Feds Slam Deutsche Bank But Next Day FINRA Nominates Executive To Its Board

May 15, 2012

I'm going to make this as short and sweet as possible and leave it to my devoted readers to fill in whatever blanks that they wish. Ultimately, this is a bizarre, sad, and somewhat shocking tale of Wall Street's regulatory community and its incessant failure to get it.

Bharara Slams Deutsche Bank

On May 10, 2012, the United States Department of Justice issued a press release: "Manhattan U.S. Attorney Recovers $202.3 Million From Deutsche Bank And Mortgageit In Civil Fraud Case Alleging Reckless Mortgage Lending Practices And False Certifications To HUD."   The release states, in part:

[t]he United States has settled a civil fraud lawsuit against DEUTSCHE BANK AG, DB STRUCTURED PRODUCTS, INC., DEUTSCHE BANK SECURITIES, INC. (collectively "DEUTSCHE BANK" or the "DEUTSCHE BANK defendants") and MORTGAGEIT, INC. ("MORTGAGEIT").  The Government's lawsuit, filed May 3, 2011, sought damages and civil penalties under the False Claims Act for repeated false certifications to HUD in connection with the residential mortgage origination practices of MORTGAGEIT, a wholly-owned subsidiary of DEUTSCHE BANK AG since 2007. . . The defendants also agreed to pay $202.3 million to the United States to resolve the Government's claims for damages and penalties under the False Claims Act . . .

[I]n addition, the Complaint alleges that, after DEUTSCHE BANK acquired MORTGAGEIT in January 2007, DEUTSCHE BANK managed the quality control functions of the Direct Endorsement Lender business, and had its employees sign and submit MORTGAGEIT's Direct Endorsement Lender annual certifications to HUD.  Furthermore, by the end of 2007, MORTGAGEIT was not reviewing any early payment defaults on closed FHA-insured loans.  Between 1999 and 2009, the FHA paid more than $92 million in FHA insurance claims for loans that defaulted within the first six payments . . .

[T]he DEUTSCHE BANK defendants admitted, acknowledged, and accepted responsibility for the fact that after MORTGAGEIT became a wholly-owned, indirect subsidiary of DB Structured Products, Inc and Deutsche Bank AG in January 2007:

    • The DEUTSCHE BANK defendants were in a position to know that the operations of MORTGAGEIT did not conform fully to all of HUD-FHA's regulations, policies, and handbooks;
    • One or more of the annual certifications was signed by an individual who was also an officer of certain of the DEUTSCHE BANK defendants; and;
    • Contrary to the representations in MORTGAGEIT's annual certifications, MORTGAGEIT did not conform to all applicable HUD-FHA regulations . . .

How serious were MortgageIt and Deutsche Bank's fraudulent acts? Consider this comment from the press release:

Manhattan U.S. Attorney Preet Bharara stated: "MORTGAGEIT and DEUTSCHE BANK treated FHA insurance as free Government money to backstop lending practices that did not follow the rules.  Participation in the Direct Endorsement Lender program comes with requirements that are not mere technicalities to be circumvented through subterfuge as these defendants did repeatedly over the course of a decade.  Their failure to meet these requirements caused substantial losses to the Government - losses that could have and should have been avoided.  In addition to their admissions of responsibility, Deutsche Bank and MortgageIT have agreed to pay damages in an amount that will significantly compensate HUD for the losses it incurred as a result of the defendants' actions."

For a detailed analysis of this case, READDeutsche Bank And MORTGAGEIT Settle Federal Fraud Charges For $202 Million ("BrokeAndBroker.com Blog" May 11, 2012).

FINRA Board Nominees

On May 11, 2012, a mere one day after the Department of Justice announced its $202 million settlement with Deutsche Bank, the Financial Industry Regulatory Authority ("FINRA") issued a press release: Election Notice: Nominees for Upcoming FINRA Board of Governors Election. In that FINRA election notice, we learn that for the upcoming 2012 Board of Governors election:

FINRA Nominating Committee Nominees

Pursuant to Article VII, Section 9 of the FINRA By-Laws, the FINRA Nominating Committee has nominated the following individuals:

Large Firm Governor: Seth H. Waugh, Chief Executive Officer, Deutsche Bank Americas . . .

Additionally, on page 5 of FINRA's Election Notice, we find the following biographical disclosure:

Profiles of Large Firm Governor Nominee

Seth Waugh joined Deutsche Bank in April 2000 as regional head of Global Markets and Equities and vice chairman of the Americas Executive Committee. Seth was appointed CEO of Corporate and Investment Banking in the Americas in 2001 and the following year was named CEO of Deutsche Bank Americas and chairman of the Americas Executive Committee, a position he has held since May 2002. He was appointed member of the Group Executive Committee effective April 1, 2009. Seth is chairman of the Deutsche Bank Securities Inc. (DBSI) Board of Directors and serves as chairman of the board, CEO and president of several Deutsche Bank companies including Deutsche Bank Trust Company and Deutsche Bank Trust Corporation Americas. He has recently announced that he will be stepping down as CEO once the ideal replacement is identified and in place. . .

Bill Singer's Comment

Unless I'm missing something here, Seth Waugh has been at Deutsche Bank since 2000 and held CEO and Chair positions in that organization since 2002.  Discounting all of Mortgageit's pre-2007 misconduct, which predated its acquisition by Deutsche Bank, that still means Waugh was part of the management team from 2007 through 2009 - years covered in the settlement with the Department of Justice.

None of which is to suggest that Waugh was personally involved in any of the alleged misconduct but it is to suggest that he was at the organization during some two years when cited misconduct occurred - misconduct that was apparently so significant as to warrant a whopping $202 million settlement. Pointedly, "Deutsche Bank Securities" is named in the DOJ's caption and Waugh is presently Chairman of the Board of that entity.

At a minimum, given all the above and the fair inferences a reasonable person would draw, did FINRA truly think it appropriate to nominate for the 2012 Large Firm seat (500 or more registered representatives) an individual whose firm just settled - the day before - a $202 million fraud case with the Department of Justice? FINRA loves to tout itself as follows:

FINRA is the largest independent regulator for all securities firms doing business in the United States. We oversee nearly 4,420 brokerage firms, 162,575 branch offices and 629,280 registered securities representatives. Our chief role is to protect investors by maintaining the fairness of the U.S. capital markets.

I guess that chief role thing about protecting investors by "maintaining the fairness of the U.S. capital markets," is subject to quite a bit of leeway when it actually comes to putting all those fine words into practice.  While the Wall Street cops at FINRA are busy drawing up names for Board nominees, perhaps they might consider today some fine men and women from, say, JP Morgan or MF Global.  After all,  what's a couple of billion in trading losses or a few missing dollars in customers' funds when we're talking about a regulator's chief role and the composition of its Board?  We're all just one big happy family on Wall Street, right?  If the Department of Justice is going to slam one of our own, maybe there's something that we can do to soften the blow - or maybe we can just pretend that it's no big deal? Ultimately this isn't about nominating Seth Waugh but it sure as hell is about nominating to a regulator's Board a high-profile Deutsche Bank executive one day after his firm entered into a $202 million fraud settlement with the Department of Justice.

Frankly, I have no idea what FINRA was thinking with this nomination - assuming that much, if any, thought went into it. One thing for certain: the self-regulatory organization dropped the ball when it came to fostering the impression that its core mission is maintaining the fairness of the markets. As they say, timing in life is everything.  The timing here stinks.