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Ambac Accues JP Morgan of Fraud in Ongoing Mortgage Suit

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One of the big reasons there have been so few fraud charges leveled against what looks like clear and widespread banking industry is that under the law, “fraud” is pretty difficult to prove. Needless to say, that puts commentators in a bit of a bind, because they can be depicted as being hysterical if they use the “f” words, since behavior that is often fraud by any common sense standard may be hard or impossible to prove in court.

The hurdle in litigation and prosecution is proving intent. Basically, the party who is being accused has to not only have done something bad, he has to have been demonstrably aware that he was up to no good. Thus po-faced claims of “I had no idea this was improper, my accountants/lawyers knew about it and didn’t say anything” or “everyone in the industry was doing it, so I had not reason to think this was irregular” is a “get out of jail free” card. Similarly, even if lower level employees knew that their company was up to stuff that stank, if the decision-makers can plausibly claim ignorance, again they can probably get away with it.

So it is gratifying in a perverse way to see a case in which the perp not only looks to have engaged in chicanery, but the facts make it pretty hard for him to say he didn’t know he was pulling a fast one. And even more fun, it involves JP Morgan, which has somehow managed to create the impression that it was better than all the other TARP banks, when on the mortgage front, there is plenty evidence to suggest that all the major banks have been up to their eyeballs in bad practices.

The case involves the bond insurer Ambac and the mortgage company EMC, which was the Bear Stearns conduit for buying mortgages to securitize and now thus part of JP Morgan. In 2010, reports surfaced that EMC had been falsifying mortgage data to keep its pipeline moving as fast as Bear wanted and contain costs.

But a suit by bond insurer Ambac alleges far more serious misbehavior. The discovery process in outstanding putback litigation has unearthed a scheme to defraud investors and Ambac and led the bond insurer to add fraud charges to its complaint. The Atlantic, which broke the 2010 story, gives a good overview:

According to the lawsuit, the Bear traders would sell toxic mortgage securities to investors and then sell back the bad loans with early payment defaults to the banks that originated them at a discount. The traders would pocket the refund, and would not pass it on to the mortgage trust, which was where it should have gone to be distributed to the investors who owned the bonds. The [Tom] Marano-led traders [Marano was Senior Managing Director and Global Head of Mortgages for Bear and is now CEO of Ally's mortgage operations] also cut the time allowed for early payment defaults, without telling the bond investors. That way, Bear could quickly securitize defective loans, without leaving enough time for investors to do their own due diligence after the bonds were sold and put-back any bad loans to Bear.

The traders were essentially double-dipping — getting paid twice on the deal. How was this possible? Once the security was sold, they didn’t have a legal claim to get cash back from the bad loans — that claim belonged to bond investors — but they did so anyway and kept the money. Thus, Bear was cheating the investors they promised to have sold a safe product out of their cash. According to former Bear Stearns and EMC traders and analysts who spoke with The Atlantic, [Mike] Nierenberg [head of the adjustable-rate mortgage trading desk] and [Jeff] Verschleiser [another senior managing director on the same desk] were the decision-makers for the double dipping scheme, and thus, are named as individual defendants in the suit.

The complaint is duly indignant:

This evidence – obtained for the first time through discovery – demonstrates that at the same time that JP Morgan and EMC were touting to Ambac the quality of the Mortgage Loans and the rigorous procedures for verifying their quality, JP Morgan personnel understood that the loans underlying the transactions were in fact – to use one JP Morgan employee’s unequivocal if impolite words – a “sack of shit.”

And there is another layer of this ugly picture. A much smaller monoline, Sycora, had also insured some Bear mortgages. Bear was pushing the originator to take back some dud mortgages insured by Syncora while simultaneously refusing to let Syncora put them back.

FTAlphaville recounts how JP Morgan continued to rebuff putback claims, even when EMC found them to be legitimate:

Ambac says JPM barred Bear from fulfilling repurchase requests right after it snapped up in 2008. In doing so, a JPM executive director also went against a review by EMC, it is claimed, that said more than half of a set of loans were in breach of reps and warranties. That, Ambac says, enabled the exec to eliminate up to $14m in JPM liabilities and reduce accounting reserves for the loans by almost 50 per cent.

So it will be rather difficult for JP Morgan to claim it has clean hands on this one and merely picked up an outstanding mess when it bought Bear.

