One of the criticisms I have issued at New York Attorney General Eric Schneiderman’s lawsuit against JPMorgan Chase was that it was filed so late, it allowed much of the statute of limitations to run out, in the process capturing just a small sliver of the actions of Bear Stearns in their issuance of mortgage backed securities. Furthermore, if this was the model suit, Schneiderman had even less time to file the rest without losing nearly all of the legal exposure on the MBS deals, which petered out around mid-2007.

However, it turns out that Schneiderman signed tolling agreements with 12 firms, including JPMorgan Chase. This means that the clock on the statute of limitations stops for a prescribed time.

New York Attorney General Eric Schneiderman is looking into the mortgage securities practices of at least a dozen financial institutions that have agreed to suspend a deadline for him to bring fraud claims, according to a person familiar with the matter.

Schneiderman, who sued JPMorgan Chase & Co. (JPM) this week for defrauding mortgage bond investors, has so-called tolling agreements with 12 institutions that preserve claims that could expire during a state investigation, according to the person, who declined to be named because the matter isn’t public [...]

The tolling agreements, reached this year, stop the clock on the six-year statute of limitations and ensure Schneiderman can bring civil fraud claims against banks for conduct going as far back as 2006, said the person. The agreements don’t necessarily mean that suits will be filed, the person said.

Actually, they create a strong possibility that other cases won’t be filed, or that they will be filed in a very narrow fashion.

A financial firm or any other defendant doesn’t allow a tolling agreement out of the goodness of its heart. It comes out of a negotiated process. The prosecutor gets to stop the clock on the statute of limitations but must give up something in return. Maybe they’re given the opportunity to stop Schneiderman from filing a case at all, or maybe they’ve moved immediately to the settlement phase. Or maybe Schneiderman got the tolling agreement in exchange for agreeing not to prosecute or name any individuals in the cases. A tolling agreement isn’t free, in other words. And it would be good to know the cost of this.

I still have to call into question the need for a tolling agreement, the equivalent of filing an extension with the IRS. As evidenced in the JPMorgan filing, there are no new or innovative legal theories here. The NY AG built off work done by private litigants, work that JPMorgan Chase’s lawyers have handled for years now, and which they know implicitly. It would have been both better for the case and would have made an agreement of this type unnecessary to charge earlier.

Meanwhile, the existence of a tolling agreement can be time-limited in its own right. It doesn’t stop the clock forever. And the other unknown is whether federal participants in the RMBS working group also have agreements in hand. If not, they could see their ability to prosecute go away, not that they’re doing anything with that.