hustle case
TRANSCRIPT
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UNITED STATES DISTRICT COURT
SOUTHERN
DISTRICT OF
NEW
YORK
.
. = : . : : : . ~
-------------------------------------x
UNITED STATES OF AMERICA ex r e l .
EDWARD O DONNELL,
Pl a i n t i f f ,
- v -
COUNTRYWIDE HOME LOANS, INC.,
COUNTRYWIDE
BANK FSB,
BANK
OF
AMERICA, N.A.,
and REBECCA
MAIRONE,
Defendants .
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
JED S. RAKOFF,
U.S.D.J .
/ 1 - I
,.
--
12-cv-1422
(JSR)
OPINION
AND
ORDER
Early
in
the
Great Recession, the Secur i t i e s and Exchange
Commission brought
s u i t
aga ins t the t h ree most sen io r execu t ives
of
Countrywide Financ ia l
Corporat ion ,
1
a l l eg in g t h a t the company,
a t
t he i r
behest , had f a l s e l y assured i nves to rs t ha t , i n the per iod
from 2005
to 2007, t was pr imar i ly a prime q u a l i t y mortgage
lender ,
when
in fac t ,
Countrywide
was
wri t ing
r i s k i e r
and
r i s ke r
loans .
Compl. 4,
SEC v.
Mozilo,
No. 09-cv-3994 (C.D. Cal. f i l e d
June
4,
2009) .
The case was
s e t t l e d
without
the
defendan ts
admit t ing o r denying the
a l l eg a t i o n s ,
and the Department
of
1
Countrywide Financ ia l Corporat ion ,
or ig ina l ly named
as
a
defendant in
t h i s
ac t ion , was dismissed on
consent
a t
the s t a r t
of
t r i a l . While
t he re
were
a number of
a f f i l i a t e d companies opera t ing
under the
Countrywide
umbrel la ,
t h i s Opinion and
Order uses
the
term
Countrywide to r e f e r to remaining defendan ts Countrywide
Home
Loans, Inc. and Countrywide
Bank, FSB,
excep t where
the
context ind ica tes otherwise .
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Jus t i ce chose
not
to br ing any cr imina l
charges . But in
2012,
a
whis t leb lower ,
Edward O'Donnell ,
a
former
Countrywide Vice
Pres iden t , f i l e d a qui tarn ac t ion a l l eg ing t h a t
ano ther
Countrywide
program, known
as the
High Speed Swim
Lane (or
HSSL
o r Hust le ) ,
was the
vehic le
by which Countrywide
had
pe rpe t ra t ed a subsequent f raudu len t scheme from August 2007 to May
2008.
2
Eventua l ly , the U.S. At to rney ' s Off ice took charge of the
case ,
and
proved,
as the j u ry found, t h a t Countrywide and
one of
i t s
o f f i c e r s , Rebecca Mairone, had engag ed in an i n t en t iona l
scheme
to
misrepresen t the qua l i ty
of
the mortgage
loans
t ha t t
processed through the
HSSL
program and so ld to
Fannie Mae
and
Freddie Mac dur ing the afo resa id nine-month
per iod .
As a r e s u l t ,
the j u ry found Countrywide and i t s successor in i n t e re s t , Bank
of
America,
N.
A. ( co l lec t ive ly ,
the
Bank
Defendants ) , along wi th
Ms.
Mairone, c i v i l l y l i a b l e for
f raud
i n v i o l a t i o n
of
the
Financ ia l Ins t i t u t i ons Reform, Recovery, and
Enforcement
Act
( FIRREA ), 12 U.S.C. 1833a. See Ju ry ' s Verd ic t , ECF No. 312.
I t
i s
now
up to the Court to
determine what c i v i l p en a l t i e s
should
be imposed
for
t ha t v io la t ion .
See
12 U.S.C.
1833a(a) .
This i s no easy t a sk , for the prov i s ion of the s t a t u t e
spec i fy ing
2
See
Government 's Rebut ta l Summation
Tr. 3456:5-6 , ECF No. 307
( I t took Ed O'Donnel l to br ing
t h i s
f raud
to
publ ic
a t t en t ion , to
publ ic sc ru t iny in t h i s cour t room .
. ) .
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the
monetary pena l ty to
be imposed in
cases l i ke the
i n s t a n t one
simply
s t a t e s that [ i ] f any
person
der ives
pecun iary ga in from
the v io l a t i o n ,
o r i f
the
v i o l a t i o n r e s u l t s in
pecun iary
l o s s t o a
person o the r than the v io la to r , the amount of the c i v i l pena l ty
may
not exceed the
amount
of
such ga in o r
l o ss .
Id.
1833a(b)
(3) .
The s t a tu t e prov ides no guidance ,
however,
as
to
how to ca l cu l a t e such ga in
o r
loss o r
how
to choose a
pena l ty
with in
the broad
range
pe rmi t t ed .
