U.S. sues Barclays for mortgage securities fraud

By Karen Freifeld

NEW YORK (Reuters) - The U.S. Department of Justice on Thursday sued Barclays Plc and two former executives on charges of fraud in the sale of U.S. mortgage securities in the run-up to the financial crisis.

The British bank was accused of deceiving investors about the quality of loans underlying tens of billions of dollars of mortgage securities between 2005 and 2007, according to the lawsuit, which was filed in U.S. District Court in Brooklyn, New York.

Loans had been made to borrowers with no ability to repay and were based on inflated home appraisals, the complaint said.

"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.

Barclays said the claims in the lawsuit are "disconnected from the facts" and that it has an obligation to defend against "unreasonable allegations and demands."

In terms of demands, Barclays was apparently referring to negotiations with the Justice Department to settle the claims without a case being filed.

"Barclays will vigorously defend the complaint and seek its dismissal at the earliest opportunity," its statement said.

The bank's U.S.-traded shares ended regular trading on Thursday down 1.8 percent at $11.07.

Barclays is among a number of European banks that have been under investigation for misconduct in the sale of mortgage securities, which contributed to the 2008 financial crisis.

Deutsche Bank and Credit Suisse are in negotiations over similar claims, sources have told Reuters.

Major U.S. banks including JPMorgan Chase & Co and Bank of America have already paid tens of billions of dollars to settle with U.S. authorities over their pooling and sale of the securities.

According to the lawsuit against Barclays, more than half the underlying loans in $31 billion worth of mortgage loans pooled into 36 deals defaulted.

In addition to Barclays and affiliated companies, the lawsuit accuses two executives of illegal behaviour central to the scheme: John T. Carroll and Paul Menefee, both former managing directors at Barclays Capital units.

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, are accused of intentionally misrepresenting and omitting key information on the securities.

When asked about 40 loans already delinquent before a deal closed, 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 rating firms that the deal did not contain such delinquent loans, the complaint said.

Menefee also described one loan pool as "about as bad as it can be," according to the complaint.

Lawyers for Menefee, 47, of Austin, Texas, and Carroll, 49, of Port Washington, New York, did not immediately return calls 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, and other misconduct.

The statute allows for civil penalties up to the amount of Barclays' gain, or the amount of losses suffered by others.

(Reporting by Karen Freifeld, additional reporting by Rodrigo Campos in New York; Editing by Steve Orlofsky and Cynthia Osterman)