Bloomberg News

U.S. Subpoena of Wall Street Due Diligence Firm Targets Banks

August 29, 2013

The U.S. Justice Department has subpoenaed documents from what was Wall Street’s largest mortgage due-diligence firm as it ratchets up an investigation into bank actions in the years before the financial crisis.

The Justice Department delivered a subpoena to Clayton Holdings LLC last month for an extensive number of documents related to the firm’s work on residential mortgage-backed securities deals. Information sought includes due diligence reports, internal communications related to reviews of pools of loans and correspondence with clients, according to a copy of the subpoena filed as an exhibit in federal court.

The work of Clayton in the years before the subprime mortgage crisis has been used by state and federal agencies in past cases. The Shelton, Connecticut-based firm so far has declined to comply with the subpoena, according to a Justice Department court filing on Aug. 27.

The fight over the subpoena underlines the Justice Department’s push to file civil claims against the largest U.S. banks related to mortgage-backed securities. Top department officials have pledged to bring more cases through a joint federal-state task force probing the deals. Clayton was a “major provider of third-party due diligence services” to the Wall Street firms that packaged mortgages into bonds for sale to investors, according to the Financial Crisis Inquiry Commission’s 2011 report.

‘Crucial’ Documents

“These documents are crucial to the United States’ investigation as to which residential mortgage-backed securities, and which businesses involved with their assembly, could give rise to” civil claims, the Justice Department said in the filing.

The department’s financial fraud task force has increased its activity in RMBS cases, suing Bank of America (BAC:US) Corp. this month as New York-based JPMorgan Chase & Co. (JPM:US) disclosed ongoing criminal and civil investigations. Bank of America, based in Charlotte, North Carolina, has denied wrongdoing and said it will fight the suit.

Private and government plaintiffs including the Federal Housing Finance Agency and New York Attorney General Eric Schneiderman have previously used information from Clayton to bolster suits against banks including JPMorgan, Bank of America, Credit Suisse Group AG (CSGN) and Citigroup Inc. (C:US) A Clayton internal report released by the FCIC showed securitizers allowing mortgages flagged during the company’s reviews to be accepted for bond deals.

All Communications

In its subpoena, issued on July 1, the Justice Department sought due diligence reviews performed by Clayton, as well as all communication between the clients for whom the company performed reviews and the employees they dealt with, according to a copy of the subpoena.

The subpoena was issued as part of a “broad and ongoing nationwide investigation into the assembly, underwriting and issuance of residential mortgage backed securities during the time period between 2005 and 2007,” the Justice Department said in its filing.

Bill Campbell, a spokesman for Clayton, didn’t respond to a phone message and e-mail seeking comment about the subpoena. Adora Andy Jenkins, a Justice Department spokeswoman, declined to comment beyond the court filings.

The Justice Department is relying on a 1989 statute, known as the Financial Institutions Reform, Recovery and Enforcement Act, as it pursues the RMBS cases against Wall Street banks.

Time Limit

The law, enacted in response to the savings-and-loan crisis, allows the government to seek, for as long as 10 years, civil penalties for losses to federally insured financial companies. Standard securities-fraud cases must be brought within a five-year time limit.

Attorney General Eric Holder, in a statement after the department and the Securities and Exchange Commission sued Bank of America for allegedly misleading investors in an $850 million mortgage-backed bond, said the U.S. would “pursue a range of additional investigations” in the future.

“We will continue to use every tool, resource and appropriate authority to ensure stability, accountability and -- above all -- justice for those who have been victimized,” Holder said on Aug. 6.

The Justice Department’s Residential Mortgage Backed Securities Working Group, established last year by President Barack Obama, has taken the lead on a series of investigations related to financial crisis-era deals.

The group took on a mix of continuing civil and criminal investigations and new probes into misrepresentations by originators and underwriters on the quality of mortgages backing the securities, failures to repurchase problem loans and failures to transfer ownership of collateral.

The group has a broad mandate to investigate “any harm suffered by American consumers” related to misrepresentations or failures in agreements related to the securities, according to a Jan. 27, 2012, memo by Holder.

To contact the reporter on this story: Phil Mattingly in Washington at pmattingly@bloomberg.net

To contact the editor responsible for this story: Steven Komarow at skomarow1@bloomberg.net


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