The pa r t i e s and the Court have unear thed on ly
one case
t ha t
discusses t h i s choice
under
FIRREA: United S ta t e s
v. Menendez,
No.
l l -cv-6313, 2013 W 828926
(C.D. Cal.
Mar.
6,
2013) . Finding
no
preceden t on po in t ,
Menendez
looked to
the
case law of arguab ly
analogous c i v i l
pena l ty
s t a tu t e s and suggested f ive f ac to r s to
consider : ( l )
the
good o r
bad
f a i t h
of
the
defendant
and
the
degree of
h is
sc i en te r ;
(2)
the
i n ju r y to
the
publ ic ,
and
whether
the
defendant ' s conduct c rea t ed subs tan t i a l l o s s o r the r i s k
of
subs tan t i a l l o s s t o o the r
persons ;
(3) the egreg iousness
of
the
v io l a t i o n ; (4) the
i so l a t e d o r repea ted na ture of the v io la t ion ;
and (5) the
de fendan t ' s
f inanc ia l
condi t ion
and a b i l i t y
to
pay.
Id . a t *5
( c i t ing
Fed.
Elec t ion
Comm'n v . Furgatch , 869 F.2d 1256,
1258
(9 th
Cir .
1989)) .
Simi la r ly ,
in
d i scuss ing
arguab ly
analogous
c i v i l
p en a l t i e s i n a non-FIRREA
context , the
Second Circu i t has
d i rec ted d i s t r i c t
cour t s
to consider the good o r bad f a i t h
of
the
defendants , the i n ju r y to the
publ ic ,
and the defendants ' a b i l i t y
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to
pay.
Advance Pharm., Inc . v. United
St a t e s ,
391 F.3d
377, 399-
400 (2d
Cir .
2004) ( in t e rna l c i t a t i o n and quo ta t i on marks
omit ted) A s imi l a r l st of f ac to r s i s a l so used
in determining
c i v i l
pena l t i e s under
the Secur i t i e s Exchange
Act.
See
SEC v.
Gupta, No.
l l -cv-7566,
2013 W 3784138, a t
* l
(S.D.N.Y. Ju ly 17,
2013)
( In determining
the appropr i a t e amount
of
a
c i v i l
penal ty ,
cour t s
in
t h i s D i s t r i c t are t yp i ca l l y
guided by the f ac to r s s e t
fo r th in
Hal ig iannis ,
to wit :
' (1)
the
egregiousness
of
the
defendants ' conduct ;
(2) the
degree of
the defendan t ' s sc i en te r ;
(3) whether
the defendan t ' s conduct
c rea ted s ubs t a n t i a l lo sses o r
the r i s k of subs t an t i a l l o s ses to o the r persons ; (4)
whether
the
defendan t ' s
conduct was i s o l a t e d or r ecu r ren t ; and (5) whether
the
pena l ty
should be
reduced
due to the defendan t ' s demonstra ted
cur ren t and
fu tu re
f inanc ia l c ond i t i on . ' ( c i t i ng
SEC v.
Hal ig iannis ,
470
F.
Supp. 2d 373,
386
(S.D.N.Y.
2007)) .
But
while
these
cases provide
some genera l guidance
as to what f ac to r s
bear
on
what the pena l ty should be
a f t e r
the cap of ga in o r
l o s s i s
determined,
they
do
not
speak to how gain
o r
loss are def ined
o r
ca lcu la ted .
At the i nv i t a t i on
of
the Court ,
the re fo re ,
the
pa r t i e s
provided extens ive br i e f i ng and ora l argument
on
how gain and
loss should
be ca lcu la ted
and
what these c a l c u l a t i o n s
should be.
See
ECF
Nos. 311, 314, 315, 319, 322, 325, 329, 333, 337. Afte r
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reviewing
these
submiss ions , as wel l as
the
ex tens ive evidence
presen ted
a t
t r i a l ,
the
Cour t f inds as fo l lows:3
FIRREA i s a so -ca l l ed
hybr id
s t a tu t e , pred ica t ing c i v i l
l i a b i l i t y on the Government 's proving cr imina l v io la t ions (here ,
mail
f raud
and
wire fraud)
by a
preponderance
of
the evidence.
Unlike p r iv a t e c i v i l ac t ions , t he re fo re ,
a FIRREA
ac t ion i s not
pr imar i ly in tended to serve compensatory func t ions but r a t h e r to
serve q u a s i - c i v i l
puni t ive
and
d e t e r r en t
func t ions .
This i s
demonst ra ted on
the
face of
the
s t a t u t e by
the
fac t ,
i n t e r a l i a ,
t ha t the s t a tu t e descr ibes the
monies
to
be
paid ,
not as
compensation
to
be
paid to the
immediate
vic t im
of the misconduct ,
but
as
a penal ty
to
be
paid to the Government. At the same t ime,
because
the re i s
no
t h r e a t
of
imprisonment nor the s t igma
assoc ia t ed
with
a
cr imina l charge, the burden of proof i s
preponderance of
the
evidence
and
the
s o - ca l l ed ru l e
of
l en i ty
has
no
app l ica t ion . In shor t ,
FIRREA
seeks to impose subs tan t i a l
c i v i l p en a l t i e s
fo r
cr imina l misconduct a f f e c t i n g f ed e r a l l y
insured
f inanc ia l
i n s t i t u t i ons .
