SEC, two banks settle over loans

The Securities and Exchange Commission won settlements worth more than $400 million from two giant financial firms accused of misleading investors about more than $1 billion in securities backed by mostly subprime home loans.

The pacts with J.P. Morgan Chase & Co. and Credit Suisse Group AG, announced Friday, represent the agency's first tangible victory in a wide-ranging investigation into Wall Street's sale of mortgage-backed securities before the onset of the financial crisis and the collapse of the U.S. housing market. But no individuals were named as defendants in either case, a practice that has drawn criticism from skeptics who question the deterrent effect of cases against large companies without adding any of their employees.

Officials involved in the settlements, which include a group of federal and state prosecutors and regulators formed by President Barack Obama in January, said more enforcement actions are coming.

The comments could point to more financial pain for big banks facing government actions and investor lawsuits tied to soured mortgage securities.

"Today's filings will not be the last," said John Walsh, the U.S. attorney in Denver and a member of the Residential Mortgage Backed Securities Fraud Working Group. "We'll continue to follow the facts and the law wherever the facts and the law lead us."

The agency alleges the bulk of the misconduct at J.P. Morgan, the nation's largest bank by assets, and Credit Suisse, Switzerland's second-largest bank by assets, stemmed from their practice of keeping cash payments from mortgage originators as compensation for problem loans that were rolled up into mortgage securities, rather than passing that money on to the investors in the securities.

Under the agreement, J.P. Morgan will pay $296.9 million and Credit Suisse $120 million to the SEC, which will distribute the money to investors who were harmed. In statements, both banks said they were "pleased" to have the settlements complete. Neither company admitted or denied the allegations.

J.P. Morgan's payment is second in size among SEC mortgage-related cases, behind the $550 million paid in 2010 by Goldman Sachs Group Inc. to settle claims that it misled investors in a collateralized debt obligation called Abacus 2007-AC1. Goldman didn't admit or deny wrongdoing. The settlement by Zurich-based Credit Suisse is No. 5 on the list.

The SEC says J.P. Morgan also misstated information about mortgage loans, while Credit Suisse allegedly made misstatements in regulatory filings about its practices in repurchasing souring mortgage loans from investment trusts.

The banks' alleged practice of keeping mortgage settlements from investors occurred in 156 offerings from 2005 to 2007 at Bear Stearns, which J.P. Morgan bought in 2008, and 75 offerings at Credit Suisse from 2005 to 2010. The agency said the Bear unit continued the practice after its acquisition by J.P. Morgan.

Alleged misconduct "contributed greatly to the tremendous losses suffered by investors once the U.S. housing market collapsed," said Robert Khuzami, director of the SEC's enforcement division.

Many big banks still face a litany of legal challenges stemming from the mortgage meltdown. This fall, New York's attorney general filed a civil lawsuit against J.P. Morgan, alleging widespread fraud by Bear Stearns unit in the sale of mortgage-backed securities.

The top federal housing regulator filed lawsuits in September 2011 against 17 of the world's biggest financial institutions, saying they sold $196 billion of securities backed by risky home loans over four years to Fannie Mae and Freddie Mac without adequately disclosing the risks. The Federal Housing Finance Agency suits included $33 billion in bond deals involving J.P. Morgan and $14 billion tied to Credit Suisse.

The Federal Deposit Insurance Corp. in August sued 11 major banks including J.P. Morgan, alleging they misled failed Colonial Bank when they sold the Alabama mortgage lender $388 million in mortgage-backed securities.

J.P. Morgan hasn't previously commented on the FHFA or FDIC actions. Credit Suisse didn't comment on the FHFA case.

The fines take the total amount that firms and individuals have agreed to pay to the SEC in actions stemming from the financial crisis to about $2.6 billion, roughly double the agency's annual budget.

Even so, the cases will revive questions about whether securities regulators were aggressive enough. For J.P. Morgan, a $297 million settlement is just a "cost of doing business," said Erik Gerding, a law professor at the University of Colorado.

The fact that the enforcement action was against the firm only, and not executives, reduced its likely impact, he said.

"The real question from a policy perspective is whether anyone's going to be deterred by this type of settlement when the next bubble comes along?" Mr. Gerding said.

In a conference call announcing the deal, the SEC's Mr. Khuzami said it was "often very challenging" with these types of complicated deals to find individuals who could be held legally liable.

(Published by WSJ - November 16, 2012)