Ex-Executive at Deutsche Bank Accused in Subprime Loan Case
September 12 2017 - 12:47AM
Dow Jones News
By Rebecca Davis O'Brien
Federal prosecutors on Monday accused the former head of
subprime mortgage trading at Deutsche Bank AG of misleading
investors about loans backing $1.4 billion in securities issued in
2007, leading to hundreds of millions of dollars in losses,
according to a fraud complaint filed in Brooklyn federal court.
The civil claims against Paul Mangione, of Scarsdale, N.Y., come
nearly a decade after the financial crisis, and months after
Deutsche Bank settled with the U.S. Justice Department for $7.2
billion to resolve related claims about the bank's use of
mortgage-backed securities and its lending practices.
In a 69-page complaint, prosecutors allege that Mr. Mangione
schemed to defraud investors and "systematically and intentionally
misrepresented key characteristics of the mortgage loans
securitized by Deutsche Bank," through two residential
mortgage-backed securities, worth $1 billion and $400 million.
"The decision to sue Paul Mangione for civil penalties in this
case is both wrong and unfair," Patrick J. Smith, a lawyer for Mr.
Mangione, said in a written statement. "It's wrong because the
facts show that Mr. Mangione never agreed to mislead any investor.
And it's unfair because Mr. Mangione is being singled out for blame
on two ten-year old securitization transactions on which numerous
other participants had more input and responsibility."
A spokesman for Deutsche Bank declined to comment.
Prosecutors in the Brooklyn U.S. Attorney's office's civil unit
alleged that "Mangione made and approved representations about the
creditworthiness of the borrowers of the mortgages" in the Deutsche
Bank securities, "despite knowing that these representations were
false" and that the securities had an "escalating likelihood of
widespread defaults."
Prosecutors said that Mr. Mangione knew that Chapel Funding
LLC., a California-based mortgage originator responsible for the
loans in the two securities, had "abandoned any semblance of
responsible underwriting practices," according to the complaint.
Despite knowing of defects in the loans, he represented that the
loans were sound, prosecutors allege. Deutsche Bank bought Chapel
Funding in 2006.
The complaint quotes from April 2007 calls and emails, in which
a diligence director at the bank allegedly told Mr. Mangione about
defects in Chapel's loans. Mr. Mangione admitted that he "knew all
that," and later stated that Deutsche Bank should "fire all those
guys at Chapel," who "should be arrested," according to the
complaint.
Mr. Mangione and the diligence director -- who is not named in
the complaint -- later agreed to lie to investors about Chapel's
loans and the bank's diligence results, prosecutors said.
Ultimately, 80% of the loans in the $1 billion security
defaulted and lost money, while 75% of the loans in the $400
million security defaulted and lost money, according to the
complaint.
Deutsche Bank's $7.2 billion settlement -- reflecting a $3.1
billion civil penalty and $4.1 billion in relief to distressed
borrowers and underwater homeowners -- marked the largest
settlement against a single entity related to the meltdown in
residential mortgage-backed securities. When the settlement was
announced, then-Attorney General Loretta Lynch said the bank didn't
merely mislead investors, but "contributed directly to an
international financial crisis."
In the case involving Mr. Mangione, prosecutors are seeking a
jury trial and a financial penalty.
(END) Dow Jones Newswires
September 12, 2017 00:32 ET (04:32 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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