October 03, 2012
Unpacking People v. JPMorgan
Posted by David Zaring

The NY AG just filed suit against JPMorgan under the state's feared Martin Act.  Some observations:

  • The suit is really about the financial crisis - nothing orthagonal about it.  It alleges that Bear Stearns (now JPM) systematically failed to inspect the quality of the mortgages it put into its mortgage related products (RMBS), which it then sold on to investors.
  • Parts of the complaint read like a political document: consider "Faced with the promise of immediate, short-term profits and no long-term risks, originators began to increase their volume of home loans without regard to prospective borrowers’ creditworthiness – including their ability to repay the loan."  Is this true?  Germaine to JPMorgan?
  • Or try "In fact, numerous originators who were top contributors to Defendants’ RMBS were on the Comptroller of the Currency’s “Worst Ten” mortgage originators in the “Worst Ten” metropolitan areas due to their loans’ high rate of foreclosures during the period 2005 to 2007." Seems like a newsy factoid more than a bit of data for the complaint.  I'd be interested in knowing if this was different for JPM than anyone else, proportions, etc.
  • The complaint spends a great deal of time (paragraphs 33-69 of an 85 paragraph complaint) arguing that the due diligence the bank made into its RMBS was insufficient, and that tells you something about a presumable defense to Martin Act fraud claims.
  • Something new: part of the complaint relies on the fact that JPM sued and settled with mortgage originators, but failed to share the settlement proceeds with RMBS investors.
  • The Martin Act is a fraud statute, and it used to be used to go after penny ante mountebanks.  Elliot Spitzer, however, turned the act into a cudgel that could be used against Wall Street, aided by the fact that the Martin Act doesn't require intent or reliance, as federal fraud statutes do, even for crimes (which is amazing, and would raise visions of due process challenges to convictions in my head).  The NYCtApp: the Act “includes all deceitful practices contrary to the plain rules of common honesty and all acts tending to deceive or mislead the public.”  That means you only need to show that a material misstatement or omission occured (the link is to a handy memo from Dechert).
  • The suits is a civil one, which means that the statute allows the AG to sue those "engaged in, is engaged or about to engage in any of the transactions heretofore referred to as and declared to be fraudulent practices."  

Administrative Law, Finance, Financial Crisis, Financial Institutions | Bookmark

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