JPMorgan Chase Raises Conflict of Interest Concerns in Mortgage Suit: Report

JPMorgan Chase (JPM) is raising another round of questions about a lawyer who works for the New York attorney general, which has sued the company over the mortgage conduct of Bear Stearns.

The nation's biggest bank by assets charged recently that a member of Attorney General Eric Schneiderman's office who represented Ambac in a lawsuit the insurer filed against JPMorgan in February 2011 is supervising Schneiderman's lawsuit against Bear Stearns.

Schneiderman sued the bank in October in New York state court in Manhattan, alleging that Bear Stearns, which JPMorgan Chase acquired in 2008, committed fraud in the sale of hundreds of millions of dollars of securities backed by residential mortgages over a roughly five-year period starting in 2003.

In court papers filed in the Ambac case, JPMorgan Chase charges that the attorney general's lawsuit "piggybacks" on charges made by Ambac in its lawsuit partly because of the lawyer's involvement, which was first reported by Reuters.

Ambac neglected to mention "one of the senior lawyers who represented Ambac in this case and signed its earlier complaint against Bear Stearns and [mortgage affiliate]EMC is now the Executive Deputy Attorney General of the Economic Justice Division that is overseeing the [attorney general's] lawsuit against Bear Stearns," JPMorgan alleged in court papers.

JPMorgan Chase has not said what action it might take, but legal experts said there might be enough evidence to establish a conflict of interest, according to Reuters. A lawyer for JPMorgan Chase declined to comment. Though JPMorgan did not identify the lawyer by name, she is reported to be Karla Sanchez, who was a partner at the law firm of Patterson, Belknap Webb & Tyler before joining Schneiderman's office in January 2011.

In June 2011, Schneiderman's office barred Sanchez from working on mortgage probes by his office because of her work in private practice, before lifting the restriction last April, the news service reported, citing documents obtained under New York's freedom of information law. In November, Schneiderman's office again banned Sanchez from working on certain mortgage cases after reportedly raised concerns.

Schneiderman's office says the reversals reflect the care it took to avoid the appearance of a conflict of interest. "These decisions were made not only out of an abundance of caution, but also based on changing circumstances," a spokesman for Schneiderman said in an email.

A source close to the case tells American Banker that Schneiderman's office cleared Sanchez to work on mortgage cases after it became clear the attorney general's investigation would not target companies who insured mortgage-backed securities.

The office reinstituted the screen that prevents Sanchez from working on the lawsuit against Bear Stearns as a courtesy to JPMorgan after the company expressed concerns about her involvement, the source said.

According to the source, another lawyer in the attorney general's office oversees the lawsuit against JPMorgan, while Sanchez' heading the economic justice division means she has a less day-to-day role.