State Attorney General Mark Herring has announced a $1.15-billion lawsuit against some of the world’s largest commercial banks for allegedly committing fraud against Virginia taxpayers during the nation’s frenzied real estate bubble.
The court documents—which were filed earlier this year but just unsealed—accuse the banks of bundling both sound and risky mortgages into toxic securities that were then fraudulently sold to the Virginia Retirement System. When the real estate bubble burst, the value of the state pension fund plummeted.
Last year, taxpayers funded two-thirds of the VRS and public employees one-third, so the lawsuit was brought under the Virginia Fraud Against Taxpayers Act. Herring said a whistleblowing firm, Integra, stepped forward with sophisticated software showing how the mortgage-backed securities were falsely represented to the VRS.
“There were very specific representations made about the percentage of loans that had a loan-to-value ratio of 80% or less. There were specific representations made about the percentage of homes that were single-occupancy homes as opposed to vacation homes or rental homes. There were specific representations made about the percentage of homes that had a second mortgage on it. And the reality was the mortgages didn’t match up to those representations—and they’re significant.”
Virginia eventually sold most of the toxic securities built on junk mortgages and lost $383 million, but the law allows the state to seek triple damages. Herring said recovered funds would be returned to taxpayers and the VRS losses redressed. The state will also seek civil penalties against each bank for each violation.
The lawsuit was filed in Richmond Circuit Court against 13 banks, including Citigroup Global Markets, Countrywide Securities, and Goldman, Sachs.