By Julie Steinberg
J.P. Morgan Chase & Co. has agreed to pay roughly $500
million to settle a class-action lawsuit over nearly $18 billion
worth of shoddy mortgage-backed securities sold by Bear Stearns
Cos., according to a court document and a person familiar with the
matter.
Lawyers for the plaintiffs, led by a group of pension funds,
filed a letter in U.S. District Court in Manhattan on Thursday in
which they stated "the parties have reached an agreement in
principle" to resolve the lawsuit. J.P. Morgan purchased Bear
Stearns in 2008 during the financial crisis.
The lawyers in the letter asked the court to set a deadline of
Feb. 2 for both sides to submit details of the plan and ask for the
court's preliminary approval.
The settlement is the latest attempt by the biggest U.S. bank by
assets to put as many legal woes behind it as possible. In the last
two years it has paid more than $20 billion to both the government
and private investors to settle an array of mortgage-related claims
stemming largely from its crisis-era acquisitions, the 2008
purchase of Bear Stearns and the banking assets of Seattle thrift
Washington Mutual Inc.
James Dimon, J.P. Morgan's chairman and chief executive, said in
October 2013 he hadn't fully anticipated how much J.P. Morgan would
have to pay to defend itself against matters passed down from Bear
Stearns and thought the bank would be insulated from Washington
Mutual's issues.
"But that doesn't mean people can't come after you," he said at
the time, "so that's a lesson learned."
The current settlement was based on the sale of $17.58 billion
worth of mortgage-backed certificates that gave buyers income
payments from pools of mortgage loans and mortgage-backed
securities. Among the lead plaintiffs in the case were the New
Jersey Carpenters Health Fund and the Public Employees' Retirement
System of Mississippi.
Investors in the complaint alleged that Bear Stearns
"misrepresented the quality of the loans in the loan pools" and
garnered credit ratings for the loans from ratings agencies that
were "unjustifiably high," according to the complaint. Many pension
funds and other institutional investors must purchase only
highly-rated securities.
The pension funds claimed that the so-called offering documents
associated with the certificates had false statements regarding the
underwriting standards used to originate the loans, according to
the complaint.
Due to the allegedly false statements, the plaintiffs said they
purchased certificates that were "far riskier than represented, not
of the 'best quality' and not equivalent to other investments with
the same credit ratings," according to the complaint. Ultimately,
most of the certificates were downgraded to below investment-grade
level and their value sank, the plaintiffs said.
Still, the plaintiffs didn't claim fraud on behalf of Bear
Stearns. The complaint advanced strict liability and negligence
claims.
The proposed settlement doesn't resolve another class-action
lawsuit J.P. Morgan is currently facing over securities it itself
sold. It is also unrelated to the bank's November 2013 settlement
with regulators in which it agreed to pay $13 billion to resolve
investigations and lawsuits into the sale of mortgage bonds before
the financial crisis.
The bank had previously settled other litigation pertaining to
mortgage products sold by Washington Mutual.
Write to Julie Steinberg at julie.steinberg@wsj.com
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