Archives For RMBS

Barclays Agrees to Pay $2 Billion to Resolve Fraud Claims

Stephanie Abbott —  March 29, 2018 — Leave a comment

Barclays Capital, Inc. and several of its affiliates (together, Barclays) have reached an agreement with the United States to settle a civil action filed in December 2016 in which the United States sought civil penalties for alleged conduct related to Barclays’ underwriting and issuance of residential mortgage-backed securities (RMBS) between 2005 and 2007.

Following a three-year investigation, the complaint in the action, United States v. Barclays Capital, Inc., alleged that Barclays caused billions of dollars in losses to investors by engaging in a fraudulent scheme to sell 36 Residential Mortgage-Backed Securities (“RMBS”) deals, and that it misled investors about the quality of the mortgage loans backing those deals.  It alleged violations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), based on mail fraud, wire fraud, bank fraud, and other misconduct.

The scheme alleged in the complaint involved 36 RMBS deals in which over $31 billion worth of subprime and Alt-A mortgage loans were securitized, more than half of which loans defaulted.  The complaint alleged that in publicly filed offering documents and in direct communications with investors and rating agencies, Barclays systematically and intentionally misrepresented key characteristics of the loans it included in these RMBS deals.  In general, the borrowers whose loans backed these deals were significantly less creditworthy than Barclays represented, and these loans defaulted at exceptionally high rates early in the life of the deals.  In addition, as alleged in the complaint, the mortgaged properties were systematically worth less than what Barclays represented to investors.  These are allegations only, which the Defendants dispute, and there has been no trial or adjudication or judicial finding of any issue of fact or law.

Barclays will pay the United States two billion dollars ($2,000,000,000) in civil penalties in exchange for dismissal of the Amended Complaint.

Agreement has also been reached with the two former Barclays executives who were named as defendants in the suit:  Paul K. Menefee, Austin, Texas, who served as Barclays’ head banker on its subprime RMBS securitizations, and John T. Carroll, Port Washington, New York, who served as Barclays’ head trader for subprime loan acquisitions.  In exchange for dismissal of the claims against them, Menefee and Carroll agree to pay the United States the combined sum of two million dollars ($2,000,000) in civil penalties.

The settlement was announced by Richard P. Donoghue, United States Attorney for the Eastern District of New York, and Laura S. Wertheimer, Inspector General, of the Federal Housing Finance Agency Office of the Inspector General (FHFA-OIG).

“This settlement reflects the ongoing commitment of the Department of Justice, and this Office, to hold banks and other entities and individuals accountable for their fraudulent conduct,” stated United States Attorney Donoghue. “The substantial penalty Barclays and its executives have agreed to pay is an important step in recognizing the harm that was caused to the national economy and to investors in RMBS.”

“The actions of Barclays and the two individual defendants resulted in enormous losses to the investors who purchased the Residential Mortgage-Backed Securities backed by defective loans,” stated FHFA-OIG Inspector General Wertheimer.  “Today’s settlement holds accountable those who waste, steal or abuse funds in connection with FHFA or any of the entities it regulates.  We are proud to have partnered with the U.S. Department of Justice and the U.S Attorney’s Office for the Eastern District of New York on this matter.”

The government’s case has been handled by this Office’s Civil Division.  Senior Counsel F. Franklin Amanat, and Assistant United States Attorneys Matthew R. Belz, Charles S. Kleinberg, Evan P. Lestelle, Matthew J. Modafferi, Josephine M. Vella and Alex S. Weinberg have been in charge of the litigation.  Mr. Donoghue thanks the FHFA-OIG for its assistance in conducting the investigation in this matter.

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Civil Fraud Complaint Filed by US Against Former DB Head of Subprime Trading

Rachel Dollar —  October 2, 2017 — Leave a comment

The United States filed a civil complaint in federal court in Brooklyn, New York, against Paul Mangione, former Deutsche Bank head of subprime trading. In its complaint, the United States alleges that Mangione engaged in a fraudulent scheme to misrepresent the characteristics of loans backing two residential mortgage-backed securities (RMBS) that Deutsche Bank sold to investors that resulted in hundreds of millions of dollars in losses. The suit was brought pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) and seeks an appropriate civil penalty.

As alleged in the complaint, Mangione engaged in a fraudulent scheme to sell ACE 2007-HE4 (HE4) — a $ 1 billion security — and ACE 2007-HE5 (HE5) — a $400 million security — by misleading investors about the quality of the loans backing the securitizations. The complaint further alleges that Mangione also misled investors about the origination practices of Deutsche Bank’s wholly-owned subsidiary, DB Home Lending LLC (DB Home) (f/k/a Chapel Funding LLC), which was the primary originator of loans included in the deals. 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 HE4 and HE5 offering documents also falsely represented that DB Home had “developed internal underwriting guidelines that it believe[d] generated quality loans” and that DB Home had instituted a quality control process that “monitor[ed] loan production with the overall goal of improving the quality of loan production,” among numerous other representations designed to instill in investors trust in DB Home’s underwriting processes. As alleged in the complaint, Mangione knew that these statements were false.

“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,” stated Acting U.S. Attorney Bridget M. Rohde for the Eastern District of New York. “We will hold accountable those who seek to deceive the investing public through fraud and misrepresentation.”

“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.”

“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.”

