Daily Management Review

For Mortgage Securities Fraud, U.S. Sues Barclays, Ex-executives


For Mortgage Securities Fraud, U.S. Sues Barclays, Ex-executives
In the sale of mortgage-backed securities during the run-up to the 2008-09 financial crisis, Barclays Plc and two former executives were sued by the U.S. Department of Justice on civil charges of fraud.
Sources told media that after Barclays resisted a penalty the U.S. government had sought in settlement negotiations, the lawsuit against it was filed.
To settle similar claims over misconduct in the sale and pooling of mortgage securities, which helped to cause the financial crisis, major U.S. banks, including JPMorgan Chase & Co and Bank of America Corp, have paid tens of millions of dollars.
According to company disclosures, among a handful of European banks still under investigation by the Justice Department was Barclays. Deutsche Bank and Credit Suisse have agreed to settlements.
According to the lawsuit filed in U.S. District Court in Brooklyn, the quality of loans underlying tens of billions of dollars of mortgage-backed securities between 2005 and 2007 were not disclosed to customers and this is the accusation against Barclays.

The complaint said that loans were based on inflated home appraisals and had been made to borrowers with no ability to repay. More than half the underlying loans in $31 billion worth of mortgage loans pooled into 36 deals defaulted according to the lawsuit.
"With this filing, we are sending a clear message that the Department of Justice will not tolerate the defrauding of investors and the American people," U.S. Attorney General Loretta Lynch said in a statement.
It has an obligation to defend against "unreasonable allegations and demands” and the claims in the lawsuit are "disconnected from the facts", Barclays said in a separate statement.
There were no comments from the bank or the Justice Department.
In regular trading on Thursday, the London-based bank's U.S.-traded shares ended down 1.8 percent at $11.07.
Barclays has not made a specific provision for the mortgage probe but has set aside $3.1 billion to generally cover litigation and penalties.
JPMorgan analysts have said that the bank's core capital ratio could be impacted by a settlement in excess of $1.5 billion as it would lead to increased provisions.
The complaint targets two former executives: John T. Carroll and Paul Menefee, both former managing directors at Barclays Capital units, in addition to Barclays and its affiliated companies.
The complaint said that Central to the alleged scheme were Menefee, the banker in charge of due diligence on the subprime deals, and Carroll, Barclays' head subprime trader in the run-up to the housing crisis. Both stand accused of intentionally making false representations.
Carroll told Menefee to "just leave them in,” according to the lawsuit, when asked about 40 loans already delinquent before a deal closed, for instance, Carroll told Menefee to "just leave them in,” according to the lawsuit, and Menefee did. He complaint said that investors and credit ratings agencies were falsely represented by Menefee, who blamed the delinquent loans on fraud, and claimed that the deal did not contain such delinquent loans.
The complaint was called a "misguided attempt" to blame his client and others for losses that resulted from the collapse of the U.S. housing market by Barry Berke, a lawyer for Menefee, 47, of Austin, Texas.
A lawyer for Carroll, 49, of Port Washington, New York, did not return a call for comment.

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