Mortgage Lawsuits Target Individuals as Well as Banks

By | September 19, 2011

By suing 131 individuals in its effort to recover losses on $200 billion of mortgage debt that went sour, the federal agency overseeing mortgage giants Fannie Mae and Freddie Mac is doing one thing that the U.S. government has largely left alone.

It is trying to hold actual people, not just companies, responsible for their roles in the global financial crisis.

The 18 lawsuits by the Federal Housing Finance Agency signal a change from prior federal efforts to punish banks and bankers for their roles in the financial crisis. Its lawsuits draw on information generated by 64 subpoenas issued in 2010 for details on pools of mortgage securities that Fannie Mae and Freddie Mac bought. They also draw on probes by a U.S. Senate investigation subcommittee and the Financial Crisis Inquiry Commission, among other sources.

Most of the financial crisis cases brought by the Department of Justice, such as its civil fraud against Deutsche Bank AG, or the Securities and Exchange Commission have named few or no individual defendants. So far, no top executives at major banks have been criminally charged.

The FHFA believes it has enough evidence to pursue civil claims against banking executives.

Sixteen of the FHFA lawsuits name two or more individuals as defendants, each of whom is said to have signed at least one regulatory filing that allowed the sale of the problem debt. Two people were sued in three different lawsuits.

The lawsuit against JPMorgan Chase & Co. names 38 individual defendants, including over alleged wrongdoing at Bear Stearns Cos. and Washington Mutual Inc., which the bank bought. Three lawsuits targeting Bank of America Corp. name 27 individuals.

None of the individual defendants is a household name, though some hold high positions in finance. Former Countrywide Financial Corp. president Stanford Kurland, for example, is now chief executive of PennyMac Mortgage Investment Trust. He is also a defendant in many other Countrywide lawsuits.

In one case, the FHFA said former Bear Stearns mortgage executive and defendant Jeffrey Verschleiser “forcefully advocated” packaging loans into securities before homeowners started missing payments, triggering default provisions.

In its suit against Goldman Sachs Group, the FHFA said Kevin Gasvoda, then head of residential whole loan trading, in February 2007 directed sales staff to sell mortgage debt as part of Goldman’s push to offload “declining and defective” mortgage assets.

“Great job syndicate and sales, appreciate the focus,” he replied after substantial sales took place, the lawsuit said.

A JPMorgan spokesman declined to comment on its lawsuit and Verschleiser. A Goldman spokesman declined to comment on its lawsuit and said Gasvoda remains employed at the bank. Verschleiser now heads mortgage operations at Goldman.

The FHFA is not part of the justice department. Its mandate is to oversee secondary mortgage markets, help make Fannie Mae and Freddie Mac sound and solvent, and minimize taxpayer losses.

Its lawsuits mark a new tack by the government, at a time investors generally are worried about the ability of banks worldwide to weather soft economies, tight credit conditions, and excess debt, including at the sovereign level. Federal regulators are also working with all 50 state attorneys general on a possible $20 billion settlement with big banks to address “robo-signing” and other foreclosure abuses.

The justice department’s biggest lawsuit this year related to the credit and financial crises is a civil case, accusing Deutsche Bank of hoodwinking a federal housing agency into insuring poor quality mortgages. The case names no individual defendants, and Deutsche Bank has sought to dismiss it.

Federal prosecutors have also pursued only two significant criminal cases tied to the crisis through trial, with mixed results.In the first, former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin were acquitted of fraud in November 2009. In the second, former Taylor, Bean & Whitaker Mortgage Corp. Chairman Lee Farkas was convicted in April, and later sentenced to 30 years in prison.

The SEC has targeted individuals in only a handful of major cases. Last year, it named just one individual defendant in a suit against Goldman over a soured mortgage investment, Abacus. Goldman settled for $550 million. The individual, vice president Fabrice Tourre, is still fighting the charges.

The SEC got a $150 million settlement from Bank of America over its failure to disclose details about its takeover of Merrill Lynch, and a $67.5 million accord with former Countrywide Chief Executive Angelo Mozilo. Mozilo admitted no wrongdoing, and insurance covered much of his payout.

Experts say insurance could limit liability for some individuals in the FHFA cases.

The FHFA’s decision to go after individuals may reflect more potentially incriminating facts uncovered through its subpoenas than what other agencies found. Also, it faces a lower standard of proof in civil cases than the justice department faces in criminal cases: that wrongdoing was more likely than not to have occurred, not that it occurred beyond a reasonable doubt.

Reporting by Jonathan Stempel; Editing by Martha Graybow and Tim Dobbyn.

Topics Lawsuits

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