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The Residential Mortgage-Backed Securities Working Group: What Is It? What Does It Do? What Has It Done?

On January 27, 2012, Attorney General Eric Holder announced the creation of the Residential Mortgage-Backed Securities (RMBS) Working Group. The Working Group is part of President Obama’s Financial Fraud Enforcement Task Force, which was established in 2009 as an interagency effort to strengthen the Government’s ability to combat financial crime. The Working Group is intended to bring together the Department of Justice, state attorneys general, and other federal agencies to investigate misconduct that contributed to the 2007-2008 financial crisis through the packaging and sale of RMBS.

The Working Group is headed by five co-chairs: Assistant Attorney General for the DOJ’s Criminal Division Lanny Breuer; Acting Assistant Attorney General for the DOJ’s Civil Division Stuart Delery; U.S. Attorney for the District of Colorado John Walsh; Director of the U.S. Securities and Exchange Commission Robert Khuzami; and New York State Attorney General Eric Schneiderman. The primary focus of the Working Group is investigating potential false or misleading statements by market participants in the creation, pooling, and sale of RMBS. The Working Group uses a variety of tools to identify and investigate RMBS offerings likely affected by fraud, such as analyzing private RMBS litigation throughout the country; utilizing risk-based analytics; and convening meetings among investigators, analysts, RMBS market experts, and corporate insiders. Indeed, the Working Group has signaled that it is particularly interested in information about RMBS fraud from corporate insiders due to the difficulty in identifying misconduct in the RMBS market. It has also indicated that it will pursue fraud even if it occurred several years ago. Under the statutes of limitations that apply to the most commonly-used federal laws, regulators likely can reach back to prosecute wrongdoing that occurred a decade ago.

The Working Group commenced its first legal action October 2, 2012, when New York Attorney General Eric Schneiderman, in his role as co-chair of the group, filed a Martin Act lawsuit against JP Morgan Chase Bank for allegedly making false representations and omissions to promote the sale of RMBS to investors. The Martin Act affords the New York Attorney General broad powers in investigating and prosecuting securities fraud. According to the lawsuit, JP Morgan misrepresented the level of care that it used to evaluate the quality of mortgage loans packaged into RMBS before the collapse of Bear Stearns in 2008, resulting in approximately $22.5 billion in losses to RMBS investors to date. Included among those investors are the Government Sponsored Entities Fannie Mae and Freddie Mac, which purchased RMBS from JP Morgan.

Since October 2012, the Working Group has spearheaded three additional enforcement actions, including a lawsuit against Credit Suisse Securities for making fraudulent statements in connection with the promotion and sale of RMBS. Like the lawsuit against JP Morgan, the action was a Martin Act complaint filed by New York Attorney General Eric Schneiderman alleging that Credit Suisse deceived investors regarding the quality of the mortgage loans packaged into the RMBS it sold to investors. The lawsuit also asserts that RMBS sponsored and underwritten by Credit Suisse in 2006 and 2007 have suffered approximately $11.2 billion in losses. Fannie Mae and Freddie Mac were again identified as victims of the fraud.

The Working Group has shown that it intends to take an aggressive approach toward investigating and prosecuting fraud in connection with the sale of RMBS by commencing a number of actions in the few months since its inception. This aggressive approach, coupled with the fact that much of the misconduct it appears to be pursuing occurred many years ago, suggests that we can expect a lot more activity from the Working Group in 2013.

People with non-public information concerning fraud by lenders or underwriters in connection with the packaging and sale of RMBS can bring such information to the attention of the Working Group in a variety of ways. The members of the Working Group enforce three different laws that create an avenue for whistleblowers to provide information to the Government regarding fraud in connection with the sale of RMBS: the False Claims Act; the Dodd-Frank Wall Street Reform and Consumer Protection Act; and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). Broadly speaking, each of these laws effectively targets fraud in different sectors of the market for RMBS. For instance, the False Claims Act prohibits false statements to the Government in connection with the packaging and sale of RMBS. The Dodd-Frank Act, by contrast, applies to RMBS offerings that violate federal securities laws. And FIAFEA renders unlawful fraud in the packaging and sale of RMBS to banks and other federally insured financial institutes.

All three of these laws allow whistleblowers to recover substantial awards if the information provided by the whistleblower results in a successful recovery of funds by the Government. Furthermore, a whistleblower is not limited to pursuing a case under just one of these laws. In fact, given the nature of RMBS fraud and the overlapping jurisdiction of the Working Group membership, it may make sense for a whistleblower to proceed under more than one, or all three, of these laws.