12 U.S.C.
1833a(c)
(2) .
The
Court ' s ca lcu la t ions ,
l i k e
the
p a r t i e s ' ,
are
not
p e r fe c t l y
prec i se a t
every
s t ep , r e ly ing ins t ead
on reasonab le
es t imates
where
appropr ia te .
The use
of
reasonab le
es t imates
o r
approximat ions
i s well es tab l i shed in
analogous contexts .
See,
~ United
Sta tes
v.
Kumar, 617
F.3d
612,
632 (2d
Cir .
2010)
(sentencing);
SEC
v. Pa te l , 61 F.3d 137, 139 (2d Cir . 1995)
(d isgorgement) ; Uni ted Sta tes
v.
Uddin, 551 F.3d 176, 180 (2d Cir .
2009)
( fo r f e i t u re ) .
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In determining the
appropr ia te pena l ty ,
the re fo re , as wel l as
the
appropr ia te
d e f i n i t i o n and
ca lcu la t ion of
lo s s
and /o r
gain ,
a t t e n t i o n must
be
pa id
to
prec i se ly what pred ica te cr ime has been
proved
and
what i t s e s se n t i a l e lements are . Here,
the e s s e n t i a l
cr ime found by the ju ry was
a scheme
to induce Fannie
Mae
and/or
Freddie
Mac to
purchase mortgage loans o r ig in a t ed through
the
High
Speed
Swim Lane
by
misrepresent ing t ha t
the
loans
were of
highe r
q u a l i t y than they
a c t u a l l y were. C t . ' s Ins t ruc t ions
of
Law to the
Jury a t 11, ECF
No. 265.
The
HSSL
program implemented t h i s
scheme
by,
i n t e r a l i a , t r a n s fe r r i n g primary
r e sp o n s i b i l i t y
fo r approving
loans
from qua l i t y - focused underwr i te rs to volume-focused
loan
s pe c i a l i s t s
employing
automated underwr i t ing sof tware , e l imina t ing
the
qua l i t y -a s su rance
check l i s t , suspending
the
qua l i ty
of
grade
compensation r educ t ion t ha t
prev ious ly
provided d is incen t ives to
low-qua l i ty
loan
or ig ina t ion ,
and
reducing
the
t u rn
t ime
fo r
loan
funding
from
45-60 days
to
15 days.
See,
e . g . ,
Defendants '
t r i a l
exh ib i t
( DX ) 191;
P l a i n t i f f ' s
t r i a l
ex h ib i t ( PX ) 262; X
31;
X 2661; X 65; X 67;
T r i a l
Transc r ip t ( Tr . ) 967 :18 -968 :6 ,
ECF
Nos. 267-309. The Chief
Operat ing
Off i ce r
of
the
Ful l
Spectrum
The
scheme
was Countrywide 's , but , a f t e r
the events
g iv ing
r i s e
to t h i s
s u i t , defendant Bank of
America,
N.A.
o r i t s a f f i l i a t e s
purchased Countrywide
and
thereby subsumed
i t s
l i a b i l i t i e s .
Although one
of
these a f f i l i a t e s ,
Bank
of
America
Corp. , was
dismissed
as a
defendant in
t h i s ac t ion , Bank
of
America,
N.A.
does not
contes t
successo r - in - in t e res t l i a b i l i t y
fo r
purposes of
t h i s
case .
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Lending d iv i s ion of Countrywide, Rebecca Mairone, was
a
l e ade r
in
des ign ing and
implementing
the HSSL program. See,
e . g . , Tr.
1670:16-17 .
Since
the essence of the
cr ime proved was
a
f r audu len t scheme
to induce
Fannie Mae and Freddie Mac i n to purchas ing r i sky
mortgages
or ig ina ted through
the
HSSL program, the
f i r s t th ing the
Court must determine in
ca l cu l a t i n g
los s o r ga in i s how
many HSSL
loans
were
sold
by Countrywide
to
Fannie
Mae and
Freddie Mac. The
Government
a s se r t s
tha t the re
were
28,882 such loans , while
the
Bank Defendants
argue t ha t t he re
were only
11 ,481 . This d i f fe rence
i s
the product
of three
f ac tua l
d i spu te s t ha t
the
Court now
resolves .
Fi r s t , while
bo th
s ide s
agree
t ha t the
HSSL
process
began on
August
13, 2007,
they disagree as
to
when the program
ended.
