Va. sues banks for $1.15 billion for allegedly defrauding taxpayers during mortgage crisis

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Source - Richmond Times-Dispatch

Virginia has filed a lawsuit seeking $1.15 billion in damages against 13 of some of the largest commercial banks in the world for allegedly committing fraud against taxpayers in the commonwealth during the real estate bubble that led the country into recession.

“Banks were packing mortgages into securities or bundles of mortgages at a breakneck pace, selling them off to investors as sturdy, solid, top-rated investments that would continue to rise in value,” Attorney General Mark R. Herring told reporters Tuesday in a news conference at the John Marshall Courthouse in Richmond.

A lot of these mortgages, Herring said, were “risky, sub-prime loans,” and in their haste to create and sell more and more of these securities, “some large commercial banks lied about the poor quality of these risky mortgages when they packaged them into securities.”

The banks, which include Barclays Capital Inc.; Citigroup; Morgan Stanley; WAMU Capital; Deutsche Bank; and Goldman Sachs & Co., are accused of fraudulently misleading the Virginia Retirement System during the sale of residential mortgage-backed securities to the state retirement fund.

“These securities were ticking time bombs that a lot of banks tried to get off their books as soon as possible,” Herring said. “As we now know, it was just a matter of time that these toxic mortgage-backed securities exploded in a catastrophic way, as we fell into the worst economic crisis in generations.”

The securities were purchased starting in 2004. By 2010, Virginia was forced to sell most of these toxic securities and lost $383 million, according to a news release sent out by the Attorney General’s Office.

Two-thirds of the money funding VRS comes from investment income. The remainder comes from contributions from state and local government employers, who pay about 66 percent of the contributions, and state and local government employees, who pay about 33 percent of contributions to the system. VRS covers about 600,000 state employees, teachers and local government workers.

VRS spokeswoman Jeanne Chenault said any comment on litigation would have to come from the AG’s office.

The Virginia Retirement System has assets now valued at $66 billion and unfunded liabilities of $26.5 billion over 30 years. A settlement presumably could help fill some of the liability.

The lawsuit differs from most others that have resulted from the financial crisis in that it was brought under the Virginia Fraud Against Taxpayers Act. Most other lawsuits of this type are brought under federal securities laws, said Quinn Curtis, an associate professor of law at the University of Virginia.

“The fact that this statute creates the potential for treble damages puts a lot of pressure on the banks to try and resolve this case,” Curtis said.

A spokesman for Goldman Sachs said the company has no comment.

The alleged fraud affects “every single taxpayer in the commonwealth,” not just state employees, Herring said. “Every Virginian felt the pain; homes were lost, retirement accounts were devastated, small businesses saw their credit dry up overnight, and vulnerable systems lost needed services as state and federal budgets were slashed.”

Carl Tobias, a professor at the University of Richmond School of Law, said this litigation is important to the VRS and Virginia taxpayers.

“Many of the defendants or their subsidiaries have been accused of fraud in the sale of (residential mortgage-backed securities), and several have already settled with the federal government on terms very favorable to the U.S.,” Tobias said. “For example, they have agreed to pay billions and to have a monitor follow their future activities, while the federal government has reserved the right to pursue criminal charges against the entities in the future.”

Virginia is not the only state seeking such remedies.

On Monday, a law firm that represents the Wyoming State Treasurer’s Office and the Wyoming Retirement System announced a $340 million proposed settlement of class-action claims against six underwriters of IndyMac mortgage-based securities.

The proposed settlement “would result in one of the largest federal class-action recoveries for investors in mortgage-backed securities,” said a statement from the law firm of Berman DeValerio, the law firm that represents the Wyoming offices, the lead plaintiffs in that case.

Under the Fraud Against Taxpayers Act, all information pertaining to the Virginia lawsuit was sealed until Tuesday, Herring said. The accused banks will now have the opportunity to respond and possible negotiate terms for a settlement.

“If the case is not settled, it would be one of the largest suits ever filed in a Virginia state court,” Tobias said.

Herring said that earlier this year, his office was tipped off by a whistle-blower — a company called Integra, a financial analysis and modeling firm in Texas, which matched the securities with the underlying mortgages and properties.

“We have been examining the evidence for months, and it clearly shows that these banks misrepresented these securities in order to entice the commonwealth into purchasing the investments,” Herring said.

In total, it is estimated that nearly 40 percent of the mortgages in the securities sold to Virginia were fraudulently misrepresented in a way that made them significantly higher risk of a default, Herring said.

“The-loan-to-value ratio of many mortgages was misrepresented. Many mortgages exceeded 80 percent of the value of the property, and in many cases the mortgage of the properties were underwater and exceeded the value of the property,” he added.

The lawsuit is complex and is expected to “take a long time,” Herring said.

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