SEC v. J.P. Morgan Securities LLC, et al.
Case No. 1:12-cv-01862-RLW (D.D.C.)
On November 16, 2012, the SEC filed a complaint against J.P. Morgan Securities LLC (“JP Morgan”), EMC Mortgage, LLC (“EMC”), Bear Stearns Asset Backed Securities I, LLC (“Bear Stearns”), Structured Asset Mortgage Investments II, Inc. (“SAMI”), SACO I, Inc. (“SACO”), and J.P. Morgan Acceptance Corporation I (“JPMAC”) (collectively, the “Defendants”). In its complaint, the Commission alleged that from approximately 2005 to 2007, certain of the Defendants entered into financial settlements with loan originators related to early defaulting loans that the Defendants had previously sold to residential mortgage backed securities trusts (individually, “Trust” and collectively, “RMBS Trusts”). EMC, as sponsor, purchased mortgage loans from loan originators and other loan sellers and sold the loans to affiliated depositor entities, Bear Sterns, SAMI, and SACO for resale to the RMBS Trusts. The assets of the RMBS Trusts were aggregations of residential mortgages. Each Trust was divided into numerous “tranches” or classes which were securitized interests in the assets of the relevant Trust. When those Defendants entered into the financial settlements with loan originators, they kept the proceeds of those settlements without notifying the RMBS Trust that owned the defaulting loans (“Bulk Settlement Practice”). Those Defendants failed to disclosure this practice to its RMBS investors, and as a result of this conduct, those Defendants improperly obtained $137,800,000. In addition, the complaint alleged, JPMAC purchased approximately 9,637 sub-prime mortgage loans (“WMC4 Transaction”). The effective date for the WMC4 Transaction was December 1, 2006. Following the purchase, JP Morgan and JPMAC personnel began work on an offering for the WMC4 Transaction. JP Morgan and JPMAC failed to disclose to investors that the offering included delinquent loans, which were underwritten by JP Morgan and collateralized by loans acquired from the WMC4 Transaction (“Delinquent Disclosure Practice”). See Complaint.
On January 7, 2013, pursuant to their consent and without admitting or denying the allegations against them, the Court entered a final judgment against the Defendants. The final judgment permanently enjoined the Defendants from violating Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, and found JP Morgan, EMC, Bear Stearns, SAMI and SACO jointly and severally liable to pay a total of $222,415,536.00 in disgorgement, prejudgment interest, penalties in connection with their conduct related to the Bulk Settlement Practice and found JP Morgan and JPMAC jointly and severally liable for a total of $74,500,000.00 in disgorgement, prejudgment interest, and penalties in connection with their conduct related to the Delinquent Disclosure Practice. See Defendants’ Final Judgment.
The Defendants paid as ordered, and the $222,415,536.00 paid by JP Morgan, EMC, Bear Stearns, SAMI, and SACO comprises the Bulk Settlement Fund and the $74,500,000.00 paid by JP Morgan and JPMAC comprises the Delinquency Disclosure Fund.
On May 10, 2013, the Court appointed Damasco & Associates LLP as the Tax Administrator to fulfill the tax obligations of both the Bulk Settlement Fund and the Delinquency Disclosure Fund.
On March 11, 2014, the Court created two Fair Funds, one consisting of the funds in the Bulk Settlement Fund and the other, the funds in the Delinquency Disclosure Fund, and appointed Rust Consulting, Inc. as the Distribution Agent to oversee the distribution of both the Bulk Settlement Fund and the Delinquency Disclosure Fund to injured investors. See Order to Establish a Fair Fund and to Appoint a Distribution Agent.
On June 9, 2016, the SEC filed a motion to approve distribution plans, together with both distribution plans. However, multiple objections were filed and after a status hearing held on August 1, 2016, the Court denied the motion without prejudice to be renewed following the Court’s review of the objections. Pursuant to the Court’s order, on November 10, 2016, the SEC filed a response to the objections, and the objectors filed a reply on December 2, 2016.
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