The
Bank
Defendants
argue
t ha t
the
HSSL
program ended
in
Apr i l
2008
when Countrywide r e in t roduced the qua l i t y -a s su rance
ch eck l i s t ,
while
the Government
contends
t ha t
the
HSSL ended
only
when
underwr i te rs were once
again
requi red to
c l e a r
the
loans
fo r
c los ing , beginning
May 22,
2008. The Court agrees
with
the
Government t ha t
the
removal of exper ienced unde rwr i t e r s
and
t h e i r
The
Court f inds ,
however, t ha t 107 loans from the p i lo t pe r iod
a t the ou tse t
of
the
HSSL p r o j ec t
should
be
excluded from the
t o t a l . See
Deel .
of
Lars Hansen
dated
Nov. 27, 2013 6,
ECF
No.
320 of
665 loans Bank
Defendants urge
excluded on
t h i s
bas i s ,
558
were
c lea red to
c lose by a loan
spec ia l i s t )
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cont inued absence from the
c l e a r - t o - c l o s e
process was a t the
hear t
of
the
HSSL
scheme,
and accordingly
concludes t ha t
May
21,
2008 i s
the appropr ia te
end da te for
def in ing
the HSSL
popula t ion .
Second,
the Bank Defendants argue tha t ,
even
with in t h i s
per iod , t he re were loans
t ha t
were in
some
degree rev iewed by an
underwr i te r
a t
some
po in t
in the
process
and should the re fo re be
excluded from the
t o t a l .
But
even in these cases , it
was the
l e s s
exper ienced, l e s s punc t i l ious loan s pec i a l i s t s
who, r e ly ing
chie f ly on sof tware , c l ea red the
loans
for c los ing , the
c r i t i c a l
t o l l ga t e on
t h i s
h igh-speed highway. The Court wi l l
not
exclude
a
loan
from
the
HSSL
popu la t ion
i f
it
was
c lea red
to
close by
a
loan
spec ia l i s t merely
because
a t
some
po in t
in
the or i g i na t i on process
an
underwr i te r glanced a t it
Third, the
Bank
Defendants contend t ha t the
Government 's HSSL
popula t ion
wrongly
inc ludes
non-HSSL
loans
processed
through
f i e l d
branches. I t i s undisputed t ha t the
HSSL
process was implemented
a t f i ve Centra l Ful f i l lment ( CF ) branches, which handled
mortgage app l i ca t ions by te lephone o r
e l ec t r on i ca l l y , as
opposed
to
f i e l d
branches where
a po t e n t i a l
borrower
could walk in of f
the
s t r ee t . The
F branches were l oca t ed
in
Richardson,
Texas;
Chandler ,
Ar izona;
Rosemead,
Cal i fo rn ia ; Plano, Texas; and
Hatboro, Pennsylvania . Tr. 1 6 9 9 : 3 - 5 . But t he re
a l so e x i s t e d
f i e ld
branches
a t t he se loca t ions , and
the
Bank Defendants
argue
t ha t
the Government
wrongly
inc luded
in i t s
popula t ion
of
HSSL
loans
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some 11,057 loans t ha t were the p roduc t
o f
a c t i v i t i e s by the f i e l d
branches
in
each
of the
f i ve
c i t i e s and t ha t
d id not proceed
th rough the
HSSL
process . Bank
Defs . '
Loss
Mem. a t 20
( c i t i n g
Tr.
2227:5-13) .
Indeed,
the Government ' s
own
witness
conf i rmed as
much.
Tr. 336:22-24 ( Q: But
genera l l y , the
f i e l d
branches did
not
use
the
procedure t ha t
was
used fo r
the
produc t ion of Hus t le
loans , am I cor rec t ? A: That ' s c o r r e c t . ) . While the
q u a l i t y
of
these non-HSSL
loans may a l s o have been overs t a t ed , t h i s
was
not
the
sub jec t of
any
proof a t t r i a l . Accordingly , the
Court w i l l
cons ider the HSSL popu la t ion to inc lude on ly those loans p rocessed
o r funded by CF branches r a t he r than
by
f i e l d branches .
The r e s u l t of the foregoing de te rmina t ions
i s
t ha t
the
popula t ion
o f
HSSL loans fo r purposes
o f
de te rmin ing
lo ss
o r
gain
i s
17,611
(see Bank Defs . '
Loss
Mem.
a t
21 n .11 , l e s s the 107
l oans
t ha t
the
Government
concedes
should
be
excluded
from
the
p i l o t
per iod)
.
But
how much was the gain
o r loss on the
f r audu len t sa l e
of
these
17,611
HSSL
l oans?
The
r e s u l t v a r i e s
hugely depending
on
how broad ly
o r narrowly one cons t rues these te rms,
and
what
purposes they a re in tended to se rve . FIRREA i t s e l f does not
provide
an
ad jec t ive to modify e i t h e r ga in o r lo ss o t h e r than
pecun ia ry .
