Industry Experts Blow the Whistle on RMBS Fraud, Help Virginia Recover $63 million
By Tim McCormack
On January 22, 2016, the Virginia Attorney General announced that the Commonwealth had settled a suit brought under the Virginia False Claims Act (FCA) (formally known as the Virginia Fraud Against Taxpayers Act) against 11 banks for misrepresentations made in connection with the sale of residential mortgage-backed securities to the Commonwealth and the Virginia Retirement System (VRS). The settlement, for $63 million, is the largest non-healthcare-related recovery ever won under the Virginia FCA.
The settling banks — the list of whom reads like a who’s who of American finance — and the amount of their payments include: Countrywide Securities Corporation and Merrill Lynch, Pierce, Fenner & Smith, Inc. (combined) ($19,500,000); RBS Securities Inc. ($10,000,000); Barclays Capital Inc. ($9,000,000); Morgan Stanley & Co. LLC ($6,900,000); Deutsche Bank Securities Inc. ($5,621,897); Citigroup Global Markets Inc. ($4,750,000); Goldman, Sachs & Co. ($2,900,000); HSBC Securities (USA) Inc. ($2,500,000); Credit Suisse Securities (USA) LLC ($1,200,000); and UBS Securities LLC ($850,000).
This recovery is notable for demonstrating the way that the False Claims Act (whether state or federal) can be used to prosecute violations in the securities industry. Even more, though, it is notable for the identity and nature of the whistleblower.
The suit was originally brought not by insiders at the defendant banks, but rather by a corporation – Integra REC LLC – comprised of a self-described “team of structured finance experts and academics [who use] detailed analysis of MBS [mortgage backed securities], ABS [asset backed securities], and CDOs [collateralized debt obligations]” to help their “clients” with “loss recovery effort[s].” Integra used its apparently substantial expertise and analytic prowess to help Virginia identify not only the fraudulent misconduct, but the specific transactions that were tainted by the fraud.
When Virginia joined the case, it specifically and effusively praised Integra’s analysis as essential to uncovering the fraud, stating:
“[N]one of the information produced or disclosed in connection with [prior government enforcement] efforts is nearly specific enough to precisely identify in which securities misrepresentations have occurred and to what extent VRS suffered as a result of such misrepresentations. This is partly due to the complexity of RMBS and the lack of specificity in such proceedings or reports. The Commonwealth’s detailed investigation with Relator’s proprietary methods, tools, and data, on the other hand, allows it to now ascertain specific, actionable misrepresentation and to link that misrepresentation to VRS’s losses. . . . The Commonwealth neither has attempted a recovery of its losses in connection with these securities nor could it have possibly done so without Relator’s unique analysis, proprietary algorithms, detailed knowledge of MBS misreporting, and advanced quantitative methodologies.”
Virginia’s Complaint in Intervention (emphasis added).
This recovery illustrates the public-private partnership fostered by the False Claims Act at its best. The False Claims Act discourages the filing of cases by those who simply read about an ongoing investigation in the newspaper and have little information or analysis to add. However, not all whistleblowers must be company insiders. There is a long history of value added by outsider-whistleblowers who have substantial industry expertise, and use that insight to uncover fraudulent practices. The False Claims Act is a perfect tool for such whistleblowers to bring their concerns to the attention of the Government, bring the wrongdoers to justice and earn a well-deserved reward in the process.