This suit is at a minimum a black eye for JP Morgan, which fought tooth and nail to keep it sealed, and may embolden other litigants, like the investors in Bear’s deals. But sadly, it also demonstrates that crime does pay. The executives named in this case as being at the heart of this scheme now run the mortgage businesses at Ally, JP Morgan, and Goldman.

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39 comments

  1. Chirvani

    Next the indictment of Ben is required for actively covering this fraud up by facilitating mergers with taxpayers’ money and when this was not enough by parking toxic assets on Fed’s balance sheet away from scrutiny.

    1. steelhead23

      You are right of course. But the stock market is up, the recovery is picking up steam, and the sun is rising. TPTB will claim that trying to “dig up the past” would merely delay the day when we can all eat our ice cream. And we dearly love ice cream.

      1. Stan

        Tao:

        I don’t disagree with your assertion that obama/justice has no intention of prosecuting financial elite but the difference is also that, since the S&L period, the legal standard for fraud in securities transaction has become more burdensome for plaintiff’s in adding the “intent” requirement. I believe this was a consequence of the Modernization in Futures act that occurred in 2005 if I’m not mistaken. So that has a definite effect on cases brought, as its almost impossible to prove. However, that act shows how much more influence “big finance” has on changing the laws to insulate themselves from prosecution for fraud. That coupled with the the destruction of glass stegal, regulatory capture of the SEC, FDIC and the ability of banks to chose which regulator they are subject to stack the decks heavily in their favor. It all started in mass under clinton too, democrats have been the defenders of fraudulent, oppressive finance for a very long time. Its a very depressing state of affairs that Dodd Frank has done very very little to change.

  2. Tao Jonesing

    “One of the big reasons there have been so few fraud charges leveled against what looks like clear and widespread banking industry is that under the law, “fraud” is pretty difficult to prove.”

    And yet Bill Black and his team were able to secure more than a thousand criminal convictions (presumably many of them for fraud) in the wake of the S&L scandal, which the most recent scandal dwarfs, both in terms of the amount of money at stake and the number of participants in the scam.

    No, the primary reason that there has been no meaningful criminal indictments or convictions for financial crime is because the federal government simply does not have the will to enforce the rule of law against the financial elite. Bill Black has said as much on several occasions now.

    1. Yves Smith Post author

      That was more than 20 years ago. There have been a lot of important court decisions, particularly a mid 1990s (I forget whether 1994 or 1996) Supreme Court decision that disallowed secondary liability, that make it much harder to make fraud charges stick. Advisors like accountants and lawyers can only be sued by their clients, not by people who are harmed by their participation in a ruse. So if an investor invests in a deal based on phony financial statements, he can’t sue the accounting firm!

      This allows miscreants to use advisors as their shield against fraud charges. They can say “Well I thought it was OK, my lawyer blessed it, I’m not an attorney, how would I know any better?” And as we can see in Florida, efforts by the state attorney general (who is not all that aggressive by state AG standards) to go after miscreant law firms are being fought by the state bar association because only it and the judiciary are supposedly allowed to discipline attorneys. With the courts being packed with business friendly judges, you now have very few states that disbar lawyers, and even then it’s typically very small fry.

      1. chris

        Yves looks like your work is reaching across the country
        Judge put stay on all BOA/recontrust foreclosures in Nevada. Parden me if you already were aware. You do great work.

      2. Tao Jonesing

        Yves,

        Thanks for the response.

        I’m not sure that I understand how going after a bank for financial crimes– fraud or otherwise– implicates any theory of secondary liability. If banks want to defend themselves against charges of criminal fraud (specifically the scienter requirement) by relying on the advice of counsel defense, by all means bring charges and encourage them to do so. The one major downside in relying upon the advice of counsel defense is that it constitutes a waiver of the attorney-client privilege.

        What we need is a prosecutor who is willing to bring every tool at his or or her disposal to ferret out and establish financial crime. Fraud is not the only weapon in the arsenal. What about RICO charges? All that’s needed is a good faith basis for bringing felony charges. Start small and follow the trail that leads to the top, just as is done with other organized crime organizations.

        Based on Bill Black’s characterization of what’s (not) happening at the DOJ as “de facto decriminalization,” the issue does not seem to be an actual change in the laws as much as it is a change in the attitude of those tasked with enforcing the laws. Prof. Black seems to think there’s meat there . . .

        http://www.huffingtonpost.com/william-k-black/the-role-of-the-criminal_b_802115.html

        1. Paul Repstock

          Now Tao..This is not rocket science. If the government writes the laws and the government doesn’t want something to be illegal…How are they going to manage that? Hmmm?

