In Baupost vs JPMorgan, Strine Approves Quotes From Bond Insurer Suits

In Baupost vs JPMorgan, Strine Approves Quotes From Bond Insurer Suits
By World Economic Forum (Flickr: The Global Financial Context: James Dimon) [<a href="">CC BY-SA 2.0</a>], <a href="">via Wikimedia Commons</a>

In a recent case involving JPMorgan Chase & Co. (NYSE:JPM), the New York attorney general, Bear Sterns and Securities and Exchange Commission, Chancellor Leo Strine of Delaware Chancery Court, decided that a trustee of Bear Stearns mortgage-backed securities, acting under the command of the hedge fund Baupost, should produce emails and testimony from those monoline cases in its breach-of-contract complaint against EMC, as reported by Alison Frankel’s.

In Baupost vs JPMorgan, Strine Approves Quotes From Bond Insurer Suits

As per the ruling, the plaintiffs, in addition to referring allegations from other complaints, can also make use of borrowed material, given that the material is relevant to the case and the parties have carried on their own investigation. The nine page decision from Strine ruled that the trustee’s complaint meets those requirements. Trustee’s lawyers, Ropes & Gray and Abrams & Bayliss, cited references from bond insurer complaints to support their claims that the EMC, most of the time, ignored underwriting standards.

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“The [trustee’s] allegations are obviously connected to [their] claim that EMC breached the representations and warranties in the purchase agreement, because, among other reasons, they provide a basis for the trustee’s contention that EMC did not adhere to accepted underwriting standards and that EMC’s own understanding of relevant commercial terms in the agreements, as shown by its course of dealing in analogous circumstances, was different from what it now contends,” Strine wrote.

In September 2012, an amended complaint was filed by Law Debenture Trust Company of New York. The complainant was a trustee for Bear Stearns MBS trust. The filing demands the payment of 1,141 underlying mortgage loans from the EMC (Eastern Mortgage Capital) unit of JPMorgan Chase & Co. (NYSE:JPM). EMC used to be the mortgage lending unit of Bear Stearns. The complaint does not mention Baupost directly, but Reuters reports that a relatively older status report clarifies the identity, ”A representative of the directing certificateholders attended the meet-and-confer sessions on August 6 and 7,” the report said. “The directing certificateholders are the Ashford Square Entities, which are wholly-owned subsidiaries of funds managed by The Baupost Group.

The latest ruling will be helpful for other trustees who brought MBS breach-of-contract cases in Delaware Chancery Court, including at least three more trustees having similar cases against JPMorgan Chase & Co. (NYSE:JPM) in Strine’s courtroom. In another implication of Strine’s opinion, MBS put-back cases may have shifted as he considered evidence that came from the bond insurer litigation.

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