Virginia Sues 13 Banks for $1.15B Alleging RMBS Fraud










Citigroup Inc., Morgan Stanley and Goldman Sachs Group Inc. are among 13 banks whose units were sued for $1.15 billion by the state of Virginia, over claims they misled its retirement system about the sale of residential mortgage-backed securities.

The suit in state court in Richmond is the largest financial fraud case ever brought by the commonwealth, Virginia Attorney General Mark Herring said in a statement today.

The sealed complaint was filed in January under the whistle-blower provisions of the Virginia Fraud Against Taxpayers Act by Integra REC LLC, a Texas-based financial modeling and analysis firm, and subsequently joined by the state.

While “wrongful actions of a general nature” by the banks have been the subject of news media and government investigations, information provided by Integra enabled the state to identify which specific loans backing the securities were misrepresented to the Virginia Retirement System, according to the complaint.

Integra developed a proprietary algorithm that lets it match properties in official records with those in security offering documents that didn’t contain identifying information such as names and addresses, the state said.

“Loan level misrepresentations are then traced to specific RMBS tranches” bought by the retirement system, according to the complaint.

Integra’s analysis “confirms that the losses suffered by VRS are beyond those related to general market conditions and resulted directly from” the banks’ misrepresentations, the state alleged in in its filings.

The suit focuses on the retirement system’s purchase of 220 packages of securities.

An analysis showed that almost 40% of the 785,000 mortgages backing those securities “were fraudulently misrepresented in a way that made them a significantly higher risk for default,” according to Herring’s statement.

Distortions included understating the number of loans with high loan-to-value ratios, and misrepresenting owner occupancy rates and the percentage of homes with second mortgages, Herring said.

The losses to the retirement system are estimated at $383 million and the state can seek triple damages. Virginia is also asking for civil penalties of $5,500 to $11,000 per violation.

The retirement system has almost 600,000 members, including 145,000 teachers and 105,000 city and county government employees, according to the attorney general.

Michael DuVally, a spokesman for Goldman Sachs, and Mark Lake, a spokesman for Morgan Stanley, both based in New York, declined to comment. A phone message left with an operator at New York-based Citigroup’s media office wasn’t immediately returned.

Also named in the complaint is a unit of JPMorgan Chase Co. A phone message requesting comment wasn’t immediately returned.

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