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Class Action Lawsuit Alleges JP Morgan Engaged in Systematic Document Fabrication to Move Mortgage Losses from Its Books into Mortgage Backed Securities

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To our knowledge, the suit filed by Ernest Michael Bakenie against JP Morgan is the first to accuse a major bank of widespread, systematic residential mortgage documentation and fraud. I don’t have a copy of the filing and am relying on the summary in Courtroom News Service (hat tip Jesse via reader Scott) but it is a doozy. (The case is described as a class action, but has yet to obtain class certification by the court).

We’ve reported repeatedly of widespread evidence of grotesque procedural abuses as servicers and foreclosure mill lawyers try to cover up for the fact that in many cases, mortgage notes were not transferred properly to securitization trusts, and the rigid way these deals were structured makes it impossible to remedy those failures at this juncture. Absent creating a time machine, the only fix is to fabricate documents that make it appear than things were done correctly. We’ve seen (as in in person) obvious forgeries submitted to the court (signatures obviously Photoshop shrunk to fit) and servicer personnel caught perjuring themselves, yet judges are remarkably unwilling to issue a ruling that hinges on finding that the plaintiff filed phony documents.

If this case moves forward, that reticence may change. Note that this case, which covers only the Central District of California, alleges that Chase engaged in over 7000 filings of motions of relief of stay in bankruptcy court using fabricated documents. Remember that filing for bankruptcy puts a “stay” or hold, on all creditor claims. They all go wait while the court determines which creditors get what from the under water borrower. A “motion for relief of stay” by a mortgage lender is tantamount to saying, “Judge, let me grab the house.” Motions for relief of stay are typically a costly nuisance for bankruptcy lawyers. It wastes the borrower’s scarce money to shoo them away (and some plaintiffs’ lawyers will take advantage of inexperienced bankruptcy lawyers by getting them to sign a waiver in return for dropping the motion for relief of stay that looks innocuous but has a paragraph in it changes the burden of proof from the bank to the borrower, which almost always puts them at a fatal disadvantage and results in the loss of the home).

The other critical document discussed in this case is a “proof of claim”. Bankruptcy court is all about establishing whether the parties that want a pound of flesh from the borrower are really entitled to it. They are required to submit a “proof of claim” to substantiate their demand. Bankruptcy judges spend a considerable amount of time assessing the validity of these claims.

The case asserts that fabricating documents was very helpful to JP Morgan, enabling it to file successful proofs of claim and motions for relief of stay 95% of the time.

And why did JP Morgan do this? The case asserts that it needed to do so to pretend that borrower promissory notes really had been transferred to mortgage securitizations, otherwise, JP Morgan would be stuck with liability. Here are the gory details:

“Rather than incur the cost of ‘proving up’ its own standing or the standing of its principal Mortgage Backed Security Trust, Chase systemically misrepresents Chase or a designated MBST to be a creditor in tens of thousands of bankruptcy cases by utilizing manufactured documents,” the complaint states.

Bakenie claims: “That said practice is utilized for all mortgage loans originated by Chase, and other loan originators, including insolvent Washington Mutual Bank, whose assets were purchased by Chase.

“That said manufactured documents are fabrications intended to create the illusion of a valid transfers MLNs and support the assertion of standing in tens of thousands of bankruptcy cases. …

“That the aforementioned fabricated evidence is ‘photo-shopped’ and is highly persuasive and authentic in appearance so as to ensure legal victory in the bankruptcy courts.

“That said manufactured evidence is systemically utilized to deceive bankruptcy players and increase the profits of Chase, its agents and its principals through massive cost savings and the imposition of attorney fees upon class borrowers.

“As a direct result of this practice, over 95 percent of Chase’s motions for relief of stay and proofs of claim are granted without objection.

“That the use of the fabricated evidence has a chilling effect on class debtors and their attorneys. Said business practices discourages bankruptcy players from offering objections or from questioning the validity of Chase’s false claims based on standing.”

Bakenie adds: “That said practice allows Chase to dump defaulted loans that were never properly securitized by WAMU and other originators acquired by Chase into private mortgage backed security trusts by creating the illusion of a valid transfer.

“Said practice shifts the liability of defaulted loans not properly securitized by WAMU, from Chase to private mortgage backed security trusts. The practice allows Chase to effectively mitigate the millions of dollars in liability of the WAMU acquisition, where WAMU failed to transfer MLNs of its portfolio before its demise. Said practice shifts losses from WAMU to MBST bond investors.

