Individuals who blew the whistle on a mortgage fraud scheme that ended up costing JPMorgan Chase (JPM) $296 million in fines have about three months to prove that their information helped lead to the settlement with federal regulators.
JPMorgan Chase agreed to pay the fines to resolve allegations that it and Bear Stearns, which it acquired in 2008, misled investors about the quality of mortgage-backed securities they sold during the run-up to the financial crisis.
Whoever can show they provided information that enabled the Securities and Exchange Commission to extract a pledge by the nation's biggest bank has until May 9 to document how he or she helped regulators enforce laws that led to the settlement, the SEC said Friday.
The settlement stems from a lawsuit the SEC filed in U.S. District Court in Washington in November that charged JPMorgan Chase with misleading investors about loans that provided collateral for a December 2006 offering of residential mortgage-backed securities. The suit alleged the bank knew that 7% of the loans that backed the securities were delinquent by between 30 and 59 days and in some instances longer but only told investors that 0.04% of the loans had such infirmities. Investors lost at least $37 million as a result of the allegedly undisclosed delinquencies while JPMorgan Chase received fees of roughly $2.7 million in underwriting fees.
The SEC further charged Bear Stearns with failing to tell investors in 156 residential mortgage-backed securities transactions over a roughly two-year period beginning in 2005 that the firm had kept most of the proceeds from buybacks by originators of loans that suffered defaults or had other defects. According to the SEC, Bear Stearns collected roughly $137.8 million from originators without paying anything to investors who had purchased the securities.
The lawsuit was based on information from at least one unnamed person who provided information about the alleged violations of securities laws by the companies. Under the agency's whistleblower program, which was created by Congress as part of the Dodd-Frank Act, eligible whistleblowers can claim between 10% and 30% of penalties collected by the regulators.
As part of the settlement, JPMorgan Chase agreed to pay $222.4 million to settle the bulk sales charges and $74.5 million to settle claims in connection with the delinquency disclosures.
By law the SEC, which must review the merits of any claims, can increase or lower an award based on the agency's review of a whistleblower's claim to proceeds. Funds that remain unclaimed by whistleblowers become the property of the government.
An SEC spokeswoman declined to comment on the case, which the agency coordinated with a joint federal-state task force that was formed last year by the Justice Department to probe misconduct in the mortgage market. A JPMorgan Chase spokesman did not respond immediately to a request for comment.
The company still faces varied claims stemming from its underwriting and sale of mortgage-backed securities on the eve of the financial crisis. In October, New York Attorney General Eric Schneiderman sued the bank charging that Bear Stearns abandoned its credit guidelines for reviewing borrowers whose loans backed securities it sold to investors over a roughly five years starting in 2003.
JPMorgan Chase also is one of 17 banks that have been sued by the Federal Housing Finance Agency for allegedly misleading Fannie Mae and Freddie Mac in connection with the sale of mortgage-backed securities.