United States Sues Barclays Bank To Recover Civil Penalties For Fraud In The Sale Of Residential Mortgage-Backed Securities

BROOKLYN, NY – Earlier today, this Office filed a civil complaint against Barclays Bank plc and several of its United States affiliates (together, Barclays), alleging that Barclays caused billions of dollars of losses to investors by engaging in a fraudulent scheme to sell residential mortgage-backed securities (RMBS) supported by defective and misrepresented mortgage loans.  As alleged in the complaint, from 2005 to 2007, Barclays personnel repeatedly misrepresented the characteristics of the loans backing securities they sold to investors throughout the world, who incurred billions of dollars in losses as a result of the fraudulent scheme.  The suit also names as defendants two former Barclays executives:  Paul K. Menefee, of Austin, Texas, who served as Barclays’ head banker on its subprime RMBS securitizations, and John T. Carroll, of Port Washington, New York, who served as Barclays’ head trader for subprime loan acquisitions.

The filing was announced by Attorney General Loretta E. Lynch, Robert L. Capers, United States Attorney for the Eastern District of New York, Bill Baer, Principal Deputy Associate Attorney General, Benjamin C. Mizer, Principal Deputy Assistant Attorney General for the Department of Justice’s Civil Division, and Steven Perez, Special Agent in Charge at the Federal Housing Finance Agency Office of the Inspector General (FHFA-OIG).

The detailed allegations in the complaint describe Barclays’, Menefee’s, and Carroll’s misconduct in connection with RMBS securitizations Barclays underwrote between 2005 and 2007.  The complaint alleges violations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), based on mail fraud, wire fraud, bank fraud, and other misconduct.  FIRREA authorizes the Attorney General to seek civil penalties up to the amount of the gain to the violator or the losses suffered by persons other than the violator.

“Financial institutions like Barclays occupy a position of vital public trust,” said Attorney General Lynch.  “Ordinary Americans depend on their assurances of transparency and legitimacy, and entrust these banks with their very livelihood.  As alleged in this complaint, Barclays jeopardized billions of dollars of wealth through practices that were plainly irresponsible and dishonest.   With this filing, we are sending a clear message that the Department of Justice will not tolerate the defrauding of investors and the American people.”

“Investors who bought RMBS from Barclays, and who suffered catastrophic losses as a result, included individuals and institutions that form the backbone of our communities,” said United States Attorney Capers.  “Credit unions, pension plans, charitable and religious organizations, university endowments, and financial institutions, among others, including many in this district, invested tens of billions of dollars in securities that Barclays repeatedly assured them were safe investments.  Instead of ensuring that their representations to investors were accurate and transparent, so that investors could make properly informed investment decisions, Barclays and its employees repeatedly misled investors and kept to themselves critical information about the loans in the deals.  Time and again, they knowingly chose to put investors at risk of harm in pursuit of additional profits.  Barclays must be held accountable for its rampant fraud in marketing and selling these RMBS, and so must the individuals at the heart of the fraudulent scheme.”

“The widespread fraud that investment banks like Barclays committed in the packaging and sale of residential mortgage-backed securities injured tens of thousands of investors and significantly contributed to the Financial Crisis of 2008,” said Principal Deputy Associate Attorney General Baer.  “Millions of homeowners were left with homes they could not afford, leaving entire neighborhoods devastated.  The government’s complaint alleges that Barclays fraudulently sold investors RMBS full of mortgages it knew were likely to fail, all while telling investors that the mortgages backing the securities were sound.  Today’s complaint makes clear that the Department of Justice will continue to hold financial institutions, and the individuals who work for them, fully accountable for harming investors and the American public.”

“What is now often referred to as the ‘Great Recession’ started with the bursting of the housing bubble, followed by an enormous drop in U.S. home values, hundreds of bank failures, significant turbulence in financial markets, trillions of dollars of losses to investors, and, most devastatingly, a huge wave of home foreclosures,” said Principal Deputy Assistant Attorney General Mizer, the head of the Justice Department’s Civil Division.  “All of these injuries, and more, were caused at least in part by the type of misconduct alleged in this lawsuit.  We will continue holding both banks and their executives responsible for their role in contributing to this unfortunate period in our history.”

“As the complaint alleges, Barclays knowingly sold investors RMBS backed by loans it knew were made to borrowers who were not creditworthy and which were supported by house appraisals it knew were inflated,” said Special Agent in Charge Perez of FHFA-OIG.  “The massive losses caused by the fraudulent behavior alleged in the complaint deeply affected not only banks and other financial institutions, including Federal Home Loan Banks, Fannie Mae, and Freddie Mac, but also the American taxpayer.  We will continue to work with our law enforcement partners to hold those who have engaged in misconduct fully accountable for their actions.”

