Mortgage Daily

Published On: April 30, 2012

JPMorgan Chase & Co. and several others in the investment banking community are fighting off a host of lawsuits and other actions filed by investors of mortgage-backed securities, insurers of mortgage-related securities and regulators. Former executives of one defunct financial institution have been sued for aggressively investing in risky MBS, and the defendant in another case is accused of providing too much information on the loans it services.

A lawsuit filed in New York’s supreme court in November by Bayerische Landesbank against subsidiaries of JPMorgan Chase & Co. was removed to U.S. District Court for the Southern District of New York on April 9. Around $2.1 billion in RMBS are involved in the case.

JPMorgan Chase Bank, N.A., and affiliates Bear, Stearns & Co. Inc., EMC Mortgage LLC and J.P. Morgan Securities LLC were named as defendants in a complaint filed on March 30 in the New York Supreme Court by Ambac Assurance Corp. Losses as a result of alleged deception have reportedly reached $1.83 billion.

A similar list of defendants was listed in a complaint filed with the same court on March 15 by Assured Guaranty Corp.

The U.S. District Court for the Southern District of New York ruled on March 30 that a motion to dismiss a lawsuit filed on behalf of investors of certain Bear Stearns Mortgage Pass-Through Certificates issued in 2006 was granted without prejudice “insofar as plaintiffs’ claims are premised on the alleged unreliability of the ratings of securities included in the investment pools.” But the motion to dismiss was denied in all other respects.

Three lawsuits filed by Deutsche Zentral against JPMorgan Chase & Co. and subsidiaries in New York’s supreme court lists RMBS issued in 2006 by Fieldstone Mortgage Investment Trust, Long Beach Mortgage Loan Trust and Bear Stearns Alt-A Trust — among other issuers. DZ seeks a judgment in the amount of $401,882,591 in one case, $157,966,000 in the second case and $84,759,000 in the third.

Principal Life Insurance Co. sued Chase entities for $114,975,720 in New York’s supreme court on March 1. Misrepresentations were allegedly made in offering materials for the 2006 and 2007 issuances by J.P. Morgan Mortgage Trust.

A separate $95,467,743 lawsuit was filed by Principal in the same venue on March 30 against most of the same Chase defendants over losses tied to issuances from the same vintages that were sponsored by EMC Mortgage Corp. and underwritten by Bear, Stearns & Co. Inc.

A settlement hearing in a class action against Deutsche Alt-A Securities Inc. has been scheduled for July 11 in a New York federal court, Robbins Geller Rudman & Dowd LLP and Labaton Sucharow LLP announced Tuesday. The proposed settlement amount is $32.5 million.

Deutsche Bank AG was sued in New York Supreme Court on April 18 by Bayerische Landesbank. At issue are $810 million in RMBS Bayerische acquired. The complaint alleges that Deutsche internally called the securities “pigs,” “crap” and “horrible” while offering materials said the loans were prudently underwritten in line with its guidelines, the quality was verified by Deutsche and the loans were secured by adequate collateral. Deutsche allegedly began in 2005 developing a $10 billion short position on the U.S. housing market that paid off when the RMBS failed.

In ACA Financial Guaranty Corp.’s lawsuit against Goldman Sachs & Co., New York Supreme Court Justice Barbara R. Kapnick denied Goldman’s motion to dismiss the first two causes of action on Tuesday. But the judge did dismiss ACA’s “unjust enrichment” third cause of action. ACA alleges that it was fraudulently induced by Goldman to insure a controversial collateralized-debt obligation, ABACUS 2007-ACI, in which Paulson & Co. Inc. selected the securities in a strategy that would cause the security to fail and provide a windfall for Paulson.

A Sept. 28, 2011, decision in favor of Goldman Sachs & Co. was appealed with the U.S. Court of Appeals for the Second Circuit by Landesbank Baden-Wurttemberg on Oct. 24. But on April 19, the dismissal was affirmed.

Goldman was not so lucky with its request to dismiss a federal lawsuit filed in 2010 by the hedge fund Dodona I LLC, according to a March 21 decision. The case involved a pair of subprime RMBS-indexed synthetic collateralized-debt obligations issued in 2006 by Hudson Mezzanine Funding. Dodona alleges that Goldman created the CDOs in an effort to unload its subprime holdings and simultaneously shorted the CDOs without disclosing this to investors.

Stanley C. Brooks, the former chief executive officer of Brookstreet Securities Corp., was ordered by a federal judge to pay a $10 million penalty and $0.1 million in disgorgement and pre-judgment interest, the Securities and Exchange Commissions said in a March 2 statement.

Brooks allegedly sold risky MBS to clients who sought conservative investments. A program at Brookstreet promoted the collateralized-mortgage obligations to more than a thousand unsuitable investors including seniors and retirees even though the firm had been warned about the risky nature of the investments.

As president, CEO and sole shareholder of Radius Capital Corp., Robert A. DiGiorgio was intimately involved in every aspect of operations and directed the actions of employees, according to an SEC lawsuit filed in U.S. District Court for the Middle District of Florida.

DiGiorgio filed a motion to dismiss in May 2011. Count one of the motion was denied by U.S. District Judge John E. Steele on March 1, though the judge granted a dismissal without prejudice on Count II alleging DiGiorgio made false statements in the prospectuses.

