Virginia reaches $63 mln pact with 11 banks in mortgage bond fraud suit

(Adds details about lawsuit, settlement amounts.)

By Suzanne Barlyn

Jan 22 (Reuters) - A group of 11 banks agreed to pay more than $63 million to settle allegations that they misled the Commonwealth of Virginia and its retirement system about residential mortgage backed-securities, Attorney General Mark R. Herring said on Friday.

The banks, which include two Bank of America Corp units , Morgan Stanley (Xetra: 885836 - news) and a unit of the Royal Bank of Scotland Group PLC, defrauded the state's retirement fund by selling it shoddy mortgage bonds in the run-up to the financial crisis, Virginia's attorney general said in a 2014 lawsuit.

None of banks admitted liability in the settlement, Herring said.

The $63 million pact is the largest non-health care-related sum ever obtained in a suit brought under a Virginia law aimed at curbing fraud against the commonwealth's taxpayers, Herring said in a statement.

In the lawsuit, Herring said an analysis showed nearly 40 percent of the mortgages that backed 220 securities purchased by Virginia's retirement fund were fraudulently represented as posing a lower risk of default than they actually did.

The fund, which bought the securities between 2004 and 2010, lost a total of $383 million when it was forced to sell the securities, the lawsuit said.

Herring had originally sought a total of $1.15 billion from the banks, or triple the commonwealth's damages, a penalty allowed under the law at issue.

Two Bank of America units will together pay $19.5 million, the largest share of the settlement, followed by a Royal Bank of Scotland Group PLC unit ($10 million), a Barclays PLC (LSE: BARC.L - news) unit ($9 million) and Morgan Stanley ($6.9 million).

Other banks in the settlement include units of Credit Suisse (LSE: 0QP5.L - news) AG, Goldman Sachs Group Inc, Deutsche Bank AG (Other OTC: DBAGF - news) , HSBC Holdings plc,, JPMorgan Chase & Co (Xetra: 850628 - news) . and UBS AG.

A spokesman for HSBC said the bank is pleased to have concluded the matter. Representatives for the other banks either declined comment or could not be immediately reached for comment. (Reporting by Suzanne Barlyn; Editing by Dan Grebler and Alan Crosby)