Virginia sues 13 banks for $1 billion over alleged mortgage bond fraud

Reuters News
Posted: Sep 16, 2014 12:45 PM

By Gary Robertson and Aruna Viswanatha

RICHMOND Va./WASHINGTON (Reuters) - The state of Virginia said on Tuesday that it sued units of Citigroup Inc, Deutsche Bank AG and 11 other banks, accusing them of defrauding the state's retirement fund by selling it shoddy mortgage bonds in the run-up to the recent financial crisis.

The lawsuit seeks $1.15 billion in damages from the banks, who allegedly misled the Virginia Retirement System about the quality of loans in investments purchased between 2004 and 2010.

The state's attorney general said an analysis showed nearly 40 percent of the mortgages that backed 220 securities the fund purchased were fraudulently represented as posing a lower risk of default than they actually did.

Attorney General Mark Herring said the fund lost $383 million when it was forced to sell the securities.

The other banks named in the lawsuit include units of Bank of America Corp, Credit Suisse AG, Goldman Sachs Group Inc, HSBC Holdings plc, Morgan Stanley, and JPMorgan Chase & Co. Representatives of the banks either declined comment or did not immediately respond to a request for comment.

The case follows many other states' resolution of similar cases over losses that state funds suffered from pools of mortgages considered to be at the center of the 2008 financial crisis. Some of the cases were wrapped up through joint federal-state settlements with several financial institutions including Bank of America and Citigroup.

At a press conference announcing the lawsuit, Herring said a whistleblower, which he identified as financial modeling firm Integra REC, recently brought the allegations to his office. Under a law about providing evidence of defrauding Virginia taxpayers, such a whistleblower could earn between 15 to 25 percent of any recovered funds. A representative of Integra REC declined to comment on the case.

The lawsuit was unsealed Tuesday in Richmond Circuit Court.

"The message today is clear. If you try to rip off or defraud Virginia consumers or Virginia taxpayers, you will be caught and you will be held responsible," Herring said at the press conference, which was held at the courthouse.

The banks have 21 days to respond to the lawsuit.

"We are in this for the long haul," Herring said.

(Reporting by Gary Robertson in Richond and Aruna Viswanatha in Washington, with additional reporting by Lauren Tara LaCapra in New York; Editing by Chizu Nomiyama)