A $1,456,174 civil administrative penalty and $3,543,826 in disgorgement are part of a settlement reached between State Street Global Advisors and Massachusetts’ securities secretary. A consent order, which referenced $1.56 billion in hybrid collateralized-debt obligations managed by State Street, additionally requires no further violations of the Massachusetts Uniform Securities Act. It also prohibits any attempt to gain a tax benefit from the penalty or file an insurance claim to recover any of it.

A Financial Industry Regulatory Authority hearing panel ruled that David Lerner Associates Inc. charged excessive markups on over 1,500 municipal bond and more than 1,700 collateralized-mortgage obligation transactions from January 2005 through January 2007 and fined the company $2.3 million for markup and related supervisory violations. FINRA said it also ordered the Long Island, N.Y., firm to pay more than $1.4 million in restitution in interest as well.

Subsidiaries of MetLife Inc. filed a lawsuit on Wednesday against Morgan Stanley and subsidiaries including Saxon in New York’s supreme court. MetLife claims that even though the investment banker represented that the underlying loans on over $757 million in RMBS were underwritten according to guidelines, used accurate property appraisals and had due diligence performed on them — Morgan Stanley knew that the securities “were destined to fail.”

“The originators whose loans collateralized the Morgan Stanley RMBS at issue were among the worst of the worst culprits in the subprime lending industry,” the complaint states. “These originators have since folded up their operations, filed for bankruptcy or been shut down by regulators, and are the subject of numerous governmental investigations and private lawsuits alleging misconduct arising out of pervasive illegal and improper mortgage lending practices and other violations of law.”

On Jan. 31, Deutsche Zentral filed an action in the New York supreme court against HSBC. The case cites $122,475,000 in MBS issued by HSBC and Option One Mortgage Corp.

“The offering materials issued by defendants for the offerings contained material misrepresentations and omissions regarding the underwriting standards used to issue the mortgage loans that were pooled together into the offerings, the legal validity of assignments of those mortgage loans to trusts formed to hold the pooled loans and to collect interest and principal payments due on the loans, and the legal validity of the trusts and their legal entitlement to receive interest and principal payments on the loans,” DZ alleges.

A $5.25 million settlement with HSBC was announced on March 12 by the National Credit Union Administration. The agreement resolves claims related to the sale of RMBS to five failed wholesale credit unions. The NCUA said that the settlement brings related recoveries to $171 million.

Flagstar Bank, FSB, was sued in a Manhattan federal court by Assured Guaranty in April 2011. The Troy, Mich.-based bank filed a motion for summary judgment, and the motion was denied on Feb. 29 by U.S. District Judge Jed S. Rakoff — who noted that he will subsequently issue an opinion explaining his ruling.

As liquidating agent for failed Western Corporate Federal Credit Union, the National Credit Union Administration filed a lawsuit against WesCorp’s former president and CEO, chief financial officer and several other former executives and directors of the wholesale credit union.

WesCorp, which was thrown into NCUA conservatorship in March 2009, bulked up on its Alt-A private-label MBS holdings beginning in 2005, according to the lawsuit. The adjustable-rate mortgages backing the securities had payment options. By 2007, option-ARM MBS investments amounted to $8.9 billion and accounted for 37 percent of its total investment portfolio.

Answers to counterclaims have been filed this month in the case, as has an amended answer to complaint, Last month, the judge granted the plaintiff’s motion to dismiss amended counterclaims with leave to amend.

The conservator of Fannie Mae and Freddie Mac — the Federal Housing Finance Agency — has been sued in a Washington, D.C., federal court by the public-interest group Judicial Watch Inc. Judicial Watch says the FHFA denied its Freedom of Information Act request for documents from the regulator’s lawsuit against 17 financial institutions.

“This is a cover-up about how and why over $150 billion in tax dollars has been spent,” Judicial Watch President Tom Fitton said in a news release. “The Obama administration says not one document from Fannie and Freddie, through which the federal government runs the nation’s mortgage markets, is subject to disclosure under FOIA to the American people.

“And now that it has a shakedown disguised as a lawsuit against much of the private banking industry, the Obama administration is doubling down on its obsessive secrecy.”

Sand Canyon Corp., the successor to Option One Mortgage Corp., filed a lawsuit in New York Supreme Court on Feb. 22 against American Home Mortgage Servicing Inc. Sand Canyon claims that American Home violated a cooperation agreement reached in 2008 when Option One’s servicing portfolio was acquired by American Home by providing easy access to file information for parties that are trying to make Sand Canyon repurchase mortgages.

While the agreement was supposed to ensure that two companies would “act as allies rather than adversaries in the management and defense of certain liabilities that were to be retained by Sand Canyon after AHMSI’s purchase of the loan servicing portfolio — namely those liabilities that are based on allegations concerning San Canyon’s pre-sale conduct,” according to court documents.

American Home has ignored repeated request by Sand Canyon to cease electronic delivery of the information, according to court documents. Sand Canyon wants the data provided by American Home only from its physical facilities during regular business hours, as reportedly required in the agreement.

Rigrodsky & Long, P.A., announced on Feb. 28 that it launched an investigation into Wells Fargo & Co. on behalf of shareholders. The law firm is zeroing in on an SEC Wells Notice over MBS disclosures.

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