Nearly 10 years to the day since Lehman Brothers failed, the US filed a civil lawsuit in federal court in Brooklyn against Paul Mangione, former Deutsche Bank head of subprime trading, whom it accused of defrauding investors in mortgage-backed securities sold before the financial crisis.
Mangione misled investors about the quality of loans underlying $1.4 billion in mortgage-backed securities, resulting in hundreds of millions of dollars in losses, the U.S. said. The case against the former trader came after the bank in January reached a $7.2 billion settlement with Deutsche Bank in a related case over risky mortgage securities sold to investors.
As alleged in the complaint, Mangione engaged in a fraudulent scheme to sell ACE 2007-HE4 (HE4) -- a $ 1 billion security -- and ACE 2007-HE5 (HE5) -- a $400 million security -- by misleading investors about the quality of the loans backing the securitizations. The complaint further alleges that Mangione also misled investors about the origination practices of Deutsche Bank’s wholly-owned subsidiary, DB Home Lending LLC (DB Home) (f/k/a Chapel Funding LLC), which was the primary originator of loans included in the deals. Mangione approved offering documents for HE4 and HE5 even though he knew they misrepresented key characteristics of the loans, including compliance with lending guidelines, borrowers’ ability to pay, borrowers’ fraud and appraisal accuracy.
The HE4 and HE5 offering documents also falsely represented that DB Home had “developed internal underwriting guidelines that it believe[d] generated quality loans” and that DB Home had instituted a quality control process that “monitor[ed] loan production with the overall goal of improving the quality of loan production,” among numerous other representations designed to instill in investors trust in DB Home’s underwriting processes. As alleged in the complaint, Mangione knew that these statements were false.
“The defendant fraudulently induced investors, including pension plans, religious organizations, financial institutions and government-sponsored entities, to name only a few, to invest nearly a billion and a half dollars in HE4 and HE5 RMBS, and caused them to suffer extraordinary losses as a result,” said Acting U.S. Attorney Bridget Rohde for the Eastern District of New York. “We will hold accountable those who seek to deceive the investing public through fraud and misrepresentation.”
The DOJ further adds that “the government’s complaint alleges that Mr. Mangione knew that certain of Deutsche Bank’s RMBS contained unsound mortgages that did not meet the credit or appraisal standards that the bank represented,” said Acting Assistant Attorney General Chad A. Readler of the Justice Department’s Civil Division. “By allegedly misleading investors about the riskiness of these securities, Mr. Mangione prioritized his and his employer’s bottom line over principles of honesty and fair dealing. The Department of Justice will continue to pursue those who engage in fraud as a way to conduct business.”
Did Mangione do anything notably different than what every other bank, Goldman Sachs most infamously, was doing in the pre-bubble days? Not at all:
“As alleged in today’s filing, this individual knowingly took steps during the lead up to the financial crisis to sell defective mortgage loans while hiding the poor quality of the loans from investors,” said Deputy Inspector General for Investigations Rene Febles for the Federal Housing Finance Agency Office of the Inspector General. “This conduct was deliberately fraudulent and resulted in significant losses for the investors. We are committed to working with the U.S. Department of Justice and the U.S. Attorney’s Office for the Eastern District of New York to hold accountable those who engaged in fraud in the secondary market for mortgages.”
Of course, since this is a civil not a criminal lawsuit, and since nobody of any significance on Wall Street has yet gone to prison, we can cut straight to the "smack on the wrist" settlement phase of the lawsuit.
Full complaint below:
http://www.scribd.com/embeds/358638241/content