Last updated: November 16, 2012 11:52 pm

Banks in $417m SEC civil settlement

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Credit Suisse and JPMorgan Chase agreed to pay roughly $417m to settle Securities and Exchange Commission civil charges alleging that the banks misled investors in residential mortgage-backed securities.

The deals are the SEC’s first cases alleging misconduct in the sale of RMBS and follow resolutions with five banks for alleged misrepresentation in their sale of collateralised debt obligations, a more complex security that is linked to residential mortgages.

The SEC said that the cases were a product of the president’s taskforce announced in January. “Today’s filing will not be the last,” said John Walsh, the US attorney in Colorado who is a member of the federal-state taskforce.

The filing follows a lawsuit last month by New York attorney-general Eric Schneiderman, another member of the taskforce, who sued JPMorgan for allegedly defrauding investors who lost more than $20bn on mortgage-backed securities written by Bear Stearns. JPMorgan, which acquired Bear Stearns in 2008, is contesting the suit.

The deal is the latest legal challenge for JPMorgan, which is defending against numerous private suits related to mortgages and its “London whale”, the trader responsible for more than $6bn in losses.

This week the bank was banned by the US energy regulator from trading electricity for six months for allegedly misleading officials in a probe of alleged market manipulation.

In announcing the new charges Robert Khuzami, director of SEC enforcement, said that RMBS securities were “ground zero in the financial crisis” and revealed two improper practices by the banks.

JPMorgan agreed to pay $296.9m, without admitting or denying wrongdoing. The SEC alleged that the bank underreported, in offering documents, the number of delinquent loans packaged into RMBS. In one offering of a $1.8bn RMBS, JPMorgan said that only four loans were delinquent when in fact, the SEC alleges, more than 620 loans were delinquent.

The SEC also alleged that JPMorgan’s Bear Stearns cheated investors by failing to pass along cash it obtained from mortgage originators when handling loans that defaulted early. The bank should have swapped the loan for cash and passed it on to investors via a trust, the SEC alleged, but instead it negotiated discount settlements for the loans, kept the cash, and left the trust with the defaulted loan. By doing so the bank avoided a loss.

The SEC alleges that Bear Stearns failed to disclose to investors that it was engaging in this “bulk settlement” process.

Credit Suisse paid $120m to resolve allegations that it also misled investors over bulk settlement practices from 2005 until 2010.

JPMorgan said it was “pleased” to “put these matters concerning RMBS behind it”. Credit Suisse said it was “pleased” to have resolved the SEC investigations.

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