Barclays sued by DOJ for fraud in sale of mortgage-backed securities

Barclays PLC, whose subsidiary bought naming rights to the Barclays Center, has a history of sketchy behavior, including civil and criminal penalties that, as I argued, should have stripped the arena of the Barclays name.

Now there's more to stain the bank's name, a civil complaint that seems destined to lead to a major fine, if not necessarily the sum sought by federal authorities.

A 12/22/16 U.S. Department of Justice press release, United States Sues Barclays Bank to Recover Civil Penalties for Fraud in the Sale of Residential Mortgage-Backed Securities:

The United States Department of Justice today filed a civil complaint in the Eastern District of New York against Barclays Bank PLC and several of its United States affiliates (together, Barclays), alleging that Barclays engaged in a fraudulent scheme to sell residential mortgage-backed securities (RMBS) supported by defective and misrepresented mortgage loans. As alleged in the complaint, from 2005 to 2007, Barclays personnel repeatedly misrepresented the characteristics of the loans backing securities they sold to investors throughout the world, who incurred billions of dollars in losses as a result of the fraudulent scheme. The suit also names as defendants two former Barclays executives: Paul K. Menefee, of Austin, Texas, who served as Barclays’ head banker on its subprime RMBS securitizations, and John T. Carroll, of Port Washington, New York, who served as Barclays’ head trader for subprime loan acquisitions.

The detailed allegations in the complaint describe Barclays’, Menefee’s, and Carroll’s misconduct in connection with RMBS securitizations Barclays underwrote between 2005 and 2007. The complaint alleges violations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), based on mail fraud, wire fraud, bank fraud, and other misconduct. FIRREA authorizes the Attorney General to seek civil penalties up to the amount of the gain to the violator or the losses suffered by persons other than the violator.
...“The widespread fraud that investment banks like Barclays committed in the packaging and sale of residential mortgage-backed securities injured tens of thousands of investors and significantly contributed to the Financial Crisis of 2008,” said Principal Deputy Associate Attorney General Bill Baer. “Millions of homeowners were left with homes they could not afford, leaving entire neighborhoods devastated. The government’s complaint alleges that Barclays fraudulently sold investors RMBS full of mortgages it knew were likely to fail, all while telling investors that the mortgages backing the securities were sound. Today’s complaint makes clear that the Department of Justice will continue to hold financial institutions, and the individuals who work for them, fully accountable for harming investors and the American public.”

(Emphases added)

More from the press release:

As alleged in the complaint, from 2005 through 2007, Barclays, through Menefee and Carroll among others, fraudulently sold tens of billions of dollars of RMBS, and repeatedly misled investors about the quality of the mortgages backing those deals. The alleged scheme involved no fewer than 36 RMBS deals, securitizing over $31 billion worth of subprime and Alt-A mortgage loans. The complaint alleges that in publicly-filed offering documents and in direct communications with investors and rating agencies, Barclays systematically and intentionally misrepresented key characteristics of the loans it included in these RMBS deals.

A negotiation, but not close enough

Bloomberg summarized it 12/23/16 as Barclays Dared U.S. to Sue Over Mortgages, a Faceoff Long Coming, noting that the bank had negotiated with prosecutors on a settlement, but couldn't come to agreement--and that the complaint quotes "consultants who privately called the underlying loans 'craptacular.'"

Bloomberg noted that Deutsche Bank had agreed on a "preliminary $7.2 billion deal with the Justice Department" and Credit Suisse will pay $5.28 billion, while Barclays has set $2 billion as its ceiling. (Those sums include civil penalties and consumer relief.)

The Barclays strategy? Bloomberg suggested that either the incoming administration will be more lenient or that the current one might compromise as it finally winds down.