U.S. ex rel O'Donnell v. Bank of America Corp et al

8/12/2019 U.S. ex rel O'Donnell v. Bank of America Corp et al

1/19

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 .

1

Case 1:12-cv-01422-JSR Document 343 Filed 07/30/14 Page 1 of 19


2/19

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 .

. ) .

2



3/19

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

3



4/19

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

4



5/19

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 ) .

5



6/19

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 .

6



7/19

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 )

7



8/19

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



9/19

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

9



10/19

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 .

10



11/19

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 .

11



12/19

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 .

12



13/19

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 .

13



14/19

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 .

14



15/19

only one

of

the d i r e c t and i n d i r e c t economic

e f f e c t s

on which the

Bank

Defendants

place such emphasis in

t h e i r

mis taken

argument fo r

net

gain

and net l os s

i s

a worthy cand ida te fo r mit iga t ing the

pena l ty .

Spec i f i ca l ly , whi le Fannie

Mae

and

Freddie

Mac

would

never have purchased any loans

from the Bank

Defendants i f they

had

known t ha t Countrywide had i n t e n t i o n a l l y l i e d to them about

the loans qua l i ty and

had,

indeed, c rea t ed a

program

fo r

process ing the loans t ha t

v i r t u a l l y

assured t h a t

many

of

the

loans

would be of

l e s s e r qua l i ty

than

represented

and even though, as

i nd ica t ed

above,

dete rmina t ion o f a FIRREA pena l ty i s pr imar i ly a

mat te r

of

punishment and

de te rrence ,

r a t h e r

than compensat ion

of

the

vic t ims still

the f ac t t ha t

a

meaningful

number

of

the HSSL

loans t h a t Fannie

Mae

and Freddie

Mac

purchased

turned

out

to

be

of

accep tab le qua l i ty

i s an

appropr ia te

f ac to r fo r the Court

to

cons ider

in asse ss ing

the egreg iousness

of the

offense .

Here,

the

Government 's own exper t concluded, in tes t imony the Court c re d i t s ,

tha t

57.19%

of the HSSL

loans

proved,

in

the

end, not

to

be

mater ia l ly de fec t ive . See Mason Deel .

6.

On

t h i s

bas i s , the

Court w i l l reduce the

pena l ty

to be imposed to 42.81%

of

the

s t a t u t o ry maximum,

o r

1,267,491,770.

Turning t o o the r mi t iga t ion

f ac to r s ,

however, the Court f inds

none t ha t

warran ts

a

fu r the r

reduc t ion

in the

Bank

Defendants '

pena l ty .

Although

a t

one

poin t in the

t r i a l

the Court , momentari ly

mesmerized

by

defendan t s superb a t to rneys , commented t h a t t h i s

15



16/19

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

16



17/19

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 .

17



18/19

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

18



19/19

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

19


U.S. ex rel O'Donnell v. Bank of America Corp et al

Documents

Transcript of U.S. ex rel O'Donnell v. Bank of America Corp et al