          1. Tao Jonesing

            In one sense you’re right, Paul. If the people currently in government refuse to enforce our laws, well, those laws effectively (“de facto”) do not exist.

            But we, the people, ARE the government, just as we are private corporations. Both the state and corporations are fictitious entities that aggregate the power and interests of many.

            Maybe if we try rediscovering the concept of society we, as individuals, will have the courage to demand and get what we rightfully should expect of our government: the application of the Rule of Law to everyone equally. Once the Rule of Law breaks down within an empire, the empire is doomed.

            And so the American empire is doomed.

    2. Stan

      Tao:

      I don’t disagree with your assertion that obama/justice has no intention of prosecuting financial elite but the difference is also that, since the S&L period, the legal standard for fraud in securities transaction has become more burdensome for plaintiff’s in adding the “intent” requirement. I believe this was a consequence of the Modernization in Futures act that occurred in 2005 if I’m not mistaken. So that has a definite effect on cases brought, as its almost impossible to prove. However, that act shows how much more influence “big finance” has on changing the laws to insulate themselves from prosecution for fraud. That coupled with the the destruction of glass stegal, regulatory capture of the SEC, FDIC and the ability of banks to chose which regulator they are subject to stack the decks heavily in their favor. It all started in mass under clinton too, democrats have been the defenders of fraudulent, oppressive finance for a very long time. Its a very depressing state of affairs that Dodd Frank has done very very little to change.

      1. Tao Jonesing

        Common law fraud has always required scienter, i.e. both knowledge and intent to defraud. Taking a quick look, it seems that the securities lawas were changed to require a higher threshold for pleading securities fraud (i.e., there must be “a strong inference”), but I’m not limiting the discussion to securities fraud. Garden variety fraud appears to abound on Wall Street, and the fact that many of these fraudulent transactions occurred in the run up to securitizing mortgages does not necessarily make them subject to the securities laws.

        I’ve never practiced criminal law, but taking a quick scan of the New York penal code and comparing it to Ambac’s allegations, it looks like there are potential charges of Insurance Fraud (most likely just a misdemeanor), Residential Mortgage Fraud (looks like a potential class B felony), Falsifying Business Records in the First Degree (class E felony), Conspiracy (potential felony), and Enterprise Corruption (the NY state version of RICO). Further, it is my understanding that these state law charges can form the basis of federal RICO charges.

        Again, Bill Black is characterizing what’s (not) happening as “de facto decriminilazation,” not actual or “de jure” decriminalization.

  3. viking

    what are the names of the executives in the suits? emails? I bet a few NC readers might have a few things they’d like to convey to those gentlemen.

  4. readerOfTeaLeaves

    So it is gratifying in a perverse way to see a case in which the perp not only looks to have engaged in chicanery, but the facts make it pretty hard for him to say he didn’t know he was pulling a fast one.

    Gratifying, indeed.
    Looking forward to Thursday’s FCIC report.

    JPM’s actions appear to be part of what Black might call a ‘criminogenic’ environment.

  5. kravitz

    Hmm…would it be better to buy PG (Dawn, de-greasing dish soap) or Henkel (Dial anti-bacterial hand soap.)

    Someone’s gonna need a whole lot of it soon.

    1. Brian

      I thought everyone knew that anti microbial products in soap and sanitizers are poisonous, and of more harm to you than to the bacteria one believes they are protecting themselves from. It is also poisoning our water supply. Please consider the disaster it has become to our immune systems, even in jest.

  6. Sunny

    Just sickening!

    What’s the purpose of keeping it sealed till now? Whose interest got furthered? NOT certainly the those of investors or the public!

    Nothing is surprising any more. What’s surprising or should say shocking is that NONE of these perpetrators are behind bars or not even under indictment!

    The charade continues unabated and the Banksters still pocketting Millions in bonuses as if nothing happened.

    1. Teri Buhl

      Sunny – I found JP Morgan’s ability to get the suit sealed an example of serious problems in our judicial process. I went on Russia Today TV – The Keiser Report in November to highlight this issue and challenge the courts to open the case. I have been covering this story since last April – it’s been amazing and sad to see the lengths JP Morgan’s outside counsel went to solw the discovery process and even strong arm a key witness to filp his testimoney. You can see some of my coverage at http://www.teribuhl.com. With all the evidence I’ve seen in the case, some of it not even filed in the courts yet, I just don’t see how Tom Marano and his mortgage trading team are not charged with criminal fraud.

