After being formed to great fanfare in January 2012, the Residential Mortgage-Backed Securities Working Group, part of President Obama’s Financial Fraud Enforcement Task Force, stayed largely silent for eight months. No longer. With its October 1 filing of what could be a $87 billion lawsuit against Bear Stearns successor J.P, Morgan—as well as not-so-subtle hints of more lawsuits to come—the RMBS Working Group made its presence felt with a bang, not a whimper.
The lawsuit is unique among RMBS cases in that it does not focus on alleged misrepresentations or omissions made in connection with individual RMBS deals. Instead, the RMBS Working Group, acting through co-chair Eric Schneiderman, New York’s Attorney General, is taking on Bear Stearns’ entire RMBS business over a multi-year period. The complaint focuses on alleged defects in Bear Stearns’ due diligence process, accusing Bear Stearns of disregarding due diligence results showing the allegedly poor quality of the loans underlying its securitizations and of ignoring its own employees’ requests to correct perceived deficiencies in its due diligence process. The complaint also charges Bear Stearns with failing to comply with its stated post-closing obligations, including by not taking adequate steps to ensure that loan originators repurchased problematic loans from the RMBS trusts. Bear Stearns allegedly arranged side deals with the originators for confidential cash payments at a fraction of the contractual repurchase price, thus securing recovery for itself without passing it on to investors. The suit seeks a variety of remedies, including “restitution of all funds obtained from investors”—potentially all of the $87 billion in RMBS allegedly sold by Bear Stearns during the relevant period.