For the last two years, MBIA Insurance Corp. and J.P. Morgan Securities have been fighting in court. In September 2012, MBIA sued JPMorgan (and Bear Stearns, which was acquired by JP Morgan in 2008), alleging that Bear Stearns altered a third-party due diligence report so that MBIA would insure a $1.16 billion mortgage securitization.

The securitization in question, 2006-HE4 Securitization, originated from a pool of risky mortgages and MBIA alleged that Bear Stearns, as lead underwriter, manipulated the deal’s due diligence report to make the securitization look safer than it actually was. 

And according to New York State Supreme Court Justice Alan Scheinkman, that’s exactly what Bear Stearns did. But Scheinkman dismissed the case anyway because MBIA could not prove that it used the fraudulent information in its decision to insure the securitization.

According to Scheinkman’s ruling (which can be read in full here), Bear Stearns sent the “altered report” to MBIA “a scant few hours” before closing on the insurance policy. Scheinkman’s ruling states that there is evidence to support MBIA’s assertion that Bear Stearns “altered due diligence information (and) intentionally misrepresented existing material facts.”

But MBIA also claimed that it “relied on this misinformation to its detriment.” Scheinkman’s ruling states that there is no evidence of that.

“Had the underwriter (Bear Stearns) simply passed on the third-party due diligence information without alteration, the insurer (MBIA) would have only itself to blame for failing to review the information before issuing the policy,” Scheinkman wrote.

“Likewise, had the third party merely sent on the unaltered due diligence information, the underwriter could have kept to itself its opinion of what that information revealed,” Scheinkman continued. “But there is evidence that is not what happened.”

Scheinkman writes that there is evidence that shows that Bear Stearns realized that the due diligence results showed the loan pool was problematic and that if MBIA had seen the unaltered report, it may have balked at insuring the deal.

Scheinkman writes there is evidence that Bear Stearns delayed the delivery of the due diligence for nine days and used that time to “massage the results” in order to mask the loan pool’s problems from MBIA.

Once it had altered the report, Bear Stearns sent it to MBIA “at the last hours before the closing.”

Bear Stearns and JPMorgan argued that MBIA was a “reckless insurer” that was interested in competing to “win” the business and because of that recklessness MBIA was willing to allow certain things, such as reviewing the results of the due diligence, after closing.

“Defendant’s main point is that no one from MBIA actually read the altered spreadsheet received from Bear Stearns on that fateful morning of September 27, 2006,” Scheinkman writes. “So MBIA cannot prove, by clear and convincing evidence, that it relied on that document in deciding to issue the policy.”

MBIA issued the policy anyway and subsequently sustained “about $168 million in claims for delinquencies and charge-offs stemming from the pool of mortgages.” MBIA claimed that was a much higher amount of claims than it should have received based on the information it received from Bear Stearns.

So it appears that Bear Stearns did, in fact, alter the report to make the mortgage pool look safer, but because MBIA can’t prove that it used the fraudulent report in its decision process, Scheinkman issued a summary judgment of dismissal.

But Scheinkman did note that MBIA can re-file the case if it amends its complaint.

So JPMorgan isn’t out of the woods yet. This case could very well end up becoming yet another check that the company has to write to right the wrongs of the late 2000’s mortgage market.