Some o ther s t a tu t e s do, but
not
in a
way t ha t a l lows
the Court to
draw a coheren t
i n f e r ence
from these
imperfec t
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analogies .
Nor
i s
the l e g i s l a t i v e h i s t o ry p a r t i c u l a r l y
i l luminat ing .
The Bank Defendants p lace grea t weight on the Alte rna t ive
Fines
Act, which con ta ins some
language
s imi l a r to FIRREA and was
enac ted on ly
two
years e a r l i e r . Spec i f i ca l ly , the r e l evan t sec t ion
of the Alte rna t ive Fines Act s t a t e s : I f
any
person der ives
pecun ia ry ga in
from the offense ,
o r i the
offense
r e s u l t s in
pecun ia ry lo ss to a
person
other
than the defendant , the defendant
may be
f ined not
more
than the gre a t e r
of
twice the
gross
ga in
o r
twice the gross
lo ss , unless imposi t ion of a f i ne
under t h i s
subsec t ion
would unduly
complicate o r prolong
the
sentenc ing
process .
18
U.S.C.
357l (d) . Where the
Alte rna t ive
Fines
Act
uses
twice the gross ga in
o r
twice the
gross
loss (emphasis
suppl ied) , FIRREA uses on ly such ga in o r l o s s ,
l ead ing
the Bank
Defendants
to
draw
the nega t ive
in ference
t ha t FIRREA's
naked
gain must be a net ga in .
6
But as the Government po in t s out ,
6
The Bank Defendants r e l y
heav i ly
for t h e i r net argument on
United
Sta tes v.
Sanford
Ltd . , 878 F. Supp.
2d
137 (D.D.C. 2012),
which concerned environmenta l v i o l a t i ons
by
a
f i sh ing o u t f i t
under
the Alte rna t ive Fines Act a context
t ha t
s e l f - e v i de n t l y does not
lend i t s e l f to an easy
analogy
here . Simi la r ly inap t are
the
precedents
t ha t
the
Bank
Defendants marshal
to
sugges t
a
norm
of
ne t t i ng
in the
Fa lse
Claims Act
o r
o the r c i v i l
contexts
ca lcu la t ing
damages. A FIRREA
c i v i l
penal ty , i n cont ra s t to a
cour t ' s
c a l c u l a t i o n
of damages caused to the
Government
in
an
ord ina ry
False
Claims Act
case ,
i s c a l i b r a t e d to de t e r and punish ,
not to re s tore a
vic t im to
the s t a tu s quo ex an te .
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when Congress means
to
permi t c e r t a i n cos t s
to
be ne t ted out , it
i s qui t e capable of s t a t i ng so
express ly .
Compare 18 U.S.C.
981
(a) (2) A) (c iv i l fo r f e i t u re involving i l l e g a l goods o r
se rv ice s not l imi t ed to
the net
ga in o r p r o f i t
r ea l i z ed
from the
offense )
with
id .
98l(a)
2)
B) (permi t t ing a
defendant
convic ted of i l l e g a l l y
s e l l i ng
only l ega l goods o r se rv ice s to
sub t rac t
from proceeds
the d i r e c t
cos ts incurred
in
providing the
goods o r
serv ices
fo r
f o r f e i t u r e )
.
7
I f , as
the
defendan ts assume,
the
pena l ty
prov i s ions of
FIRREA
were
in tended to
t ake the
opposi te tack from
those of
the Al te rna t ive Fines Act, Congress
could e a s i l y have so s t a t ed , e i t h e r in the words
of
the s t a tu t e
i t s e l f o r
in i t s l e g i s l a t i ve h i s to r y .
This f a i l u r e
to do so
s t rong ly
sugges t s t ha t the Bank Defendants ' negat ive in fe rence
argument i s
f lawed o r a t
l e a s t
too
con jec tu ra l to be r e l i e d on.
Moreover,
as
de ta i l ed
above,
FIRREA
i s
in
c e r t a i n
re spec t s
a
unique s t a tu t e , and,
accord ing ly ,
the Court
r e tu rns to
the genera l
p r in c ip l e s
re fe renced ea r l i e r : the c i v i l pena l ty
provis ions
of
FIRREA
are
designed
to
serve puni t ive
and d e t e r r en t
purposes
and
should
be cons t rued in accordance with those purposes . This
s t rong ly cu t s
in
favor of the
Government 's p o s i t i o n
t h a t both
gain
7
Moreover, when Congress does see it
to deploy
an ad jec t ive l i ke
gross
o r
net to modify
gain
o r l o ss ,
it
i s
not
s e l f -
evident what
s p ec i f i c
cos ts a re
in tended
to
be
net ted
ou t .
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and l os s should
be viewed
simply in terms of how
much
money the
defendants
f raudu len t ly induced the v ic t ims to pay to them.s
While
no analogy
i s p e r f ec t , a
s imple
one
wi l l i l l u s t r a t e
the
poin t . I f
I
so ld you
a
cow fo r 100 say ing it was
a
hea l thy
da i ry
cow when I
knew
it had foot -and-mouth
disease ,
you would in
theory
have a net
l os s of
l e ss than 100
s ince the
cow would
still
be
worth something as
dead meat.
