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Barclays agrees to pay $2 billion to settle fraud charges related to the sale of mortgage securities prior to the Great Recession

Barclays

Photo: Secretlondon

Barclays Capital Inc. and several of its affiliates agreed Thursday to settle charges of fraudulent conduct related to Barclays’ issuance of residential mortgage-backed securities between 2005 and 2007, according to the U.S. Department of Justice. Barclays, a huge British bank, will pay $2 billion in civil penalties in exchange for dismissal of the lawsuit.

The settlement is about $3 billion less than what the department originally asked for, according to a Consumer Affairs article. Barclays refused to pay $5 billion, causing the department to file a lawsuit in 2016. From the beginning, Barclays said it would refuse to pay more than $2 billion.

The department’s lawsuit alleged 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.

The lawsuit alleged that in offering documents and in communications with investors and rating agencies, Barclays systematically and intentionally misrepresented key characteristics of the loans it included in the RMBS deals. 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 lawsuit, the mortgaged properties were systematically worth less than what Barclays represented to investors. 

The department charged Barclays with violations of federal law including mail fraud, wire fraud, and bank fraud. The bank denies the allegations.

Agreement was also reached with the two former Barclays executives who were named as defendants in the lawsuit: Paul K. Menefee, of Austin, Texas, who served as Barclays’ head banker on its subprime RMBS sales, and John T. Carroll, of Port Washington, New York, who served as Barclays’ head trader for subprime loan acquisitions. In exchange for dropping the charges against them, Menefee and Carroll agreed to pay the combined amount of $2 million in civil penalties.

“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,” said U.S. Attorney Richard P. Donoghue.

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