Barclays Resolves Claims with DOJ for Fraud in the Sale of Residential Mortgage-Backed Securities
On March 29, 2018, the United States Department of Justice (“DOJ”) issued a press release which reported that the United States has reached an agreement with Barclays Capital, Inc. and several of its affiliates (“Barclays”) to settle a civil action filed in December 2016 in which the United States sought civil penalties for alleged conduct related to Barclays’ underwriting and issuance of residential mortgage-backed securities (“RMBS”) between 2005 and 2007. DOJ said Barclays will pay the United States $2,000,000,000 in civil penalties in exchange for dismissal of the Amended Complaint
Following a three-year investigation, the complaint in the action alleged that Barclays caused billions of dollars in losses to investors by engaging in a fraudulent scheme to sell 36 RMBS deals, and that Barclays misled investors about the quality of the mortgage loans backing those deals. The complaint alleged violations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, based on mail fraud, wire fraud, bank fraud, and other misconduct.
An agreement also has been reached with the two former Barclays executives who were named as defendants in the suit. One defendant is Paul K. Menefee (“Menefee”) who served as Barclays’ head banker on its subprime RMBS securitizations; the other defendant is John T. Carroll (“Carroll”) who served as Barclays’ head trader for subprime loan acquisitions. In exchange for dismissal of the claims against them, Menefee and Carroll agree to pay the United States the combined sum of $2,000,000 in civil penalties.
The scheme alleged in the complaint involved 36 RMBS deals in which over $31 billion worth of subprime and Alt-A mortgage loans were securitized, more than half of which defaulted. The complaint alleged that in publicly-filed offering documents and in direct communications with investors and rating agencies, Barclays systematically and intentionally misrepresented key characteristics of the loans it included in these RMBS deals. Generally, the borrowers whose loans backed these deals were significantly less creditworthy than Barclays represented, and these loans defaulted at exceptionally high rates early in the life of the deals. Additionally, as alleged in the complaint, the mortgaged properties were systematically worth less than what Barclays represented to investors.