U.S. Sues Former Deutsche Bank Trading Executive Over Role in Mortgage Fraud

US authorities today filed fraud charges against the former Deutsche Bank head of subprime trading, alleging that he sold investors mortgage-backed investments that were secretly expected to lose value.

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Investigators are targeting Paul Mangione, who allegedly engaged in misleading investors about the “characteristics of loans backing two residential mortgage-backed securities (RMBS),” knowing that they were doomed to fail.

Mr. Mangione faces fines and a ban from the financial industry. The exact punishment will be determined at a later hearing, the US Justice Department said today.

The case casts more light on the main cause of the financial crisis, raising the possibility that the bankers who devised these investments knew that they were selling toxic financial products. While they were only concerned with their fees, the fraudulent scheme resulted in hundreds of millions of dollars in losses for investors who bet that the mortgage markets would continue to boom.

Earlier this year, Deutsche Bank AG settled over the same case and paid $7.2 billion after admitting to misleading investors about its handling of mortgage-backed securities before 2008. This was the first accord with a European bank since the mortgage investment misconducts were marketed.

This case involves a new type of target for the US authority, which this time is tracing the mortgage pipeline in an attempt to uncover wrongdoing. Specifically, the complaint alleges that Mangione hid the mortgage company that the loans primarily originated from, namely DB Home Lending LLC, a wholly-owned subsidiary of Germany's biggest bank.

Acting US Attorney Bridget M. Rohde for the Eastern District of New York said: “The government’s complaint alleges that Mr. Mangione knew that certain of Deutsche Bank’s RMBS contained unsound mortgages that did not meet the credit or appraisal standards that the bank represented,” said Acting Assistant Attorney General Chad A. Readler of the Justice Department’s Civil Division. “By allegedly misleading investors about the riskiness of these securities, Mr. Mangione prioritized his and his employer’s bottom line over principles of honesty and fair dealing. The Department of Justice will continue to pursue those who engage in fraud as a way to conduct business.”

He continued: “As alleged in today’s filing, this individual knowingly took steps during the lead up to the financial crisis to sell defective mortgage loans while hiding the poor quality of the loans from investors,” said Deputy Inspector General for Investigations Rene Febles for the Federal Housing Finance Agency Office of the Inspector General. “This conduct was deliberately fraudulent and resulted in significant losses for the investors. We are committed to working with the U.S. Department of Justice and the U.S. Attorney’s Office for the Eastern District of New York to hold accountable those who engaged in fraud in the secondary market for mortgages.”