JPMorgan Chase & Co (JPM.N) has won the dismissal of nearly all of a lawsuit accusing it of misleading the Belgian-French bank Dexia SA (DEXI.BR) into buying more than $1.6 billion of troubled mortgage debt.
The decision made public on Wednesday by U.S. District Judge Jed Rakoff in Manhattan is a victory for the largest U.S. bank and its chief executive, Jamie Dimon, eliminating an estimated 99 percent of the potential damages.
Dexia's case that gained notoriety after emails and other materials were disclosed that suggested the bank and its affiliates knew the residential mortgage-backed securities they were selling were toxic, but sold them anyway.
Rakoff said he would explain the reasons for his decision "in due course."
In a statement, JPMorgan's law firm Cravath, Swaine & Moore said the dismissal of Dexia's claims on all but five of the 65 RMBS certificates at issue reduced potential damages to about $5.7 million from $774 million.
Dexia was not immediately available for comment. A spokesman for its U.S. law firm declined to comment immediately. JPMorgan spokeswoman Jennifer Zuccarelli declined to comment.
NOT OUT OF THE WOODS
The lawsuit is one of many accusing banks of trying to boost profit and revenue by packaging low-quality mortgages into seemingly safe securities, and simultaneously hiding the risks or failing to ensure that the loans were underwritten properly.
JPMorgan has also been sued by New York Attorney General Eric Schneiderman and the National Credit Union Administration over securities created by Bear Stearns Cos, which it bought in 2008.
People familiar with the matter have said it also faces a related U.S. Department of Justice probe.
JPMorgan is also one of 17 lenders defending against lawsuits by the Federal Housing Finance Agency over the sale of roughly $200 billion of troubled mortgage securities to housing financiers Fannie Mae FNMA.OB and Freddie Mac FMCC.OB.
In November, JPMorgan agreed to pay $296.9 million to settle U.S. Securities and Exchange Commission claims that Bear stuck investors with problem home loans.
Dexia alleged it was fraudulently misled about the quality of 65 RMBS certificates it had bought from 51 offerings from 2005 to 2007 by JPMorgan, Bear and Washington Mutual Inc, which the bank also bought in 2008.
In a two-page order, Rakoff dismissed the case with prejudice, meaning it cannot be brought again, apart from claims by Dexia's FSA Asset Management unit over the five certificates.
In court hearings, Rakoff indicated skepticism about whether Dexia had legal standing to bring some claims, and whether some of the alleged misrepresentations supported its claims.
"You're saying that if you know that 84 percent of a given loan pool does not comply with your own guidelines, but you make no representation about compliance with your guidelines, it's still an actionable omission to fail to reveal this," Rakoff told a Dexia lawyer at a March 4 hearing. "How could that be?"
It is unclear how Rakoff's order affects prospects for a trial, which the judge had said could begin in early July.
It is also unclear when Rakoff will explain why he dismissed much of the case. On February 27, he gave his written reasons for rejecting JPMorgan's bid to dismiss the case, five months after he had issued a "bottom line" holding.
Emails disclosed in the case suggested many instances where JPMorgan, Bear or Washington Mutual staff knew of problems in the quality of documentation of many loans being packaged into securities, yet tried to press ahead with the underwriting.
In one example, a Bear official wrote in a 2006 email that some loans "were not flagged appropriately and we securitized many of them which are still to this day not cleared. I think the ball was dropped big time."
Dimon in October said his bank did the Federal Reserve a "favor" by purchasing Bear in 2008.
"Would I have done Bear Stearns again knowing what I know today?" he told the Council on Foreign Relations in October. "It's real close.
The case is Dexia SA/NV et al v. Bear Stearns & Co et al, U.S. District Court, Southern District of New York, No. 12-04761.
(Reporting by Nate Raymond and Jonathan Stempel in New York; Editing by Phil Berlowitz and Bernadette Baum)