Fred R. Conrad/The New York TimesJudge Jed S. Rakoff of Federal District Court in Manhattan.A federal judge dealt a devastating blow to a lawsuit against JPMorgan Chase that accused the nation’s largest bank and its affiliates of duping investors into buying troubled mortgage-backed securities.
In a ruling on Tuesday, Judge Jed S. Rakoff dismissed claims from Dexia, a Belgian-French bank that had sued JPMorgan over losses on $1.6 billion in 65 residential mortgage investments, according to court documents.
FSA Asset Management, another plaintiff, can continue to pursue its claims over five of the soured investments, with losses of more than $5 million.
The ruling significantly limits the potential legal bill from the case, a major victory for JPMorgan. The lawsuit was being closely watched on Wall Street, in part because it could provide a window into another high-stakes suit facing the industry.
In 2011, the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, accused 17 banks of selling $200 billion of dubious mortgage securities to the housing finance giants. At least 20 of the securities at issue were also included in the Dexia case, according to an analysis of court records.
The Dexia lawsuit, filed in 2012 in United States District Court in Manhattan, centered on complex securities created by JPMorgan, Bear Stearns and Washington Mutual during the heady days of the housing boom. As profits soared, the Wall Street firms churned out ever more investments, some of which imploded. Dexia, which has been bailed out twice since the financial crisis, lost $774 million on the securities, according to court records.
Lawyers for JPMorgan have been working to quash the Dexia lawsuit since it was originally filed. They tried to persuade the judge that Dexia did not have the legal standing to sue the bank, court records show.
Judge Rakoff sided with the bank, according to several people with knowledge of the matter. The judge did not outline the reasoning for his decision in Tuesday’s order.
Dexia’s lawsuit was part of a broad-ranging assault on Wall Street for its role in the financial crisis, as prosecutors, regulators and private investors pursue the banks for losses on mortgage-related securities. New York’s attorney general, Eric T. Schneiderman, for example, sued JPMorgan last year over investments created by Bear Stearns from 2005 to 2007.
For JPMorgan and other big banks, the legal woes have been costly.
In November, JPMorgan agreed to pay $296.9 million to settle claims by the Securities and Exchange Commission that Bear Stearns, which the bank bought in 2008, had misled investors by failing to disclose some problematic loans in the portfolio. JPMorgan did not admit or deny wrongdoing.
Separately, Citigroup agreed last month to pay $730 million to settle claims that the bank had misled investors in securities backed by mortgage loans. The bank did not admit or deny wrongdoing.
Analysts say the mortgage-related legal costs pose one of the most severe threats to the industry’s profit. For example, Citigroup said that its fourth-quarter profit was eroded by a $1.3 billion legal bill.