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Remarks During News Conference Call About Enforcement Actions Against J.P. Morgan and Credit Suisse

Robert Khuzami

Director of the SEC’s Division of Enforcement
U.S. Securities and Exchange Commission

Washington, D.C.

Nov. 16, 2012

A basic tenet of our nation’s financial system is that investors must be given accurate information upon which to base their investment decisions.

If a major investment bank misleads investors and places its own interests first, it is not just the investors who suffer, but the credibility of our financial system as well.

That is why we work every day to find evidence of wrongdoing and to pursue such wrongdoing whenever and wherever it occurs. Indeed, in the last two years the SEC has brought the two highest numbers of enforcement actions in the agency’s history.

Today, we are announcing actions against two major investment firms that will pay a combined total of almost $420 million for engaging in misconduct in connection with hundreds of residential mortgage backed securities — transactions that involve the pooling together of residential mortgages that are then securitized and sold to investors by Wall Street.

In these two cases, the Commission is charging J.P. Morgan Securities LLC and Credit Suisse Securities (USA) with violating the federal securities law by misleading investors in connection with the securitizations of what were primarily subprime mortgage loans — during a time when the quality of the collateral for these transactions was deteriorating.

J.P. Morgan

In the J.P. Morgan action, the firm has agreed to pay $296.5 million to resolve charges that they made materially false and misleading disclosures related to two practices, among others.

Issuance Delinquency

The first practice involved a December 2006 transaction in which the firm issued approximately $1.8 billion of securities collateralized by more than 9,600 subprime loans.

In offering documents for that transaction, J.P. Morgan represented that as of the cut-off date, only four loans, representing .04 percent of the underlying collateral, were 30 to 59 days delinquent. And those offering documents further indicated that those four loans were the only loans that had had an instance of delinquency of 30 or more days in the preceding 12 months.

Loan delinquencies are an important representation for an investor because it is the loans that underlie their investment. And if the loan performs badly or defaults, the investor will not get repaid.

We allege in our complaint that when J.P. Morgan made these representations, the firm actually had information that these representations were false. In fact, the information they possessed showed that more than 620 loans — more than 7 percent of the collateral — were 30 or more days delinquent. These same 620 loans were also among those that had had instances of delinquency of 30 or more days in the preceding 12 months.

Investors were thus denied important information about the quality of their investment — information that J.P. Morgan had and failed to disclose to investors.

Bulk Settlement

The second practice in the J.P. Morgan case involved what is known as bulk settlements — a practice that involved conduct in connection with 156 transactions offered between 2005 and 2007.

As the Commission alleges in the complaint, loan originators were usually required by contract to buy back loans that suffered early payment defaults or had other defects. Initially, when Bear Stearns asserted these so-called “early payment default” provisions, it would swap the money for the loan, meaning it would get the money from the originator, put the money in the trust, and take the faulty loan out of the trust.

As a result, the RMBS investors would not be harmed.

That practice changed, however, as Bear Stearns began negotiating discounted cash settlements with these loan originators instead of buying the loan back from the trust. They did not want to repurchase the loan from the trust because the settlements were discounted, meaning that they were for less than the full price of the loan.

If they had to buy the loan back from the trust, they would have to pay 100 cents on the dollar, or something close to that, which was more than they had received in settlement. And the difference would have been a loss to the firm.

By keeping the settlement proceeds and not repurchasing the loan from the trust, the firm unfairly profited.

The problem, we allege, is that this practice was not disclosed to RMBS investors, the result of which was that the faulty loans stayed in the trust to the detriment of the investors who were relying on the quality of the loans for repayment of their investment.

Credit Suisse

In the Credit Suisse action, the firm has agreed to pay $120 million to resolve charges that they made materially false and misleading disclosures related to two practices, among others.

Bulk Settlement

With respect to Credit Suisse, the first of the two overall violations is the same “bulk settlement” practice that we just described in connection with the case against J.P. Morgan. In the case of Credit Suisse, the misconduct took place from 2005 to 2012 and occurred in 75 different RMBS transactions.

One difference is that in nine of the 75 RMBS trusts, Credit Suisse’s conduct was more troubling than that involving Bear Stearns, since Credit Suisse actually promised in the offering documents that it would repurchase certain early defaulting loans from the trusts, and failed to do so.

First Payment Default

The second violation involving Credit Suisse concerns misleading statements about a key investor protection known as the First Payment Default provision, which was a feature in some of their RMBS offerings. The First Payment Default provision required the originator to repurchase or substitute mortgages that missed a payment by a certain date.

As a result, Credit Suisse told investors that “all First Payment Default Risk” was removed from its RMBS.

In fact, we allege that this was misleading, because Credit Suisse was secretly extending that deadline, the result of which was that fewer loans were subject to this First Payment Default provision. Thus loans that were higher risk and would have been removed from the trust in fact remained in the trust.


Today’s actions are being instituted in coordination with the federal-state Residential Mortgage-Backed Securities Working Group.

I want to thank my Working Group co-chairs: New York Attorney General Eric Schneiderman, Assistant Attorney General for the Justice Department’s Criminal Division Lanny Breuer, Principal Deputy Assistant Attorney General for the Justice Department’s Civil Division Stuart Delery, U.S. Attorney for the District of Colorado John Walsh, as well as the Justice Department’s Acting Associate Attorney General Tony West and all of the members of the Working Group for their assistance and cooperation. This has been a highly successful collaboration, as we have all shared resources and expertise to maximize our effectiveness in investigating misconduct related to RMBS securities.

I particularly want to recognize the SEC staff who have been absolutely dogged in their pursuit of our RMBS investigations, including the two cases filed today. The J.P. Morgan and Credit Suisse investigations were conducted by members of the SEC Enforcement Division’s Structured and New Products Unit in both the Denver and Washington D.C. offices, including Ken Lench, Zachary Carlyle, Mark Cave, Sarra Cho, Allison Herren Lee, Laura Metcalfe, Colin Rand, Thomas Silverstein, John Smith, Andrew Sporkin, Amy Sumner, and Jeffrey Weiss. The Trial Unit members assigned to this matter were Dugan Bliss, Kyle DeYoung, Jan Folena, and Christian Schultz. The Enforcement Division was assisted by Eugene Canjels and Vance Anthony in the Division of Risk, Strategy and Financial Innovation.

Thank you and we’ll be happy to take questions.

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