FBI Subprime Mortgage Probe Expands

March 19, 2008 — -- Criminal investigations have been launched against 17 companies in the fallout of the subprime mortgage collapse, the FBI disclosed late Tuesday.

The list of corporate fraud investigations focused on subprime mortgage lending practices by major banks and companies has grown since January, when the bureau announced a probe of 14 mortgage lenders.

While the bureau will not comment on the companies that are under investigation, two Justice Department officials confirmed to ABC News reports in last week's Wall Street Journal that Countrywide Financial is under investigation.

FBI and Justice Department officials declined to comment on any open cases after the recent troubles of investment bank Bear Stearns, which JPMorgan Chase bailed out earlier this week by purchasing the company.

But in an interview with the Reuters news service Tuesday, Neil Power, section chief of the FBI's Economics Crimes Unit, alluded to a possible probe, saying, "Common sense would indicate that we would look at something that big."

"The problem is that banks weren't doing their due diligence," Power said.

Although Justice Department officials declined to specifically address a possible Bear Stearns inquiry, the investment bank noted in a Jan. 29 filing with the Securities and Exchange Commission that federal investigators were looking at the operations of its hedge funds, which heavily invested in subprime lending and debt obligations.

The filing noted that Bear Stearns "has also been contacted by and received requests for information and documents from various federal and state regulatory and law enforcement authorities" about one such fund, which both the Justice Department and the Massachusetts Secretary of State's Office are investigating.

"The company has received requests for information from various regulatory and governmental entities relating to subprime mortgages, mortgage securitizations, collateralized debt obligations and synthetic products related to subprime mortgages. The company is cooperating with the requests," the documents said.

Shortly after the probe was disclosed by the Wall Street Journal in December, Ralph Cioffi, the manager of two structured credit hedge funds at Bear Stearns, left the company. Cioffi stayed with Bear as an adviser after the funds filed for bankruptcy in July 2007.

Contacted by ABC News, an attorney for Cioffi declined to comment on the matter.

There are currently several lawsuits filed by investors against Bear for its management practices concerning those funds. The suit filed by the Massachusetts Secretary of State alleges Bear Stearns Asset Management inadequately managed investors' funds by devising a set of increasingly complex deals that they did not clear with top Bear Stearns directors. The fund crumbled as the subprime credit industry unraveled.

E-mails obtained as part of the Massachusetts lawsuit indicate the trouble the Bear Stearns funds were encountering.

"Time is of the essence. … We have: 2 hedge funds (1.5 billion on capital) that are in danger of a wipe out because of a lack of liquidity," then-Chief Operating Officer Matthew Tannin wrote in an May 26, 2007 e-mail to Cioffi.

"This is the problem. There is simply no market. Too many variables," Tannin wrote. "But there is another solution. We can construct a package -- that is really a 'synthetic sale.'"

Though the list of companies under investigation has grown, one FBI official said the number of firms under investigation is "fluid," as some of them may not pan out, some of them might close and more firms could come under scrutiny as these long-ranging investigations continue.

The FBI Criminal Investigative Division currently has 1,253 mortgage fraud investigations into all types of mortgage fraud and schemes around the country, including illegal property flipping, home equity schemes and check fraud cases.

"The corporate fraud cases are pretty large entities," Power told Reuters, adding that the time frame for such investigations could stretch on. "I would think we're looking at years," he said.