Feds Sue Financial Institutions Over Bad Mortgages

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK FEDERAL HOUSING FINANCE AGENCY, AS CONSERVATOR FOR THE
FEDERAL NATIONAL MORTGAGE ASSOCIATION AND THE FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff, -againstGOLDMAN, SACHS & CO., GS MORTGAGE SECURITIES CORP., GOLDMAN SACHS MORTGAGE COMPANY, THE GOLDMAN SACHS GROUP, INC., GOLDMAN SACHS REAL ESTATE FUNDING CORP., PETER C. ABERG, HOWARD S. ALTARESCU, ROBERT J. CHRISTIE, KEVIN GASVODA, MICHELLE GILL, DAVID J. ROSENBLUM, JONATHAN S. SOBEL, DANIEL L. SPARKS, AND MARK WEISS, Defendants.
___ CIV. ___ (___)
COMPLAINT JURY TRIAL DEMANDED
TABLE OF CONTENTS Page NATURE OF ACTION ...................................................................................................................1 PARTIES .........................................................................................................................................9 The Plaintiff and the GSEs...................................................................................................9 The Defendants ..................................................................................................................10 JURISDICTION AND VENUE ....................................................................................................13 FACTUAL ALLEGATIONS ........................................................................................................14 I. The Securitizations.............................................................................................................14 A. B. C. Residential Mortgage-Backed Securitizations in General .....................................14 The Securitizations at Issue in This Case ..............................................................16 The Securitization Process .....................................................................................19 1. 2. II. Goldman Sachs Mortgage Company Pools Mortgage Loans in Special Purpose Trusts ...............................................................................19 The Trusts Issue Securities Backed by the Loans ......................................21
The Defendants Participation in the Securitization Process .............................................25 A. The Role of Each Defendant ..................................................................................25 1. 2. 3. 4. 5. 6. B. Goldman, Sachs & Co................................................................................25 GS Mortgage Securities Corp. ...................................................................26 Goldman Sachs Mortgage Company .........................................................27 The Goldman Sachs Group, Inc. ................................................................28 Goldman Sachs Real Estate Funding Corp. ...............................................29 The Individual Defendants .........................................................................29
Defendants Failed To Conduct Proper Due Diligence ..........................................32
III.
The Registration Statements and the Prospectus Supplements..........................................37 A. Compliance with Underwriting Guidelines ...........................................................37 i
B. C. D. IV.
Statements Regarding Occupancy Status of Borrower ..........................................40 Statements Regarding Loan-to-Value Ratios.........................................................43 Statements Regarding Credit Ratings ....................................................................45
Falsity of Statements in the Registration Statements and Prospectus Supplements ..........47 A. A Review of Loan-Level Data Indicates That the Statistical Data Provided in the Registration Statements and Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False ....................................47 1. 2. B. Owner-Occupancy Data Was Materially False..........................................48 LTV Data Was Materially False ................................................................50
The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines .........................................................54 1. Government Investigations Have Confirmed That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines ..............................................................55 The Collapse of the GSE Certificates Credit Ratings Further Indicates that the Mortgage Loans Were not Originated in Adherence to the Stated Underwriting Guidelines ....................................64 The Surge in Mortgage Delinquencies and Defaults Further Demonstrates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines ....................................66
2.
3.
V.
Goldman Sachs Knew Its Representations Were False .....................................................68 A. Evidence Regarding Goldmans Due Diligence ....................................................69 1. 2. B. Goldmans Due Diligence Benefitted From a Direct Window Into the Originators Practices ...........................................................................69 Goldman Had Actual Knowledge, on a Daily Basis, of the Number of Non-Performing Loans ..........................................................................72
Other Evidence Of Goldmans Willingness to Capitalize on Its Unique Knowledge at the Expense Of Investors ................................................................75 1. 2. Goldman Began Shorting Its Own Offerings Beginning in 2006 ..............76 Goldmans Targeted Campaign to Put Back Defective Loans to Originators Demonstrates That It Knew the Targeted Originators Loans Breached Underwriting Guidelines .................................................79 ii
C. D. VI. VII.
Numerous Government Investigations Have Confirmed Goldman Acted With Scienter .........................................................................................................82 Further Evidence that Goldman Knew the Appraisals Were Inflated ...................84
The GSEs Justifiably Relied on Goldman Sachss Representations .................................85 Fannie Maes and Freddie Macs Purchases of the GSE Certificates and the Resulting Damages ............................................................................................................87
FIRST CAUSE OF ACTION ........................................................................................................89 SECOND CAUSE OF ACTION ...................................................................................................93 THIRD CAUSE OF ACTION .......................................................................................................98 FOURTH CAUSE OF ACTION .................................................................................................103 FIFTH CAUSE OF ACTION ......................................................................................................107 SIXTH CAUSE OF ACTION .....................................................................................................112 SEVENTH CAUSE OF ACTION ...............................................................................................116 EIGHTH CAUSE OF ACTION ..................................................................................................122 NINTH CAUSE OF ACTION .....................................................................................................125 TENTH CAUSE OF ACTION ....................................................................................................128 PRAYER FOR RELIEF ..............................................................................................................131 JURY TRIAL DEMANDED .......................................................................................................131
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Plaintiff, The Federal Housing Finance Agency (FHFA), as conservator for The Federal National Mortgage Association (Fannie Mae) and The Federal Home Loan Mortgage Corporation (Freddie Mac), by its attorneys, Quinn Emanuel Urquhart & Sullivan, LLP, for its Complaint herein against Goldman, Sachs & Co., GS Mortgage Securities Corp., Goldman Sachs Mortgage Company, The Goldman Sachs Group, Inc., Goldman Sachs Real Estate Funding Corp. (collectively, Goldman Sachs or Goldman), Peter C. Aberg, Howard S. Altarescu, Robert J. Christie, Kevin Gasvoda, Michelle Gill, David J. Rosenblum, Jonathan S. Sobel, Daniel L. Sparks, and Mark Weiss (collectively, the Individual Defendants, and together with Goldman Sachs, the Defendants) alleges as follows: NATURE OF ACTION 1. This action arises out of Defendants actionable conduct in connection with the
offer and sale of certain residential mortgage-backed securities (RMBS) to Fannie Mae and Freddie Mac (collectively, the Government Sponsored Enterprises or the GSEs). These securities were sold pursuant to registration statements, including prospectuses and prospectus supplements that formed part of those registration statements, which contained materially false or misleading statements and omissions. Defendants falsely stated that the underlying mortgage loans and properties complied with certain underwriting guidelines and standards. These false statements and misleading omissions significantly overstated the ability of the borrowers to repay their mortgage loans and the value of the collateralized property. These statements were material to the GSEs, as reasonable investors, and their falsity violates Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77a, et seq., Sections 13.1-522(A)(ii) and 13.1522(C) of the Virginia Code, Sections 31-5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, and constitutes negligent misrepresentation, common law fraud, and aiding and abetting fraud. 1
2.
