A federal judge has revived a closely watched lawsuit accusing JPMorgan Chase & Co of misleading Belgian-French bank Dexia SA into buying more than $1.6 billion (1 billion pounds) of troubled mortgage debt.
Citing a recent federal appeals court decision involving American International Group Inc and Bank of America Corp, U.S. District Judge Jed Rakoff in Manhattan said he had lacked jurisdiction when he decided on April 2 to throw out much of Dexia's lawsuit against JPMorgan.
That ruling had dismissed claims for all but $5.7 million, or less than 1 percent, of the roughly $774 million of damages that Dexia had sought from the largest U.S. bank.
In finding on Friday that he had no jurisdiction under an obscure 1919 federal law known as the Edge Act, Rakoff reinstated the dismissed claims and sent the case back to the New York state court where it began in January 2012.
"Those who don't believe in ghosts have never been in court, where legal claims are regularly seen rising from the grave," Rakoff wrote on Friday. "This is a case in point."
JPMorgan spokesman Justin Perras declined to comment. Timothy DeLange, a partner at Bernstein Litowitz Berger & Grossmann representing Dexia, also declined.
The lawsuit is one of many accusing banks of trying to boost profit by packaging low-quality mortgages into seemingly safe securities, while fraudulently hiding the risks or failing to ensure the loans were underwritten properly.
Dexia alleged it was misled about the quality of 65 residential mortgage-backed securities certificates it bought from 51 offerings between 2005 and 2007 by JPMorgan, Bear Stearns Cos and Washington Mutual Inc.
JPMorgan, whose chief executive is Jamie Dimon, bought Bear and most of WaMu in 2008. The Dexia case gained notoriety from emails and other materials that suggested the defendants knew the securities they were selling were toxic.
2ND CIRCUIT DECISION
In his earlier ruling, Rakoff let Dexia sue JPMorgan in federal court only over claims by its FSA Asset Management unit on five of the 65 certificates.
But matters changed after the 2nd U.S. Circuit Court of Appeals in New York said on April 19 that AIG's similar, larger lawsuit against Bank of America belonged in state court.
The Edge Act was designed to help free banks from state regulatory burdens and compete in offshore banking, and Bank of America said it warranted federal court jurisdiction.
AIG said the Edge Act should not apply, noting that the $28 billion of securities it bought were created domestically, as were nearly all of the 1.7 million underlying home loans.
In ruling for AIG, the 2nd Circuit said federal courts could resolve disputes over offshore transactions handled by federally chartered corporations that are parties to those disputes.
Rakoff said this forced him to reverse his original order.
While noting that some loans underlying Dexia's securities involved Virgin Islands properties, he said these were created by another lender, Flagstar Bank. Rakoff also said it did not matter that JPMorgan engaged in other international banking.
"Because JPMorgan Chase Bank did not itself engage in the foreign banking transactions on the basis of which the defendants sought removal, the court cannot exercise jurisdiction over this case under the Edge Act," Rakoff wrote.
In seeking to dismiss Dexia's lawsuit, JPMorgan argued that all of the alleged misstatements were addressed in a prospectus or prospectus supplement, and that there was no showing that alleged fraud caused any of Dexia's alleged losses.
Emails disclosed in the case suggested many instances where bank employees tried to press ahead with underwriting mortgage securities, despite knowing of deficient documentation in many of the underlying loans.
The case is Dexia SA/NV et al v. Bear Stearns & Co et al, U.S. District Court, Southern District of New York, No. 12-04761.
(Reporting by Jonathan Stempel in New York; Additional reporting by Alison Franke; Editing by Andre Grenon)