“That after a non-judicial foreclosure sale, class members remain indebted to the true beneficiary for the unsecured note but without credit for the loss of the collateral to Chase’s designated assignee.

“Most egregiously, the network attorneys utilize the inducing documents to obtain attorney fees awards from by the bankruptcy judges ranging from $600-$1,000 for each successful motion for relief of stay.”

As gratifying as it is to read of this case, JP Morgan has a well established pattern of paying up smartly to make anything that might grow into a serious problem go away. Bankruptcy courts are courts of equity, and if JP Morgan is proven to have behaved badly, it could have wider ramifications (if a party does not have “clean hands,” a bankruptcy judge will hold it against them in evaluating their claim). But the flip side is this action covers only one bankruptcy court. Even if it settles this one, JP Morgan is exposed to similar actions in other courts.

This could be interesting, and in a good way, for a change.

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35 comments

  1. stuhlmann

    I understand why this is going forward as a civil suit, but I don’t understand why all these judges are so reluctant to issue arrest warrants for the lawyers and their clients who knowingly present fraudlent evidence in their courtrooms. You’d think that the judges would be up in arms over this wide-spread contempt of their courts. A more cynical man would suspect that the judges are being paid to look away.

    1. chris

      I would say that it would not be surprising if their are payoffsb but more likely it is the network of lawyers, judges, bankers and politicians that are trying to protect the big money bankers that pay for all of the elections and charitty work. There is no reason thousands of bankers are not in jail right now. It is only because of the massive cover up by the government and the banks that in some way has included the judges that we don’t see jail time. It is almost laughable if it wasn’t so horrific to see how much destruction has gone on without out punishment.

      1. Cheyenne

        “There is no reason thousands of bankers are not in jail right now. It is only because of the massive cover up by the government and the banks that in some way has included the judges that we don’t see jail time.”

        Right on. The fact that judges are in on it is what kills me. Even if you can attribute it to plain ignorance–nearly impossible to believe across thousands of cases–your best-case scenario is official disregard for the rule of law.

        And yet people speak of recovery. Seriously? This won’t end well at all.

        1. Up the Ante

          ” “As a direct result of this practice, over 95 percent of Chase’s motions for relief of stay and proofs of claim are granted without objection.”

          Stocking the courts, and I seem to recall ‘Booshie’ mentioning something once about ‘excess’ litigation tendencies of Americans ?

      2. steelhead23

        I am not so certain that the motivations of judges and prosecutors in “going easy” on the banksters is entirely pecuniary. Permeating all levels of government is a fear of upsetting the “system.” This fear is manifest in the bailouts as well as the lack of prosecutions. Indeed, it goes so far as to suppress even investigations, which would tend to make the crimes more obvious. Also, there is my pet issue – the reliance on experts. Judges are not experts in macroeconomics. Times are tough, judges and prosecutors fear making things worse. Hence, the rule of law takes a back seat to preventing the next depression, civil unrest, etc.

    2. Woodrow Wilson

      “who knowingly” -

      Intent is the hardest element to prove in criminal law.

      Since we haven’t seen widespread indictments, anywhere, in regards to fraud, it’s pretty obvious the “fix” is in at all levels.

      I don’t blame the dumb people being paid $10/hr to forge signatures, they probably didn’t ask, and certainly didn’t know the ramifications of what they were doing. Everyone above them, all the way to CONgress knows this was arguably the greatest fraud upon the Citizenry of our time (even beyond “robo-signing”). Chances are, regardless of all the harsh language, the perpetrators still walk (maybe a few lambs sacrificed).

      These banks donate pay CONgress Members generously. Does anyone seriously think they are going to cut that off? It’s going to take a lot more than harsh language and peaceful protests to bring back the Rule of Law. Until then, enjoy being pillaged daily.

      1. Cheyenne

        “It’s going to take a lot more than harsh language and peaceful protests to bring back the Rule of Law.”

        I pray you’re wrong but plan as if you’re right.

        “Until then, enjoy being pillaged daily.”

        Yup. Anyone who thinks MF Global was a one-off is dreaming.