Between September 7, 2005 and October 29, 2007, Fannie Mae and Freddie Mac
purchased from Goldman Sachs over $11.1 billion in residential mortgage-backed securities (the GSE Certificates) issued in connection with 40 securitizations for which Goldman served as sponsor, depositor, and/or lead underwriter.1 The GSE Certificates purchased by Freddie Mac, along with date and amount of the purchases, are listed below in Table 10. The GSE Certificates purchased by Fannie Mae, along with date and amount of the purchases, are listed below in Table 11. The 40 securitizations at issue (collectively, the Securitizations) are: i. Accredited Mortgage Loan Trust 2005-4, Asset-Backed Notes,
Series 2005-4 (ACCR 2005-4); ii. American Home Mortgage Assets Trust, Mortgage-Backed Pass-
Through Certificates, Series 2006-1 (AHMA 2006-1); iii. FFMLT Trust 2005-FF11, Mortgage Pass-Through Certificates,
Series 2005-FF11 (FFML 2005-FF11); iv. FFMLT Trust 2005-FF8, Mortgage Pass-Through Certificates,
Series 2005-FF8 (FFML 2005-FF8); v. FFMLT Trust 2006-FF13, Mortgage Pass-Through Certificates,
Series 2006-FF13 (FFML 2006-FF13); vi. Fremont Home Loan Trust 2006-E, Mortgage-Backed Certificates,
Series 2006-E (FHLT 2006-E);
For purposes of this Complaint, the securities issued under the Registration Statements (as defined in paragraph 4 below) are referred to as Certificates, while the particular Certificates that Fannie Mae and Freddie Mac purchased are referred to as the GSE Certificates. Holders of Certificates are referred to as Certificateholders.
vii.
GSAA Home Equity Trust 2005-11, Asset-Backed Certificates,
Series 2005-11 (GSAA 2005-11); viii. GSAA Home Equity Trust 2005-14, Asset-Backed Certificates,
Series 2005-14 (GSAA 2005-14); ix. GSAA Home Equity Trust 2005-15, Asset-Backed Certificates,
Series 2005-15 (GSAA 2005-15); x. GSAA Home Equity Trust 2006-11, Asset-Backed Certificates,
Series 2006-11 (GSAA 2006-11); xi. GSAA Home Equity Trust 2006-2, Asset-Backed Certificates,
Series 2006-2 (GSAA 2006-2); xii. GSAA Home Equity Trust 2006-4, Asset-Backed Certificates,
Series 2006-4 ((GSAA 2006-4); xiii. GSAA Home Equity Trust 2006-5, Asset-Backed Certificates,
Series 2006-5 (GSAA 2006-5); xiv. GSAA Home Equity Trust 2006-8, Asset-Backed Certificates,
Series 2006-8 (GSAA 2006-8); xv. GSAA Home Equity Trust 2007-6, Asset-Backed Certificates,
Series 2007-6 (GSAA 2007-6); xvi. GSAMP Trust 2005-AHL2, Mortgage Pass-Through Certificates,
Series 2005-AHL2 (GSAMP 2005-AHL2); xvii. GSAMP Trust HE5, Mortgage Pass-Through Certificates, Series
2005-HE5 (GSAMP 2005-HE5);
xviii.
GSAMP Trust 2005-HE6, Mortgage Pass-Through Certificates,
Series 2005-HE6 (GSAMP 2005-HE6); xix. GSAMP Trust 2005-WMC2, Mortgage Pass-Through Certificates,
Series 2005-WMC2 (GSAMP 2005-WMC2); xx. GSAMP Trust 2005-WMC3, Mortgage Pass-Through Certificates,
Series 2005-WMC3 (GSAMP 2005-WMC3); xxi. GSAMP Trust 2006-FM1, Mortgage Pass-Through Certificates,
Series 2006-FM1 (GSAMP 2006-FM1); xxii. GSAMP Trust 2006-FM2, Mortgage Pass-Through Certificates,
Series 2006-FM2 (GSAMP 2006-FM2); xxiii. GSAMP Trust 2006-FM3, Mortgage Pass-Through Certificates,
Series 2006-FM3 (GSAMP 2006-FM3); xxiv. GSAMP Trust 2006-HE3, Mortgage Pass-Through Certificates,
Series 2006-HE3 (GSAMP 2006-HE3); xxv. GSAMP Trust 2006-HE4, Mortgage Pass-Through Certificates,
Series 2006-HE4 (GSAMP 2006-HE4); xxvi. GSAMP Trust 2006-HE5, Mortgage Pass-Through Certificates,
Series 2006-HE5 (GSAMP 2006-HE5); xxvii. GSAMP Trust 2006-HE7, Mortgage Pass-Through Certificates,
Series 2006-HE7 (GSAMP 2006-HE7); xxviii. GSAMP Trust 2006-HE8, Mortgage Pass-Through Certificates,
Series 2006-HE8 (GSAMP 2006-HE8);
xxix.
