By Karen Freifeld and Aruna Viswanatha
Feb 20 The U.S. Justice Department is
investigating JPMorgan Chase & Co over allegations that
Bear Stearns provided misleading information about its mortgage
products during the lead-up to the financial crisis, according
to people familiar with the matter.
JPMorgan acquired Bear Stearns in a 2008 fire sale
encouraged by the government, and has pushed back against
various government suits that have sought to hold JPMorgan
accountable for the failed investment bank's alleged
In this investigation, civil lawyers in the Justice
Department are looking into whether Bear Stearns altered due
diligence information that third parties provided about the
quality of mortgage loans packaged into securities, said the
people, who were not authorized to speak publicly about the
The investigation, which is in early stages, shows that
enforcement authorities are still actively building cases amid
criticism that institutions have not adequately been held to
account for their role in causing the 2007-2009 financial
Jennifer Zuccarelli, a spokeswoman for JPMorgan, declined to
comment. DOJ spokeswoman Adora Andy also declined to comment.
The Justice Department last year issued more than a dozen
civil subpoenas to top financial institutions as part of an
inquiry into the packaging and sale of home loans.
Pending inquiries at the Justice Department are largely an
outgrowth of a state-federal initiative known as the Residential
Mortgage-Backed Securities Working Group, which President Barack
Obama announced during his 2012 State of the Union speech.
One of the co-chairs of the group, New York Attorney General
Eric Schneiderman, already sued JPMorgan for fraud over Bear
Stearns' packaging and sale of mortgage securities in the run up
to the financial crisis.
It is unclear whether the recent Justice Department
investigation into JPMorgan will result in enforcement action or
might merge with mortgage-related probes by other agencies.
In a sign of how important the department appears to view
these cases, the JPMorgan inquiry involves lawyers close to
acting associate attorney general Tony West, according to people
familiar with the matter.
West led the department's civil division until last February
when he was promoted to his current post as the agency's third
In another sign U.S. authorities are actively pursuing
mortgage-related inquiries, the inspector general's office of
the Federal Housing Finance Agency is hosting a training session
this week with members of the RMBS working group, including
federal prosecutors, members of the Federal Bureau of
Investigation, special agents and others, a person familiar with
the training said. The group has held several similar sessions
in the past year, the person said.
The DOJ inquiry into the due diligence performed for Bear
Stearns tracks accusations detailed in private lawsuits against
Bear Stearns hired Mortgage Data Management Corp to review a
sample of loans in a 2006 mortgage securitization, according to
a case filed against JPMorgan last year by bond insurer MBIA Inc
Reviewers concluded that around one-third of the loans had
serious credit and compliance problems, the lawsuit said.
But Bear Stearns altered the electronic spreadsheets to
conceal the problems, according to the lawsuit, which was filed
in New York State Supreme Court.
Bear Stearns removed 50 columns of information from the
spreadsheet that showed the issues and then sent the altered
report to MBIA, the lawsuit said.
In its answer to the MBIA complaint, JPMorgan denied the
allegations that it had altered the spreadsheets. That case is
LATEST LEGAL HEADACHE
JPMorgan has recently been hit by a wave of lawsuits over
the conduct of Bear Stearns that appear to have some overlap.
New York's case, filed in October, accuses Bear Stearns of
causing some $22.5 billion in losses to investors of
mortgage-backed securities by failing to ensure the quality of
the underlying loans.
In December, the U.S. credit union regulator sued the bank
over $3.6 billion in securities sold by Bear Stearns.
And in November, JPMorgan paid $296.9 million to settle a
case with the U.S. Securities and Exchange Commission that
accused Bear of failing to disclose it had arranged discounted
cash settlements with originators that left investors stuck with
problem loans. The SEC also accused JPMorgan itself of
overstating the quality of home loans that backed a $1.8 billion
residential mortgage-backed securities offering it underwrote in
The bank's chief executive Jamie Dimon has said the bank is
continuing to pay the price for doing "a favor" for the Federal
Reserve in agreeing to rescue Bear Stearns.
The inquires are the latest legal headache for JPMorgan,
which also faces separate investigations from a trading loss of
$6.2 billion that sprung from a botched hedging strategy carried
out in its London office, and inquiries into whether its traders
manipulated benchmark interest rates.