    3. Michel Delving

      No doubt evidence properly presented will show plaintiff Ernest Bakenie’s claims to be accurate and I wish him the best of luck. Though no coverage of this lawsuit and there has been plenty of it, makes any reference to plaintiff’­s profession­al background­. While the complaint states that plaintiff defaulted on $1,170,000.00 mortgage secured by property located at 1617 West Balboa Blvd., Newport Beach, CA “following his loss of employment as a licensed real estate broker and a devastating motorcycle accident”, LinkedIn http://www­.linkedin.­com/pub/er­nest-baken­ie-mba/14/­1a0/8b5 depicts other facets of his career path and has him at Home Loan Funding 2002-2007 as Retail Sales Manager, then Directors Financial Group – December 2009 – November 2011 as Senior Mortgage Banker. According to Spoke he was also an Account Executive at Argent Mortgage Corp.. In total he racked up over 9 years at the mortgage originatio­n feed trough.

      Sheesh ! Talk about p___ing in the pot you ate out of or eating your own !
      As they say, it takes someone who’s been on the inside to bring down the facade.

  2. Pokey

    “That after a non-judicial foreclosure sale, class members remain indebted to the true beneficiary for the unsecured note but without credit for the loss of the collateral to Chase’s designated assignee.”

    I don’t see how this fraud affects a borrower. What difference does it make to whom the deficiency is owed? I know the quoted language implies that the whole debt to the “true beneficiary” remains, but that makes no sense either, and even if this were somehow possible, it would have no real effect as in a 7 the unsecured debt is discharged and in a 13 the debtor is paying his “disposable income” to the trustee for the period of his indenture. The identity of the recipient should be immaterial.

    If the charges are true, the victims are the investors, who should be seeking damages, and the integrity of the system. Unfortunately, there is not much of that. If a debtor files a false statement, he is subject to severe criminal penalties. The same applies to a false or fraudulent POC (“Penalty for presenting fraudulent claim: Fine of up to $500,000 or imprisonment for up to 5 years, or both. 18 U.S.C. §§ 152 and 3571″), but that would require the “Justice” Dept. to give a damn. The Justice Dept. disappeared at least 12 years ago, at least as to business crimes.

    The good thing about this kind of BS claim is that it calls attention to the problem, and after enough attention has been focused on this crap, it will be hard to keep it under the rug.

  3. Fraaaaack

    I’m a bit slow in understanding this. Are we talking about mortgages that were not securitized initially but now JPM is shoving them into MBS, or that they WERE securitized but the paper trail is so gawdawful they are forging that information to cover their asses now? I’m not even sure my question makes sense….

    In either case, it sure seems like investors in these MBS were not only screwed from buying sub-prime loaded bonds dressed with AAA ratings, but now no one can even prove exactly what mortgages were even bundled into it in the first place?

    1. Yves Smith Post author

      No, your question makes sense, and the lack of the clarity in the drafting is not a good sign.

      I am pretty sure the suit means the latter, that the loans were in theory securitized (as in the deals closed and the loans were reported to the SEC as being in the trusts) but the transfers were not done correctly, hence the trusts can’t foreclose.

  4. chunga

    Bank Against America has some problems too…Jan. 18, 2012.

    Bank of America CEO Moynihan to be Named as Defendant in Federal Foreclosure Lawsuit

    “I hereby accuse your bank, or one if its functionaries, of altering the original document, which is a crime in the State of Rhode Island, and then recording the altered document in the Narragansett Rhode Island Registry of Deeds for the sole purpose of illegally foreclosing on Mr. Brady’s property. This too is a crime. I hereby impute this crime to you as the Captain of the Ship that is Bank of America.”

    “This is but a small sampling of the documentation that I have amassed in this file, but I am certain, that as an educated man, in charge of Billions of dollars, you can see that such practices as working fraud on the Federal Court and the Town of Narragansett, Rhode Island, are not sound.”

    “The gratuitous letter my client received from Mr. Lara, an alleged Customer Advocate in your office, states that “[p]roper foreclosure & bankruptcy notices were issued accurately in accordance with the status of your account.” (attached hereto) This statement is also imputed to you since Mr. Lara works out of your office.”

    “Let me be clear, I am going to file an action for Mr. Brady in the Federal District Court for the District of Rhode Island and I am going to name you a Defendant. Let me stress that I do not operate from a position of fear, nor do I stand in awe of you or your company. The time has come for you to be called to task for your role in the destruction of my America.”

