Yesterday, the Department of Justice (“DOJ”) entered into a settlement with Paul Mangione, the former head of Deutsche Bank’s subprime loan trading desk. Mangione will pay the DOJ $500,000 in exchange for a release of claims brought by the DOJ against Mangione under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), 12 U.S.C. § 1833a. In September 2017, the United States Attorney’s Office for the Eastern District of New York (“EDNY”) filed a complaint against Mangione alleging that he engaged in a scheme to defraud investors in two residential mortgage-backed securities (“RMBS”) issued by Deutsche Bank in 2007.
Specifically, EDNY alleged that Mangione knew the loans underlying these two securities did not meet representations made by Deutsche Bank in the securities’ offering documents. In its complaint, EDNY cited emails and calls involving Mangione—one in particular where he allegedly stated that a loan originator who produced loans underlying the security he was offering “should be arrested for the s*** they were doing.” Mangione denied the allegations and entered into yesterday’s settlement without an admission of liability.
FIRREA is a civil penalty statute passed in the wake of the savings and loan crisis of the 1980s. It provides for civil penalties if one or more of fourteen enumerated criminal predicates are violated. The FIRREA predicates alleged in Mangione’s case were mail fraud (18 U.S.C. § 1341) and wire fraud (18 U.S.C. § 1343). Although the underlying predicates are criminal, the burden of proof for the DOJ in these cases is a civil one—by a preponderance of the evidence. The DOJ has successfully used FIRREA to obtain tens of billions of dollars from banks following the financial crisis.
Mangione’s settlement follows a much larger settlement by Deutsche Bank in January 2017, in which the bank paid a $3.1 billion civil penalty under FIRREA (along with an additional $4.1 billion in relief to homeowners) to resolve the DOJ’s allegations that Deutsche Bank securitized billions of dollars in defective mortgages between 2006 and 2007, and allegedly made false representations in connection with those securities.
EDNY has brought a number of FIRREA actions stemming from the financial crisis, settling cases with Citigroup, Barclays, Nomura, and Société Générale, and actively litigating an ongoing dispute with UBS. While other individuals have been named in RMBS lawsuits filed by the DOJ, Mangione’s case is the first and only of its kind in which the DOJ pursued an individual for alleged RMBS fraud after reaching a settlement with the bank.
Derek Adams, a former Trial Attorney with the Department of Justice, Civil Fraud Section, is a partner in the firm’s Litigation and Government Investigations practice group. Derek has extensive experience with False Claims Act and FIRREA matters, and can be reached at firstname.lastname@example.org or (202) 466-8960 if you have any questions.