before the deal closed, which the bank argued had stated explicitly that those so-called representations and warranties wouldn't be made. Representations and warranties are contractual promises that loans meet certain characteristics or will perform in certain ways.
The loan originators' commitments to Credit Suisse "are different from -- and materially broader than -- Credit Suisse's representations and warranties" tied to the securitization transaction, the bank said in court filings.
"MBIA is entitled to what its contracts with CS provide, and not more," Vames, the Credit Suisse spokesman, said yesterday in an e-mail.
MBIA said in yesterday's court filing that Credit Suisse in some cases cited the same issues as it later did to reach settlements with lenders, and that any early loan defaults should have been seen as "red flags" for further reviews of its obligations.
A review by Credit Suisse in 2006 showed that 60 percent of loans with early defaults failed to meet promised underwriting guidelines, MBIA said, citing an e-mail between the banks' employees.
External auditor PricewaterhouseCoopers LLP advised Bear Stearns in August 2006 that it needed to review loans that were defaulting or defective to see if their quality breached its obligations and begin the "immediate processing of the buy-out if there is a clear breach in order to match common industry practices, the expectation of investors and to comply" with its mortgage bonds' contracts, according to Ambac's filing.
Its own lawyers by early 2007 were making similar suggestions, according to the insurer's amended complaint.
MBIA is seeking access to a database that contains information about Credit Suisse's "quality control and repurchase processes" and shows how much the bank recovered from loan originators, according to its suit. Before MBIA found references to the database through the lawsuit, Credit Suisse denied its existence, the insurer said.
The insurer's filing said that it has also discovered "in the last few weeks" that the securitization at issue in the case, HEMT 2007-2, included home loans that "were previously securitized by Credit Suisse and then repurchased by Credit Suisse as defective, just months before Credit Suisse pumped them" into the deal.
"MBIA is unable to determine what Credit Suisse knew about the defects associated with these recycled loans that required their repurchase from other securitizations," the insurer said.
MBIA filed hundreds of pages of records and e-mails between Credit Suisse employees, loan originators and brokers that the insurer says show the bank knew of -- and received recoveries on -- loans on which borrowers misrepresented income or otherwise failed to comply with underwriting guidelines.
"They show Credit Suisse's motivation and scienter for fraudulently inducing MBIA to participate in" the bond deal, the insurer said in court filings. The bank did so, "in part, to obtain double-recoveries on the defective loans by shoveling them into the trust, profiting from their securitization, and then recovering again when it demanded that the originators of those loans repurchase them, even though Credit Suisse no longer owned the loans."
In the e-mails involving the North Carolina stripper's loan application, Credit Suisse employees questioned whether her income was accurately reported.
"We have an adult entertainer that is stating $142,800 per year," Ron Szukala, a Credit Suisse underwriting manager in Florida wrote in a January 2007 e-mail to another bank employee. "While I know this profession can make decent money, we feel that $142K is overstated in NC."
"I don't believe she is making $12K per month," Robert Sacco, a director at the bank, wrote in a separate e-mail, saying that of all the so-called Alt-A loans the bank bought in 2006, 1 percent of those with fully documented incomes had gone delinquent for 60 days or more, compared with 5.56 percent for loans with stated incomes. "5 1/2 times worse because they are overstating their income on their application," Sacco wrote.
One case is MBIA Insurance Corp. v. Credit Suisse Securities (USA) LLC, 603751/2009, New York State Supreme Court (Manhattan). Another is Ambac Assurance Corp. v EMC Mortgage Corp., 650421/2011, New York state Supreme Court (Manhattan). Another is Ambac v. EMC Mortgage, 08-cv-9464, U.S. District Court, Southern District of New York (Manhattan).
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