Baupost hedge fund files hot put-back complaint vs Bear Stearns

September 12, 2012

In July, not long after the Economist dubbed Baupost’s revered founder Seth Klarman “The Oracle of Boston,” the hedge fund abruptly dropped out of the litigation challenging Bank of America’s proposed $8.5 billion settlement with investors in Countrywide mortgage-backed securities. Baupost also sold off at least some of its Countrywide notes, signaling that after battling fruitlessly to get Countrywide and BofA to buy back allegedly deficient underlying loans, the hedge fund had decided to cut its MBS losses and run.

But it turns out that Baupost isn’t out of the MBS put-back game. On Sept. 4, the Law Debenture Trust Company of New York, as trustee for a Bear Stearns MBS trust, filed an amended complaint in Delaware Chancery Court demanding that the onetime Bear mortgage lending unit EMC (now part of JPMorgan Chase) buy back 1,141 underlying mortgage loans that allegedly breached the representations and warranties EMC made about them. The 66-page amended complaint is a must-read for MBS fans, since it’s based on a review of the actual loan origination documents for more than 1,500 mortgages in the underlying pool. The trustee obtained the files through litigation that launched in February 2011, then had them re-underwritten by The Barrett Group, which found that more than 80 percent of the mortgages it reviewed breached EMC’s reps and warranties. The complaint details not only aggregated stats on the breaches but also specific examples of how EMC supposedly failed to meet underwriting standards and let utterly unqualified borrowers take out mortgages.

The amended complaint does not name Baupost, but an Aug. 15 status report on the year-old litigation does. “A representative of the directing certificateholders attended the meet-and-confer sessions on August 6 and 7,” the report said. “The directing certificateholders are the Ashford Square Entities, which are wholly-owned subsidiaries of funds managed by The Baupost Group.”

Baupost’s lead counsel, Harvey Wolkoff of Ropes & Gray, confirmed Tuesday that the hedge fund is, in fact, directing the put-back litigation against EMC. As the new complaint explains, the hedge fund began agitating for information about the underlying mortgages all the way back in 2009. At its direction, the trustee sued for the repurchase of more than 800 loans almost a year ago. Thanks to the additional information Baupost obtained through discovery in the suit, the amended complaint upped the demand.

Wolkoff said the 88 percent breach rate the re-underwriter found in its “exhaustive” review is “alarming.” Nevertheless, he said, EMC (which is represented by Sullivan & Cromwell) has been exceedingly reluctant to concede that loans materially breached reps and warranties. How reluctant? So far, Wolkoff said, EMC has agreed to buy back a grand total of 54 loans, of the more than 1,100 that Baupost contends are deficient. (I emailed a JPMorgan spokesman with a copy of the complaint, but he didn’t respond.)

Wolkoff declined to comment when I asked whether this is the only put-back case Baupost is pursuing, and a Baupost spokeswoman didn’t return my call. I also asked Wolkoff how Baupost’s case would be affected if, as I’ve speculated it might, JPMorgan negotiates a global MBS settlement with the major institutional investors represented by Gibbs & Bruns, the firm that orchestrated the global Countrywide MBS settlement Baupost previously objected to. Wolkoff (rightly) pointed out that my question rested on a hypothetical but said: “We represent the trustee in this matter, not Gibbs & Bruns.” He also said Gibbs has not reached out to Baupost about the hedge fund’s put-back claims.

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