  7. Francois T

    In a “criminogenic environment”, to use the expression of Prof. Black, it is safe to work under the hypothesis that for one coming to light, there are many more to be found.

  8. 60sradical

    Yves, I thought I would write the following now. I’m coming in at an earlier time.
    The relentless question which has been gnawing on many of us now for several years, including many of the regulars on NC is more or less, the following: “When will Americans find justice in the entire fraudulent, spurious, and venal financial model which is destroying us and most of the globe? And just how can a strong ‘resistance’ ever develop?” We are all screaming for baksta perps, right?

    I’ll attempt an answer, of sorts, but first some perspective. I was born in Canada in 1940. The British and young Canadian troops were at war with Germany. America exploded into World War 2 in Dec. ,1941. In that time, practically all of North America was terrified. I remember the end of WW2 with Japan and Germany. And I remember the post war period in the late forties. What did Americans/Canadians experience on a daily level?
    1. Rationing of damn near everything from gasoline to bread. I remember as a child going to our neighborhood corner store with different colored tokens for milk, meat, bread, etc.
    2.People everywhere plowed up their back yards and planted Vicory Gardens.
    3.And, amazingly a 90% tax was levied upon the wealthy–that’s right–90%! And even more interesting, this 90% tax remained not only with Truman, but Eisenhower-former commander of the entire euopean war theater ,and Republican, left it that way through his entire administration! In the 40s, especially, the wealthy could not do a thing, because of the fear, sadness, and longing of the American people.

    My father and 3 of his brothers were in the military. One uncle spent all of WW2 in a Japanese concentration Camp, as they were then called. As a child, along with many adults, we did not know if we were going to be attacked from Japan from the West or the North. Fear, anxiety, and sacrifice ruled the day. Our backs were up against a brick wall.

    Flash forward to the 60s. I was in SE Asia in 1962-64 and saw the Viet Nam horror develop. I must make this following point clear. Although I was in the resistance movement and many great chages occured in the 60s and 70s, the average Ameican’s life at home was bliss compared to WW2.
    The main reason resistance “worked” was becuase Academia/the student movement had the military draft with which they struggled. And a big turning point was when Viet Nam Vets joined the movement. There were some 1.5 million Americans who rotated through Viet Nam and it was not a private war such as Iraq or Afghanistan.
    Now we are faced with a slow motion blood-letting: global food shortage, collapsing Western economies, millions of people being thrown out of their homes when the TBTF get fiat money from the Fed and global bankstaz, there will be escalating crime as the unemployed and permanently poor struggle to live. A Darwinian, Facsist, neo-feudal landscape is emerging in real time and we can actually see it. Yet, there is no resistance, and most impotantly no SACRIFICE such as in the 40s.
    From my point of view, Americans will not act and a strong resistance will not form, unless our collective asses are in fear.
    So, I must return to the Frech existential position. With no hope, notwithstanding, one continues to act. This site, in particular really goes after one of the core banksta items: SECURITIZATION. Please keep it going. I hope I didn’t depress too many–just keepin’ it real

  9. Mark Stevens

    I am missing the “Antidote du jour”. Are you not posting them any more? You have some great pictures. Do you have an archive of them?
    Thanks

  10. Joseph Stephens

    I am a forensic loan auditor representing homeowners in Florida. Every day I average 12-15 federal lending violations per loan. Each bank, with the possible exception Suntrust is just over run with fraud. 94% of all loan audits performed to date have fraud from beginning to end.

    I would love to get a chance to share these cases with someone who make public this overwhelming abuse of the American people.

    1. Tony Savoie

      I am sure the folks at
      foreclosurehamlet.com and
      4closurefraud.org and
      stopforeclosurefraud.com
      would love to help you share what you know.

    2. DumpTheBankInfoJulian

      I have been trying to prove to my AG that the documents that are corrupt are also in NON-DEFAULT recordings. The corruption of our land records will take decades to recover, if that.

  11. MinnItMan

    Q: Why is fraud hard to prove?

    A: “You can’t cheat an honest man.”

    Well, you can, but it’s a lot harder. It’s a lot easier if you can show he’s just as much a crook. Showing he’s inexcusably dense, greedy, or manipulative might work, too.

    My problem with loosely using the term “fraud” is that what is really alleged here is theft or conversion. EMC accepted funds, almost certainly in trust, and didn’t pay the beneficiary. Somebody diverted these funds to someone or something.