    Very truly yours,


    George E. Babcock, Esquire

  5. Fraud Guy- Also

    Isn’t there strong circumstantial evidence of widespread documentation fraud contained in the state-by-state comparisons of foreclosure rates, particularly with respect to New York? As I understand it, the NY state courts put the banks on notice that there would be severe repercussions (e.g., arresting lawyers) for submitting false documents in foreclosures. As a result, the pace of foreclosures slowed dramatically there. See this graphic from USA Today, where you can see that NY had the lowest foreclosure rate in 2011 of any state other than the low population ones where there was no housing frenzy:

    http://www.usatoday.com/money/economy/housing/story/Foreclosures-Interactive/36604658/1

    Apparently, it’s very hard to foreclose without submitting fake paperwork to the courts. I don’t understand why this discrepancy isn’t covered in the mainstream press on a daily basis.

    Also, a main thrust of the “50 state settlement” has to be to let the banks overcome these documentation problems and local judge outrage so that they can start foreclosing again.

  6. brian

    wondering in how many of these securitizations title insurance and/or legal opinions issued?

    recognize their exposure is probably qualified with an exclusion for fraud but one would thing being big boys they would have at least insisted on originals?

    time to put their carriers on notice and invite them to the party??

    1. Ms G

      Proving up title, ownership — that’s for the “little people” (and banks are “big people”) (Posthumous message from Leona Helmsley)

    2. Yves Smith Post author

      The opinions are kind of useless but everyone relied on them. They take the form of “if everything was done correctly, the securitization is kosher.” No representation that the steps were actually taken.

  7. Deontos

    Another tidbit in this case:

    FROM PARA 75 IN THE FILING
    ” … 75. That on December 29,2009, the designated Chapter 7 Trustee Richard Marshack, represented by Plaintiff’s **current counsel**, filed an Adversary Proceeding against CHASE [Adversary case 8:09-ap-0 1814]

    The lawyer who filed this case had on prior occasion represented the Bankruptcy Trustee. This begs a few questions …

    Did our Federal Government once again invoke the “right to remain silent” as a Corporatist Citizen eviscerated a real American? In this case, with the facts so blatant, where was the U.S. Trustee?

    Did a lawyer who saw foul play decide to take action unilaterally?

    Sure like to separate ALL the goats from the heroes. The Bank Goat is just perhaps one in a compromised system now being exposed.

  8. October Sky

    My question is about the difficult-to-prove “intent.” Doesn’t forged documents nationwide prove intent to defraud? If the falsified documents were few and far between, then yeah, maybe intent is not proved, but a massive move to submit forgeries to every court in America? Surely systemwide forgeries and perjured documents could prove intent.

    1. patrick

      Spot on. The question is how many instances of document falsification does it take to prove intent?

      We all know that the banks passed that threshold a long time ago. The system just doesn’t want to admit that. Which is why there is no proper investigation of the issue. They don’t want an investigation since they know what it will uncover.

    2. Woodrow Wilson

      “My question is about the difficult-to-prove “intent.” Doesn’t forged documents nationwide prove intent to defraud?” -

      A $10/hr “Robo-Signer” is going to say: “I was paid ten buck an hour to sign names!”

      A competent attorney is going to ask: “Did you know what you were signing?

      RoBo-boy: “Just some paperwork” (having ZERO clue as to what he/she was signing). Intent fails.

      You have to get past the Robo-clown to get anywhere. Sure, you have plenty of evidence it was in fact done (signing of documents that are bogus), but you have prove “of the mind” of the person doing the criminal act. Your task is to get a person to say: “Yes, I know I paid someone $10/hr to sign affidavits that I knew was illegal.”

      My guess is, this is the tactic being used in Nevada by the AG there, climb the ladder. Eventually, everyone is going to lawyer-up if they haven’t already. In the end, as cynical as I am, banks are still laughing all the way to their own bank spilling their bourbons saying: “Stupid serfs, did they really think they could do something? To US? LMFO!”

      1. Justicia

        Pattern and practice in business operations are evidence of “intent.” Management is responsible for putting in place systems that meet legal requirements — like, having a person with knowledge of the facts sign affidavits submitted in court. Instead, they used people who knew nothing about the borrowers’ accounts to swear to false claims about the borrowers’ indebtedness. This wasn’t a bug, it was a feature.

        And the higher ups can’t cop to a “who could have known” defense. Under Sarbanes-Oxley, the CEO and the CFO must certify that the company has appropriate “internal controls” in place to ensure the accuracy of the company’s financial reports. How can a mortgage servicer claim that its financial statements are accurate if its shown repeatedly in court that the servicer is attempting to collect more money than is owed.

  9. Tim

    “That after a non-judicial foreclosure sale, class members remain indebted to the true beneficiary for the unsecured note but without credit for the loss of the collateral to Chase’s designated assignee.”

