New York Attorney General Eric Schneiderman filed a lawsuit on Monday against JPMorgan Chase (NYSE:JPM) for alleged fraud over faulty mortgage-backed securities packaged and sold by Bear Stearns.
Bear Stearns was a former Wall Street bank that collapsed and was snapped up by rival JPMorgan for $2 a share in March 2008.
It was the first action to come out of a working group created by US President Barack Obama to go after alleged wrongdoing during the financial crisis.
Investors were deceived about the defective loans backing securities they bought, leading to “monumental losses”, Schneiderman said in the complaint.
JPMorgan said it intends to contest the allegations.
The lawsuit alleged a “systematic abandonment of underwriting guidelines” in the selling of home loans that went into securities offered by Bear Stearns.
In its statement, JPMorgan noted that the allegations concern actions by Bear Stearns before it took over the investment bank.
“The NYAG civil action relates to Bear Stearns, which we acquired over the course of a weekend at the behest of the U.S. Government. This complaint is entirely about historic conduct by that entity,” the company said.
The Residential Mortgage-Backed Securities Working Group was formed to probe the pooling and sale of risky mortgages in the run-up to the 2008 financial crisis.
The task force includes the Justice Department, the Securities and Exchange Commission, the Department of Housing and Urban Development and the Internal Revenue Service.
Schneiderman said they failed to abide by claims they were ensuring the quality of loans backing the securities and “routinely overlooked defective loans” identified during due diligence reviews.
The misconduct in due diligence and quality control “constituted systemic fraud on thousands of investors”, the New York State attorney general added.
According to the complaint, the current cumulative realised losses on more than 100 subprime and Alt-A securitizations that the defendants sponsored and underwrote in 2006 and 2007 total about £14 billion, or about 26% of the original balance of around £54 billion.
Schneiderman seeks an order for the bank to disgorge all money it obtained in connection with the fraud.