Thursday, January 31, 2008

New York's State Securities "Martin Act" Used to Prosecute Mortgage Fraud

New York Attorney General Andrew Cuomo and his Staff have begun using the State's 1921 "Martin Act," i.e., the State's Securities Act, to go after Wall Street Firms for allegedly packaging and selling mortgage securities improperly to an unsuspecting public. Subpoenas under the Martin Act have already been sent to Bear Stearns, Deutsche Bank, Morgan Stanley, Merrill Lynch and Lehman Brothers. What makes the Martin Act particularly favorable for prosecuting mortgage abuse is that it broadly defines securities fraud but does not require proof of intent to defraud and permits the Attorney General to go after civil and criminal penalties.

It is believed by the Attorney General's Office that in 2005 and 2006 when the mortgage securities business was at its height, investment bankers acting as underwriters bought home loans containing "exceptions" that did not meet the minimum lending standards set by rating organizations, and then repackaged and sold them to investors as mortgage securities without disclosing the exceptions that made these investments risky. The Attorney General's Office is now empowered to proceed against the Wall Street firms under the Martin Act because it recently obtained the cooperation of Clayton Holdings, one of the premier companies to provide due diligence about mortgage pools, that has disparaging information on the particular mortgage securities sold to investors.

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