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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

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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

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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

    4

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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 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

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    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

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    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

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    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

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    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

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    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

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    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

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    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

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    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

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    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

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    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

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    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

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    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

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    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

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