GSAMP Trust 2006-NC2, Mortgage Pass-Through Certificates,
Series 2006-NC2 (GSAMP 2006-NC2); xxx. GSAMP Trust 2007-FM1, Mortgage Pass-Through Certificates,
Series 2007-FM1 (GSAMP 2007-FM1); xxxi. GSAMP Trust 2007-FM2, Mortgage Pass-Through Certificates,
Series 2007-FM2 (GSAMP 2007-FM2); xxxii. GSAMP Trust 2007-HE1, Mortgage Pass-Through Certificates,
Series 2007-HE1 (GSAMP 2007-HE1); xxxiii. GSAMP Trust 2007-HE2, Mortgage Pass-Through Certificates,
Series 2007-HE2 (GSAMP 2007-HE2); xxxiv. GSAMP Trust 2007-NC1, Mortgage Pass-Through Certificates,
Series 2007-NC1 (GSAMP 2007-NC1); xxxv. GSR Mortgage Loan Trust 2006-OA1, Mortgage Pass-Through
Certificates, Series 2006-OA1 (GSR 2006-OA1); xxxvi. GSR Mortgage Loan Trust 2007-AR2, Mortgage Pass-Through
Certificates, Series 2007-AR2 (GSR 2007-AR2); xxxvii. GSR Mortgage Loan Trust 2007-OA1, Mortgage Pass-Through
Certificates, Series 2007-OA1 (GSR 2007-OA1); xxxviii. GSR Mortgage Loan Trust 2007-OA2, Mortgage Pass-Through
Certificates, Series 2007-OA2 (GSR 2007-OA2); xxxix. IndyMac INDX Mortgage Loan Trust 2005-AR18, Mortgage Pass-
Through Certificates, Series 2005-AR18 (INDX 2005-AR18); and
xl.
IndyMac INDX Mortgage Loan Trust 2005-AR27, Mortgage Pass-
Through Certificates, Series 2005-AR27 (INDX 2005-AR27). 3. Each Certificate was offered for sale pursuant to one of eight shelf registration
statements (the Shelf Registration Statements) filed with the Securities and Exchange Commission (the SEC). Defendant GS Mortgage Securities Corp. filed four of the Shelf Registration Statements (the GS Mortgage Shelf Registration Statements, including any amendments thereto), which pertained to 35 of the Securitizations. The Individual Defendants signed one or more of the GS Mortgage Shelf Registration Statements and the amendments thereto. Accredited Mortgage Loan REIT Trust, American Home Mortgage Assets LLC, Fremont Mortgage Securities Corp., and IndyMac MBS, Inc., respectively, filed the remaining four Shelf Registration Statements. Goldman, Sachs & Co. was the lead underwriter and the underwriter who sold the GSE Certificates to Fannie Mae and Freddie Mac with respect to all the Securitizations. 4. For each Securitization, a prospectus (Prospectus) and prospectus supplement
(Prospectus Supplement) were filed with the SEC as part of the Registration Statement for that Securitization.2 The GSE Certificates were marketed and sold to Fannie Mae and Freddie Mac pursuant to the Registration Statements, including the Shelf Registration Statements and the corresponding Prospectuses and Prospectus Supplements. 5. The Registration Statements contained statements about the characteristics and
credit quality of the mortgage loans underlying the Securitizations and the origination and underwriting practices used to make and approve the loans. Such statements were material to a The term Registration Statement, as used herein, incorporates the Shelf Registration Statement, the Prospectus and the Prospectus Supplement for each referenced Securitization, except where otherwise indicated.
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reasonable investors decision to invest in mortgage-backed securities by purchasing the Certificates. Unbeknownst to Fannie Mae and Freddie Mac, these statements were materially false, as significant percentages of the underlying mortgage loans were not originated in accordance with the represented underwriting standards and origination practices, and had materially poorer credit quality than was represented in the Registration Statements. 6. The Registration Statements also contained statistical summaries of the collateral
groups and the entire group of mortgage loans in each Securitization, such as the percentage of loans secured by owner-occupied properties and the percentage of the loan groups aggregate principal balance with loan-to-value ratios within specified ranges. This information was material to reasonable investors. However, a loan-level analysis of a sample of loans for each Securitizationa review that encompassed thousands of mortgages across all of the Securitizationshas revealed that these statistics were false and omitted material facts due to inflated property values and misrepresentations of other key characteristics of the mortgage loans. 7. The percentage of second homes or investment properties is a material risk factor
to purchasers of Certificates, such as Fannie Mae and Freddie Mac, since a borrower who lives in a mortgaged property is generally less likely to stop paying his or her mortgage and more likely to take better care of the property. The loan-level review reveals that the true percentage of owner-occupied properties for the loans supporting the GSE Certificates was materially lower than was stated in the Prospectus Supplements. Likewise, the Prospectus Supplements misrepresented other material factors, including the true value of the mortgaged properties relative to the amount of the underlying loans.
