JPMorgan Discloses Criminal Mortgage Probe

NEW YORK ( TheStreet) -- JPMorgan ( JPM) disclosed on Wednesday it is facing a criminal probe by the U.S. Department of Justice, as authorities investigate the company's sale of mortgage backed securities (MBS) between 2005 and 2007.

In a quarterly filing with the Securities and Exchange Commission, JPMorgan disclosed that the civil and criminal divisions of the U.S. Attorney's office for the Eastern District of California is looking into its pre-crisis MBS offerings. While the criminal probe is ongoing, JPMorgan said civil authorities have deemed the bank to have broken securities laws.

"In May 2013, the Firm received a notice from Civil Division stating that it has preliminarily concluded that the Firm violated certain federal securities laws in connection with its subprime and Alt-A residential MBS offerings during 2005 to 2007," JPMorgan said in a 10Q filing with the SEC.

In addition, JPMorgan said it also has received numerous subpoenas and informal requests for information from federal and state authorities concerning its origination of mortgages and sale of MBS. JPMorgan indicated regulators are looking into whether the firm made full disclosures in its securities sales and whether it had potentially breached securitization representations and warranty disclosures.

"The Firm continues to respond to other MBS-related regulatory inquiries," JPMorgan said.

The disclosure indicated that the DoJ and Securities and Exchange Commission could be preparing to charge the bank with fraud for any alleged misrepresentation on its MBS security sales.

On Tuesday, the DoJ announced it had filed a civil complaint in the U.S. District Court in Charlotte, N.C., charging Bank of America ( BAC) with making "false and misleading statements," when it sold over $850 million in mortgage-backed securities in February 2008 to a group of investors that included the Federal Home Loan Bank of San Francisco and Wachovia Bank.

The charge came just days after Bank of America disclosed the DoJ's inquiry in its quarterly 10Q filing.

The Justice Department said that Bank of America and subsidiaries, including Merrill Lynch, "lied to investors about the relative riskiness of the mortgage loans backing the residential mortgage-backed securities (RMBS), made false statements after intentionally not performing proper due diligence and filled the securitization with a disproportionate amount of risky mortgages originated through third party mortgage brokers."

The SEC filed a similar complaint, saying in a press release that "Bank of America failed to tell investors that more than 70 percent of the mortgages backing the offering - called BOAMS 2008-A - originated through the bank's 'wholesale' channel of mortgage brokers unaffiliated with Bank of America entities."

Bank of America spokesman Lawrence Grayson in an email expressed confidence in the bank's ability to defend itself in court.

"These were prime mortgages sold to sophisticated investors who had ample access to the underlying data and we will demonstrate that," Grayson said in the e-mail.

-- Written by Antoine Gara and Philip van Doorn in New York