FHLB demands DOJ draft complaint: ‘What is JPMorgan trying to hide?’

December 10, 2013

If JPMorgan Chase and the Justice Department thought that all the zeroes at the end of the bank’s multibillion-dollar settlement for mortgage securitization failures would foreclose questions about the bank’s actual wrongdoing, clearly they thought wrong. Days after the much-leaked-about $13 billion deal was finally announced, New York Times columnist Gretchen Morgenson looked at the admissions accompanying the settlement and wondered why it had taken the federal government so long to hold the bank accountable for conduct that’s been in the public domain for years. Morgenson’s column echoed posts at Bloomberg and Slate that also scoffed at JPMorgan “admissions.” On Monday, even a commissioner of the Securities and Exchange Commission piled on. Dan Gallagher, a Republican, criticized the settlement as a penalty on the bank’s current shareholders that’s not justified by JPMorgan’s admitted conduct. “It is not rational,” Gallagher told an audience in Frankfurt at an event organized by the American Chamber of Commerce in Germany.

At the heart of all of this criticism is a nagging suspicion that we don’t really know what the Justice Department had – or didn’t have – on JPMorgan, that the $13 billion settlement was not pegged to the bank’s actual misconduct but to the public relations benefits to both sides from a supposedly record-setting deal. Attorney General Eric Holder has called the size of the settlement a proportionate response to JPMorgan’s wrongdoing, but it’s tough to take that assertion on faith when the statement of facts that accompanied the settlement revealed so little about the government’s evidence.

The Federal Home Loan Bank of Pittsburgh believes that the government knows a lot more about JPMorgan’s securitization practices than it disclosed in the settlement agreement – and the FHLB’s lawyers at Robins, Kaplan, Miller & Ciresi are pretty sure those additional details are contained in a civil complaint against the bank that was drafted by the U.S. Attorney in Sacramento, California. At a closed-door hearing last Friday, Judge Stanton Wettick of the Allegheny County Court of Common Pleas heard Robins Kaplan argue that release of this “rich source of detailed facts about JPMorgan’s conduct” would serve the public’s interest in understanding the basis of the $13 billion settlement. JPMorgan’s lawyers at Sidley Austin, meanwhile, contend that the Justice Department never intended the complaint to be public but used it only as leverage in negotiations with the bank. Turning the document over to FHLB and the public, the bank asserts, would be contrary to Pennsylvania’s interest in promoting settlements, would violate attorney-client privilege and would accomplish nothing because Justice’s allegations are not related to claims by the FHLB. Judge Wettick did not issue a public ruling from the bench Friday and lawyers for JPMorgan and FHLB didn’t respond to my emails requesting comment. But if we’re ever going to find out more about the government’s dirt on JPMorgan, there’s a good chance it will be in the FHLB litigation.

Wettick, after all, has already ordered the draft complaint to be turned over to the FHLB once. In early October, when JPMorgan’s settlement with Justice was still just a rumor, Robins Kaplan moved to compel JPMorgan to turn over whatever documents it had disclosed to the Justice Department, in case any of that material shed light on FHLB’s allegations that it was duped into buying JPMorgan mortgage-backed securities. (You may remember the litigation because FHLB successfully deployed the same tactic of moving for Justice documents against Standard & Poor’s, which is also a defendant in the case.) At the time, JPMorgan’s counsel in the FHLB case in Pittsburgh said he didn’t know for sure whether Justice had prepared a complaint against the bank, despite press reports that the complaint existed. At a hearing on Oct. 17, Judge Wettick ordered JPMorgan lawyer Robert Pietrzak of Sidley to find out if the government had shown a draft complaint to JPMorgan, and “to the extent that you have it, (to) turn it over.”

According to an affidavit from FHLB’s general counsel, Dana Yealey, the existence of a draft complaint was confirmed soon thereafter when Justice Department lawyers contacted him to ask if FHLB would agree to extend the deadline on Judge Wettick’s order so that Justice could wind up its negotiations with JPMorgan. Yealey said that he asked if Justice would intervene in his case to oppose production of the draft complaint and received a promise that it would not. “(The Justice lawyer) said he was very close to a final deal with JPMorgan and that after one more week, he would not care about the draft complaint,” Yealey’s affidavit said. FHLB agreed to hold off until the Justice settlement was finalized.

But after JPMorgan and the Justice Department announced their deal, JPMorgan filed a motion asking Judge Wettick to vacate or reconsider his order directing the bank to produce the draft complaint. As JPM assistant general counsel Alyssa Kelman explained in her affidavit, Justice only showed the complaint to the bank to prod negotiations. JPMorgan had to agree to keep the draft confidential, she said. The bank’s brief argued that the draft is protected from discovery under the laws of New York and California. “Such drafts are exchanged with the understanding that they will not be disclosed outside of the settlement process and will be kept confidential,” the brief said. “An order denying this motion and requiring the JPMorgan defendants to produce the draft DOJ complaint here would not only be contrary to federal and state law, it would chill the use of such materials in future settlement negotiations.” Besides, the bank argued, the 11-page statement of facts accompanying the Justice Department settlement provides a public explanation of JPMorgan’s alleged wrongdoing, none of which is relevant to FHLB’s claims. (JPMorgan’s brief was filed in November but was released on Dec. 5.)

In its response, a Nov. 26 motion to compel, FHLB asks just what JPMorgan is so afraid the draft complaint will reveal – a question I suspect it is not alone in asking. “Given the DOJ’s desire not to have the draft complaint become public until after the settlement was reached, and given JPMorgan’s apparent deep desire to prevent it from ever seeing the light of day, it would not be at all surprising if the draft complaint is a much more detailed account of JPMorgan’s fraudulent conduct, and as such, far more enlightening than the statement of facts,” the brief said. “Those facts should be made public, not only to aid private litigants such as Pittsburgh FHLB in the pursuit of their claims, but also to inform the public of the basis for the DOJ’s settlement.”

Neither side discusses the collateral litigation consequences for JPMorgan if the draft complaint is disclosed, but I doubt they’d be disastrous. The bank has already settled with the government, the Federal Housing Finance Agency and private investors with mortgage put-back claims (assuming, of course, that MBS trustees sign on to that proposed $4.5 billion deal). We’re more than six years past the issuance of most mortgage-backed securities, which means time has just about run out on even state-law fraud claims. There are doubtless good reputational reasons why JPMorgan doesn’t want the Justice Department’s draft complaint to see the light of day, but I don’t think any revelations of misconduct would lead to a flood of new suits, or, at least, viable new suits.

I’ll let you know what Judge Wettick decides.

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