8.
Defendants Goldman, Sachs & Co. (which lead underwrote and then sold the GSE
Certificates to the GSEs), GS Mortgage Securities Corp. (which acted as the depositor in 35 of the Securitizations), and the Individual Defendants (who signed the Registration Statements with respect to 35 of the Securitizations) are directly responsible for the misstatements and omissions of material fact contained in the Registration Statements because they prepared, signed, filed and/or used these documents to market and sell the Certificates to Fannie Mae and Freddie Mac. 9. Defendants Goldman Sachs Mortgage Company, The Goldman Sachs Group, Inc.
and Goldman Sachs Real Estate Funding Corp. are likewise responsible for the misstatements and omissions of material fact contained in the Registration Statements by virtue of their direction and control over Defendants GS Mortgage Securities Corp. and Goldman, Sachs & Co. 10. GS Mortgage Securities Corp. was a wholly owned subsidiary of Goldman Sachs
Mortgage Company and Goldman Sachs Real Estate Funding Corp., both of which were wholly owned by The Goldman Sachs Group, Inc. Goldman, Sachs & Co. was likewise a wholly owned subsidiary of The Goldman Sachs Group, Inc. 11. Goldman Sachs Mortgage Company, The Goldman Sachs Group, Inc. and
Goldman Sachs Real Estate Funding Corp. directly participated in and exercised dominion and control over the business operations of Defendant GS Mortgage Securities Corp. The Goldman Sachs Group, Inc. directly participated in and exercised dominion and control over the business operations of Defendant Goldman, Sachs & Co. 12. Fannie Mae and Freddie Mac purchased over $11.1 billion of the Certificates
pursuant to the Registration Statements filed with the SEC. The Registration Statements contained misstatements and omissions of material facts concerning the quality of the underlying mortgage loans and the practices used to originate and underwrite such loans. As a result of
Defendants misstatements and omissions of material fact, Fannie Mae and Freddie Mac have suffered substantial losses as the value of their holdings has significantly deteriorated. 13. FHFA, as Conservator of Fannie Mae and Freddie Mac, brings this action against
the Defendants for violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77k, 77l(a)(2), 77o, Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, Sections 31-5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, and for negligent misrepresentation, common law fraud, and aiding and abetting fraud. PARTIES The Plaintiff and the GSEs 14. The Federal Housing Finance Agency is a federal agency that has its principal
executive offices at 1700 G Street, N.W. in Washington, D.C. FHFA was created on July 30, 2008 pursuant to the Housing and Economic Recovery Act of 2008 (HERA), Pub. L. No. 110289, 122 Stat. 2654 (2008) (codified at 12 U.S.C. 4617), to oversee Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. On September 6, 2008, under HERA, the Director of FHFA placed Fannie Mae and Freddie Mac into conservatorship and appointed FHFA as conservator. In that capacity, FHFA has the authority to exercise all rights and remedies of the GSEs, including but not limited to, the authority to bring suits on behalf of and/or for the benefit of Fannie Mae and Freddie Mac. 12 U.S.C. 4617(b)(2). 15. Fannie Mae and Freddie Mac are government-sponsored enterprises chartered by
Congress with a mission to provide liquidity, stability and affordability to the United States housing and mortgage markets. As part of this mission, Fannie Mae and Freddie Mac invested in residential mortgage-backed securities. Fannie Mae has its principal executive offices at 3900 Wisconsin Avenue, N.W. in Washington, D.C. Freddie Mac has its principal executive offices at 8200 Jones Branch Drive in McLean, Virginia. 9
The Defendants 16. Defendant Goldman, Sachs & Co. is incorporated in New York and has its
principal executive offices at 200 West Street in New York, New York. Goldman, Sachs & Co. was the lead underwriter for each Securitization. Fannie Mae and Freddie Mac purchased all of the GSE Certificates from Goldman, Sachs & Co. in its capacity as underwriter of the Securitizations. Goldman, Sachs & Co. is a wholly owned subsidiary of The Goldman Sachs Group, Inc. and is its principal U.S. broker-dealer. 17. Defendant GS Mortgage Securities Corp. is incorporated in Delaware and has its
principal executive offices at 200 West Street in New York, New York. As described below, GS Mortgage Securities Corp. served as the depositor for 35 of the Securitizations. GS Mortgage Securities Corp. is a wholly owned subsidiary of The Goldman Sachs Group, Inc. and an affiliate of Defendants Goldman, Sachs & Co. and Goldman Sachs Mortgage Company. In addition, GS Mortgage Securities Corp., as the depositor, is the issuer of the GSE Certificates within the meaning of Section 2(a)(4) of the Securities Act, 15 U.S.C. 77b(a)(4), and in accordance with Section 11(a) of the Securities Act. 18. Defendant Goldman Sachs Mortgage Company is a New York limited partnership
and has its principal executive offices at 200 West Street in New York, New York. Goldman Sachs Mortgage Company is (i) the sponsor of 36 of the Securitizations, (ii) the parent company of GS Mortgage Securities Corp. (the depositor in 35 of the Securitizations), and (iii) an affiliate of Goldman, Sachs & Co. (the lead underwriter in all 40 of the Securitizations) through ultimate parent ownership by The Goldman Sachs Group, Inc. By the end of 2006, Goldman Sachs Mortgage Company had sponsored the securitization of approximately $162 billion of residential mortgage loans, including prime, subprime, Alt-A, FHA/VA/RHS, second lien, and home equity lines of credit. See GSAMP 2007-NC1 Prospectus Supplement (filed Feb. 21, 2007). 10
19.
