Lawsuit alleges Va. Retirement System was misled on purchases of securities

Attorney General Mark R. Herring Sept. 16 announced a lawsuit against 13 commercial banks for alleged fraud against Virginia taxpayers during the height of the real estate bubble, according to a news release from his office.

A lawsuit unsealed today in Richmond Circuit Court seeks $1.15 billion in damages against 13 banks that are each accused of fraudulently misleading the Virginia Retirement System (VRS) during the sale of residential mortgage-backed securities (RMBS) to the state retirement fund.

According to the lawsuit, VRS was entitled to accurate information about the underlying mortgages when making decisions on how to invest taxpayer money and contributions by employees. The banks are accused of purposefully including high-risk mortgages in securities and fraudulently misrepresenting the quality of those loans to rating agencies and large investors like VRS. The securities were purchased starting around 2004; prior to 2010, Virginia was forced to sell the vast majority of these toxic securities built on junk mortgages and lost $383 million, the news release said.

Each bank is alleged to have bundled risky residential mortgages into securities which were then sold to VRS in various quantities. Named in the lawsuit are Barclays Capital Inc.; Citigroup Global Markets Inc.; Countrywide Securities Corporation; Credit Suisse Securities (USA) LLC; Deutsche Bank Securities Inc.; Goldman, Sachs & Co.; RBS Securities, Inc.; HSBC Securities (USA) Inc.; Morgan Stanley & Co. LLC; UBS Securities LLC; WAMU Capital Corp. J.P. Morgan Securities LLC (and as current owner of Bear, Stearns & Co.); Merrill Lynch, Pierce, Fenner & Smith Incorporated(and as current owner of Banc of America Securities LLC).

The news release alleged that, “while the banks offered the securities to VRS as stable, solid investments, an analysis shows that nearly 40% of the 785,000 mortgages backing 220 securities purchased by Virginia’s retirement system were fraudulently misrepresented in a way that made them a significantly higher risk for default.”

According to the news release, the attorney general filed the lawsuit based on information from a “whistleblower,” identified by the press release as a “financial modeling and analysis firm called Integra REC, LLC,” [that] discovered the alleged fraud “using extremely sophisticated proprietary methods to match-up the Residential Mortgage Backed Securities (RMBS) purchased by VRS with the actual mortgages and properties they contained.”

The news release says the attorney general’s office expects “that money recovered as part of this suit will be returned to Virginia taxpayers and that damages suffered by VRS will be redressed.”