WASHINGTON—Federal prosecutors are actively pursuing criminal cases against executives from Royal Bank of Scotland Group PLC and J.P. Morgan Chase & Co. for allegedly selling flawed mortgage securities, people familiar with the probes said, as the clock ticks down for bringing cases from the 2008 financial crisis. Officials are working to establish that the bankers ignored warnings from associates that they were packaging too many shaky mortgages into investment offerings and are weighing whether they can prove that constituted fraud, the people said. At RBS, prosecutors are scrutinizing a $2.2 billion deal that repackaged home mortgages into bonds in 2007, the people said. In a 2013 civil settlement with RBS, the Securities and Exchange Commission described the lead banker on that deal, whom it didn’t name, as trying to push it through over concerns of the diligence department. At J.P. Morgan, prosecutors are focusing on two people who worked on a different residential-mortgage deal, the people said. J.P. Morgan noted the existence of a criminal probe in a Nov. 2 quarterly securities filing. A spokesman declined to comment beyond that document. RBS, which neither admitted nor denied the SEC’s findings in its settlement with the agency, declined to comment for this article. In a July securities filing, the bank said the civil and criminal divisions of the Justice Department were investigating the bank’s mortgage securitizations. Some Justice Department officials said they believe they have a viable criminal case in the RBS probe, although a decision on whether to bring charges isn’t expected until early next year, the people said. The J.P. Morgan probe has long been stalled because officials have been divided over whether they have sufficient evidence to charge anyone with a crime but it has recently picked up steam, they said. If filed, the charges would be among the first pursued against specific employees of the largest Wall Street firms over the housing collapse. Since the crisis, big banks have paid billions of dollars in settlements, but the lack of convictions has sparked political controversy. Democratic presidential front-runner Hillary Clinton said in October that “too often it has seemed that the human beings responsible for corporate wrongdoing get off with limited consequences, or none at all.” The Justice Department is trying to complete any possible criminal cases against individuals by the end of President Barack Obama’s term in January 2017 and before the 10-year statute of limitations for most of the alleged infractions expires later that year. Several U.S. attorney’s offices have used funds from the bank settlements to hire additional temporary staff for mortgage-backed securities investigations. The Brooklyn, N.Y., office recently advertised four such positions that are expected to end in September 2017. The RBS and J.P. Morgan probes are the most concrete criminal investigations currently active under the effort. Most previous bank settlements tied to the financial crisis have invoked a law that gives prosecutors 10 years to pursue charges where the misconduct affected a financial institution. That essentially gives prosecutors another year or two to bring such cases. When organizing its mortgage investigations three years ago, the Justice Department assigned different banks to different U.S. attorney’s offices. J.P. Morgan was originally assigned to the Sacramento, Calif., office, which reached a $9 billion civil settlement with the bank in 2013, combined with a separate $4 billion deal between the bank and the Federal Housing Finance Agency. A few months ago, the Justice Department transferred the J.P. Morgan probe to its Manhattan office, where a case, if brought, would be filed, according to people familiar with the investigation. The Manhattan U.S. attorney’s office is home to many of the most experienced financial-crime prosecutors. The Justice Department’s Fraud Section, within the agency’s Washington-based Criminal Division, has also been brought in to assess the viability of the case, people familiar with the probe said. The J.P. Morgan criminal probe flows directly from the Sacramento civil investigation, in which prosecutors unearthed a 2007 memo written by a bank employee warning her bosses before the financial crisis hit that they were putting bad loans into securities—warnings that were ignored. That memo helped the Justice Department develop a legal basis for the then-record 2013 settlement. J.P. Morgan in that settlement neither admitted nor denied wrongdoing, but it agreed to a “statement of facts” outlining this conduct. In the private negotiations that led up to that settlement, J.P. Morgan repeatedly argued that the allegations didn’t rise to the level of a criminal case. J.P. Morgan nodded to the expanded criminal inquiry in its Nov. 2 quarterly filing with the SEC, referring for the first time to “an ongoing investigation being conducted by DOJ’s Criminal Division” and saying the bank was now dealing with “two United States Attorney’s Offices.” The document didn’t say whether the probe was targeting individuals. The RBS investigation by the U.S. attorney’s office in Boston mirrors a November 2013 civil settlement in which the bank agreed to pay $150 million to resolve SEC claims that it misled investors on a $2.2 billion subprime-mortgage offering in 2007, people familiar with the probe said. The SEC accused RBS of saying the loans were generally in compliance with the lender’s underwriting guidelines, even though the agency found almost 30% should have been kicked out because they deviated so much from guidelines. The role of the lead banker on that deal is part of the criminal investigation, the people said. Separately, prosecutors are continuing with civil investigations against banks that haven’t yet paid fines for their handling of precrisis mortgage securities. Federal prosecutors in Brooklyn are preparing such a case against UBS Group AG that could result in substantial penalties, some of the people said. UBS said in a securities filing this month that the Brooklyn U.S. attorney’s office had “identified a number of transactions…related to the bank’s mortgage-securities business from 2005 to 2007” that are “currently the focus of their inquiry.” The bank declined to comment beyond the filing.
JP Morgan and Royal Bank of Scotland (RBS) executives are reportedly being probed by federal prosecutors over their participation in the sales of flawed mortgage securities, according to a report from the Wall Street Journal, which says that the probes in question are criminal investigations. The probe revolves around whether the bankers ignored warnings that they were packing too many weak mortgages into investment offerings, and whether this constitutes as fraud. If filed, it will be the the first case where employees have been pursued over the housing collapse.