From: Reuters
Published January 30, 2008 11:46 PM

New York may use potent law vs mortgage banks: report

NEW YORK (Reuters) - New York Attorney General Andrew Cuomo, who is probing how Wall Street banks packaged and sold mortgage bonds, may use the same powerful state law that predecessor Eliot Spitzer wielded to secure billions of dollars in settlements from investment banks and mutual fund firms, the Wall Street Journal reported Wednesday, citing unnamed sources.

New York's 1921 Martin Act is considered one of the most potent legal tools in the United States because it broadly defines securities fraud and does not require prosecutors to prove intent.

Spitzer used the act to great effect when he targeted misleading brokerage research, improper IPO allocations and mutual fund abuses earlier this decade.

Cuomo's office is considering using the act as it investigates whether banks committed securities fraud as they packaged risky mortgages into securities, the paper said, citing people familiar with the matter.

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Clayton Holdings Inc <CLAY.O>, a company that scrutinizes mortgages for underwriters, is cooperating with Cuomo's office, the paper said.

Prosecutors want to see if underwriters failed to disclose warnings from Clayton and other firms like it about loans that didn't meet an originator's lending standards, the paper said.

Disclosing potential problems might have prompted credit-rating agencies to assign lower grades and make the bonds harder to sell.

The attorney general also is examining if Wall Street firms concealed information about shortcomings from rating agencies, the people familiar with the matter told the Journal.

The state's probe is at an early stage. So far firms receiving subpoenas include Bear Stearns Cos <BSC.N>, Deutsche Bank AG <DBKGn.DE>, Morgan Stanley <MS.N>, Merrill Lynch & Co <MER.N> and Lehman Brothers Holdings Inc <LEH.N>, the paper reported.

Officials from Cuomo's office and the banks could not be reached immediately for comment.

(Reporting by Joseph A. Giannone; Editing by Michael Urquhart)

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