A federal judge on Monday recommended that a large firm that reviewed mortgages for Wall Street banks turn over e-mails and other data that may help the government decide which banks to sue for packaging shoddy mortgages into securities that fueled the financial crisis.
U.S. Magistrate Judge Donna Martinez in Hartford, Connecticut, said Clayton Holdings LLC should turn over due diligence reviews it prepared for its clients from 2005 through 2007, e-mails between employees and clients during that time, and a database that was used in providing services.
Investigators had subpoenaed the materials on July 1 on behalf of the Residential Mortgage-Backed Securities Working Group, which includes the U.S. Department of Justice and other federal and state regulators.
If enforced, the subpoena could help the government pursue cases against banks it wants to hold accountable for selling securities that fueled the U.S. housing and financial crises.
The government alleged that Clayton's due diligence reviews discussed "potential problems with individual loans making up the loan pools, as did internal and external communications at Clayton associated with the reviews."
Clayton called the subpoena a "fishing expedition" on its dealings with its 193 clients, not just the 16 financial institutions that the government had advised were being probed. It also said it has cooperated with the working group and responded to "every government request for over six years."
Martinez nonetheless concluded that Clayton did not show that it was too burdensome to comply with the subpoena, or that the government already had much of the information it sought.
"The government's investigation into abuses in the residential mortgage-backed securities market is broad and extensive," she wrote. "The relevance of the agency's subpoena requests may be measured only against the general purposes of its investigation... Clayton has not met its burden of showing that the subpoena is unreasonable."
Martinez's recommendation now goes to U.S. District Judge Robert Chatigny in Hartford, who oversees the case.
Marc Rothenberg, a partner at Blank Rome representing Clayton, declined to comment, saying the company does not discuss litigation.
The case is being handled by the office of U.S. Attorney Loretta Lynch in the Eastern District of New York. Robert Nardoza, a spokesman for Lynch, did not immediately respond to a request for comment. Thomas Carson, a spokesman for Acting U.S. Attorney Dierdre Daly in Connecticut, declined to comment.
Clayton was a "major provider of third-party due diligence services" to Wall Street, according to the Financial Crisis Inquiry Commission's 2011 report.
"Because of the volume of loans examined by Clayton during the housing boom, the firm had a unique inside view of the underwriting standards that originators were actually applying - and that securitizers were willing to accept," it said.
The government issued the subpoena under the Financial Institutions, Reform, Recovery and Enforcement Act of 1989, which it uses to recover civil penalties for losses to federally insured financial institutions.
FIRREA has a 10-year statute of limitations, versus five years for some securities fraud laws. Bank of America Corp and Wells Fargo & Co are among companies that the government has sued under FIRREA in mortgage-related cases.
The case is U.S. v. Clayton Holdings LLC, U.S. District Court, District of Connecticut, No. 13-mc-00116.
(Editing by Dan Grebler)