Analysis: New York suit against JPMorgan makes a ripple, not a splash

Tue Oct 2, 2012 7:27pm EDT
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By Aruna Viswanatha

WASHINGTON (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.   Continued...

People look at the JP Morgan headquarters in New York, May 17, 2012. REUTERS/Eduardo Munoz