Hustle Case

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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 .

    1

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

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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 .

    . ) .

    2

    Case 1:12-cv-01422-JSR Document 343 Filed 07/30/14 Page 2 of 19

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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

    3

    Case 1:12-cv-01422-JSR Document 343 Filed 07/30/14 Page 3 of 19

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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

    4

    Case 1:12-cv-01422-JSR Document 343 Filed 07/30/14 Page 4 of 19

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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

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