Barclays Agrees To Pay $2 Billion To Settle Claims Related To The Issuance Of Residential Mortgage-Backed Securities

• Posted on: Apr 2 2018

On March 29, 2018, the Department of Justice (“DOJ”) announced (here) that it had reached agreement with Barclays Capital, Inc. and several of its affiliates (together, “Barclays” or the “Bank”) to settle a civil action in which the United States sought civil penalties for alleged conduct related to Barclays’ underwriting and issuance of residential mortgage-backed securities (“RMBS”) between 2005 and 2007. Under the settlement, Barclays will pay the United States two billion dollars ($2,000,000,000) in civil penalties in exchange for dismissal of the Amended Complaint.

A copy of the settlement agreement can be found here.

The settlement follows a three-year investigation into allegations that Barclays caused billions of dollars in losses to investors by engaging in a fraudulent scheme to sell 36 RMBS deals, and that it misled investors about the quality of the mortgage loans backing those deals. Those allegations, violations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), and the predicate acts of mail fraud, wire fraud, bank fraud, and other misconduct, were set forth in the DOJ’s initial complaint, which it filed in December 2016. The lawsuit also names as defendants two former Barclays executives: Paul K. Menefee (“Menefee”), who served as Barclays’ head banker on its subprime RMBS securitizations; and John T. Carroll (“Carroll”), who served as Barclays’ head trader for subprime loan acquisitions.

The DOJ also reached agreement with Menefee and Carroll. In exchange for dismissal of the claims against them, Menefee and Carroll agreed to pay the United States the combined sum of two million dollars ($2,000,000) in civil penalties.

“This settlement reflects the ongoing commitment of the Department of Justice, …, to hold banks and other entities and individuals accountable for their fraudulent conduct,” stated Richard P. Donoghue, United States Attorney for the Eastern District of New York. “The substantial penalty Barclays and its executives have agreed to pay is an important step in recognizing the harm that was caused to the national economy and to investors in RMBS.”

“The actions of Barclays and the two individual defendants resulted in enormous losses to the investors who purchased the Residential Mortgage-Backed Securities backed by defective loans,” stated Laura S. Wertheimer, Inspector General, of the Federal Housing Finance Agency Office of the Inspector General (“FHFA-OIG”). “Today’s settlement holds accountable those who waste, steal or abuse funds in connection with FHFA or any of the entities it regulates.”

The scheme alleged in the complaint involved 36 RMBS deals in which over $31 billion worth of subprime and Alt-A mortgage loans were securitized, more than half of which loans defaulted. The complaint alleged that in publicly filed offering documents and in direct communications with investors and rating agencies, Barclays systematically and intentionally misrepresented key characteristics of the loans it included in these RMBS deals. In general, the borrowers whose loans backed these deals were significantly less creditworthy than Barclays represented, and these loans defaulted at exceptionally high rates early in the life of the deals. In addition, as alleged in the complaint, the mortgaged properties were systematically worth less than what Barclays represented to investors.

In a statement, Barclays Chief Executive Officer, Jes Staley, called the settlement a “fair and proportionate settlement.” Staley said that, because of the settlement and a 2017 restructuring, Barclays was “well positioned” to ramp up profits and return a greater share of its profit to shareholders.

The settlement amount is less than market analysts had expected and less than the penalties paid by other banks, such as by Goldman Sachs and JPMorgan Chase, facing similar claims involving the underwriting and issuance of residential mortgage-backed securities.

Tagged with: Department of Justice, DOJ, Financial Markets, Securities