Should Deutsche Bank AG be held financially responsible for the obligations of a mortgage company it acquired if, at the time it was preparing to make the acquisition (in 2006), Deutsche Bank learned that the mortgage company had lied to the U.S. government about its mortgages, yet went ahead with the purchase anyway? 

According to the department's amended $1 billion complaint filed Monday evening with the U.S. District Court in Manhattan, Deutsche Bank was "on notice of and expressly assumed responsibility" for wrongdoing at MortgageIT Inc, which it bought in 2007.  The government first sued Deutsche Bank and MortgageIT in May, saying they misled the FHA (Federal Housing Administration) into believing that mortgages issued by MortgageIT qualified for federal insurance, when the quality was so poor that nearly 33% defaulted.

Deutsche Bank had previously sought to dismiss the complaint, in part by arguing that the government failed to show it assumed MortgageIT's obligations.
 

Deutsche Bank's Due Diligence are All-Telling.   The feds said DB, in conducting due diligence prior to the merger, knew MortgageIT violated rules of the Department of Housing and Urban Development (HUD), which the FHA is part of, and made false representations to the agency.  Deutsche Bank had access to several letters showing that MortgageIT did not review all early payment defaults, and the bank further had access to managers who knew that misconduct was taking place.

The Justice Department said it first learned about the defendants' false claims to HUD in July 2010.  Its lawsuit seeks triple damages under the federal False Claims Act.

"Notwithstanding its knowledge of MortgageIT's wrongful conduct, Deutsche Bank completed the merger with MortgageIT, pursuant to which it expressly agreed to acquire all of the pre-merger assets and liabilities of MortgageIT.  Wrongful conduct alleged herein not only continued after Deutsche Bank acquired MortgageIT in January 2007, but it got worse." 

Deutsche Bank countered by stating that is doesn't believe the deficiencies in the government's original complaint have been cured by this amended complaint, and will continue its defense.

The case is U.S. v. Deutsche Bank AG et al, U.S. District Court, Southern District of New York, No. 11-02976.

For further details, go to:  [Reuters, 8/22/11]