    Is there a lawyer in the house that can explain what would play out if the security owner ever came back for the collateral from the homeowner?

    Wouldn’t the paper trail from the bankruptcy court and the security owner’s records clearly show that Chase stole the house from both parties via fraudulent documentation? Is there any statute of limitations that would protect the bank?

    It just seems wildly unlikely that the security owner would waste their legal dollars pursuing a likely poor, previously bankrupted individual to recoup their losses instead of pursuing the multibillion dollar bank that defrauded them coming and going.

    Another question. Does thousands of occurances of deliberate fraud accross multiple states qualify corporate entity for violation of RICO laws and associated punishments? And if so who would be responsible for bring the case before a federal judge for prosecution?

    Thanks!

    1. Justicia

      Nothing, if the homeowner’s debts were discharged in bankruptcy. The true owner of the debt would have a claim against whoever foreclosed on the property.

      This is the reason that NY courts (and other states) have held that the note (evidence of the debt) and the mortgage (the security interest in the property) are inseparable. Splitting the note from the mortgage creates the potential for the confusion described in this litigation.

      1. Tim

        Thank you for your response!

        Anyone else care to comment on my other question of RICO laws being applicable here?

  10. mac

    Seems to me that: The borrower did not pay as promised. That someone has a right to the property. Who that might be really does not involve the borrower but involves who legally has a right to the property. A further issue is that the system and the courts are being fooled.
    But in the end the borrower did not pay

  11. PQuincy

    If a massive fraud on securitization trusts is being perpetrated by Chase (and presumably BoA and WF), the question is why some smart lawyer isn’t suing the banks on behalf of the trusts and their investors. My guess would be that the key reason is that the trusts have no institutional existence, really, and the parties who could most easily act on their behalf are in bed with, or simply are, the same banks and investment banks who are perpetrating the fraud in the first place. Still, in a nation as litigious as ours, and with as many hungry lawyers, why haven’t we seen such suits. Is it because the investors in the trusts, who ultimately take the losses, all had to agree to arbitration and are quietly being bought off if they are in a position to make a fuss?

    I dislike conspiracy theories, but when as many oxen have been gouged as were on Wall Street over the last few years, and there’s not a peep from their lawyers, one does have to wonder…

    1. Tim

      I’ve asked myself the same question.

      Maybe the Banks’ core competency is knowing who not to make enemies with.

      They gave the short MBS mortgage deals to everybody that they knew had it together enough to come after them (likely people investing their own money) and the long deals to everybody they knew would never come after them (likely people managing somebody elses money-mutual funds pension funds…etc.)

  12. Joseph Arthur Roberts

    Borrowers, investors and anyone who values a fraud free bankruptcy court system are getting screwed.

    The practice varies, but every major player engages in the use of fabricated documents to prove standing in bankruptcy court…and beyond. There is also two similar Aurora cases filed by my office:

    Aurora- Jahromi:
    http://www.scribd.com/doc/77046211/AURORA-Class-Action-Photoshopped-Assignments-and-systemic-131g-TILA-violations

    Aurora-CHE
    http://www.scribd.com/doc/74828333/Class-Action-Complaint-TILA-part-1of-3-v-AURORA
    http://www.scribd.com/doc/74828171/Class-Action-Complaint-TILA-part-2-of-3-v-AURORA
    http://www.scribd.com/doc/74828253/Class-Action-Complaint-TILA-part-3-of-3-v-AURORA

    The theory is that defendants are systemically violating the 131g TILA by failing as a new creditor\assignee to provide a statutory notice to the borrower within 30 days of loan transfer or…that the defendants and thier agents routinely use fabricated documents to deceive bankruptcy players through the use of phony assignments, allonges and affidavits and prevail in BK matters.

    The practice chills legal opposition through the use of false evidence that misrepresents transactions that have never occurred, degrades the legal system, results in massive cost savings in “standing” prove-ups and an unfair competitive advantage over legitimate servicers, enriches Defendants through attorney fee awards, enriches Defendants through pay-outs from Chapter 13 plans and enriches Defendants through in increase in attorney fees added to loan balances.

    Joseph Arthur Roberts, Esq.
    HomeLawLawyers.com

  13. ECON

    The fraud and corruption in the Mortgage tragedy has such a lineup of criminals and the more heinous crimes of mainstream media and courts and federal government sweeping it under the rug that one surmises “the land of the free and home of the brave”is not America. Just what is it?

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