Barclays Sued for Selling Risky MBS

German-based Bayerische Landesbank (BayernLB) has sued Barclays PLC ( BCS - Snapshot Report ) over the losses that it incurred from investments in risky mortgage backed securities (MBS). BayernLB alleged that Barclays made false representations while selling MBS worth more than $274 million.

Last Friday, BayernLB filed the case documents in New York State Supreme Court in Manhattan. The firm charged Barclays of issuing misleading statements regarding underwriting standards that were used while issuing MBS.

BayernLB also alleged that Barclays’ offer documents contained untrue statements and omissions regarding the risks involved in the investments. These led to huge losses as the market value of MBS continued to plummet.

Apart from Barclays, BayernLB filed similar lawsuits against many other large banks including Bank of America Corporation ( BAC - Analyst Report ) , Deutsche Bank AG ( DB - Snapshot Report ) , Morgan Stanley ( MS - Analyst Report ) and JPMorgan Chase & Co. ( JPM - Analyst Report ) over the past year. The firm is seeking damages related to over $4 billion invested in risky MBS.

Additionally, Barclays has been on sticky grounds as it has been accused by many financial institutions of misrepresenting documents related to MBS. Most of these are related to the sale of MBS during the height of the housing bubble that later led to the financial crisis in 2008.

In June, Landesbank Baden-Wuerttemberg and Sealink Funding Ltd., in two separate lawsuits, accused Barclays for losses over the investments in MBS. Landesbank Baden-Wuerttemberg alleged that the company made false claims in the offer documents while selling MBS worth $204.6 million. Similarly, Sealink stated that Barclays omitted material related to securities valued at $604.1 million.

Further in May, Barclays was sued by DZ Bank AG over $133.3 million in residential MBS and accused the company of fraudulent and negligent misrepresentation. Likewise in April, Barclays was dragged to the court by HSH Nordbank AG, for misrepresenting the credit quality of loans underlying MBS.

We believe that these litigations will negatively impact Barclays’ financial credibility going forward. However, the investors who were duped of their hard earned money will get some respite.

Barclays currently retain a Zacks #3 Rank, which translates into a short-term Hold rating.