washingtonpost.com | September 17, 2014
By Danielle Douglas and Laura Vozzella
Virginia Attorney General Mark R. Herring on Tuesday announced a $1.15 billion lawsuit against 13 of the nation’s biggest banks, accusing them of misleading a state retirement fund about the quality of bonds made up of residential mortgages.
The lawsuit, unsealed in Richmond Circuit Court, is the largest financial fraud action ever brought by the state of Virginia. It mirrors legal actions being taken across the country by attorneys general seeking redress for state pension funds that were ravaged by the financial crisis.
“These securities were financial time bombs that a lot of banks tried to get off their books as soon as possible,” Herring said during a news conference. “And some of them provided .?.?. investors with information they knew or should have known was false in order to lure them into buying these new investments.”
Herring said the banks — including JPMorgan Chase, Citigroup and Credit Suisse — knowingly packaged faulty home loans into securities they sold to the Virginia Retirement System (VRS). The pension fund, which counts 600,000 members on its rolls, purchased 220 residential-mortgage-backed securities starting in 2004. When the financial markets tanked and the value of those bonds took a nose dive, the fund was forced to sell the vast majority of the securities and lost $383 million.
Once a brisk business for Wall Street, mortgage securities were at the heart of the financial crisis. Banks pooled hundreds of home loans and marketed the bundles as investments. Many have been accused of packaging risky mortgages into securities that they knew would go sour and selling them to unsuspecting investors.
When the housing market crashed, the securities were worthless and left investors saddled with massive losses. Lenders retreated from the market. Stock markets plummeted, and home values tumbled.
Herring launched his investigation into the securities sold to the VRS after Integra REC, a financial modeling and analysis firm in Texas, informed his office that it had found a high percentage of soured loans in the securities. The firm used proprietary software to match up the securities the fund bought with the individual mortgages included in the bundles. It discovered that nearly 40 percent of the 785,000 mortgages backing the 220 securities purchased by the VRS carried a much higher risk than the banks had said.
“These investments were doomed, and yet these banks told the Virginia Retirement System and Virginia taxpayers that these were the most stable investments money could buy,” Herring said. “And they thought they could get away with it.”
Integra stands to reap 15 to 25 percent of any recovery as a reward for whistleblowing. The firm initially filed the lawsuit against the 13 banks in January under a state fraud statute that gives the attorney general the right to take up the action.
The attorney general officially took over the case Tuesday and is seeking civil penalties against each bank in the amount of $5,500 to $11,000 for each violation.
All of the banks named in the lawsuit declined to comment.
Virginia is among several states that have gone after the big banks for allegedly defrauding state retirement funds. In the past three years, attorneys general from New York, California, New Jersey and Illinois have filed suit against many of the same banks involved in the Virginia case, under the same claims.
Some states have recouped money for their retirement funds through settlements the Justice Department has brokered with Citigroup, JPMorgan and Bank of America.
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