Last updated: November 6, 2012 11:00 pm

JPMorgan in talks over misconduct claims

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JPMorgan©Bloomberg

JPMorgan Chase is in advanced settlement talks with the Securities and Exchange Commission over allegations of misconduct in the handling of mortgage-backed securities, according to people familiar with the matter.

The settlement – if finalised as expected – would remove one significant item from the bank’s toxic pile of litigation and regulatory action related to both the financial crisis and its trading losses this year.

The settlement talks involve an inquiry into Bear Stearns’ mortgage operation, which JPMorgan acquired in 2008.

The SEC is investigating the bank’s alleged failure to pass on proceeds recovered from loan originators for soured mortgage loans to a trust managing residential mortgage-backed securities, according to people familiar with the matter.

The SEC investigation is also focused on disclosures made to investors concerning the renegotiated loans.

The two sides are yet to agree on any financial penalty but some people involved do not expect it to be of the magnitude of previous SEC action, such as the $550m settlement paid by Goldman Sachs in 2010 to settle alleged mis-selling of collateralised debt obligations backed by mortgages.

An SEC spokesman and JPMorgan declined comment.

Other banks that sold securities, including Credit Suisse, Citigroup and Wells Fargo are still under SEC investigation. Some lawyers involved with the litigation say they expect JPMorgan’s to be resolved first, followed by additional cases.

JPMorgan disclosed in a regulatory filing in February that it was facing two SEC investigations into mortgage products. The second investigation, for which it may face civil charges, was in connection with “due diligence conducted for two mortgage-backed securitisations”, JPMorgan said at the time. The status of that investigation is unclear.

The litigation cloud continues to hang around JPMorgan. Last month, Eric Schneiderman, the New York attorney-general, sued the bank for allegedly defrauding investors who lost more than $20bn on mortgage-backed securities underwritten by Bear Stearns. In that case, Mr Schneiderman alleged the bank “committed multiple fraudulent acts in promoting and selling” MBS. JPMorgan said it was “disappointed” by the lawsuit and that it would contest the allegations.

Though the mortgage-related allegations date back several years – including a $154m settlement over alleged mis-selling of CDOs – JPMorgan also faces regulatory investigation of the losses incurred by one of its traders earlier this year.

Nicknamed “the London whale” for the outsized positions in credit derivatives markets, the trades have cost the bank at least $6bn and spurred investigations by authorities including the SEC and FBI into the positions, whether they were concealed and whether JPMorgan’s disclosure was adequate.

On Tuesday, Wells Fargo disclosed that government investigations are focusing on its mortgage origination and securitization practices, including those related to Wachovia, which it acquired in 2008.

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