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Bear Sterns Mortgage Securitization Fraud

Ambac Assurance Corp. v. EMC Mortgage Corp. and J.P. Morgan Securities Inc., 65021/2011 (N.Y. Supr. N.Y. Co.) Manhattan


In November 2008, Ambac commenced an action in federal court against EMC alleging breach of contract in connection with certain mortgage-backed securities investments. After document discovery, in July 2010 Ambac moved for permission to amend its complaint to add claims of fraudulent inducement (against EMC and proposed new defendant Bear, Stearns & Co., now J. P. Morgan Securities Inc.); federal securities fraud (against EMC, Bear Stearns and ten Bear Stearns employees), and tortious interference with contract (against J.P. Morgan Securities Inc.) The Proposed Amended Complaint alleged that in 2006, Bear Stearns and certain individual employees induced investors to buy, and Ambac to guarantee, securities that were backed by a pool of mortgage loans that a Bear deal manager allegedly called “a SACK OF SHIT.” Bear allegedly profited “by obtaining settlements from certain lenders that sold the bank defective loans, while at the same time denying repurchase requests from investors and insurers based on the same loans and the same deficiencies (thereby "double-dipping" on these loans)…simultaneously selling short shares of banks holding Ambac-insured securities as it denied the bond insurer the benefit of its contractual right to have Bear repurchase defective loans..[Bear also] covertly cut the time allowed for early payment defaults without telling investors, allowing it to securitize more loans that had already gone bad…[and] ignored its own due diligence findings on loan deficiencies, lied to rating agencies about this data, and securitized these loans anyway.” Bear also allegedly ignored outside review by Clayton Holdings LLC, ignored its own due diligence and/or intentionally curtailed the review process. Plaintiff alleges cumulative losses from the transactions of over $1.2 billion; claims it has already had to pay over $600milion in claims as guarantor. The case was referred to a Magistrate Judge who issued a report on 16 December 2010, recommending that Ambac be allowed to add its proposed fraudulent inducement claim, but finding that that the Federal securities claims and interference with contract claim were futile, thus these claims should not be permitted to be added to the complaint. Because there was not federal diversity jurisdiction, removal of the federal claims meant that the federal court would no longer have jurisdiction to hear the remaining state law claims.


On or about 17 February 2011, Ambac (re)filed this action in New York State Court after the federal court proceeding was dismissed for lack of jurisdiction. See Ambac Assurance Corp. et al. v. EMC Mortgage Corp. No. 1:08-cv-09464 (S.D.N.Y.)