(Photo: Elliott Brown)

Leading up to the 2008 global financial crisis, executives in The Royal Bank of Scotland Group made a number of risky moves and failed to disclose them to investors, including U.S. mortgage lenders Fannie Mae and Freddie Mac. The moves resulted in $49 billion in investor losses, according to the U.S. Department of Justice.

On Tuesday, DOJ announced a $4.9 billion settlement with London-based RBS—the largest U.S. penalty imposed by the agency for financial crisis-related misconduct at a single entity. (In 2017 Deutsche Bank agreed to pay a $3.1 billion penalty; plus a separate $4.1 billion in relief to underwater homeowners and affected communities.)

The RBS settlement stands as a lesson for general counsel in how not to let a company behave, including discussing the misconduct in emails and texts.

The settlement document and its statement of facts suggest the record penalty was imposed due to the size of the fraud and the egregiousness of the misconduct, according to two legal sources who have been deeply involved in pursuing similar bank behavior. They declined to be identified because they were not authorized by their employers to speak on the record.

A third source, law professor G. Marcus Cole of Stanford University, said, “The settlement targets what the DOJ and regulators view as both fraudulent behavior as well as irresponsible behavior and practices.”

Cole specifically pointed to an RBS practice of “capping” the number of bad mortgages that it would reject or kick out from loan initiators and lenders, allowing bad mortgages into the pool of securities. “To make matters worse,” Cole said, “they failed to disclose these kick-out caps, as well as the loan origination errors that RBS discovered and accepted because of these caps.”

A statement from Andrew E. Lelling, U.S. attorney for the District of Massachusetts, said, “This resolution—the largest of its kind—holds RBS accountable for defrauding the people and institutions that form the backbone of our investing community. Despite assurances by RBS to its investors, RBS's deals were backed by mortgage loans with a high risk of default.”

Lelling signed the settlement, along with Chad Readler, acting assistant attorney general for DOJ's Civil Division; and Michael Shaw, chief legal officer and general counsel for RBS.

The bank did not admit any wrongdoing and “disputes the contentions” made by the federal government in the statement of facts.

However as part of a previous settlement in March with the New York State Attorney General's office, “RBS admit[ted] that it sold investors [residential mortgage-backed securities] backed by mortgage loans that, contrary to its representations, did not materially comply with underwriting guidelines.”

After Tuesday's settlement, Ross McEwan, RBS chief executive, said the bank is interested in moving on.

“We are pleased to have reached a final settlement with the DOJ and that we can focus our energy on serving our customers better and returning capital to our shareholders,” he said in a statement.

While McEwan still did not admit misconduct, he continued, “This settlement dates back to the period between 2005 and 2007. There is no place for the sort of unacceptable behavior alleged by the DOJ at the bank we are building today.”

The statement of facts contains details using contemporaneous calls and emails of RBS executives, showing how the bank “routinely made misrepresentations to investors about significant risks” and then discussed the misconduct among themselves, the DOJ said.

Among the statements cited:

  • One RBS chief credit officer in the United States labeled them “total f***ing garbage” loans with “fraud [that] was so rampant … [and] all random,” so “the loans are all disguised to, you know, look okay kind of … in a data file.”
  • A senior vice president in RBS's asset-backed finance department explained to one of his colleagues that the loans were the product of a broken mortgage industry: The mortgage lenders “raking in the money” had an “incentive … to bring in as many loans as possible,” while “the [mortgage lenders' employees] that … have the incentive to hold the line don't give a sh** because they're not getting paid.”
  • A senior RBS trader noted in a May 2006 self-evaluation that, when compared to “the rest of [Wall S]treet, … we do the least amount of diligence and kick out the fewest loans.” On occasion, RBS did not conduct any due diligence at all.