* First suit by gov't task force may aid private litigants
* Mortgage bond investors seeking billions from banks
* Law makes it easier for NY state to sue banks
(Adds analyst comment, background, stock movement)
WASHINGTON, Oct 2 (Reuters) - New York state's lawsuit
against JPMorgan Chase & Co alleging fraud in mortgage-backed
securities sold by Bear Stearns may be one of the broadest cases
to come out of the financial crisis, but its impact is likely to
be limited. The biggest beneficiaries may be investors who have
taken out private lawsuits against the bank.
The civil suit, brought by New York Attorney General Eric
Schneiderman, is the first from a federal-state financial fraud
task force. It did not unearth any previously unknown details or
attempt to assign criminal liability.
Instead, it largely follows in the footsteps of private suits
from investors who have accused Bear Stearns and other firms of
deceptively selling toxic mortgage-backed securities.
While the state could extract a monetary settlement out of
JPMorgan that rivals other financial-crisis cases and government
officials pledged more cases will follow, the biggest outcome of
the New York state suit will be to add firepower to
multibillion-dollar private litigation dogging Wall Street.
"With the tools available to the attorney general...we have
a better prospect of getting the whole story out," said Don
Hawthorne, a New York lawyer who has brought cases against banks
on behalf of bond insurers.
New York state's suit gives private plaintiffs more leverage
to extract settlements from the banks they are targeting. It
also could give investors more evidence as litigation unfolds
The lawsuit, filed late Monday, accused Bear Stearns of
deceiving investors by leading them to believe the quality of
loans in the mortgage-backed securities had been carefully
evaluated, even though they had not been.
It charges that Bear systematically ignored defects in the
loans and kept investors in the dark.
The suit differs from prior government financial-crisis
suits, such as the U.S. Securities and Exchange Commission's
case that accused Goldman Sachs of misleading investors on one
subprime mortgage product in 2007. That case was settled.
The 31-page complaint against JPMorgan more closely
resembles a less-detailed version of dozens of private cases out
there, including a lawsuit from bond insurer Ambac Assurance
Corp against the Wall Street bank.
U.S. banks face billions of dollars in potential liability
from investors who bought now-soured mortgage-backed securities
and from insurers who were stuck with losses from the bonds.
But experts did not think New York state's suit would
immediately add to banks' risk. "We do not see this litigation
as a game changer as it is similar to many of the civil suits
that already are pending," Jaret Seiberg of Guggenheim Partners
said in a Tuesday investors note.
JPMorgan's stock price barely reacted to the news, dipping
just 0.1 percent on Tuesday to close at $40.92.
Through the lawsuit, New York wants JPMorgan to return
profits obtained through the alleged fraud and pay damages.
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JPMorgan said in a statement late Monday it would contest
the allegations, and noted that the suit does not target
JPMorgan's activity in the lead-up to the crisis.
The suit "relates to Bear Stearns, which we acquired over
the course of a weekend at the behest of the U.S. Government.
This complaint is entirely about historic conduct by that
entity," the statement said.
MORE TO COME
Schneiderman and federal authorities discussed the case
during a press conference in Washington on Tuesday and said more
actions were coming, although they declined to provide
specifics.
"We are looking forward to more cases," Schneiderman said at
the U.S. Justice Department's headquarters.
The civil lawsuit against JPMorgan was brought under a
powerful New York state law known as the Martin Act, which
generally does not require proof of intent, a major stumbling
block in most fraud cases.
The statute allows the New York attorney general's office to
pursue both criminal and civil cases, although the 2006 and 2007
conduct in the JPMorgan complaint appears to fall outside the
statute of limitations of two years for misdemeanors and five
for felonies. The civil statute of limitations is six years.
The New York attorney general's office has for years been
investigating misdeeds related to the packaging and sale of home
loans. In 2008, Schneiderman's predecessor, Andrew Cuomo, sent
subpoenas to a handful of banks, including Bear Stearns,
Deutsche Bank AG, Morgan Stanley, Merrill Lynch & Co. and
others, according to news reports at the time.
Earlier this year, the U.S. Justice Department also issued
more than a dozen civil subpoenas to top banks on the issue.
The announcement comes weeks before the presidential
election, but the Justice Department said there was no political
connection on the timing of the case.
"When cases are mature and ready to be brought, we bring
them," said acting Associate Attorney General Tony West.
President Barack Obama, who is trying to show he is helping
the nation move past the devastating housing crisis and
resulting recession, announced the task force in his January
State of the Union speech. At the time, he said the group would
"help turn the page on an era of recklessness that hurt so many
Americans."
The working group includes the Justice Department, the U.S.
Department of Housing and Urban Development, the Securities and
Exchange Commission, the New York Attorney General's office and
other agencies.
In forming the group, officials said it was designed to
avoid duplicating efforts and collaborate on specific cases to
bring actions more quickly.
OVERNIGHT RESCUE
When JPMorgan purchased Bear Stearns, the investment bank's
instability was threatening the larger financial system. The
Federal Reserve and Treasury were desperate to find a buyer who
could take on its toxic assets and help calm markets.
Bear Stearns was the No. 1 U.S. underwriter of residential
mortgage-back securities in 2005, 2006 and 2007, Thomson Reuters
league tables show.
The officials in the working group defended the decision to
go after JPMorgan in their first lawsuit, even though the
federal government encouraged and was heavily involved in the
investment bank's purchase of Bear Stearns.
"The liability traveled with the company, so it would be far
worse for us to send the message that this kind of fraud is to
be tolerated," Schneiderman said. "No one is above the law."
It was unclear how strong a legal defense JPMorgan will
have, said John Coffee, director of Columbia University Law
School's Center on Corporate Governance, who noted that JPMorgan
acquired Bear Stearns through "an arranged marriage."
"Morally it's not JPMorgan's responsibility but there were
losses and the public wants the historical record set right,"
Coffee said. "They took the bitter with the sweet when they
accepted a major package of federal financing to complete the
deal."
(Reporting By Aruna Viswanatha and David Ingram in Washington
and Jed Horowitz, Karen Freifeld and Cezary Podkul in New York;
Editing Karey Wutkowski and David Gregorio)