JPMorgan Chase & Co., the largest U.S. bank, said it's under federal criminal investigation for practices tied to sales of mortgage-backed bonds that the Justice Department has already concluded broke civil laws.
The department's civil division told the bank in May of its preliminary finding after examining securities tied to subprime and Alt-A loans, which were sold to investors from 2005 to 2007, JPMorgan said today in a filing. The U.S. Attorney's Office led by Benjamin Wagner in Sacramento has been conducting civil and criminal inquiries, the filing shows.
"It would be a major decision for them to indict a major U.S. bank, and frankly I would not predict it," said John Coffee, a professor at Columbia Law School in New York. "You can often bring dual investigations, civil and criminal, in order to maximize pressure for a global civil resolution."
Investigators are seeking to wrap up years-long probes of abuses that fueled the housing collapse and prompted global credit markets to freeze in 2008. Yesterday, the Justice Department and Securities and Exchange Commission sued Bank of America Corp., the nation's second-biggest lender, accusing the firm of misleading investors in an $850 million mortgage-backed bond in 2008.
"Whether they are waking up belatedly to the public's need for retribution or looking at the expiration of the statute of limitations, they are reaching similar decisions about Bank of America and JPMorgan," Coffee said in an interview.
Additional Inquiries
Like with Bank of America, the U.S. is investigating JPMorgan under the Financial Institutions Reform, Recovery and Enforcement Act, according to a person briefed on the matter. The 1989 law allows the government to seek civil penalties for losses to federally insured financial institutions.
Lauren Horwood, a spokeswoman for Wagner in Sacramento, declined to comment about the the bank's disclosures.
JPMorgan "continues to respond to other MBS-related regulatory inquiries," the New York-based company wrote in the filing. Federal and state authorities have sent subpoenas and inquiries about its origination and purchase of mortgages, and the packaging of debts into bonds, the bank said.
Investigators have asked about the "treatment of early payment defaults, potential breaches of securitization representations and warranties, reserves and due diligence in connection with securitizations," it said.
Prosecutors' Reluctance
Joe Evangelisti, a company spokesman, declined to comment. Charlotte, North Carolina-based Bank of America has said buyers of its mortgage bonds were sophisticated investors with ample access to underlying data.
U.S. prosecutors are reluctant to bring criminal charges against a large bank that's tightly interconnected with other firms because it could endanger national or global economies, U.S. Attorney General Eric Holder told a Senate Judiciary Committee hearing in March.
"It has an inhibiting impact on our ability to bring resolutions that I think would be more appropriate," he told lawmakers.
JPMorgan, led by Chief Executive Officer Jamie Dimon, 57, has $2.44 trillion in assets and $1.2 trillion in deposits at the end of June, the filing shows. The company also held derivative contracts with a notional value of $73.5 trillion.
'Extremely Cautious'
"The Department of Justice is likely to be extremely cautious" in the criminal probe, Coffee said. "If they did anything, they might indict a subsidiary" or individual executives.
JPMorgan said it's also cooperating with the Justice Department's four-year-old antitrust probe of the credit-default swaps market.
The firm is among more than a dozen financial institutions, including Morgan Stanley and Citigroup Inc., accused by the European Commission last month of colluding to curb competition in credit derivatives. JPMorgan said today that it's cooperating with that inquiry, among others.
Separately, the bank received subpoenas and other requests for information from the U.S. Attorney's Office in Connecticut and the SEC regarding its discussions with other firms about certain mortgage-bond transactions, the filing shows. New York state bank regulators are examining JPMorgan's handling of home loans for properties affected by superstorm Sandy last year.
To contact the reporter on this story: Dawn Kopecki in New York at dkopecki@bloomberg.net
To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net; Christine Harper at charper@bloomberg.net
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JPMorgan Says U.S. Concluded Mortgage-Bond Sales Broke Civil Law
Pedestrians walk by the offices of JPMorgan Chase & Co. in New York.
Pedestrians walk by the offices of JPMorgan Chase & Co. in New York. Photographer: Victor J. Blue/Bloomberg