In January 2017, the Department of Justice settled a related RMBS matter with Deutsche Bank.

The United States’ case is being handled by Assistant U.S. Attorneys Edward K. Newman and Ryan M. Wilson. Acting U.S. Attorney Bridget M. Rohde and Acting Assistant Attorney General Readler thanked the Office of the Inspector General for the Federal Housing Finance Administration for its assistance in conducting the investigation in this matter.

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Former RMBS Trader Sentenced

Rachel Dollar —  May 2, 2017 — Leave a comment

Jessie C. Litvak, 42, Boca Raton, Florida, was sentenced to 24 months of imprisonment, followed by three years of supervised release, for engaging in fraudulent residential mortgage-backed securities (RMBS) trades. Litvak was also ordered to pay a $2 million fine.

On January 27, 2017, a jury found Litvak guilty of one count of securities fraud. According to the evidence introduced during the trial, in response to the 2008 financial collapse, the U.S. Department of Treasury introduced the Legacy Securities Public-Private Investment Program (PPIP), and used billions of dollars of bailout money from the Troubled Asset Relief Program (TARP) to restart the trading markets for many troubled securities, including certain kinds of RMBS. The program created nine PPIP funds, and more than 100 firms applied to manage the funds.

Litvak was a senior trader and managing director at Jefferies & Co, Inc. (“Jefferies”), a global securities and investment banking firm headquartered in New York. Jefferies also had a trading floor in Stamford, Connecticut, where Litvak and other members of its Mortgage and Asset-Backed Securities trading group worked.

The jury found that Litvak engaged in a scheme to defraud. As a broker-dealer, only Litvak – not the bond seller or buyer – knew the selling and asking prices of the parties. Litvak exploited this information by misrepresenting to his PPIP fund victim the price Jefferies paid for a RMBS bond in order to increase Jefferies’ profit on the trade.

Litvak has been released on bond since his arrest on January 28, 2013.

On March 7, 2014, Litvak was convicted after trial of 10 counts of securities fraud, one count of TARP fraud and three counts of making false statements to the government. Chief Judge Hall subsequently sentenced him to 24 months of imprisonment and a fine of $1.7 million. Litvak appealed his conviction and, on December 8, 2015, the U.S. Court of Appeals for the Second Circuit reversed the judgment of conviction as to the TARP fraud and making false statement charges, and remanded the matter for a new trial on the securities fraud charges.

The investigation of this matter revealed that members of Jefferies’ management in the fixed income division became aware that Jefferies employees were making misrepresentations to customers and did nothing to stop it. Jefferies has cooperated with the federal criminal investigation and paid a total penalty of $25 million as part of a non-prosecution agreement with the government. The penalty included up to $11 million in restitution to victims and up to a $4,200,402 penalty to the U.S. Securities and Exchange Commission (SEC). Jefferies also addressed deficiencies in the compliance and ethics practices and policies of its Mortgage and Asset-Backed Securities Trading group. These measures included Jefferies’ agreement to retain an Independent Compliance Consultant to conduct a review of Jefferies’ policies and procedures for detecting and preventing fraud in connection with the purchase or sale of RMBS.

Deirdre M. Daly, United States Attorney for the District of Connecticut, Christy Goldsmith Romero, Special Inspector General for the Troubled Asset Relief Program (SIGTARP), and Patricia M. Ferrick, Special Agent in Charge of the New Haven Division of the Federal Bureau of Investigation, made the announcement. The sentence was imposed by Chief U.S. District Judge Janet C. Hall in New Haven, Connecticut.

“This sentence sends an unequivocal message that fraud in the residential mortgage backed securities trading market will be met with serious punishment,” said U.S. Attorney Daly. “Jesse Litvak took advantage of his victims through his repeated and brazen lies, and as the Court correctly found, Litvak’s lies led to more than $6 million in unearned profits for his employer. Simply put, Litvak lied to investors to cheat them and make more money for himself. This has been a demanding and lengthy prosecution. I thank our prosecutors and the SIGTARP and FBI agents for their tireless professionalism throughout this case. Our criminal investigations of individuals and institutions involved in fraudulent RMBS trading activities remain active and ongoing.”

“Today former Jefferies trader Jesse Litvak was sentenced to federal prison for lying to customers about the prices of residential mortgage backed securities to criminally enrich his firm’s profit and his bonus based on the profit,” said Christy Goldsmith Romero, Special Inspector General for TARP. “This fraudulent pursuit of profit victimized customers including a fund trading with taxpayer dollars – part of a TARP program that unlocked frozen credit markets during the crisis. Despite making more than $15 million in four years, Litvak was motivated by greed to lie in 76 trades with 35 victims. Now Litvak has faced justice for his crimes. Since his arrest by SIGTARP special agents, broker dealers have changed their sale practices to prevent this type of fraud. SIGTARP commends U.S. Attorney Daly and prosecutors Jonathan Francis, Heather Cherry and William Nardini and for fighting crime in the residential mortgage backed securities market.”

“The prison term imposed today serves as another example that justice prevails over greed, deceit and criminal behavior,” said FBI Special Agent in Charge Ferrick.

This matter was investigated by SIGTARP and the Federal Bureau of Investigation. The case was prosecuted by Assistant U.S. Attorneys Jonathan Francis, Heather Cherry and William Nardini.

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