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SEC investigating 'possible fraud' by ResCap

The Securities and Exchange Commission is investigating what it characterizes as possible fraud by the bankrupt mortgage subsidiary of Ally Financial Inc. in the sale of mortgage-backed securities.

The investigation of Residential Capital LLC, which filed for bankruptcy protection in May, came to light in documents filed by the SEC Monday in federal district court in Los Angeles.

The agency disclosed that it began a formal investigation on Feb. 22 into ResCap's handling of mortgage-backed securities -- the debt obligations at the heart of the 2008 financial crisis. Such securities consist of residential mortgage loans, often including subprime or poor-quality loans, bundled together and sold to investors.

The SEC said it has been examining ResCap's description of the quality of loans backing the securities when it offered them for sale. It said the company indicated that they complied with certain underwriting standards.

The filing on Monday was part of the SEC's request to force R.R. Donnelley & Sons Co. to hand over documents it drafted on behalf of the banks that underwrote the securities.

The federal agency subpoenaed Donnelley in June. It said in the court filing that the Chicago-based corporation refused to fully comply with the subpoena, claiming that it would expose itself to potential liability by disclosing the names of individual borrowers.

A Donnelley spokesman said Tuesday that the company complied promptly but withheld the names of borrowers because of the Right to Financial Privacy Act.

"If a judicial ruling confirms that we will be in compliance by providing documents with the names not redacted, we will promptly provide the requested additional information," Donnelley spokesman Doug Fitzgerald said.

ResCap spokeswoman Susan Fitzpatrick said the company does not comment on pending litigation. Ally Financial spokeswoman Gina Proia also declined comment.

ResCap filed for Chapter 11 bankruptcy protection on May 14 after years of losses and borrowing to cope with bad mortgages. New York-based parent company Ally, which is 74 percent owned by the U.S. government, took a $1.2 billion second-quarter charge related to the filing.

Buyers of ResCap loans have lawsuits pending against the company, arguing that it should repurchase loans that did not meet its stated standards.

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