JPMorgan Chase & Co. (JPM) should turn over a draft complaint used as the lender negotiated a $13 billion deal to settle probes of its mortgage-bond sales and identify an employee who cooperated with the U.S. investigation, according to lawyers for a Pennsylvania bank.
The Federal Home Loan Bank of Pittsburgh, which claims its losses of more than $1 billion from JPMorgan mortgage-backed securities aren't covered by the settlement, filed a request to force the New York-based company to comply with a judge's order that it turn over the documents.
Attorneys for the Pittsburgh FHLB say the draft complaint may lead to the discovery of evidence that could be used in its own case against the bank.
State court Judge Stanton Wettick in Pittsburgh ordered JPMorgan in October to disclose drafts of a federal complaint, which an attorney for the bank said may have been turned over as part of the negotiations.
Lawyers for JPMorgan argued against such disclosure at an Oct. 17 hearing, according to a court transcript. The bank later moved to throw out the order.
"JPMorgan also now attempts to stand in the shoes of the U.S. government and argues that the policy favoring settlements should hide the draft complaint from views," David Beehler, an attorney for the Pittsburgh FHLB, said in court papers filed yesterday. "Public policy -- the interests of full disclosure and transparency - demands just the opposite of what JPMorgan seeks. The circumstances of this motion lead to one obvious question -- what is JPMorgan trying to hide?"
The accord, which was announced a month after the Pittsburgh hearing, settles allegations that JPMorgan, the biggest U.S. lender by assets, misled investors and the public when it sold bonds backed by faulty residential mortgages.
Lauren Horwood, spokeswoman for U.S. Attorney Benjamin Wagner in Sacramento, who worked on the complaint, said in an e-mail her office wouldn't release the document.
Brian Marchiony, a JPMorgan spokesman, declined to comment on the FHLB's request.
The Pittsburgh bank, which wasn't part of the deal, is suing JPMorgan and credit ratings companies including Moody's Investors Service over mortgage-backed securities it purchased in 2006 and 2007.
The conduct and deals at issue in the FHLB's case are the same ones in the U.S. Justice Department's settlement with JPMorgan, Beehler said in the filing. JPMorgan argued in its motion to toss Wettick's order that a statement of facts accompanying the settlement makes production of a draft complaint unnecessary, Beehler said.
The draft complaint may reveal relevant documents produced by JPMorgan to the Justice Department or witnesses whose testimony may be relevant to the case, according to the filing.
"The DOJ's settlement agreement and statement of facts give even more reason to believe that the draft complaint will lead to the discovery of admissible evidence," Beehler said in the filing.
Lawyers for the Pittsburgh bank told Wettick in October that they wanted JPMorgan to turn over "documents that they produced pursuant to the subpoenas from the Department of Justice," including the name of a bank employee described as a cooperating witness in a Sept. 30 Wall Street Journal article.
The employee allegedly warned her superiors that they were vastly overstating the quality of mortgages being bundled into securities and sold to investors before the financial crisis, Janet Evans, an attorney for FHLB, told Wettick citing the article.
Tom Paskowitz, an attorney for JPMorgan, told the judge that whether a U.S. complaint had been filed was "completely up to speculation."
"Whether there was a filed complaint that the government was willing to stand behind, I think you have a very different situation than a draft complaint that they may have turned over to JPMorgan as part of a negotiation," Paskowitz said during the Oct. 17 hearing.
Wettick rejected that argument and ordered the bank to turn over whatever it had.
"I'm going to, for the time being, let you get any drafts of a complaint and the name of that employee, if they have it," Wettick said in his ruling, according to the transcript.
In an affidavit attached to yesterday's filing, Dana Yealy, Pittsburgh FHLB's general counsel, said he received a call from a Justice Department attorney involved in the investigation on Nov. 1. He received another call on Nov. 14 from another prosecutor in charge of the settlement discussions who asked the bank to grant an extension until Nov. 22 for the production of the draft complaint.
"The DOJ attorney stated explicitly that if Pittsburgh FHLB would grant this additional extension, the DOJ would not intervene to urge this court to vacate its order," Beehler said, citing Yealy's affidavit.
JPMorgan requested another extension on Nov. 22 and when the Pittsburgh bank refused, JPMorgan filed its request to toss Wettick's order and asked for a hearing in January. In that request, lawyers for JPMorgan asserted that the settlement involved 10 trusts unrelated to the claims made by the Pittsburgh FHLB.
"That is simply not true," Beehler said in court documents. "JPMorgan's conduct with respect to the trusts at issue here are expressly identified as covered conduct. The Statement of Facts is remarkably consistent with the facts that Pittsburgh FHLB has discovered in this litigation."
JPMorgan acknowledged the settlement's statement of facts without admitting violations of law, Chief Financial Officer Marianne Lake said on a Nov. 19 conference call. In the statement, the official narrative of events leading up to the infractions, the bank acknowledged that between 2005 and 2007 its subsidiaries securitized sub-prime and Alt-A mortgages loans and sold the resulting mortgaged-backed securities to investors while failing to disclose that the loans didn't meet underwriting standards.
The statement doesn't refer to specific employees, documents or events. It also doesn't provide any details about the loan programs or vendors. The draft complaint "likely does so," Beehler said.
"The lack of specificity in the statement of facts has led others to question what it was the DOJ actually found in its investigation that caused JPMorgan to pay $13 billion," Beehler said in the filing.
In its case, the Pittsburgh FHLB said it has discovered facts which show JPMorgan employees were concerned about material representations regarding borrowers' reported income levels and about the performance of certain stated income loan programs.
"Given JPMorgan's apparent deep desire to prevent it from ever seeing the light of day, it would not be at all surprising if the draft complaint is a much more detailed account of JPMorgan's fraudulent conduct, and as such, far more enlightening than the statement of facts," according to the filing.
The case is Federal Home Loan Bank of Pittsburgh v. J.P. Morgan Securities LLC, GD09-016892, Court of Common Pleas of Allegheny County, Pennsylvania (Pittsburgh).