Barclays Fights $31B Residential Mortgage-Backed Securities Fraud Lawsuit

In New York federal court, Barclays PLC (BAC) is trying to get the US government’s civil residential mortgage-backed securities fraud lawsuit against it dismissed. Prosecutors went after the British bank, a number of its affiliates, and two ex-employees—former mortgage securitizations head Paul Menefee and former subprime loan acquisitions head trader John T. Carroll.

The government contends that the defendants misrepresented the loans packaged in 36 securitizations from 2005 through 2007 were doing well when, in fact, thousands of them had been deemed defective during the vetting process, with hundreds more in default or delinquent.

The RMBS fraud lawsuit is accusing Barclays of letting the loans be packaged into the securitizations despite knowing they were faulty, and even, on occasion, adding in faulty loans that had already been removed from other deals. According to the government, the securitizations failed badly, over half of the mortgages underlying them defaulted, and investors, including banks that were investors, lost billions of dollars.

RMBS Fraud Lawsuit Brought Under FIRREA
Prosecutors sued the defendants by invoking the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). The law lets the government go after penalties when certain federal offenses are involved and a federally insured financial institution has been impacted. Now, Barclays is contending that the government overreached by treating “time-barred, garden-variety securities-fraud claims” as “banking crimes.”

Under the law, the fraudulent act alleged needs to have targeted or impacted a financial institution that is federally insured. Barclays characterized the certifications from the securitizations bought by the other banks as “relatively small” and not enough to create the kind of bank-related link that the government would need to sustain the claims it is making under FIRREA.

In its filing, Barclays said that FIRREA wasn’t an “all-purpose fraud statute.” It also noted that purchase of a security by a federally insured financial institution didn’t always mean that the fraud allegedly “meaningfully involved” said institution.

Barclays cautioned against expanding the reach of FIRREA in such a way that it would be stepping into the US Securities and Exchange Commission’s sphere. If that were the case, argued the bank, the government would need to allege that a federally insured financial institution had made one purchase to give the Justice Department permission to file a civil case seeking remedy for the alleged fraud.

Carroll and Menefee are also seeking to get the securities fraud claims against them dismissed.

Contact The SSEK Partners Group today.

Barclays Seeks Toss Of Feds’ Fraud Suit Over $31B RMBS, Law360, October 11, 2017

Financial Institutions Reform, Recovery and Enforcement Act of 1989


More Blog Posts:

SEC Orders Barclays to Pay Over $16.5M Over Alleged RMBS Fraud by Former Traders, Institutional Investor Securities Blog, May 1, 2017

Lloyds, Barclays, to Set Aside Hundreds of Millions of Dollars for Allegedly Mis-Selling to Victims, Stockbroker Fraud Blog, August 27, 2013