Barclays has become the latest bank to reach an agreement with the United States regarding the packaging, marketing, sale, and issuance of residential mortgage-backed securities to investors leading up to the financial crisis.
On March 29, the Department of Justice announced that Barclays Capital and several of its affiliates agreed to pay $2 billion in civil penalties in exchange for the dismissal of 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.
Following a three-year investigation, the complaint in the case, United States v. Barclays Capital, alleged that Barclays caused billions of dollars in losses to investors by engaging in a fraudulent scheme to sell 36 RMBS deals, and that it misled investors about the quality of the mortgage loans backing those deals. It alleged violations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), based on mail fraud, wire fraud, bank fraud, and other misconduct.
Agreement has also been reached with the two former Barclays executives who were named as defendants in the suit Paul Menefee, who served as Barclays’ head banker on its subprime RMBS securitizations, and John 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 million 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 loans 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.
In general, 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. In addition, as alleged in the complaint, the mortgaged properties were systematically worth less than what Barclays represented to investors. These are allegations only, which the defendants dispute, and there has been no trial or adjudication or judicial finding of any issue of fact or law.