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Barclays (BCS) Faces DoJ Lawsuit for Mortgage Malpractices
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Legal matters continue to make headlines for U.K.-based Barclays PLC (BCS - Free Report) . The U.S. Department of Justice (DoJ) has sued the bank for alleged mortgage mishandlings. The company’s two former executives have also been sued.
The civil case was filed after the bank pulled back from paying the fines that the DoJ was seeking in settlement negotiations. The lawsuit, filed in the U.S. District Court in Brooklyn, New York, accuses Barclays of misrepresenting the quality of the underlying loans from 2005 to 2007.
Quality of $31 Billion Worth Loans Misrepresented
In its complaint, the DoJ alleged that Barclays deceptively sold billions of dollars of residential mortgage backed securities and repeatedly misrepresented facts about the quality of over $31 billion worth mortgages backing those deals to the investors. Further, the lawsuit accused the bank of intentionally misrepresenting the facts in the offer documents as well, while directly communicating with investors and rating agencies.
Barclays had assured investors of weeding out “unacceptable” loans, and that the underlying loans in the deals were underwritten on confirming the borrowers’ repaying ability. Further, the DoJ alleged that the bank wrongly represented that property evaluations were trustworthy and the value was substantial to cover losses in case of default.
However, in reality, over 50% of the underlying mortgages defaulted, leading to significant losses to the investors. The lawsuit alleged that Barclays due diligence was a “sham.” Investors of AAA-rated tranches of these securities, considered as safe as investments in U.S. Treasury bonds, “suffered or will suffer significant losses”.
Barclays Moving Against the Tide
Barclays plans to vigorously defend itself. In a statement, the company spokesperson said, “Barclays considers that the claims made in the complaint are disconnected from the facts. We have an obligation to our shareholders, customers, clients and employees to defend ourselves against unreasonable allegations and demands. Barclays will vigorously defend the complaint and seek its dismissal at the earliest opportunity.”
The lawsuit itself is rare for big global banks as they usually try to negotiate settlement deals in order to avoid risky litigation and a potential trial. Over the last several months, Barclays along with Deutsche Bank AG (DB - Free Report) and Credit Suisse Group AG were in talks with the U.S. prosecutors to resolve the matter. Nonetheless, both Deutsche Bank and Credit Suisse settled the matter today with payment of $7.2 billion and $5.3 billion, respectively.
Notably, this is the first time the DoJ has filed a lawsuit against big banks for similar allegations. So far, the DoJ has recouped more than $46 billion from six major U.S. banks including JPMorgan Chase & Co. (JPM - Free Report) , Bank of America Corporation and Citigroup Inc.
However, Barclays moved away from settlement deal as the fine sought by the DoJ was deemed too high, based on the losses incurred by the investors (as calculated by the bank). This is not the first time the company has done this.
Earlier in 2014, Barclays pulled out of a global settlement by six other banks with the U.S. and the U.K. regulators over allegations of rigging foreign exchange rates. Nevertheless, the company ended up paying a significantly large amount as fine.
So, will this happen yet again? Well, we will have to wait and watch till then.
Over the last three months, Barclays’ shares on NYSE have over 25%, significantly outpacing the Zacks categorized Foreign Banks industry’s growth of approximately 9%. Continued restructuring efforts and divestiture of non-core businesses are perhaps the reason for this outperformance.
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Barclays (BCS) Faces DoJ Lawsuit for Mortgage Malpractices
Legal matters continue to make headlines for U.K.-based Barclays PLC (BCS - Free Report) . The U.S. Department of Justice (DoJ) has sued the bank for alleged mortgage mishandlings. The company’s two former executives have also been sued.
The civil case was filed after the bank pulled back from paying the fines that the DoJ was seeking in settlement negotiations. The lawsuit, filed in the U.S. District Court in Brooklyn, New York, accuses Barclays of misrepresenting the quality of the underlying loans from 2005 to 2007.
Quality of $31 Billion Worth Loans Misrepresented
In its complaint, the DoJ alleged that Barclays deceptively sold billions of dollars of residential mortgage backed securities and repeatedly misrepresented facts about the quality of over $31 billion worth mortgages backing those deals to the investors. Further, the lawsuit accused the bank of intentionally misrepresenting the facts in the offer documents as well, while directly communicating with investors and rating agencies.
Barclays had assured investors of weeding out “unacceptable” loans, and that the underlying loans in the deals were underwritten on confirming the borrowers’ repaying ability. Further, the DoJ alleged that the bank wrongly represented that property evaluations were trustworthy and the value was substantial to cover losses in case of default.
However, in reality, over 50% of the underlying mortgages defaulted, leading to significant losses to the investors. The lawsuit alleged that Barclays due diligence was a “sham.” Investors of AAA-rated tranches of these securities, considered as safe as investments in U.S. Treasury bonds, “suffered or will suffer significant losses”.
Barclays Moving Against the Tide
Barclays plans to vigorously defend itself. In a statement, the company spokesperson said, “Barclays considers that the claims made in the complaint are disconnected from the facts. We have an obligation to our shareholders, customers, clients and employees to defend ourselves against unreasonable allegations and demands. Barclays will vigorously defend the complaint and seek its dismissal at the earliest opportunity.”
The lawsuit itself is rare for big global banks as they usually try to negotiate settlement deals in order to avoid risky litigation and a potential trial. Over the last several months, Barclays along with Deutsche Bank AG (DB - Free Report) and Credit Suisse Group AG were in talks with the U.S. prosecutors to resolve the matter. Nonetheless, both Deutsche Bank and Credit Suisse settled the matter today with payment of $7.2 billion and $5.3 billion, respectively.
Notably, this is the first time the DoJ has filed a lawsuit against big banks for similar allegations. So far, the DoJ has recouped more than $46 billion from six major U.S. banks including JPMorgan Chase & Co. (JPM - Free Report) , Bank of America Corporation and Citigroup Inc.
However, Barclays moved away from settlement deal as the fine sought by the DoJ was deemed too high, based on the losses incurred by the investors (as calculated by the bank). This is not the first time the company has done this.
Earlier in 2014, Barclays pulled out of a global settlement by six other banks with the U.S. and the U.K. regulators over allegations of rigging foreign exchange rates. Nevertheless, the company ended up paying a significantly large amount as fine.
So, will this happen yet again? Well, we will have to wait and watch till then.
Over the last three months, Barclays’ shares on NYSE have over 25%, significantly outpacing the Zacks categorized Foreign Banks industry’s growth of approximately 9%. Continued restructuring efforts and divestiture of non-core businesses are perhaps the reason for this outperformance.
Currently, Barclays sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Zacks' Top Investment Ideas for Long-Term Profit
How would you like to see our best recommendations to help you find today’s most promising long-term stocks? Starting now, you can look inside our portfolios featuring stocks under $10, income stocks, value investments and more. These picks, which have double and triple-digit profit potential, are rarely available to the public. But you can see them now. Click here >>