Buckle Up, Folks: JPMorgan Won't Likely Be Last Bank Sued by Presidential Task Force

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It's officially called the Residential Mortgage Backed Securities Working Group: a task force of state and federal prosecutors created by President Obama this past January to investigate banks that misbehaved in the run-up to the financial crisis, specifically through the pooling and sale of residential mortgage-backed securities. 

On Monday, the group announced its first legal action, with New York's attorney general filing suit against JPMorgan Chase (NYSE: JPM) for securities fraud committed by its Bear Stearns unit in the years leading up to the crash. Though we're now four years out since the official start of the crisis (that being the demise of Lehman Brothers in September 2008), investors beware: The task force's work has likely just begun.

For my next trick, the Martin Act
Residential mortgage-backed securities (RMBS), if you remember, were those very creative -- and seemingly innocent -- debt instruments that ended up almost taking down the financial system.

The suit alleges that Bear, which JPMorgan bought in March of 2008, as it was collapsing, lost its clients more than $20 billion in value for "fraudulent and deceptive acts in promoting and selling" RMBS. Whether or not JPMorgan can be held accountable for the sins of Bear will be up to a judge, but the RMBS Working Group has a trick up its sleeve that will make JPMorgan's -- and any other big banks' -- prosecution that much easier.

In charging JPMorgan with securities fraud, New York's attorney general is employing the Martin Act. Enacted in 1921, it allows state prosecutors to pursue charges of fraud without the government having to prove the defendant intended fraud. As such, the state has a much lower bar to bring cases than, say, the average civilian plaintiff, or even the Securities & Exchange Commission.

Foolish bottom line
Don't be surprised if Bank of America (NYSE: BAC) , Citigroup (NYSE: C) , and maybe even Wells Fargo (NYSE: WFC) also end up in the legal gun sights of New York's attorney general. All three did massive amounts of mortgage-origination and mortgage-securitization. And if prosecutors can go after JPMorgan for the misdeeds of an organization that wasn't even part of it at the time of the alleged crimes, the sky might be the limit for the rest of Wall Street... at least until the elections are over.

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