The Securities and Exchange Commission (“SEC”) announced that J.P. Morgan Securities LLC (“J.P. Morgan”) and Credit Suisse Securities (USA) (“Credit Suisse”) have agreed to settle charges that the firms made misrepresentations to investors relating to offerings of residential mortgage-backed securities (“RMBS”).
In its Complaint filed in Washington D.C., the SEC alleged that J.P. Morgan made material misrepresentations in a prospectus supplement for a $1.8 billion RMBS offering in December 2006. The SEC claimed that J.P. Morgan represented that only four of the loans collateralizing the transaction were delinquent, when in fact, J.P. Morgan knew that 620 loans (over 7% of the total loans) were delinquent. According to the SEC, investors suffered losses in excess of $37 million on the undisclosed delinquent loans, while J.P. Morgan received fees of $2.7 million on the RMBS offering.
In addition, J.P. Morgan was also charged for Bear Stearns’ alleged failure to disclose to investors its practice of reaching bulk settlements with loan originators for problem loans that Bear Stearns had sold into RMBS trusts between 2005 and 2007, and then keeping the majority of the settlement proceeds. The SEC claims that Bear Stearns received proceeds in excess of $137 million related to this practice.
J.P. Morgan agreed to pay more than $212 million in disgorgement and prejudgment interest and a penalty of $84 million to settle the SEC’s charges.
Similarly, the SEC’s Complaint against Credit Suisse alleges that, from 2005 and 2010, the firm failed to disclose that it had reached bulk settlements with loan originators, in lieu of buying back troubled loans, in connection with 75 RMBS transactions, and then kept the settlement proceeds for itself. In addition, the SEC alleged that Credit Suisse made misrepresentations to investors regarding the “First Payment Default” provision, a key investor protection in two RMBS issues.
Credit Suisse agreed to settle the SEC’s claims and will pay approximately $81 million in disgorgement and prejudgment interest, plus a $39 million penalty.