US banking giant JP Morgan Chase has been hit with a lawsuit by the New York Attorney General for allegedly defrauding investors of more than 20 billion dollars through mortgage-backed securities sold by Bear Stearns.

JP Morgan, which bought ailing investment bank Bear Stearns in March 2008, said it would contest the allegations, which are based on deals done between 2005 and 2007.

It said the civil action related entirely to Bear Stearns, which it acquired "over the course of a weekend at the behest of the US government".

Mortgage-backed securities were the financial products that were at the heart of the global financial crisis.

Each security was linked to pools of US mortgage loans, some of which were sub-prime, despite being given a clean bill of health by ratings agencies.

The Attorney General claims Bear Stearns defrauded investors by assuring them the loans the firm was bundling up had been stringently vetted.

"Rather than carefully reviewing loans for compliance with underwriting guidelines, defendants instead implemented and managed a fundamentally flawed due diligence process that often, and improperly, gave way to originators' demands," The Attorney General's claim said.

The legal action said Bear Stearns "systematically failed to fully evaluate the loans, largely ignored the defects that their limited review did uncover, and kept investors in the dark about both the inadequacy of their review procedures and the defects in the underlying loans".

JP Morgan will now begin the fight against the claim for an undisclosed amount of damages "caused, directly or indirectly, by the fraudulent and deceptive acts".

"We're disappointed that the New York A.G. decided to pursue its civil action without ever offering us an opportunity to rebut the claims and without developing a full record — instead relying on recycled claims already made by private plaintiffs," said Joseph Evangelisti, JP Morgan's spokesman.

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