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NY AG Opens Investigation Into Mortgage Securities

Source: WSJ - Ruth Simon

Posted on 17 May 2011

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An investigation into the packaging of mortgage loans into securities has begun by New York Attorney General Eric Schneiderman in what is the latest sign of increased scrutiny of the mortgage industry.

Meetings with executives of several major banks, including Bank of America Corp., Morgan Stanley and Goldman Sachs, will be held with the NY Attorney General. Mr. Schneiderman intends to discuss securitization of mortgage loans and other mortgage practices and has requested related documents from the firms, according to people familiar with the matter. The meetings over securitization are expected to happen in the coming week.
Spokesmen for Bank of America, Goldman Sachs and Morgan Stanley declined to comment.

The New York inquiry comes just as banks are trying to resolve mortgage related problems on various fronts. Federal officials and state attorneys general continue their efforts to negotiate a settlement to the investigation of questionable mortgage servicing practices, including "robo-signing," that came to light last fall.

Banks are also edging closer to resolving civil-fraud charges related to mortgage-bond deals. The Securities and Exchange Commission is in talks with a number of major Wall Street firms to settle allegations of fraud on their sales of collateralized debt obligations or CDOs. Wall Street's $1 trillion sales of these complex pools of mortgages and other loans lay at the heart of the financial crisis.

Mr. Schneiderman, who took office this year, appears to be continuing in the aggressive footsteps of his predecessors, Andrew Cuomo and Eliot Spitzer.

They have a powerful legal tool at their disposal. The 1921 Martin Act, revived by Mr. Spitzer as a weapon against Wall Street, is seen as one of the most potent prosecutorial tools against financial fraud. The sweeping definition of fraud in the Martin Act doesn't require prosecutors to prove intent to defraud, in contrast to federal securities laws. The act has been used to prosecute Wall Street firms for securities manipulation, improper allocation of initial public offerings of stock and misleading stock research on Wall Street.

Mr. Schneiderman has said for months that he intends to pursue investigations related to the mortgage meltdown. He has expressed concerns over the mortgage-servicing talks that a broad deal could allow companies to escape liability for future legal claims.

The New York attorney general has also broadened his scrutiny of the mortgage industry, investigating firms that have profited from the foreclosure boom.

Mr. Schneiderman recently issued subpoenas to two investment firms that own stakes in a paperwork-processing firm, according to people familiar with the investigation.

The firm, Pillar Holdings Inc., was spun off from the law firm of Steven J. Baum, which handled nearly 40% of all foreclosure cases filed in New York.

Mr. Schneiderman is investigating whether the investment firms profited from questionable foreclosure practices, people familiar with the matter said.