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Former Deutsche Bank head subprime mortgage bond trader fires back at U.S. fraud charges

Denies all charges, accuses government of ‘concocting a baseless theory of fraud’

Paul Mangione, the former head of subprime mortgage trading at Deutsche Bank who stands accused over overseeing systemic mortgage bond fraud during the run-up to the financial crisis, says that the government kowtowed to public pressure to see individuals held responsible for the financial crisis by filing lawsuit against him that is wrong, unfair, and without merit.

On Monday, the government sued Mangione, stating that he “engaged in a fraudulent scheme to misrepresent the characteristics of loans backing two residential mortgage-backed securities that Deutsche Bank sold to investors that resulted in hundreds of millions of dollars in losses.”

In its announcement, the Department of Justice stated that this new lawsuit and Mangione’s alleged conduct are related to the DOJ’s $7.2 billion settlement with Deutsche Bank from earlier this year.

In January, the DOJ announced that it reached a settlement with Deutsche Bank in connection with the bank’s issuance and underwriting of residential mortgage-backed securities between 2005 and 2007.

In this new lawsuit, DOJ stated that 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.

But in a response to the government’s lawsuit, provided to HousingWire by Mangione’s legal representatives, Smith Villazor, Mangione denies the government’s charges, suggesting that others are much more to blame for the alleged fraud, and pledges to fight back.

“The decision to sue Paul Mangione for civil penalties in this case is both wrong and unfair. It’s wrong because the facts show that Mr. Mangione never agreed to mislead any investor,” Mangione’s lawyers say in the statement.

“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,” the statement continues.

The statement also suggests that the lawsuit is in response to claims that the government did not pursue enough individuals for crisis-era financial malfeasance.

“The government, apparently succumbing to criticism that it has not held anyone accountable for the housing market collapse and the ensuing credit crisis, has concocted a baseless theory of a civil fraud that supposedly victimized federally insured banks rather than digging in and gaining a full understanding of what actually happened,” the statement adds.

According to Mangione’s lawyers, the government filed its “meritless” lawsuit despite “knowing” that Mangione was not involved in much of the conduct he is accused of taking part in.

In the statement, Mangione’s lawyers dispute the charges against their client point-by-point, stating the following:

  • Paul Mangione had no role in buying or originating the allegedly problematic mortgage loans that went into the two securitizations at issue
  • Paul Mangione had no role in Deutsche Bank’s decision to purchase Chapel Funding, LLC, the subsidiary that originated the allegedly problematic mortgage loans
  • Paul Mangione had no managerial responsibility for Chapel after it was acquired, and, in particular, no oversight responsibility for Chapel’s mortgage-loan underwriting operations
  • Paul Mangione consistently told investors that Chapel mortgage loans were not subject to standard due diligence procedures because Deutsche Bank already owned the loans
  • Paul Mangione had no responsibility for Deutsche Bank’s disclosure policy on its RMBS deals

According to Mangione’s lawyers, the government’s entire case is based on two “short” phone calls between Mangione and an unnamed Deutsche Bank employee, who voiced concerns over the bank’s subprime loan origination practices.

“Mr. Mangione, hearing about these concerns for the first time and clearly unfamiliar with the issues, asked whether the problems were fixed and whether superiors at Deutsche Bank had been informed about these concerns,” the statement continues. “After being assured that the problems had indeed been fixed and that supervisors up the chain had been informed, Mr. Mangione continued to work on the two securitizations that the government now claims are fraudulent.”

Mangione’s lawyers conclude by stating that Mangione denies the charges and plans to fight the government in court.

“Mr. Mangione categorically denies that he participated in any fraud on these two securitization transactions dating back to 2007,” the statement concludes. “We will fight the allegations in this overwrought complaint and look forward to Mr. Mangione’s vindication.”

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