-SEC investigating loans that were packaged into securities
-Agency says R.R. Donnelley hasn't fully complied with subpoena
to hand over documents
-Mortgage-securities suits helped push ResCap into
bankruptcy
(Adds details about SEC investigation in third paragraph, R.R.
Donnelley comments in seventh and eighth paragraphs, details about
mortgage-securities investigations in 10th, 11th and 12th
paragraphs and details beginning in third paragraph.)
By Andrew Ackerman and Andrew R. Johnson
WASHINGTON--The Securities and Exchange Commission is
investigating the bankrupt mortgage subsidiary of Ally Financial
Inc., as part of a probe into possible fraud related to the unit's
loan-origination and underwriting practices.
In court filings, the SEC said it is examining Residential
Capital LLC loans that were bundled into mortgage-backed
securities. The agency said it began a formal investigation into
ResCap on Feb. 22.
The agency said it is "investigating ResCap's origination and
underwriting practices" for the approval of loans that were tied to
mortgage-backed securities. The SEC is looking at the credit
quality of the loans as well as the "creditworthiness of borrowers
on loans underlying offerings" of the securities, according to a
court document.
The SEC documents were filed Monday in U.S. District Court for
the Central District of California as part of a request by the
agency to force R.R. Donnelley & Sons Co. (RRD) to turn over
documents it drafted as part of due diligence for the banks that
underwrote the securities, according to the filings. The reports
looked at whether the loans packaged into securities met ResCap's
underwriting standards, the SEC said.
The SEC subpoenaed R.R. Donnelley in June, but the company
refused to comply fully with the subpoena, the agency said.
"Donnelley's continued refusal to comply with the subpoena is
hindering the Commission staff's efforts to determine what, if any,
violations of the securities laws have occurred or continue to
occur," the SEC said in one of the filings.
Doug Fitzgerald, executive vice president of communications for
R.R. Donnelley, stressed the firm had already handed over redacted
documents to the SEC. He said a judge should decide if it can
release unredacted versions.
"We'll respond promptly with additional information as specified
by the judge," he said.
Spokeswomen for Ally and ResCap declined to comment, as did a
spokesman for the SEC.
Federal and state regulators announced the formation of the
Residential Mortgage-Backed Securities Working Group, a joint
effort to pursue potential wrongdoings in the mortgage-backed
securities market.
Wells Fargo & Co. (WFC) agreed earlier this month to pay
more than $6.5 million to settle charges by the SEC that the bank's
brokers didn't properly disclose to customers the risk of mortgage
securities.
Other banks, including Goldman Sachs Group Inc. (GS) and J.P.
Morgan Chase & Co. (JPM) have also paid the SEC after
allegation of insufficient disclosures tied to mortgage-related
investments.
ResCap, once one of the largest subprime lenders in the country,
filed for Chapter 11 bankruptcy on May 14 as litigation over faulty
mortgage securities mounted and bond-related payments loomed. Ally,
which isn't part of the bankruptcy, hopes that ResCap's filing will
allow it to sever itself from costly litigation that has been a
drag on the company and focus solely on its core auto-lending and
online-banking operations.
ResCap said in a bankruptcy court filing in May that 27 lawsuits
regarding mortgage-backed securities had been filed against it as
well as related companies that aren't part of the bankruptcy,
including Ally and its bank subsidiary. A major component of the
mortgage lender's bankruptcy is a proposed $8.7 billion settlement
ResCap has reached with various MBS investors.
Ally is the former in-house financing arm for General Motors Co.
(GM) and is 74% owned by the U.S. government after receiving more
than $17 billion in bailout funds during the financial crisis.
Reuters reported on the SEC investigation earlier Tuesday.
-Joseph Checkler contributed to this article.
Write to Andrew Ackerman at andrew.ackerman@dowjones.com and
Andrew R. Johnson at andrew.r.johnson@dowjones.com