Bear Stearns Mortgage Traders Face Criminal Investigation

Bear Stearns mortgage traders alleged to have cheated their monoline insurance clients are now being investigated by the Manhattan District Attorney's Office for possible violations of the Martin Act.

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According to sources who have been interviewed by the D.A.'s office, Bear Stearns executives Tom Marano, Mike Nierenberg, and Jeff Verschleiser are at the center of the investigation.

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Lawsuits now filed in New York state and federal courts by insurers Ambac Assurance and Syncora Guarantee against Bear Stearns, and their wholly owned mortgage shop EMC Mortgage, allege that starting around 2005 the Bear traders would sell toxic mortgage securities to investors and then sell back the bad loans to the banks that originated them at a discount. The traders would keep the refund on their own books and not pass it on to the mortgage trust. What's in question is if they legally had to pass the profits back to the investors in the bonds.

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In the insurers' lawsuits, a federal judge ruled last month that Syncora did not have to prove loan-by-loan which loans were toxic and deserved a refund. Instead, Syncora is allowed to use a sample from the $666 million in securities as the monetary basis for fraudulent loans. This may constitute a big win for investors who will not have to spend time and money sorting through the loans in each security, and opens up the amount of damages that could be awarded to the plaintiffs.