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By Karen Freifeld
NEW YORK, Dec 22 (Reuters) - The U.S. Department of Justiceon Thursday sued Barclays Plc and two former executiveson charges of fraud in the sale of U.S. mortgage securities inthe run-up to the financial crisis.
The British bank was accused of deceiving investors aboutthe quality of loans underlying tens of billions of dollars ofmortgage securities between 2005 and 2007, according to thelawsuit, which was filed in U.S. District Court in Brooklyn, NewYork.
Loans had been made to borrowers with no ability to repayand were based on inflated home appraisals, the complaint said.
"With this filing, we are sending a clear message that theDepartment of Justice will not tolerate the defrauding ofinvestors and the American people," U.S. Attorney GeneralLoretta Lynch said in a statement.
Barclays said the claims in the lawsuit are "disconnectedfrom the facts" and that it has an obligation to defend against"unreasonable allegations and demands."
In terms of demands, Barclays was apparently referring tonegotiations with the Justice Department to settle the claimswithout a case being filed.
"Barclays will vigorously defend the complaint and seek itsdismissal at the earliest opportunity," its statement said.
The bank's U.S.-traded shares ended regular tradingon Thursday down 1.8 percent at $11.07.
Barclays is among a number of European banks that have beenunder investigation for misconduct in the sale of mortgagesecurities, which contributed to the 2008 financial crisis.
Deutsche Bank and Credit Suisse are innegotiations over similar claims, sources have told Reuters.
Major U.S. banks including JPMorgan Chase & Co andBank of America have already paid tens of billions ofdollars to settle with U.S. authorities over their pooling andsale of the securities.
According to the lawsuit against Barclays, more than halfthe underlying loans in $31 billion worth of mortgage loanspooled into 36 deals defaulted.
In addition to Barclays and affiliated companies, thelawsuit accuses two executives of illegal behavior central tothe scheme: John T. Carroll and Paul Menefee, both formermanaging directors at Barclays Capital units.
Carroll, Barclays head subprime trader in the run-up to thehousing crisis, and Menefee, the banker in charge of duediligence on the subprime deals, are accused of intentionallymisrepresenting and omitting key information on the securities.
When asked about 40 loans already delinquent before a dealclosed, Carroll told Menefee to "just leave them in," accordingto the lawsuit, and Menefee did.
Menefee, who blamed the delinquent loans on fraud, thenfalsely represented to investors and rating firms that the dealdid not contain such delinquent loans, the complaint said.
Menefee also described one loan pool as "about as bad as itcan be," according to the complaint.
Lawyers for Menefee, 47, of Austin, Texas, and Carroll, 49,of Port Washington, New York, did not immediately return callsfor comment.
The complaint alleges violations of the FinancialInstitutions Reform, Recovery, and Enforcement Act of 1989(FIRREA), based on mail fraud, wire fraud, bank fraud, and othermisconduct.
The statute allows for civil penalties up to the amount ofBarclays' gain, or the amount of losses suffered by others. (Reporting by Karen Freifeld, additional reporting by RodrigoCampos in New York; Editing by Steve Orlofsky and CynthiaOsterman)
