Citigroup Inc., Bank of America Corp. and Goldman Sachs Group Inc. are among 13 banks whose units were sued for $1.15 billion by Virginia over claims they misled the state’s retirement system about the sale of residential mortgage-backed securities.

The suit in state court in Richmond is the largest financial fraud case ever brought by the commonwealth, Virginia Attorney General Mark Herring said in a statement yesterday.

The sealed complaint was filed in January under the whistle-blower provisions of the Virgina Fraud Against Taxpayers Act by Integra REC LLC, a Texas-based financial modeling and analysis firm, and subsequently joined by the state. It was made public yesterday.

While “wrongful actions of a general nature” by the banks have been the subject of news media and government investigations, information provided by Integra enabled the state to identify which specific loans backing the securities were misrepresented to the Virginia Retirement System, according to the complaint.

Michael DuVally, a spokesman for Goldman Sachs, and Mark Costiglio, a spokesman for Citigroup, both based in New York, declined to comment on the lawsuit.

Bill Halldin, a spokesman for Charlotte, North Carolina-based Bank of America, also declined to comment.

‘Proprietary Algorithm’

Integra developed a proprietary algorithm that lets it match properties in official records with those in security offering documents that didn’t contain identifying information such as names and addresses, the state said.

“Loan level misrepresentations are then traced to specific RMBS tranches” bought by the retirement system, according to the complaint.

Integra’s analysis “confirms that the losses suffered by VRS are beyond those related to general market conditions and resulted directly from” the banks’ misrepresentations, the state alleged in in its filings.

President Barack Obama created a task force aimed at holding banks accountable for practices leading to the 2008 financial crisis. Several financial institutions, including some of those named in the Virginia litigation, have paid settlements to resolve federal and state investigations.

Last month, Bank of America agreed to pay almost $16.7 billion, a record amount, for misrepresenting the quality of bonds backed by home loans. Citigroup Inc. agreed to pay $7 billion in July while JPMorgan Chase & Co. struck a $13 billion accord in November over similar claims.

Other States

An analysis like the one Virginia is applying can be done by other states and could lead more of them to file claims against banks, said Isaac Gradman, a lawyer at Perry Johnson Anderson Miller & Moskowitz LLP in Santa Rosa, California, who consults on mortgage litigation.

“I would assume other states will see this filing and say ‘Why can’t we do the same thing?,’” Gradman said. One key factor is whether the statutes of limitations in individual states will allow them to reach back far enough to make a meaningful case, Gradman said.

Michael Kelly, a spokesman for Herring, said he didn’t know if Integra REC had uncovered evidence for similar suits in other states.

Jason Collins, of Reid Collins & Tsai, a lawyer for Integra REC, didn’t immediately respond to a phone call requesting comment on the suit.

Retirement System

The Virginia suit focuses on the retirement system’s purchase of 220 packages of securities.

An analysis showed that almost 40 percent of the 785,000 mortgages backing those securities “were fraudulently misrepresented in a way that made them a significantly higher risk for default,” according to Herring’s statement.

Distortions included understating the number of loans with high loan-to-value ratios, and misrepresenting owner occupancy rates and the percentage of homes with second mortgages, Herring said.

Civil Penalties

The losses to the retirement system are estimated at $383 million and the state can seek triple damages. Virginia is also asking for civil penalties of $5,500 to $11,000 per violation.

If the suit is successful, Integra is eligible for 15 percent to 25 percent of any recovery under Virginia law, according to Kelly.

The retirement system has almost 600,000 members, including 145,000 teachers and 105,000 city and county government employees, according to the attorney general.

The case is Commonwealth of Virginia v. Barclays Capital, CL14-399, Circuit Court for the City of Richmond (Virginia).