JPMorgan Chase agreed to settle a lawsuit brought by the Federal Home Loan Bank of Pittsburgh after a judge ordered the JPMorgan to turn over the government's draft complaint at the center of its $13 billion deal with regulators.
Lawyers for the Pittsburgh FHLB said yesterday in Pennsylvania state court that they had reached an agreement, without disclosing terms of the deal. The Pittsburgh FHLB sued JPMorgan and credit-ratings companies in 2009 over losses on $1.8 billion in mortgage-backed securities it bought in 2006 and 2007.
The deal came less than a month after a judge ordered JPMorgan, the biggest U.S. lender by assets, to give the plaintiff's lawyers a draft of the U.S. Justice Department's proposed complaint that the record settlement was based on. That deal resolved allegations involving sales of mortgage bonds that officials said helped fuel the financial crisis of 2008.
The Pittsburgh FHLB argued that the conduct and transactions at issue in its case were the same as those addressed in the settlement with the government. The draft complaint, the bank said in court papers, would provide a more detailed account of the federal probe and reveal the name of a JPMorgan employee who cooperated with the federal investigation.
Fitch Group Inc., one of the defendants in the Pittsburgh bank's suit, also agreed to resolve claims against it related to its ratings on mortgage backed securities.
When the U.S. settlement was announced on Nov. 19, no complaint was made public. Instead, JPMorgan acknowledged a statement of facts without admitting any wrongdoing.
According to that document, from 2005 to 2007 JPMorgan's subsidiaries securitized subprime and Alt-A mortgage loans and sold the resulting mortgage-backed securities to investors while failing to disclose that the loans didn't meet underwriting standards.
The statement made no reference to specific employees, documents or events. It also didn't provide details on the company's loan programs or vendors.
"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," David Beehler, an attorney for the Pittsburgh FHLB, said in court papers filed in November.
Brian Marchiony, a JPMorgan spokesman, declined to comment on yesterday's announced settlement.
FHLB attorneys persuaded Judge R. Stanton Wettick in October to order JPMorgan to turn over the draft civil fraud complaint prepared by U.S. Attorney Benjamin Wagner in Sacramento, California. It alleged violations of the Financial Institution Reform, Recovery and Enforcement Act of 1989, known as FIRREA, according to court filings in the Pittsburgh case.
JPMorgan asked Wettick to void his order days after the government accord was announced, arguing prosecutors provided the draft as a "confidential settlement communication."
Wettick disagreed, ordering that the document be turned over by Dec. 17. It hasn't been put into evidence.
The Pittsburgh FHLB claimed in the course of the litigation it had uncovered misgivings by JPMorgan employees about material representations regarding borrowers' reported incomes and the performance of certain income loan programs.
In its lawsuit, the bank also accused credit-rating companies, including Moody's Investors Services Inc. and McGraw Hill Cos., of assigning the highest possible ratings to mortgage-loan pools so they could be sold to institutional investors while knowing the certificates were actually junk bonds. McGraw Hill Financial Inc. is the parent of Standard & Poor's Financial Services. The litigation with those defendants is continuing.
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).