Defendant The Goldman Sachs Group, Inc. is incorporated in Delaware with its
principal executive offices at 200 West Street in New York, New York. The Goldman Sachs Group, Inc. is a bank holding company regulated by the Board of Governors of the Federal Reserve System and is the ultimate parent company of Goldman, Sachs & Co. (the selling and lead underwriter in all 40 Securitizations), Goldman Sachs Mortgage Company (the sponsor in 36 of the Securitizations), and GS Mortgage Securities Corp. (the depositor in 35 of the Securitizations). Last year, The Goldman Sachs Group, Inc. generated net revenues of $39.2 billion and net profits of $8.4 billion. See The Goldman Sachs Group, Inc., Form 10-K (filed Mar. 1, 2011). 20. Defendant Goldman Sachs Real Estate Funding Corp. is incorporated in the State
of New York and has its principal executive offices at 200 West Street in New York, New York. Goldman Sachs Real Estate Funding Corp. is a wholly owned subsidiary of Goldman Sachs Bank USA and is the general partner of Goldman Sachs Mortgage Company, the sponsor of 36 of the Securitizations. 21. Defendant Peter C. Aberg served at the time of the Securitizations as a Director of
Defendant GS Mortgage Securities Corp. and worked in New York, New York. Mr. Aberg signed one or more GS Mortgage Registration Statements, and did so in New York. 22. Defendant Howard S. Altarescu served at the time of the Securitizations as Vice
President, Chief Financial Officer, and Chief Accounting Officer of Defendant GS Mortgage Securities Corp. and worked in New York, New York. Mr. Altarescu signed one or more GS Mortgage Registration Statements, and did so in New York.
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23.
Defendant Robert J. Christie served at the time of the Securitizations as a Director
of Defendant GS Mortgage Securities Corp. and worked in New York, New York. Mr. Christie signed one or more GS Mortgage Registration Statements, and did so in New York. 24. Defendant Kevin Gasvoda served at the time of the Securitizations as a Director
of Defendant GS Mortgage Securities Corp., in addition to serving as Managing Director for Goldmans Fixed Income, Currency, and Commodities business line and head of Residential Whole Loan Trading at Goldman Sachs, and worked in New York, New York. Mr. Gasvoda signed one or more GS Mortgage Registration Statements, and did so in New York. 25. Defendant Michelle Gill served at the time of the Securitizations as Vice
President and principal financial officer and principal accounting officer of Defendant GS Mortgage Securities Corp. and worked in New York, New York. Ms. Gill signed one or more GS Mortgage Registration Statements, and did so in New York. 26. Defendant David J. Rosenblum served at the time of the Securitizations as Vice
President and a Director of Defendant GS Mortgage Securities Corp., in addition to serving as the head of Goldmans Collateralized Loan Obligation activities, and worked in New York, New York. Mr. Rosenblum signed one or more GS Mortgage Registration Statements, and did so in New York. 27. Defendant Jonathan S. Sobel served at the time of the Securitizations as a Director
of Defendant GS Mortgage Securities Corp., in addition to having served as the head of Goldmans mortgage department, and worked in New York, New York. Mr. Sobel signed one or more GS Mortgage Registration Statements, and did so in New York. 28. Defendant Daniel L. Sparks served at the time of the Securitizations as Chief
Executive Officer, Vice President and a Director of Defendant GS Mortgage Securities Corp., in
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addition to serving as the head of Goldmans mortgage department, and worked in New York, New York. Mr. Sparks signed one or more GS Mortgage Registration Statements, and did so in New York. 29. Defendant Mark Weiss served at the time of the Securitizations as Vice President
and principal financial officer and principal accounting officer of Defendant GS Mortgage Securities Corp. and worked in New York, New York. Mr. Weiss signed one or more GS Mortgage Registration Statements, and did so in New York. The Non-Party Originators 30. The loans underlying the Certificates were acquired by the sponsor for each
Securitization from non-party mortgage originators.3 The originators principally responsible for the loans underlying the Certificates were Accredited Home Lenders, Inc., American Home Mortgage Investment Corp., Argent Mortgage Company, L.L.C., Countrywide Home Loans, Inc., First Franklin Financial Corporation, Fremont Investment & Loan, GreenPoint Mortgage Funding, Inc., IndyMac Bank, F.S.B., Meritage Mortgage Corporation, NC Capital Corporation., New Century Mortgage Corporation, SouthStar Funding, LLC, and WMC Mortgage Company, Inc. JURISDICTION AND VENUE 31. Jurisdiction of this Court is founded upon 28 U.S.C. 1345, which gives federal
courts original jurisdiction over claims brought by FHFA in its capacity as conservator for Fannie Mae and Freddie Mac.
Defendant Goldman Sachs Mortgage Company was the sponsor for 36 of the 40 Securitizations. The remaining four Securitizations were sponsored by non-parties. Specifically, Accredited Home Lenders, Inc., Fremont Investment & Loan, and IndyMac Bank, F.S.B. each sponsored one or more of those four Securitizations.
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32.