But i f you had
known the
t ru th ,
or ,
shor t
of
t ha t , had known t ha t I as the s e l l e r was i n t e n t i o n a l l y
ly ing
to
you about a
mate r i a l
mat te r , you would never
have bought
the cow
in
the
f i r s t
place ,
so your
out -o f -pocke t
l os s of
100 i s
r e a l l y more r e f l e c t i ve
of the
misconduct perpe t ra ted
upon
you.
Simi la r ly , s ince
I would have spen t some money to purchase
o r
r a i s e the cow before
I
discovered it was diseased and
duped
you
i n to buying it my
ne t
gain from the s a l e would have been l e s s
than
100. But
s ince
you would
have
never purchased
the
cow
from
m i f you knew t ha t it had foot -and-mouth
disease
o r t ha t
I
had
i n t en t iona l ly l i e d to
you in t ry ing
to induce
you
to p a r t
with
your 100, the 100
I
received, t ha t i s ,
my
gross gain , i s f a r
Were
the Court to
accep t
the defendants ' ne t t ing
theory ,
then
a
rebounding housing market
could
render FIRREA's pena l ty
provis ions
a
nu l l i t y
i f a d i l i g e n t f raud v i c t i m
managed to recover
more than
the p r in c ip a l
owed a t
a
fo rec losure sa le . Simi la r ly ,
Fannie Mae's
and Freddie Mac's
con t rac tua l r i g h t t o requ i re the
Bank
Defendants
to
repurchase
f au l t y mortgages
could
wipe out any pena l ty .
Such a
read ing
of
the
pena l ty provis ion
would thwar t Congress ' s i n t e n t
to
de te r and
punish FIRREA
v i o l a t o r s .
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more
r e f l e c t i ve of
the e s se n t i a l natu re
of
y f raudu len t
misconduct than
y
net ga in .9
t fol lows t ha t , i n t h i s case , the
amount
of the vic t ims '
los s
and
the defendan ts ' gain
i s i d e n t i c a l , and cons i s t s of
the
pr ice t ha t Fannie Mae and Freddie Mac paid to Countrywide fo r the
f raudu len t ly
misrepresented loans . The popula t ion o f f raudu len t ly
misrepresen ted loans , moreover, cons i s t s not
j u s t of
some subse t
of the
17,611 HSSL
loans
so ld to
Fannie
Mae and
Freddie
Mac,
but
a l l of
them.
For even though, desp i t e the de fec t ive process ing,
some of the
HSSL
loans
may
in f ac t have been of h igh
qua l i ty
(as
descr ibed
below) ,
what the Government charged, and
what the ju ry
found, was an i n t en t i o n a l scheme
to
defraud Fannie
Mae and Freddie
Mac brought
about
by des ign ing a system of process ing , the HSSL
t ha t
the defendants knew
and
in tended
would l e ad
to
loans being
9
Analogies
as ide , it bears
ment ioning
t ha t by v i r t u e
of
t h i s f raud
the Bank Defendants managed
to
unload a vas t
p o r t fo l i o
of r i sky
as s e t s
on unwi t t ing buyers and were thereby ab le to reduce the
r i s k on t he i r own
balance
shee t a t a
c r u c i a l moment
in t ime.
Indeed, Countrywide 's i n t roduc t ion of the HSSL program
co inc ided
wi th a severe con t rac t ion of the market fo r r i s k i e r mortgages
and
Countrywide 's unders tand ing t ha t it would no longer f ind wil l ing
buyers for
the subprime mortgages t h a t the
Ful l
Spectrum Lending
d iv i s ion
had
churned out fo r
years .
Given
t h a t l a rge ,
sys temica l ly
r i sky
p o r t fo l i o s
of
s imi l a r l y
dubious mor tgage-backed
as s e t s
were
a
s i g n i f i c a n t con t r ibu to r
to
the f i n an c i a l c r i s i s , it s t r a ins
c r ed u l i t y
to
imagine
t ha t FIRREA would requ i re the Court to
c lose
i t s eyes
to
the overarch ing f raud
and ask,
Yes, but what did the
vic t ims
manage
to
recover
in fo rec losure?
The
use of a net
amount
to
ca l cu l a t e gain or los s would the re fo re fundamenta l ly
misconstrue the natu re
of
the f raud and undermine Congress ' s
d i rec t ive
tha t the
Court
penal i ze and
thereby
d e t e r t h i s
se r ious
misconduct .
