Issues pertaining to the pre-crisis business conducts continue to trouble major global banks. Units of Citigroup Inc. (C), Deutsche Bank AG (DB), Bank of America Corp. (BAC), The Goldman Sachs Group Inc. (GS), Credit Suisse AG (CS), HSBC Holdings plc (HSBC), Morgan Stanley (MS) and JPMorgan Chase & Co. (JPM) were among the 13 banks sued by the state of Virginia. The complaint accused these banks of selling inferior mortgage bonds fraudulently to the state’s retirement fund between 2004 and 2010.
The lawsuit was filed in January under the provisions of the Virginia Fraud Against Taxpayers Act by Texas-based financial modeling and analysis firm – Integra REC LLC, and was later joined by the state of Virginia. However, it was disclosed publicly on Tuesday.
Allegations
The state alleged that these banks issued misleading statements with omissions related to the sale of residential mortgage-backed securities and concealed risks associated with these securities. Virginia Retirement System claims that the documents used for offering the securities contained fraudulent statements regarding the risks associated with the investments. Misinterpretation of these risks led to the investments, which incurred losses.
Distorted documents included misrepresenting number of loans with high loan-to-value ratios along with owner occupancy rates. Further, a percentage of homes with second mortgages were also misrepresented.
Notably, 40% of the mortgages which backed 220 securities purchased by the fund between 2004 and 2010 were fraudulently misrepresented. The state’s attorney general – Mark Herring claimed the lost value of fund at $383 million and demanded $1.15 billion from the banks as damages. Moreover, Virginia is seeking $5,500 to $11,000 per violation as civil penalty. Further, on the closure of the case, Integra is liable to get 15–25% of the recovered amount under Virginia law.
Conclusion
For these banks, the above-mentioned lawsuit is an additional burden to their ongoing legal problems. Further, banks across the globe have been facing increasing scrutiny for their business practices in the years prior to the financial crisis. Many of the banks have paid billions of dollars as fines and compensation to settle lawsuits and probes.
In the less than a year, the banking regulators have been able to settle three major mortgage issues. Last month, BofA finally reached a $16.65 billion settlement with the U.S. Department of Justice (DOJ), a few other regulators and Attorneys General (AGs) of six states. JPMorgan had announced a $13 billion-settlement to clear similar charges in Nov 2013. This was followed by Citigroup’s mortgage accord of $7 billion in Jul 2014.
Many investors have lost their hard-earned money as a result of such business malpractices by the banks. These lawsuits and their success will restore their confidence in law-enforcement agencies.
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