Potential Fraud in ResCap's Mortgage-Backed Securities

SEC Investigates Possible Fraud in ResCap’s Offer/Sale of Mortgage-Backed Securities

The SEC is investigating Residential Capital (“ResCap”), Ally Financial Inc.’s troubled mortgage business, for potential instances of mortgage fraud, according to recent court documents. Though the SEC’s investigation into the company began on Feb. 22, it wasn’t disclosed until this week, when the SEC filed new documents in court in an effort to obtain due diligence reports from R.R. Donnelley & Sons, a firm involved in the case.

“The information in Donnelley’s possession is relevant in determining whether ResCap made material misrepresentations or omissions about the mortgage loan pools that backed the securitizations under investigation,” the S.E.C. wrote in its filing.

According to court documents, the SEC is looking into ResCap’s offer and sale of the mortgage-backed securities for possible instances of fraud. In statements reported by Reuters, Ally Financial admitted that it had received subpoenas related to the company’s mortgage practices in 2011 from both the SEC and the Justice Department. Materials given to the investors in the mortgage-backed securities were among the documents requested by the SEC.

Residential Capital filed for Chapter 11 bankruptcy in May after the company found itself unable to make payments on the debts related to its bad mortgage loans. Among the other claims listed against the company’s assets were at least 32 claims related to active or potential securities arbitration, according to a May 14 article on Bloomberg.com. It looks like the May bankruptcy filing might indicate an effort on the part of ResCap to shed legal liability for the mortgage-related claims.


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