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represen ted to
be of
a
mate r i a l l y
higher qua l i ty than they
ac tu a l l y were. The happenstance t h a t some of
the
loans
may
have
st ll
been of
high
qua l i ty
should not
r e l i e v e the
defendan ts of
bear ing r e sp o n s i b i l i t y fo r the
fu l l payments
they rece ived from
the
scheme, a t l e a s t
not
i f the
purposes of
the pena l ty
are
punishment
and
de te rrence . Relatedly , i f the
v ic t ims had known
t ha t
the defendants were
ly ing to them about the qua l i ty of the
loans
produced
by
the HSSL process , they would
never
have
purchased any
of
the
loans
so generated , o r
pa r t ed
with
any
of
t he i r money, so the happenstance t ha t
some of
the
loans
tu rned out
to be of h igh
qua l i ty would
be i r r e l e v a n t
from a de te rrence
s tandpo in t .
In shor t , the proper measure
of
both l os s and gain in t h i s
case
i s
the
amount
Fannie
Mae
and Freddie
Mac p a i d to
Countrywide
for
the
e n t i r e
17,611
HSSL-generated
loans .
This
sum i s
$2,960,737,608.
1
While
t h i s
se t s the
upper
l imi t
fo r the pena l ty , the Court ,
in
i t s
d isc re t ion ,
may
impose
a l e s s e r pena l ty
a f t e r
cons ide ra t ion
of
the
re l evan t mi t iga t ing
f ac to r s . In the
C o u r t s view,
however,
10
This
sum i s
ar r ived
a t
by
t ak ing
the
r a t i o
t ha t
17,611
bears
to
28,882 and mul t ip ly ing t by the $4,855,602,953 t h a t
the
Government rep re sen t s was the amount t h a t was paid to Countrywide
fo r the 28,882 loans . See Declara t ion
of
Dr. Joseph R. Mason dated
Jan.
29,
2014
( Mason
Deel . )
5, ECF No.
326.
This
assumes
t ha t
the average p r i ce
of
the 17,611
loans
was not mate r i a l l y d i f f e r e n t
from
the
average fo r the
28,882
loans , an assumpt ion
shared by
both
p a r t i e s br ie f ing .
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was
a
c lose case , Tr. 3169:10 , the ca re fu l review of the
evidence t ha t
the Court has conducted
in connect ion with
determining the pena l ty
has convinced the Court ,
as t
d id the
ju ry ,
t ha t
the evidence of
the
defendants ' f raudulent scheme and
f raudulent
in ten t was ample. That
evidence,
coupled
wi th
the
adverse
in ferences to be drawn from the implaus ib le
tes t imony
of
Ms.
Mairone
and o the r
defense
witnesses ,
proved convinc ingly
t ha t
the
defendants were
f u l l y prepared to j e t t i s o n reasonable s teps to
assure
loan
qua l i t y i n favor
of volume,
speed, and p r o f i t s .
Even
when Countrywide s
own in te rna l
qua l i t y
r epo r t s
evidenced
de t e r i o r a t i ng loan qua l i t y , see , e .g . , X
56, X
406, X 408
concerns echoed
by Mairone s
own
f r on t - l i ne
s t a f f ,
see , e .g . ,
X
52 the defendants
shunted c r i t i c s and
cr i t i c i sms
aside ,
doubled
down on
t h e i r
r i sky behavior , and
appl ied ever more pres su re
on
loan
spec ia l i s t s
to
ignore
loan
qua l i t y
concerns ,
see ,
e .g . ,PX
253,
X
262, X 489,
X
524. Furthermore, defendants purposefu l ly
ignored t h e i r con t r ac tua l ob l iga tions to r epo r t to
Fannie
and
Freddie a l l l oa ns - i de n t i f i e d as defec t ive , r epo r t ing only s ix
HSSL
loans as
such, when, in
fac t , there were thousands .
See,
e .g . ,
Tr.
1703:5-10.
In shor t , while the
HSSL
process l a s t ed
only
nine months, t
was from s t a r t to f in i sh the vehic le for
a
brazen f raud
by
the
defendants , dr iven
by
a
hunger for
p r o f i t s and ob l iv ious
to
the
harms the reby v i s i t ed , not j u s t on the immediate
vic t ims
but
a l so
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on
the
f inanc ia l
system
as
a
whole.
11
The HSSL f raud, simply by
i t s e l f
more than war ran ts
a pena l ty of
1,267,491,770.
Having
completed the
de te rmina t ion of the pena l ty with
respec t to the
Bank Defendants , the
Court turns
to Ms. Mairone.
Not
a littl of the r e sp o n s i b i l i t y
for t h i s f raud
can be l a i d
a t
her doors tep . Despi te her implaus ib le tes t imony to the
cont ra ry
from which the
Court draws an adverse
infe rence there
was
convincing evidence t ha t
Ms.
Mairone
-
the
r e l a t i ve l y
new employee
who
had
to prove
herse l f
-
most
aggre ss ive ly pushed forward the
HSSL f raud and
most
sca th ing ly denounced those who
ra i sed
concerns . Thus, fo r example, when Mr.
O'Donnel l re layed to Ms.
