Bah-Humbug: The JPMorgan Settlement & Cy Pres Remedies

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Maybe I’m just getting a head start on my “bah humbug” mood for the holidays, I don’t know. Did it strike anyone else as discordant that almost a third of the record-setting JPMorgan RMBS settlement was ear-marked to fund “affordable housing / erase urban blight” policy initiatives? Is it right to fund the Administration’s social policies through the settlement of civil litigation brought by DOJ?

On November 19th, the Justice Department and various state AG’s (among others) announced a $13Bn global settlement — “the largest settlement with a single entity in American history” — of FIRREA and other civil claims arising from the packaging and sale of various Residential Mortgage Backed Securities (“RMBS”) by JP Morgan, Bear Stearns and Washington Mutual.  Of that $13Bn, $2Bn was a civil penalty under FIRREA, with other amounts going to the complaining states and to other “victims” (FDIC, FHFA, National Credit Union Administration, with the largest amount of $4Bn to FHFA).

Then there’s the part that caught my attention:  “The resolution also requires JPMorgan to provide much needed relief to underwater homeowners and potential homebuyers, including those in distressed areas of the country.”  Huh? Yes, about 1/3 of the settlement ($4Bn) was ear-marked for directed payments “in the form of relief to aid consumers,” “including principal forgiveness, loan modification, targeted originations and efforts to reduce blight” with any shortfall paid to NeighborWorks America – a Congressionally-chartered non-profit “affordable housing and community development” organization. See DOJ Release (Nov. 19, 2013) here. $4Bn is a lot, so I looked it up:  NeighborWorks America’s total 2011 Congressional appropriation was $238M here.

In my practice, I’m used to seeing victim-compensation funds, in civil class litigation and in the settlement of regulatory enforcement actions by the SEC and others.  But DOJ didn’t accuse JPM, Bear or WaMu of fraudulently originating those bad mortgages, or taking advantage of homebuyers in distressed areas, or of duping people into buying houses they couldn’t afford. Instead, the suit targeted the later bundling and sale of those mortgages in the after-market for complex RMBS-backed securities purchased by institutional investors. Those are the allegedly defrauded victims — the “credit unions, banks and other investor victims,” “Fannie and Freddie,” and pension funds cited in the later parts of the Release.

Justice’s Release claims the directed-payments “aid consumers harmed by the unlawful conduct.” But it isn’t readily apparent to me how DOJ leaps the causation gap from defrauding other big financial institutions on the one hand to “providing much needed relief to underwater homeowners and potential homebuyers, including those in distressed areas of the country” on the other. Maybe they don’t have to.  Maybe that’s just part of “prosecutorial discretion.”

Just two weeks earlier, Chief Justice Roberts issued an unusual statement accompanying cert denial in class litigation. Marek v. Lane, 571 U.S. ____  (Nov. 4, 2013) (No. 13-136) (Roberts, C.J.) here. In that case, Facebook paid $9.5M to settle the “Beacon” putative class litigation, paying $3M to named plaintiffs and their lawyers and the rest ($6.5M) as a cy pres remedy to establish a new foundation dedicated to online privacy. Justice Roberts noted his concern over growing cy pres remedies in class litigation and “more fundamental concerns” about them, including appropriateness, how to assess fairness, the use of new entities, how closely the goals of the cy pres organization must correspond to class interests “and so on.” Id. at 4.