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US Justice Department sues Barclays over RMBS

The U.S. Department of Justice said Dec. 22 it has filed a lawsuit against Barclays Plc unit Barclays Bank Plc and several of its U.S. affiliates over accusations of fraud in the sale of residential mortgage-backed securities leading up to the financial crisis.

The Justice Department claims the securities in question, sold between 2005 and 2007, relied on defective mortgage loans that were misrepresented to investors. The lawsuit also names former Barclays executives Paul Menefee and John Carroll as defendants. Menefee was a head banker on the company's subprime RMBS securitizations, while Carroll was a head trader for subprime loan acquisitions. The Justice Department alleges the two violated the Financial Institutions Reform, Recovery, and Enforcement Act by misrepresenting at least 36 deals, covering more than $31 billion in subprime and Alt-A mortgage loans.

Overall, the lawsuit claims Barclays employees knowingly overrode or ignored due diligence regarding vendors that graded delinquent or in-default loans at the time of securitization.

The Barclays lawsuit is the latest in the Justice Department's pursuit of wrongful mortgage-backed securities practices at several overseas banks.

In September, rumors surfaced that the Justice Department had asked Deutsche Bank AG for $14 billion to settle its investigation into RMBS sales, although later rumors shrank the possible settlement to $5.4 billion. The Justice Department was also rumored to be in discussions around settlements with Barclays and Credit Suisse Group AG over RMBS, but to date, settlements for all three banks have yet to be reached.

The lawsuit against Barclays was filed in federal court in the Eastern District of New York.