Mairone
a lengthy list
of concerns about
the e ros ion
of loan
qua l i ty
under
the HSSL
program, she not only gave
h i s
concerns the
back of her
hand
but a l so
d i rec ted
t he r e a f t e r
t h a t
qua l i ty
assurance
r epor t s
be
sent
only
to
her
r a t h e r
than
d i s t r i bu t e d
more
widely, t ha t
loan
s pe c i a l i s t s no longer
be
no t i f i e d of e r ro r s
in
t he i r HSSL loans
t h a t
the qua l i ty -a s surance check l i s t be
11
Whether
the HSSL
program was
symptomatic
of more pervas ive f raud
a t Countrywide, the
Court cannot say,
s ince
as
noted, the SEC's
case aga ins t i t s highes t of f i c e r s was s e t t l e d
without
the
defendants admi t t ing o r denying
l i a b i l i t y .
See Set t l ement
Agreements, SEC
v.
Mozilo,
No.
09-cv-3994,
ECF
Nos. 481, 482,
483
(C.D. Cal. Oct. 15, 2010).
While,
moreover, the Government
prof fe red in the i n s t a n t case an emai l from ano ther Countrywide
execut ive Cindy Simantel ,
in
which she
informs Countrywide 's
Chief Cred i t Off i ce r
Rod
Will iams
t h a t
she l i e d to
Freddie
Mac to
conceal
the awful qua l i ty
of c e r t a i n non-HSSL
loans
see
ECF
No.
165, Deel .
of Malachi Jones , Ex.
A the Court
excluded the
email
from i n t roduc t ion a t t r i a l and wi l l not
cons ider
it here .
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e l imina ted , and t ha t o the r
changes
be made to i nc rease
volume
and
sa les a t
the
expense of qua l i t y . See, e .g . , X
68.
In hi s ins tan t papers , Ms
Mairone s exce l l en t counsel
argues ,
among much
e l se ,
t ha t
Ms
Mairone d id
not
ac t alone
and
t ha t
many
of
her
act ions and others were taken in consu l t a t ion
with her d iv i s i on ' s Chief Execut ive Off ice r and Chief Credi t
Off icer . See
ECF
No. 314.
Indeed,
the j u ry i t s e l f wanted to know
why
these o the r of f i ce r s were not
a l so
named as defendants . See
Tr. 3478 :8 -9 . But
the fac t
t ha t o the r , h igher - l eve l ind iv idua l s
arguably
pa r t i c i pa t ed in the
f raud
but
were, fo r
whatever
reason,
not
charged
by the Government,
does
not
s ign i f i can t l y lessen
Ms
Mairone s cu lpab i l i t y for
her leading
ro le in the f raud. She
was,
in
the
eyes of Countrywide s
own employees,
the
HSSL s ca ta lys t .
Tr.
1670:16-17 .
There
i s
one
obvious
d i f f e rence , however,
between
Ms
Mairone
and
the
Bank
Defendants, and
t ha t i s in a b i l i t y to
pay a
subs t an t i a l
penal ty . Chief ly for t h i s
reason,
the Government
i t s e l f seeks to impose on her
a
pena l ty
of
no
more than
$1,200 ,000 . See Mar. 13
Hr g
Tr.
4:11 ,
ECF
No. 337.
Furthermore,
the Court has personal ly reviewed
Ms
Mairone s f inanc ia l records
submit ted
under sea l , and f inds tha t , while she
i s
ce r t a in ly
not
a
candida te
for
welfare , and
i s
l i ke ly
to
remain
employed
in
luc ra t ive pos i t ions for
the foreseeable
fu ture , to impose on
her
the
lump
sum payment
of
$1,200 ,000
mil l ion reques ted by the
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Government would s t r a i n her resources to the
l imi t .
Accordingly,
the
Court orders t ha t she pay a t o t a l of only 1,000,000, and
over
a
per iod of t ime. S p ec i f i c a l l y
she
i s
to
make
quar t e r ly
payments
of
20
of
her gross
income
fo r
the previous
t h ree
months
un t i l the
fu l l
1,000,000 i s
pa id .
For
the foregoing
reasons
the
Clerk
of
the
Court
i s d i r ec t ed
to
en te r Fina l
Judgment
d i rec t ing Bank of America, N.A.,
on
behal f
of
the
Bank Defendants , to pay to the Government by no
l a t e r
than
September
2, 2014 the
sum of 1,267,491,770 and d i r e c t i n g Ms
Mairone to pay
the
Government q u a r t e r l y payments of
a t l ea s t 20
of her
gross
income fo r the
previous
t h ree months,
such
payments
to
be made
with in
one
month of the end of each such quar te r
beginning wi th
the quar te r ending September 30, 2014 and
cont inuing un t i l
she has paid a t o t a l
of
1,000,000.
SO
ORDERED.
Dated:
New York, NY
Ju ly 2CJ 2014
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