Jurisdiction of this Court is also founded upon 28 U.S.C. 1331 because the
Securities Act claims asserted herein arise under Sections 11, 12(a)(2), and 15 of the Securities Act, 15 U.S.C. 77k, 77l(a)(2), 77o. This Court further has jurisdiction over the Securities Act claims pursuant to Section 22 of the Securities Act, 15 U.S.C. 77v. 33. This Court has jurisdiction over the statutory claims of violations of Sections
13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code and Sections 31-5606.05(a)(1)(B) and 315606.05(c) of the District of Columbia Code, pursuant to this Courts supplemental jurisdiction under 28 U.S.C. 1367(a). This Court likewise has jurisdiction over the common law claims of negligent misrepresentation, fraud, and aiding and abetting fraud, pursuant to this Courts supplemental jurisdiction under 28 U.S.C. 1367(a). 34. Venue is proper in this district pursuant to Section 22 of the Securities Act, 15
U.S.C. 77v, and 28 U.S.C. 1391(b). Many of the acts and transactions alleged herein, including the preparation, dissemination and signing of the Registration Statements, occurred in substantial part in the State of New York. Additionally, the GSE Certificates were actively marketed and sold from this State and several of the Defendants can be found and transact business in this District. Defendants are also subject to personal jurisdiction in this District. FACTUAL ALLEGATIONS I. The Securitizations A. 35. Residential Mortgage-Backed Securitizations in General
Asset-backed securitization distributes risk by pooling cash-producing financial
assets and issuing securities backed by those collateral groups. In residential mortgage-backed securitizations, the cash-producing financial assets are residential mortgage loans. 36. The most common form of securitization of mortgage loans involves a sponsor
the entity that acquires or originates the mortgage loans and initiates the securitizationand the 14
creation of a trust, to which the sponsor directly or indirectly transfers a portfolio of mortgage loans. The trust is generally established pursuant to a Pooling and Servicing Agreement entered into by, among others, the depositor for that securitization. In many instances, the transfer of assets to a trust is a two-step process: the financial assets are transferred by the sponsor first to an intermediate entity, often a limited purpose entity created by the sponsor and commonly called a depositor, and then the depositor will transfer the assets to the [trust] for the particular asset-backed transactions. Asset-Backed Securities, Securities Act Release No. 33-8518, Exchange Act Release No. 34-50905, 84 SEC Docket 1624 (Dec. 22, 2004). 37. Residential mortgage-backed securities are backed by the underlying mortgage
loans. Some residential mortgage-backed securitizations are created from more than one pool of loans called collateral groups, in which case the trust issues securities backed by different groups. For example, a securitization may involve two groups of mortgages, with some securities backed primarily by the first group, and others primarily by the second group. Purchasers of the securities acquire an ownership interest in the assets of the trust, which in turn owns the loans. Within this framework, the purchasers of the securities acquire rights to the cash-flows from the designated collateral group, such as homeowners payments of principal and interest on the mortgage loans held by the related trust. 38. Residential mortgage-backed securities are issued pursuant to registration
statements filed with the SEC. These registration statements include prospectuses, which explain the general structure of the investment, and prospectus supplements, which contain detailed descriptions of the collateral groups underlying the certificates. Certificates are issued by the trust pursuant to the registration statement and the prospectus and prospectus supplement. Underwriters sell the certificates to investors.
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39.
A mortgage servicer is necessary to manage the collection of proceeds from the
mortgage loans. The servicer is responsible for collecting homeowners mortgage loan payments, which the servicer remits to the trustee after deducting a monthly servicing fee. The servicers duties include making collection efforts on delinquent loans, initiating foreclosure proceedings, and determining when to charge off a loan by writing down its balance. The servicer is required to report key information about the loans to the trustee. The trustee (or trust administrator) administers the trusts funds and delivers payments due each month on the certificates to the investors. B. 40. The Securitizations at Issue in This Case
This case involves the 40 Securitizations listed in Table 1 below. Goldman Sachs
served as the lead underwriter and sold the GSE Certificates to the GSEs for all 40 of the Securitizations. In 36 of the Securitizations, Goldman also served as the sponsor, and in 35 of the Securitizations, Goldman was also the depositor and therefore the issuer and offeror of the Certificates. For each GSE Certificate, Table 1 identifies: (1) the sponsor; (2) the depositor; (3) the lead underwriter; (4) the principal amount issued for the tranches purchased by the GSEs; (5) the date of issuance; and (6) the loan group backing the GSE Certificates for that Securitization (referred to as the Supporting Loan Group).
Table 1
Transaction Tranche4 Sponsor Accredited Home Lenders, Inc. Depositor Accredited Mortgage Loan REIT Trust Lead Underwriter Goldman, Sachs & Co. Principal Amount Issued Date of Issuance November 23, 2005 Supporting Loan Group Group 1
ACCR 2005-4
A1
$354,752,000
A tranche is one of a series of certificates or interests created and issued as part of the same transaction.
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Transaction
Tranche4
Sponsor Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Fremont Investment & Loan Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company
Depositor American Home Mortgage Assets LLC American Home Mortgage Assets LLC GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. Fremont Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp.
Lead Underwriter Goldman, Sachs & Co.
Principal Amount Issued $165,000,000
Date of Issuance May 25, 2006
Supporting Loan Group Group 1
AHMA 2006-1
1A1
AHMA 2006-1
1A2
Goldman, Sachs & Co.
