Swiss banks sued over alleged mortgage bond fraud

UBS (pictured here on Park Avenue in New York) and Credit Suisse are among 13 banks named in the Virginia state lawsuit Keystone

Credit Suisse and UBS are among 13 banks facing fraud allegations and a claim for $1.1 billion (CHF1 billion) in damages in the US state of Virginia. They are accused of selling shoddy mortgage bonds between 2004-2010 during the financial crisis.

Virginia Attorney General Mark Herring said on Tuesday the banks knowingly packaged risky home loans into bonds or securities, which they sold to the Virginia Retirement System (VRS) as AAA-rated bonds. The pension fund counts 600,000 members including teachers, employees from the city and county governments, state troopers, and court employees.

Almost 40% of the mortgages that backed 220 securities the VRS purchased were fraudulently represented as posing a lower risk of default than they actually did, the attorney general said.

Herring said the fund lost $383 million when it was forced to sell the securities during the financial crisis.

The other banks named in the lawsuit are Barclays Capital Inc, Citigroup Global Markets Inc, Countrywide Securities Corp, Deutsche Bank Securities Inc, Goldman, Sachs & Co, RBS Securities, HSBC Securities (USA) Inc, Morgan Stanley & Co. LLC, WAMU Capital Corp, J.P. Morgan Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Inc.

The banks have 21 days to respond to the lawsuit.

The case follows many other states’ resolution of similar cases over losses that state funds suffered from pools of mortgages considered to be at the center of the 2008 financial crisis. Some of the cases were wrapped up through joint federal-state settlements with several financial institutions including Bank of America and Citigroup.

At a press conference announcing the lawsuit, Herring said a whistleblower, which he identified as financial modeling firm Integra REC, recently brought the allegations to his office.

“The message today is clear. If you try to rip off or defraud Virginia consumers or Virginia taxpayers, you will be caught and you will be held responsible,” Herring said at the press conference.