Two institutions with a stake in residential mortgage-backed securities sued Morgan Stanley (MS) and JPMorgan Chase (JPM) in separate lawsuits, claiming the banks made material misrepresentations about the quality of loans underlying mortgage bonds.
The first plaintiff, Sealink Funding, claimed in a lawsuit filed with a New York state court that it acquired $556 million in Morgan Stanley RMBS in 11 offerings from 2006 and 2007. Sealink — a company formed in Ireland to manage and hold RMBS — alleges Morgan Stanley made material misrepresentations about the quality of mortgages backing those bonds.
Morgan Stanley declined to comment on the case.
The RMBS deals facing scrutiny had AAA ratings at the onset of the transaction. But those ratings were gradually downgraded. Court records show most of the securities are now rated CCC, Ca, D, Caa3, Caa2, CC, C and D, with some labeled junk status.
“This misconduct (of misrepresenting loan quality) has resulted in astounding rates of default on the loans underlying the Morgan Stanley RMBS and massive downgrades of the certificates, which are all now considered junk by at least one credit rating agency,” Sealink wrote in its complaint.
The company accuses Morgan Stanley of fraud, fraudulent inducement, aiding and abetting fraud, and negligent misrepresentation. Sealink contends Morgan Stanley knew certain mortgages originated by Countrywide, WMC Mortgage Corp., Decision One Mortgage, Accredited Home Lenders, Fremont Investment & Loan and Greenpoint Mortgage Funding among others were not the safest of RMBS investments, but the investment bank securitized and sold off the loans to investors anyway.
In a similar complaint, Boston-based John Hancock Life Insurance Co., a subsidiary of Manulife Financial Corp. is suing JPMorgan Chase (JPM) after the insurer made investments in residential mortgage-backed securities that were securitized and sold by JPMorgan.
The insurer wrote in its complaint that the defendant sold the securities even after identifying “widespread underwriting and appraisal deficiencies by the mortgage originators.”
Other defendants named in the suit include EMC Mortgage Corp., Bear Stearns, Washington Mutual and Long Beach Mortgage Co. The suit accuses JPMorgan and defendants of partaking in nine separate causes of action, including fraud, fraudulent inducement, aiding and abetting fraud, negligent misrepresentation and various securities law violations.
Write to Kerri Panchuk.