$101,477,000
May 25, 2006
Group 1
FFML 2005FF11
A1
$240,920,000
November 22, 2005
Group 1
FFML 2005-FF8
A1
$304,713,000
September 29, 2005
Group 1
FFML 2006FF13
A1
$244,303,000
September 28, 2006
Group 1
FHLT 2006-E
1A1
$468,289,000
December 6, 2006
Group 1
GSAA 2005-11
1A1
$103,804,000
September 29, 2005
Group 1
GSAA 2005-14
1A1
$168,059,000
November 22, 2005
Group 1
GSAA 2005-14
1A2
$18,674,000
November 22, 2005
Group 1
GSAA 2005-15
1A1
$243,018,000
December 29, 2005
Group 1
GSAA 2006-11
1A1
$242,367,000
June 30, 2006
Group 1
GSAA 2006-2
1A1
$148,975,000
February 6, 2006
Group 1
GSAA 2006-4
1A1
$223,080,000
March 6, 2006
Group 1
GSAA 2006-5
1A1
$186,376,000
March 30, 2006
Group 1
GSAA 2006-8
1A1
$199,053,000
April 28, 2006
Group 1
GSAA 2007-6
3A1A
$78,936,000
May 30, 2007
Group 3
17
Transaction
Tranche4
Sponsor Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company
Depositor GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp.
Principal Amount Issued
Date of Issuance December 28, 2005
GSAMP 2005AHL2
A1A
$108,759,000
GSAMP 2005HE5
A1
$405,814,000
November 22, 2005
Group 1
GSAMP 2005HE6
A1
$341,242,000
December 29, 2005
Group 1
GSAMP 2005WMC2
A1A
$266,290,000
November 23, 2005
Group 1
GSAMP 2005WMC3
A1A
$238,899,000
December 28, 2005
Group 1
GSAMP 2006FM1
A1
$241,822,000
April 27, 2006
Group 1
GSAMP 2006FM2
A1
$351,611,000
September 29, 2006
Group 1
GSAMP 2006FM3
A1
$257,050,000
December 21, 2006
Group 1
GSAMP 2006HE3
A1
$304,472,000
May 26, 2006
Group 1
GSAMP 2006HE4
A1
$352,415,000
June 29, 2006
Group 1
GSAMP 2006HE5
A1
$241,582,000
August 25, 2006
Group 1
GSAMP 2006HE7
A1
$333,098,000
October 31, 2006
Group 1
GSAMP 2006HE8
A1
$353,741,000
December 27, 2006
Group 1
GSAMP 2006NC2
A1
$239,618,000
June 29, 2006
Group 1
GSAMP 2007FM1
A1
$315,873,000
January 30, 2007
Group 1
GSAMP 2007FM2
A1
$351,823,000
January 30, 2007
Group 1
18
Transaction
Tranche4
Sponsor Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company IndyMac Bank, F.S.B. IndyMac Bank, F.S.B.
Depositor GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. IndyMac MBS, Inc. IndyMac MBS, Inc.
Principal Amount Issued
Date of Issuance February 23, 2007
GSAMP 2007HE1
A1
$205,454,000
GSAMP 2007HE2
A1
$370,801,000
April 20, 2007
Group 1
GSAMP 2007NC1
A1
$479,787,000
February 20, 2007
Group 1
GSR 2006-OA1
1A1
$744,970,000
August 24, 2006
Group 1
GSR 2007-AR2
6A1
$89,703,000
May 24, 2007
Group 6
GSR 2007-OA1
1A1
$374,616,000
May 8, 2007
Group 1
GSR 2007-OA2
1A1
Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co.
$186,326,000
October 1, 2007
Group 1
INDX 2005AR18 INDX 2005AR27
1A1
$629,654,000
September 7, 2005 October 28, 2005
Group 1
2A1
$136,304,000
Group 2
C.
The Securitization Process 1. Goldman Sachs Mortgage Company Pools Mortgage Loans in Special Purpose Trusts
41.
As the sponsor for 36 of the 40 Securitizations, Defendant Goldman Sachs
Mortgage Company purchased mortgage loans underlying the Certificates for those 36 Securitizations after the loans were originated, either directly from the originators or through affiliates of the originators. Goldman Sachs Mortgage Company then sold or otherwise transferred the mortgage loans for the 36 Securitizations it sponsored to the depositor, which was an affiliated entityDefendant GS Mortgage Securities Corp.in 35 of the Securitizations. With respect to the remaining four Securitizations, non-party sponsors sold the mortgage loans to
19
non-party depositors, as reflected in Table 1 above. Defendant Goldman, Sachs & Co. was the lead and selling underwriter for all 40 Securitizations. 42. Both Goldman Sachs Mortgage Company (the sponsor) and GS Mortgage
Securities Corp. (the depositor) were controlled by their ultimate parent, The Goldman Sachs Group, Inc. The sole purpose of the depositor, and the common law trusts created through this process, was to act as a conduit through which loans acquired by the sponsor could be securitized and sold to investors. 43. The transfer of the mortgage loans to the trust was generally effected by means of
either a Master Servicing and Trust Agreement or a Pooling and Servicing Agreement (either referred to herein as a PSA) executed among the depositor and the parties responsible for monitoring and servicing the mortgage loans in that Securitization. The trust, administered by the trustee, held the mortgage loans pursuant to the related PSA and issued certificates, including the GSE Certificates, backed by such loans. The GSEs purchased the GSE Certificates, through which they obtained an ownership interest in the assets of the trust, including the mortgage loans. 44. The process by which loans were acquired by Goldman Sachs Mortgage
