Fraudster of the Week -- Deutsche Bank's Paul Mangione
On Monday, the Department of Justice filed a civil suit against Paul Mangione, the former Deutsche Bank head of subprime mortgage trading, alleging that he “systematically and intentionally” lied about the quality of subprime mortgages underlying nearly $1.5 billion in mortgage-backed securities in the run-up to the 2008 financial crisis. Although DOJ has aggressively pursued financial institutions for their participation in the mortgage-backed securities debacle, the suit against Mangione marks one of only a handful of times that the government has sought to hold an individual accountable.
According to the DOJ’s press release, Mangione engaged in a “fraudulent scheme” to sell ACE 2007-HE4, a $ 1 billion subprime mortgage bond, and ACE 2007-HE5, a $400 million subprime mortgage bond, by misleading investors about the quality of the loans backing the securitizations. Specifically, the complaint alleges that Mangione misled investors about the loan origination practices of Deutsche Bank’s wholly owned subsidiary, Chapel Funding. Despite being informed by Deutsche Bank’s Diligence Director that nearly 50% of the loans underwritten by Chapel had “significant defects, including rampant guideline violations, borrower fraud, inflated appraisals and loans made to borrowers that likely did not have the ability to repay their loan,” Mangione allegedly personally selected these loans for securitization and sale to investors. When the loans backing the securities inevitably failed, the pension plans, religious organizations, financial institutions and government-sponsored entities that had purchased the mortgage-backed securities lost millions of dollars.
The Mangione lawsuit follows on the heels of DOJ’s recent $7.2 billion settlement with Deutsche Bank for misleading investors about the mortgage loans it securitized between 2005 and 2007. Deutsche Bank ultimately agreed to pay a $3.1 billion civil penalty under the Financial Institutions Reform, Recovery and Enforcement Act, and to provide $4.1 billion in relief to underwater homeowners, distressed borrowers and affected communities. According to DOJ, Mangione was the individual specifically responsible for making many of the false and misleading statements about the quality of the subprime mortgages securitized by Deutsche Bank.
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