Last week, 11 Wall Street banks agreed to pay more than $63 million to settle claims brought against them by the Commonwealth under the Virginia Fraud Against Taxpayers Act. Brought by the Virginia attorney general, the suit originally sought $1.15 billion against the banks for alleged misrepresentation of the quality of residential mortgage-backed securities (“RMBS”) sold to the Virginia Retirement System between 2004 and 2010. Although the alleged damages totaled $383 million, with $250.6 million in realized losses, the amount sought was trebled pursuant to the state fraud statute.
The alleged fraud was first reported to the Commonwealth by Integra REC LLC, a financial modeling company that examined the RMBS and the underlying properties that served as collateral. The complaint alleged, among other things, that the defendants misrepresented the loan-to-value ratio of the 785,000 mortgages securitized into the 220 relevant securities. For example, the banks claimed that only 23 percent of such mortgages were made for more than 80 percent of the value of the underlying properties, when in fact 54 percent of the mortgages had a loan-to-value ratio in excess of 80 percent. Additionally, more than 15 percent of the underlying properties were underwater; those mortgages exceeded the total value of the underlying properties.
As announced by Attorney General Mark R. Herring, Bank of America entities Merrill Lynch, Pierce, Fenner & Smith, and Countrywide agreed to pay a combined $19.5 million; RBS agreed to pay $10 million; Barclays agreed to pay $9 million; Morgan Stanley agreed to pay $6.9 million; Deutsche Bank agreed to pay $5.6 million; Citigroup agreed to pay $4.8 million; Goldman Sachs agreed to pay $2.9 million; HSBC agreed to pay $2.5 million; Credit Suisse agreed to pay $1.2 million; and UBS agreed to pay $850,000. None of the defendants admitted liability, and the suit was dismissed with prejudice.