Ex-Executive at Deutsche Bank Accused in Subprime Loan Case

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)