NYS banking lawsuit not seeking jail terms

Average U.S. rates on fixed mortgages fell to Average U.S. rates on fixed mortgages fell to fresh record lows for the second straight week. With nationwide data on prices and sales trending up, the housing industry may be seeing slight recovery. Photo Credit: iStock

advertisement | advertise on newsday

ALBANY -- While New York Attorney General Eric Schneiderman alleges massive fraud in mortgage-backed securities in a lawsuit filed this week, he's not criminally prosecuting anyone.

advertisement | advertise on newsday

Described as a template for more lawsuits to follow, the move signals that Wall Street players won't face state prison for packaging and selling the troubled investments that nearly brought the U.S. economy to its knees. The felony statute of limitations under New York's Martin Act against securities fraud is five years, so it's too late to bring a criminal case.

The civil suit claims misconduct by Bear Stearns & Co. in 2006-2007 cost investors $22.5 billion in losses and left them holding $30 billion in bad loans. The suit filed Monday names Bear Stearns successor JPMorgan Chase, which says it will contest the allegations.

"The statute of limitations is an issue we expect to be in dispute in the litigation," Schneiderman said in describing the civil suit, noting that even then, it's six years under the Martin Act. That also puts pressure on his office to bring cases soon against other investment banks for actions that led to the 2008 market crash.

His office has a so-called "tolling agreement" with the defendants in this case, waiving their right to dismiss otherwise time-barred matters, Schneiderman said. At issue is conduct back to 2005, he said.

The complaint alleges Bear Stearns failed to properly evaluate pools of mortgages, ignoring their defects and misleading investors by claiming they maintained due diligence and quality controls -- to satisfy big mortgage lenders and meet demand in overheated financial markets that eventually imploded. The suit seeks to recoup the losses.

The latest LI business news in your inbox daily. Get the Biz Briefing newsletter!

You also may be interested in: