Attorney General Eric Schneiderman alleges in his Martin Act lawsuit that Bear Stearns knowingly misled investors and holders of mortgage-backed securities.

Schneiderman filed the suit as part of his job as co-chairman of the Residential Mortgage-Backed Securities Working Group, which was formed last year by the Obama administration.

The complaint, filed today in state Supreme Court court, charges that while Bear Stearns executives privately derided the securities in internal emails, the company continue to publicly claim the benefits of the investment.

The mortgage loans were packagted in to residential mortgage-backed securities, referred to as RMBS, which the financial firm sold to investors as a carefully monitored product. In reality, Schneiderman says, the company largely did not monitor the quality of the investments, nor did it pay attention to the possible defects. Bear Stearns also kept investors in the dark, even when executives were aware of the issues with the mortgage-backed securities.

Schneiderman’s complaint says that as a result, the securities were bundled with mortgages taken out by many who could not repay their loans.

Bear Stearns collapsed in 2008, with losses totaling $22.5 million.

In fact, Defendants systematically failed to fully evaluate the loans, largely ignored the defects that their limited review did uncover, and kept investors in the dark about both the inadequacy of their review procedures and the defects in the underlying loans. Furthermore, even when Defendants were made aware of these problems, they failed to reform their practices or to disclose material information to investors. As a result, the loans in Defendants’ RMBS included many that had been made to borrowers who were unable to repay, were highly likely to default, and did in fact default in large numbers.

j Pm Complaint

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