JP Morgan in court over mortgage backed securities

In a bid to hold banks to account for their part in the financial crisis New York’s chief law enforcement officer has filed a lawsuit over mortgage backed securities sold by Bear and Stearns.

This is the first case that have emerged from the working group of state and federal prosecutors that the Obama administration has set up to investigate the 2008 financial crisis.

It is estimated that investors lost around $20 billion from bonds sold by Bear and Stearns backing sub-prime mortgages in 2007.  The insolvent investment bank was taken over by JP Morgan in 2008.

The New York Attorney General’s office used the powerful state securities fraud statute, the Martin Act to file the lawsuit.  The act does not require “intent to deceive” as a prerequisite for filing fraud claims.

The lawsuit accuses Bear Stearns of failing to conduct adequate “due diligence” on the underlying mortgages that were being backed by the securities sold by the investment bank.

The state government has said that the bank "systematically failed to fully evaluate the loans, largely ignored the defects that their limited review did uncover, and kept investors in the dark about both the inadequacy of their review procedures and the defects in the underlying loans".

JP Morgan however has issued a statement saying it would fight the civil fraud lawsuit especially since it took over failed Bear and Stearns at the urgings of the US government in 2008.

"The NYAG civil action 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.