Former JPMorgan Chase Insider Blows the Whistle

Matt Taibbi of Rolling Stone recently profiled the woman JPMorgan Chase paid one of the largest fines in American history to keep from talking in his article, The $9 Billion Witness: Meet JPMorgan Chase’s Worst Nightmare. Alayne Fleischmann, a former Chase manager, revealed the true reason why JPMorganChase settled the claims brought by the DOJ for such a seemingly staggering amount — cash in exchange for secrecy.

On the eve of a civil complaint being filed against Chase, Jamie Dimon called federal prosecutors and negotiated a quiet resolution, keeping many details regarding Chase’s misconduct hidden from the public. Expecting to be called as a key witness in a criminal prosecution against Chase executive officers, Fleischmann says that she was stood up by the government, despite her ability to present ample evidence with time remaining before the statute of limitations expired on a claim for wire fraud. By coming forward now, Fleischman seeks to prevent the “biggest financial cover-up in history.”

No longer muzzled by the fear of retribution, Fleischman tells the story of what she calls a “massive criminal securities fraud” that Chase’s stipulated Statement of Facts (part of its public settlement with the DOJ) only hints at. As a transaction manager, Fleischmann functioned as a quality-control officer ensuring that lower quality “scratch and dent” loan products were not cleared to be re-sold and securitized into mortgage pools marketed as being above subprime. However, Fleischman contends that is exactly what occurred despite her numerous attempts to alert and dissuade her supervisors. Fleishmann was then laid off in February 2008.

Fleischmann states that despite initial reports by her colleagues advising superiors that the loans being re-sold contained a high incidence of “material misrepresentations” due to overstated income, diligence managers pressured the team until loans began to clear. Perhaps most indicative of the fact that Chase knew what it was doing and intended on keeping its misdeeds secret was what Fleischmann referred to as a “no e-mail” policy. After speaking with the DOJ, Fleishmann realized that the government intended on using the new evidence that she could provide as leverage in negotiations to extract a larger settlement from Chase in order to keep her testimony concealed.

Significance of Chase’s Misconduct for Correspondent Lenders

Despite its lack of specifics in some respects, Chase’s 10-and-a-half-page Statement of Facts to its settlement with the DOJ can be cited by correspondent lenders in defending mortgage put-back cases brought by Chase. Contrary to the position it takes in many ongoing buyback cases, Chase acknowledged its widespread practice of conducting pre-purchase quality control reviews prior to acquiring loans from originators and re-selling or securitizing its loan products. Moreover, Chase often deliberately purchased loans it knew or suspected were non-compliant with its own guidelines without regard for the ability of correspondent lenders to bear the burden of repurchasing defaulted loans, and without regard for its obligation to timely notify correspondent lenders of defects.  These facts have numerous potentially favorable implications for parties fighting repurchase and make-whole claims made by Chase.