Virginia suing 13 banks for $1.15 billion

Virginia has filed a lawsuit seeking $1.15 billion in damages against 13 banks accused of misleading the Virginia Retirement System (VRS).

The case stems from the sale of residential mortgage-backed securities to VRS from 2004 to 2010. The retirement system was forced to sell most of the securities, taking a loss of  $383 million.

“The VRS was entitled to accurate information about the underlying mortgages when making decisions on how to invest taxpayer money and contributions by employees,”  the office of Attorney General Mark Herring said in a statement. “Instead, these large banks purposefully included high-risk mortgages in securities and fraudulently misrepresented the quality of those loans to rating agencies and large investors like VRS.”

The case is the largest financial fraud action brought by the commonwealth and is the largest case ever brought under the Virginia Fraud Against Taxpayers Act.

The banks named in the suit are:

• Barclays Capital Inc.
• Citigroup Global Markets Inc.
• Countrywide Securities Corp.
• Credit Suisse Securities (USA) LLC
• Deutsche Bank Securities Inc.
• Goldman, Sachs & Co.
• RBS Securities, Inc.
• HSBC Securities (USA) Inc.
• Morgan Stanley & Co. LLC
• UBS Securities LLC
• WAMU Capital Corp.
• J.P. Morgan Securities LLC (and as current owner of Bear, Stearns & Co.)
• Merrill Lynch, Pierce, Fenner & Smith Inc. (and as current owner of Banc of America Securities LLC)

The attorney general’s office says that the banks offered the securities to VRS as stable, solid investments, but an analysis showed that nearly 40 percent of the 785,000 mortgages backing 220 securities purchased by the retirement system had a significantly higher risk for default.

The suit charges that these banks knew, or should have known, that claims they made about the quality of the mortgages were false.

The attorney general’s office said a whistleblower, Integra REC LLC, a financial modeling and analysis firm, discovered the fraud using sophisticated methods to match the securities purchased by VRS with the mortgages and properties they contained.

The case is being handled by the civil litigation division of the attorney general’s office.