Ex-Deutsche Bank Trader Sued by U.S. Over Crisis-Era Bonds

(Bloomberg) -- A former Deutsche Bank AG head of subprime trading defrauded investors in mortgage-backed securities sold before the financial crisis, the U.S. said in a civil lawsuit filed Monday in Brooklyn.

Paul Mangione misled investors about the quality of loans underlying $1.4 billion in such securities, resulting in hundreds of millions of dollars in losses, the U.S. said.

“Mr. Mangione prioritized his and his employer’s bottom line over principles of honesty and fair dealing," said Chad Readler, acting head of the Justice Department’s civil division, in a statement.

The government’s complaint, focusing on Mangione’s representations about securities sold in 2007, shows how Justice Department lawyers continue to push forward with mortgage-bond cases left over from the Obama administration. It’s also a rare example of federal prosecutors seeking to hold individuals to account for actions that helped lead up to the financial crisis, after they extracted tens of billions of dollars in settlements with global banks, including Deutsche Bank.

Mangione categorically denied wrongdoing, said his lawyer, Patrick Smith, who accused the government of concocting “a baseless theory of a civil fraud” after “succumbing to criticism that it has not held anyone accountable for the housing market collapse and ensuing credit crisis."

“The decision to sue Paul Mangione for civil penalties in this case is both wrong and unfair,” Smith said in a 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 10-year-old securitization transactions on which numerous other participants had more input and responsibility.”

Mangione misled investors about the quality of loans backing the securities as well as about the origination practices of a Deutsche Bank subsidiary, DB Home Lending LLC, the Justice Department said. He approved bond-offering documents even though he knew they misrepresented key elements of the loans, such as compliance with lending guidelines, borrowers’ ability to pay, borrowers’ fraud and appraisal accuracy, according to the complaint.

“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," Bridget M. Rohde, the acting U.S. attorney in Brooklyn, said in the statement.

January Settlement

The government has brought its mortgage-related cases under the Financial Institutions Reform, Recovery and Enforcement Act of 1989, a remnant of the savings-and-loan crisis of the 1980s. The Justice Department has used the law, known as Firrea, to bring civil cases against banks including Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. over mortgage-related conduct in the lead-up to the financial crisis. Firrea allows the government to sue an individual or group, rather than charge them with a crime, for fraud that affects a federally insured financial institution.

Deutsche Bank in January finalized a $7.2 billion agreement to resolve a years-long U.S. investigation into its dealings in mortgage-backed securities. The German lender agreed to pay a $3.1 billion civil penalty and provide $4.1 billion in relief to consumers. Deutsche Bank declined to comment on the lawsuit.

A few banks remain under investigation, including HSBC Holdings Plc and Royal Bank of Scotland Group Plc. Late last year, after settlement talks broke down, the Justice Department sued Barclays Plc and two individuals over how the bank marketed and sold more than $30 billion in crisis-era mortgage securities.

--With assistance from David McLaughlin

To contact the reporters on this story: Tom Schoenberg in Washington at tschoenberg@bloomberg.net, Patricia Hurtado in Federal Court in Manhattan at pathurtado@bloomberg.net.

To contact the editors responsible for this story: Jeffrey D Grocott at jgrocott2@bloomberg.net, David Glovin at dglovin@bloomberg.net, Elizabeth Wollman