For the last two years, MBIA Insurance Corp. and J.P. Morgan Securities have been fighting in court. In September 2012, MBIA sued JPMorgan (and Bear Stearns, which was acquired by JP Morgan in 2008), alleging that Bear Stearns altered a third-party due diligence report so that MBIA would insure a $1.16 billion mortgage securitization.
The securitization in question, 2006-HE4 Securitization, originated from a pool of risky mortgages and MBIA alleged that Bear Stearns, as lead underwriter, manipulated the deal’s due diligence report to make the securitization look safer than it actually was.
And according to New York State Supreme Court Justice Alan Scheinkman, that’s exactly what Bear Stearns did. But Scheinkman dismissed the case anyway because MBIA could not prove that it used the fraudulent information in its decision to insure the securitization.
According to Scheinkman’s ruling (which can be read in full here), Bear Stearns sent the “altered report” to MBIA “a scant few hours” before closing on the insurance policy. Scheinkman’s ruling states that there is evidence to support MBIA’s assertion that Bear Stearns “altered due diligence information (and) intentionally misrepresented existing material facts.”
But MBIA also claimed that it “relied on this misinformation to its detriment.” Scheinkman’s ruling states that there is no evidence of that.
“Had the underwriter (Bear Stearns) simply passed on the third-party due diligence information without alteration, the insurer (MBIA) would have only itself to blame for failing to review the information before issuing the policy,” Scheinkman wrote.
“Likewise, had the third party merely sent on the unaltered due diligence information, the underwriter could have kept to itself its opinion of what that information revealed,” Scheinkman continued. “But there is evidence that is not what happened.”
Scheinkman writes that there is evidence that shows that Bear Stearns realized that the due diligence results showed the loan pool was problematic and that if MBIA had seen the unaltered report, it may have balked at insuring the deal.