As alleged in the complaint, from 2005 through 2007, Barclays, through Menefee and Carroll among others, fraudulently sold tens of billions of dollars of RMBS, and repeatedly misled investors about the quality of the mortgages backing those deals.  The alleged scheme involved no fewer than 36 RMBS deals, securitizing over $31 billion worth of subprime and Alt-A mortgage loans.  The complaint alleges 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.

The United States alleges that in selling certificates in these deals, Barclays assured investors that it had excluded “unacceptable” loans and that the loans in the deals had been underwritten under loan origination guidelines intended to ensure the borrowers’ ability to pay.  The complaint alleges Barclays represented to investors that property appraisals were reliable and that the properties were worth enough to avoid loss in the event of default.  Barclays told investors that it conducted “robust,” “thorough,” and “comprehensive” due diligence on the loan pools it securitized, and that it did not securitize non-compliant, delinquent, or “scratch and dent” loans.

As alleged in the complaint, these statements were false.  In reality, the complaint alleges, Barclays’ due diligence on these RMBS deals was a sham.  When it did not skip due diligence altogether, Barclays routinely ignored or kept to itself due diligence results that showed the bank that a considerable percentage of the loans in the deals did not conform to the representations it made to investors.  According to the complaint, Barclays sought to maximize the number of loans it securitized, regardless of how poor the quality of the loans.

The United States alleges that Barclays securitized thousands of loans (worth billions of dollars) that its due diligence vendors graded as materially defective, as well as hundreds more that were delinquent or in default at the time of securitization.  Its vendors told it that large percentages of the loans they reviewed violated the lenders’ underwriting guidelines or the relevant law, or involved borrowers who lacked the ability to repay.  Its vendors also told Barclays that the appraised values of significant percentages of the mortgaged properties were overstated and that thousands of those properties were underwater when they were securitized – meaning the properties were worth less than the loans on the properties.  The complaint alleges that Barclays employees, including Menefee and Carroll, ignored or knowingly overrode these findings, waiving thousands of bad loans into the deals.  On a number of occasions, Barclays even recycled into its deals defective loans it had kicked out of previous deals, without conducting any additional due diligence on the loans. 

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, mortgaged properties were systematically worth less than what Barclays represented to investors.  The deals were dismal failures, as more than half of the underlying residential mortgages defaulted, resulting in billions of dollars in losses to investors.  Even investors in AAA-rated tranches of these securities, which were rated as safe as investments in U.S. Treasury bonds, suffered or will suffer significant losses.

Menefee and Carroll were central to Barclays’ allegedly fraudulent scheme.  Menefee was the head banker in charge of due diligence and securitization on all of Barclays’ subprime deals, and he decided which loans would be subject to due diligence, as well as which loans would be removed from loan pool purchases.  Carroll was the head trader on all of Barclays’ principal subprime deals, and he determined which subprime loan pools Barclays would bid on, at what price, and on what terms.  As alleged in the complaint, both men made representations about the characteristics of the loans backing the securities that they knew were false when they made them.

The government’s case is being handled by this Office’s Civil Division.  Senior Counsel F. Franklin Amanat, and Assistant United States Attorneys Katharine E.G. Brooker, Evan P. Lestelle, and Josephine M. Vella are in charge of the prosecution.  They are assisted by the Fraud Section of the Commercial Litigation Branch of the Justice Department’s Civil Division, as well as attorneys, analysts, and other individuals assigned to the Department of Justice’s RMBS Working Group, which also includes special agents from the FHFA-OIG.  Mr. Capers thanks the FHFA-OIG for its assistance in conducting the investigation in this matter.

The complaint was filed under the auspices of the President’s Financial Fraud Enforcement Task Force, which was created in November 2009 to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes.  Since its formation, the Task Force has made great strides in facilitating investigation and prosecution of financial crimes; in enhancing coordination and cooperation among federal, state, and local authorities; in addressing discrimination in the lending and financial markets; and in conducting outreach to the public, to victims, to financial institutions, and to other organizations.    

The RMBS Working Group, part of the Task Force, was established by the Attorney General in late January 2012.  The Working Group has been dedicated to initiating, organizing, and advancing new and existing investigations by federal and state authorities into fraud and abuse in the RMBS market that helped precipitate the 2008 Financial Crisis.  The Working Group has to date recovered tens of billions of dollars in civil penalty settlements and consumer relief from banks and other entities that are alleged to have committed fraud in connection with the issuance of RMBS.  To report RMBS fraud, go to: http://www.stopfraud.gov/rmbs.html.

The Individual Defendants:

PAUL K. MENEFEE
Age:  47
Residence:  Austin, Texas

JOHN T. CARROLL
Age:  49
Residence:  Port Washington, New York

E.D.N.Y. Docket No. 16-CV-7057 (KAM/RLM)