    The law, for whatever it’s worth, usually gets to the bottom of things. It’s not a stretch for me to say that the bottom of things is simply this: at the moment a true putback is required, it exceedingly unlikely to happen. The money is frequently gone.

    And, if I’m following this correctly, EMC already had a shortage in it’s obligation to the securitized trust when it accepted a discounted price on the loan. What was it’s obligations in funding that shortgage?

    Yeah, eventually this looks like fraud, but it’s on top of a mountain of other illegality.

  12. Michel Delving

    In addition to being Bear Stearns’ top mortgage trader, global head of mortgages and asset-backed securities, Thomas Marano was also a Director of Bear Stearns subsidiary mortgage servicer EMC Mortgage Corporation while EMC’s mortgage servicing fraud was being investigated by the FTC, resulting in a mere 28 million dollar settlement, September 2008. http://www.ftc.gov/opa/2008/09/emc.shtm EMC’s egregious servicing added much toxicity to these mortgage securities. Helps to have a complicit servicer in pocket while rigging bets.

  13. KnotRP

    Q: Why is fraud hard to prove?
    A: “You can’t cheat an honest man.”

    C: However, if you can get the trustee of the honest man’s pension fund to accept kickbacks in exchange for funding
    some really dicey MBS and derivatives, you in fact CAN
    cheat an honest man. They just don’t discover it until the
    money is all gone.

  14. William Benedict

    The fraud is so blatant, so totally in your face that is it just bewildering. That not one bankers has gone to prison simply confirms the legal system of the USA is of no value whatsoever.

    Basically it is every thief for himself now!

  15. Brick

    Perhaps we should ask a different question. After 9/11 the FBI task force to combat finacial fraud was severely depleted despite the FBI repeatedly reporting an increase in the need for securities and mortgage related fraud. It was reported that a number of high profile cases were shelved with investigators being re-allocated. The new York times during the height of the crisis reported.

    Several former law enforcement officials said in interviews that senior administration officials, particularly at the White House and the Treasury Department, had made clear to them that they were concerned the Justice Department and the F.B.I. were taking an antibusiness attitude that could chill corporate risk taking.

    The question is did those same attitudes affect the regulators and what does this say about the current attitude of business friendliness? Are you really surprised that there as been little reported investigation of fraud?

  16. Alex

    Quick question for anyone with knowledge. The Atlantic article states that the the defective loans were sold back to the originators and the traders “pocketed” the the proceeds instead of passing it along to the trust.

    How is this in any way possible? Is this a misunderstanding by the Atlantic? Bear/JPM is a third party, so how would funds EVER hit their P&L and why would they act on behalf of the trustee? Something doesn’t sound right.

    Any comments?

    1. Teri Buhl

      Alex – it’s not legaly right but it’s possible because they did it. The last piece in the puzzel (I’m still working on sourcing it) is who at Countrywide, Wells Fargo, and some smaller originators was agreeing to buy back the EPD loans and not check that they’d already been securitized. There is cleary another person not named yet in the suit who aided in the fraud.

  17. Chico

    There is definitely a difference on who gets prosecuted, based on class. It’s tough to prove a lot of things, but it doesn’t keep prosecutors from prosecuting (the poor).

    For example, if you catch a poor black teenager with three joints in his possession, that’s “possession with intent,” because who needs more than one at a time? I’ve seen hundreds of prosecutions like this.

    An ordinary schmuck stopped with a beer on his breath will be prosecuted for “operating under the influence,” even in the absence of an accident or even bad driving.

    It’s only when the potential defendant is rich that the difficulty of prosecution becomes predominant.

  18. Rob

    I do not mean to divert but there is a related problem. The Obama administration and Republican obstruction seem to have left an inordinate number of openings on the federal bench. Do you think this is an accident or could it be a relatively easy way of guaranteeing that the costs for prosecutors are simply too high because the backlog inhibits the swift administration of justice. Under such circumstances, it seems optimal to only prosecute slam dunks and there are very few of those in this criminal activity.

    Chico’s comment is easy to understand and almost certainly true. Why would a prosecutor not want to go after Koch Industries for environmental infractions or Goldman Sachs for any number of infractions if they will use every resource to defend themselves and they have more resources to throw at the problem than the prosecutor.

  19. jose

    that is why they never trabsfered the notes and had them destroyed or kept them with blank endorsements, MERS MADE IT EASY TO HIDE THE CRIME. IT IS EASIER AND BETTER TO foreclose.

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