MANHATTAN (CN) - Federal prosecutors seek as much as $1 billion in damages in a mortgage fraud lawsuit against Deutsche Bank and its subsidiary MortgageIT, for violations that allegedly spanned a decade.
When an auditor warned MortgageIT that its loans had "serious problems," the company "stuffed the letters, unopened and unread, in a closet in MortgageIT's Manhattan headquarters," according to the complaint.
U.S. Attorney Preet Bharara blasted Deutsche Bank and MortgageIT's "lies and recklessness" at a Tuesday afternoon press conference. Bharara said the bank had "repeatedly and brazenly breached the public trust" from 1999 to 2009.
"Deutsche Bank and MortgageIT repeatedly lied to be included in a government program to select mortgages for insurance by the government," the complaint states. "Once in that program, they recklessly selected mortgages that violated program rules in blatant disregard of whether borrowers could make mortgage payments. While Deutsche Bank and MortgageIT profited from the resale of these government-insured mortgages, thousands of American homeowners have faced default and eviction, and the government has paid hundreds of millions of dollars in insurance claims, with hundreds of millions of dollars more expected to be paid in the future. The government brings this action seeking damages and penalties for the past and future claims that violate the False Claims Act, 31 U.S.C. §§ 3729 et seq., and the common law."
Prosecutors say that MortgageIT, which Deutsche Bank acquired in 2007, endorsed more than 39,000 mortgages for Federal Housing Administration (FHA) insurance, totaling more than $5 billion.
By February this year, the U.S. Department of Housing and Urban Development had paid more than $386 million in FHA insurance claims and related costs arising out of defendants' approval of mortgages for FHA insurance, according to the 48-page complaint.
It continues: "Many of these losses were caused by the false statements defendants made to HUD to obtain FHA insurance on thousands of individual loans. The government expects HUD will be required to pay hundreds of millions of dollars in additional FHA insurance claims as additional mortgages underwritten by MortgageIT default in the months and years ahead."
At the press conference, Bharara said, "The defendants simply ignored every type of red flag and breached every duty of due diligence before endorsing mortgages for federal insurance. In fact, they seemed to treat red flags as if they were green lights."
He added that Deutsche Bank and MortgageIT had a "proverbial skeleton in the closet," the auditor's findings that had been stuffed into a closet.
According to the complaint: "MortgageIT repeatedly failed to address dysfunctions in the quality control system, which were reported to upper management; MortgageIT took the only staff member dedicated to auditing FHA-insured mortgages, and reassigned him to increase production instead; and when an outside auditor provided findings to MortgageIT revealing serious problems, those findings were literally stuffed in a closet and left unread and unopened."
Bharara added in his remarks that when a new manager actually read the findings months later, upper management did nothing.
Asked why such a far-reaching fraud is being prosecuted as a civil action, Bharara replied: "That's a litigation decision made by us ... to get the maximum recovery possible."
Bharara added that the allegations in the complaint relate to "recklessness," but said that his office "as of yet" had not discovered evidence of "criminal intent."
No individuals are named as defendants.
Pace University law professor Bennett Gershman, a former prosecutor and defense attorney, told Courthouse News in an interview that that civil actions can be "pretty heavy weapons" against fraud, and carry less risk than criminal prosecution.
"The burden of proof in a criminal case is daunting," Gershman said. "It's much less risky to bring a civil action."
He added that lenders did not need to be jailed to be sent a strong message.
"If you're talking about deterrence, it could be that hitting them hard in their pocketbook is a pretty effective weapon," Gershman said.
Although Bharara declined to comment on other mortgage investigations, he hinted that they were ongoing.
"I don't think it would be a fantastical stretch to say we're looking at other lending institutions as well," Bharara said.
Prosecutors seek indemnification and compensatory, treble and punitive damages against Deutsche Bank and MortgageIT for violations of the False Claims Act, breach of fiduciary duty, negligence, and gross negligence.