(Recasts; adds background on negotiations, details)
By Karen Freifeld
NEW YORK Dec 22 The U.S. Department of Justice
on Thursday sued Barclays Plc and two former executives
on civil charges of fraud in the sale of mortgage-backed
securities during the run-up to the 2008-09 financial crisis.
The lawsuit was filed after Barclays resisted a penalty the
U.S. government had sought in settlement negotiations, a person
familiar with the matter said. The person would not disclose the
Major U.S. banks, including JPMorgan Chase & Co and
Bank of America Corp, have paid tens of millions of
dollars to settle similar claims over misconduct in the sale and
pooling of mortgage securities, which helped to cause the
Barclays was among a handful of European banks still under
investigation by the Justice Department, according to company
disclosures. Deutsche Bank and Credit Suisse
are also in settlement talks, sources have said.
Barclays is accused of deceiving investors about the quality
of loans underlying tens of billions of dollars of
mortgage-backed securities between 2005 and 2007, according to
the lawsuit filed in U.S. District Court in Brooklyn.
Loans had been made to borrowers with no ability to repay
and were based on inflated home appraisals, the complaint said.
According to the lawsuit, more than half the underlying
loans in $31 billion worth of mortgage loans pooled into 36
"With this filing, we are sending a clear message that the
Department of Justice will not tolerate the defrauding of
investors and the American people," U.S. Attorney General
Loretta Lynch said in a statement.
In a separate statement, Barclays said the claims in the
lawsuit are "disconnected from the facts" and that it has an
obligation to defend against "unreasonable allegations and
A Justice Department spokesman would not comment on
negotiations or the penalty sought during talks. The lawsuit
does not include a penalty amount.
A Barclays spokesman would not comment on negotiations
beyond the statement.
The London-based bank's U.S.-traded shares ended
down 1.8 percent at $11.07 in regular trading on Thursday.
Barclays has set aside $3.1 billion to generally cover
litigation and penalties, but has not made a specific provision
for the mortgage probe.
A settlement in excess of $1.5 billion would lead to
increased provisions and could impact the bank's core capital
ratio, JPMorgan analysts have said.
In addition to Barclays and its affiliated companies, the
complaint targets two former executives: John T. Carroll and
Paul Menefee, both former managing directors at Barclays Capital
Carroll, Barclays' head subprime trader in the run-up to the
housing crisis, and Menefee, the banker in charge of due
diligence on the subprime deals, were central to the alleged
scheme, the complaint said, and stand accused of intentionally
making false representations.
When asked about 40 loans already delinquent before a deal
closed, for instance, Carroll told Menefee to "just leave them
in," according to the lawsuit, and Menefee did.
Menefee, who blamed the delinquent loans on fraud, then
falsely represented to investors and credit ratings agencies
that the deal did not contain such delinquent loans, the
Barry Berke, a lawyer for Menefee, 47, of Austin, Texas,
called the complaint a "misguided attempt" to blame his client
and others for losses that resulted from the collapse of the
U.S. housing market.
A lawyer for Carroll, 49, of Port Washington, New York, did
not return a call for comment.
The complaint alleges violations of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989
(FIRREA), based on mail fraud, wire fraud, bank fraud as well as
The statute allows for civil penalties up to the amount of
Barclays' gain, or the amount of losses suffered by others.
The actions against the banks over mortgage securities stem
from a 2012 initiative by U.S. President Barack Obama to pursue
the misconduct that helped lead to the financial crisis. The
Trump administration, which takes over on Jan. 20, will oversee
any ongoing matters.
(Reporting by Karen Freifeld, additional reporting by Rodrigo
Campos in New York and Lawrence White in London; editing by
Cynthia Osterman and G Crosse)