JPMorgan Chase Settles Mortgage Claims for $13 Billion

, The National Law Journal

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Federal and state prosecutors issued a stern warning to banks on Tuesday as enforcement officials announced a record $13 billion settlement with JPMorgan Chase & Co. over its role in the financial crisis: Investigations are ongoing.

“Without a doubt, the conduct uncovered in this investigation helped sow the seeds of the mortgage meltdown,” Attorney General Eric Holder Jr. said in a written statement. “No firm, no matter how profitable, is above the law, and the passage of time is no shield from accountability.”

JPMorgan, one of the country's largest banks, will pay $13 billion to resolve civil allegations that it and its subsidiaries misrepresented to investors the quality of residential mortgage-backed securities. The settlement does not preclude criminal charges against the bank or any individual. DOJ said the deal is the largest settlement to date with a single company.

The deal, which resolves claims from state attorneys generals in California, Illinois, Massachusetts, New York and Delaware, includes JPMorgan’s acknowledgement that it made serious misrepresentations to the public and investors about mortgage-backed securities packaged, marketed, sold and issued by JPMorgan, Bear Stearns and Washington Mutual.

New York settled its claims for $613.8 million and California for nearly $300 million. The settlement requires the appointment of an independent monitor through Dec. 31, 2017, to determine whether JPMorgan is satisfying its obligations.

The deal includes $4 billion in relief for homeowners—including principal forgiveness and loan modification—and a $2 billion civil penalty to settle claims under the Financial Institutions Reform, Recovery and Enforcement Act—a law, long on the books, that the government dusted off following the 2008 financial crisis.

Stuart Delery, who leads the Justice Department's Civil Division, said the record-settlement “underscores the power of FIRREA and other civil enforcement tools for combatting financial fraud." Holder said, "The size and scope of this resolution should send a clear signal that the Justice Department’s financial fraud investigations are far from over."

New York Attorney General Eric Schneiderman called the JPMorgan settlement a “historic deal" that "will bring long-overdue relief to homeowners around the country."

A lawyer for JPMorgan, H. Rodgin Cohen, a banking partner at Sullivan & Cromwell, did not immediately respond to requests for comment.

JPMorgan chairman and chief executive officer Jamie Dimon said in a written statement that the bank is “pleased to have concluded this extensive agreement … and to have resolved the civil claims of the Department of Justice and others.” The bank said it continues to cooperate with prosecutors in an continuing criminal investigation.

The deal marked the latest—and biggest—settlement JPMorgan has reached with agencies this year. Last month, the bank revealed it has set aside $23 billion to cover litigation expenses. In addition to Sullivan & Cromwell, Wilmer Cutler Pickering Hale and Dorr and Paul Weiss Rifkind Wharton & Garrison have reaped significant fees working for JPMorgan.

"We continuously evaluate our legal reserves, but in this highly charged and unpredictable environment, with escalating demands and penalties from multiple government agencies, we thought it was best to significantly strengthen them," Dimon said at the time.

On Nov. 15, JPMorgan reached a $4.5 billion deal to settle claims by 21 institutional investors, agreeing to repurchase faulty residential mortgage-backed securities. That amount is in addition to the recovery announced on Tuesday.

The bank paid more than $1 billion earlier this fall to settle charges by the U.S. Securities and Exchange Commission, the Commodity Futures Trading Commission and other regulators over massive credit default swaps trading losses by the so-called London Whale.

JPMorgan faces a continuing legal fight with Deutsche Bank, seeking $10 billion for faulty mortgage-backed securities that it purchased from Washington Mutual before JPMorgan bought that failed bank in 2008. JPMorgan argues that, based on finely tuned contract language, liability for Washington Mutual's shoddy securities actually belong to the Federal Deposit Insurance Corp., which acted as its receiver.

The $13 billion settlement specifically prohibits JPMorgan from demanding indemnification from the FDIC for the Washington Mutual securities at issue in the government’s case. It does not, however, appear to bar JPMorgan from continuing to argue in the Deutsche Bank case that the FDIC is on the hook for Washington Mutual’s other mortgage-backed securities. That case is pending in U.S. District Court for the District of Columbia.

“The settlement announced today will provide a significant recovery for six FDIC receiverships. It also fully protects the FDIC from indemnification claims out of this settlement,” FDIC Chairman Martin Gruenberg said. “The FDIC will continue to pursue litigation where necessary in order to recover as much as possible for FDIC receiverships, money that is ultimately returned to the Deposit Insurance Fund, uninsured depositors and creditors of failed banks.”

Boies, Schiller & Flexner partner Tanya Chutkan, who represents Deutsche Bank, did not respond to a request for comment.

Plaintiffs lawyer Darren Robbins, a name partner at Robbins Geller Rudman & Dowd, which has sued JPMorgan on behalf of shareholders, praised the deal.

“With complex settlements like this one, the devil is always in the details,” he said. “That said, any recovery that provides compensation to institutions victimized by the packaging, marketing and sale of defective [mortgage-backed securities] is a big step forward.”

Jenna Greene and Mike Scarcella contributed to this report.

This article originally appeared in The National Law Journal.

What's being said

  • Mark Rome

    ?No firm, no matter how profitable, is above the law, and the passage of time is no shield from accountability.?

    Like so many banks, JPMorgan has ended up with multiple sources of policy, training, surveys, assessments and issue reporting hotlines.

    To ensure mega-banks implement and maintain a high performance culture of compliance after settling allegations of fraud and mismanagement, regulators should demand improved transparency into operations and request access to internal systems:
    1) Direct feed monitoring systems (e-mail, trades, etc.)
    2) Effective policy management (utilizing an online policy library)
    3) Ongoing culture assessment surveys
    4) Performance Scorecards (hard & soft metrics)
    5) Event management and reporting
    6) Annual certifications to the Code of Conduct

    Within every organization, decision making drives performance. Every employee comes to work every day and makes decisions that impact performance. These decisions, at every level of the organization, define the corporate culture and drive performance.

    An essential role of bank leadership should be to acquire data on how well individual roles align with corporate goals and strategy, and design incentives that encourage and reward performance, while enforcing compliance will applicable laws, rules and regulations?

    With the right tools and the right data, leadership can better understand its workforce to align the culture (decision making) with corporate goals and drive performance, and regulators should be keeping close watch.

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