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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