Deutsche Bank AG knew in 2006 that a mortgage company it was preparing to buy lied to the U.S. government about its mortgages, yet went ahead with the purchase and should be held financially responsible, the Justice Department said on Monday.

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 Federal Housing Administration into believing that mortgages issued by MortgageIT qualified for federal insurance, when the quality was so poor that nearly one in three 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.

But the government said the bank, in conducting due diligence prior to the merger, knew MortgageIT violated rules of the Department of Housing and Urban Development, which the FHA is part of, and made false representations to the agency.

It said Deutsche Bank had access to several letters showing that MortgageIT did not review all early payment defaults, and had access to managers who knew that misconduct was taking place.

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, the complaint said.

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.

Wrongful conduct alleged herein not only continued after Deutsche Bank acquired MortgageIT in January 2007, but it got worse, the department said.

Deutsche Bank in a statement said: We do not believe the deficiencies in the government's original complaint have been cured by this amended complaint and we will continue to defend ourselves vigorously.

The amended complaint adds new examples of alleged false certifications, and updates earlier data provided on the cost of that misconduct.

It said that of the more than 39,000 loans that MortgageIT approved for FHA insurance between 1999 and 2009, more than 12,900 were in default by June, up from 12,500 in February.

It also said the government has paid more than $368 million of FHA insurance claims on roughly 3,200 of the mortgages, compared with an earlier, higher payout estimate of $386 million on 3,100 mortgages.

The amended complaint also adds two Deutsche Bank units as defendants, DB Structured Products Inc and Deutsche Bank Securities Inc. No individuals have been charged.

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

(Additional reporting by Sakthi Prasad in Bangalore; Editing by Gary Hill and Lincoln Feast)

Deutsche Bank Mortgage