RICHMOND, Va. — Virginia Attorney General Mark Herring announced a historic lawsuit Tuesday against some of the largest commercial banks in the world, for fraud allegedly committed against Virginia taxpayers during the height of the real estate bubble.
A whistleblower helped shed light on the fraudulent operations. A provision of the Virginia Fraud Against Taxpayers Act incentivizes and allows whistleblowers to report fraud against state taxpayers.
After closely examining the evidence collected by the whistleblower and finding it to be “accurate and convincing,” the state filed suit in January; the case was unsealed Tuesday when the announcement was made.
The lawsuit seeks $1.15 billion in damages in total from the 13 banks, who 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.
The Commonwealth will also seek civil penalties against each bank in the amount of $5,500-$11,000 for each violation.
The banks include Barclays Capital Inc., Citigroup, Countrywide Securities Corporaton, Credit Suisse, Deutsche Bank, Goldman, Sachs & Co. RBS, HSBC, Morgan Stanley, UBS, WAMU Capital, J.P Morgan, and Merrill Lynch.
“These banks had their internal evaluations as well as third-party due diligence providers inform them about their conclusions about the safety of the mortgages and whether they met the right criteria,” Herring said at Tuesday’s press conference.
But, Herring said, the banks still told the VRS that the mortgage-backed securities were the most stable investments that could be bought, but in reality they were “doomed investments.”
“And we found that the banks didn’t care, they often times hid that information from the buyers of these securities, as well as the commanding agencies; and they did it in order to try and get those top rating so they could sell these securities,” Herring said.
There were three key ways that the misrepresentation was made, Herring said.
He said banks misrepresented the percentage of loans that had a loan to value ratio of 80% or less.
There were specific misrepresentations made about the percentage of homes that were single occupancy as opposed to vacation or rental homes. And he also said that banks made specific misrepresentations about the amount of homes that had a second mortgage.
“As we know now it was just a matter of time before these toxic mortgage-backed securities exploded in in a catastrophic way – as we fell into the worst economic crisis in generations,” Herring said. “Every Virginian felt the pain, homes were lost, retirement accounts were devastated, small businesses saw their credit dry up overnight and vulnerable citizens lost needed services as state and federal budgets were slashed.”
The securities were purchased starting around 2004, and before 2010, Virginia was forced to sell the vast majority of these toxic securities built on junk mortgages and lost $383 million.
In 2013, VRS was funded approximately 66% by Virginia taxpayers and 33% by contributions from state employees, with nearly 600,000 members including 145,000 teachers, 105,000 employees of city and county governments, and 78,000 state employees, as well as state troopers, local law enforcement, and court employees.
The message today is clear, Herring said, in what is the largest financial fraud action brought by the Commonwealth.
“It doesn’t matter if you are a small time con-artist, or a multi-billion Wall Street bank, if you try to rip off Virginia taxpayers we will catch you and hold you responsible.
The whistleblower, a financial modeling and analysis firm called Integra REC, LLC, discovered the fraud using extremely sophisticated proprietary methods to match-up the RMBS purchased by VRS with the actual mortgages and properties they contained.
The whistleblower will be represented by their own law firm. The case is being handled by Attorney General Herring’s Civil Litigation Division.
The banks will receive copy of the suit, and have 21 days from that time to file their response. Discovery take place over the course of months, and then a trial date will be set, Herring said.