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Trader Sued Over Decade-Old Subprime RMBS

The former chief of subprime trading at Deutsche Bank has been sued by the government for allegedly misleading investors about the quality of subprime residential mortgage-backed securities.

Paul L. Mangione joined Deutsche Bank in 2000. By 2006, he had worked his way up to managing director at Deutsche Bank Securities Inc. and head of subprime loan trading at Deutsche Bank.

His compensation at the German financial institution was based, in large part. on the profitability of the subprime trading desk that he was in charge of, according to a complaint filed by the Department of Justice.

Mangione was responsible for Deutsche’s ACE shelf
registration which securitized loans originated by its subsidiaries, DB Home Lending LLC, formerly known as Chapel Funding LLC, and MortgageIT Securities as well as pools of loans acquired from other firms through a bidding process.

The government claims that Mangione was deeply involved throughout the entire process of acquiring and securitizing loans, including due diligence.

“Deutsche Bank’s diligence group, in conjunction with Mangione, decided which loans to purchase and which loans to reject from a given pool,” the complaint stated. “Mangione exercised authority over whether a subprime loan with ‘diligence issues’ would be purchased and often overrode the diligence group’s. determination, directing the diligence group to reconsider for purchase loans that the department had designated for rejection.”

He allegedly overrode the diligence group’s determination without disputing their conclusions.
His strategy was to ensure that the deal would go through and that the originators would continue to sell business to Deutsche.

In offering documents, Mangione used data from the originator’s bid tape — even if Deutsche’s diligence results contradicted the information.

Among the investors in Deutsche’s RMBS were Freddie Mac — which was allowed to purchase interests in securitizations as long as the loans were originated by an approved Freddie seller.

The Justice Department said in a written statement that
Mangione violated the Financial Institutions Reform, Recovery and Enforcement Act of 1989 by misleading investors about the quality of loans backing ACE 2007-HE4, a $ 1 billion transaction, and ACE 2007-HE5, a $400 million security.

“Mangione approved offering documents for HE4 and HE5 even though he knew they misrepresented key characteristics of the loans, including compliance with lending guidelines, borrowers’ ability to pay, borrowers’ fraud and appraisal accuracy,” the statement said.

The fraudulent scheme allegedly resulted in hundreds of millions of dollars in losses.

“The defendant fraudulently induced investors, including pension plans, religious organizations, financial institutions and government-sponsored entities, to name only a few, to invest nearly a billion and a half dollars in HE4 and HE5 RMBS, and caused them to suffer extraordinary losses as a result,” Acting U.S. Attorney for the Eastern District of New York Bridget M. Rohde said in the announcement. 

The Justice Department settled  a related RMBS matter with Deutsche this past January.

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