Company differed somewhat among Securitizations. For example, in a number of the Securitizations, the loans were acquired through Goldman Sachs Mortgage Companys conduit program. Under the conduit program, Goldman Sachs Mortgage Company acquired mortgage loans from various banks, savings and loan associations, mortgage bankers and other mortgage loan originators, and purchasers of mortgage loans in the secondary market. According to the Registration Statements, mortgage loans acquired by Goldman Sachs through its conduit program were acquired in accordance with the underwriting criteria specified in the Registration Statements. Where the mortgage loans were acquired by the sponsor pursuant to Goldman
20
Sachs conduit program, the Registration Statement stated that the mortgage loans met certain criteria, including specified maximum loan-to-value ratios for each loan documentation program based upon borrower FICO scores. 45. In addition, Goldman Sachs Mortgage Company acquired other mortgage loans
by bulk purchases in the secondary market from numerous originators and intermediate purchasers of loans. The Registration Statements described the underwriting guidelines applicable to many of these originators and intermediate purchasers. Such guidelines typically included maximum loan-to-value ratios, the degree of verification of borrower information required, the means by which the originator assessed borrower creditworthiness and likelihood of default on the mortgage loan, the adequacy of the mortgaged property as collateral, and whether a primary mortgage guarantee policy was required. 2. 46. The Trusts Issue Securities Backed by the Loans
Once the mortgage loans were transferred to the trusts in accordance with the
PSAs, each trust issued Certificates backed by the underlying mortgage loans. The Certificates were then sold to investors like Fannie Mae and Freddie Mac, which thereby acquired an ownership interest in the assets of the corresponding trust. Each Certificate entitles its holder to a specified portion of the cashflows from the underlying mortgages in the Supporting Loan Group. The level of risk inherent in the Certificates is a function of the capital structure of the related transaction and the credit quality of the underlying mortgages. 47. Each Certificate was issued pursuant to one of eight Shelf Registration Statements
filed with the SEC on Form S-3. The Shelf Registration Statements were amended by one or more Forms S-3/A filed with the SEC. Each Individual Defendant signed one or more of the four GS Mortgage Shelf Registration Statements, including any amendments thereto, which were filed by GS Mortgage Securities Corp. The SEC filing number, registrants, signatories and filing 21
dates for the eight Shelf Registration Statements and amendments thereto, as well as the Certificates covered by each Shelf Registration Statement, are reflected in Table 2 below.
Table 2
Date Registration Statement Filed Date(s) Ame nded Registration Statement Filed Signatories of Registration Statement James H. Berglund, John S. Buchanan, Gary M. Erickson, Bowers W. Espy, Jody A. Gunderson, Joseph J. Lydon, Ray W. McKewon, Richard T. Pratt, James A. Konrath
SEC File No.
Registrants
Covered Certificates
Signatories of Amendments
333124435
4/28/2005
6/10/2005
Accredited Home Lenders, Inc. Accredited Mortgage Loan REIT Trust
ACCR 2005-4
James H. Berglund, John S. Buchanan, Gary M. Erickson, Bowers W. Espy, Jody A. Gunderson, Joseph J. Lydon, Ray W. McKewon, Ray W. McKewon, Richard T. Pratt, James A. Konrath 1. Michael Strauss, Stephen Hozie, Thomas McDonagh, Alan Horn; 2. Michael Strauss, Stephen Hozie, Thomas McDonagh, Alan Horn; 3. Michael Strauss, Stephen Hozie, Thomas McDonagh, Alan Horn; 4. Michael Strauss, Stephen Hozie, Thomas McDonagh, Alan Horn 1. Murray L. Zoota, Louis J. Rampino, Wayne R. Bailey, Thomas W. Hayes, Donald Puglisi, Patrick E. Lamb. 2. Kyle W. Walker, Murray L. Zoota, Louis J. Rampino, Wayne R. Bailey, Thomas W. Hayes, Donald Puglisi, Ronald S. Nicolas.
333131641
2/7/2006
1. 2. 3. 4.
3/23/2006, 4/6/2006, 4/18/2006, 4/21/2006
American Home Mortgage Assets LLC
AHMA 2006-1
Michael Strauss, Stephen Hozie, Thomas McDonagh, Alan Horn
333132540
3/17/2006
1. 5/16/2006, 2. 6/23/2006
Fremont Mortgage Securities Corporation
FHLT 2006-E
Murray L. Zoota; Louis J. Rampino; Wayne R. Bailey; Thomas W. Hayes; Donald Puglisi; Kyle R. Walker; Ronald Nicolas, Jr.,
333127620
8/17/2005
Not applicable
GS Mortgage Securities Corp.
333132809
3/29/2006
Not applicable
FFML 2005-FF11; FFML 2005-FF8; GSAA 2006-4; GSAA 2006-5; GSAMP 2005-AHL2; GSAMP 2005-HE5; GSAMP 2005-HE6; GSAMP 2005-WMC2; GSAMP 2005-WMC3 FFML 2006-FF13; GSAA 2006-11; GSAA 2006-8; GSAMP 2006-FM1; GSAMP 2006-FM2; GSAMP 2006-FM3; GSAMP 2006-HE3; GSAMP 2006-HE4; GSAMP 2006-HE5; GSAMP 2006-HE7; GSAMP 2006-HE8; GSAMP 2006-NC2; GSAMP 2007-FM1; GSAMP 2007-NC1; GSR 2006-OA1; GSR 2007-AR2
Daniel L. Sparks, Mark Weiss, Jonathan S. Sobel
Not applicable
Daniel L. Sparks, Mark Weiss, David J. Rosenblum, Jonathan S. Sobel
Not applicable
22
SEC File No.
Date Registration Statement Filed
Date(s) Ame nded Registration Statement Filed
Registrants
Signatories of Registration Statement Daniel L. Sparks, Howard S. Altarescu, Peter C. Aberg, Robert J. Christie, Jonathan S. Sobel Daniel L. Sparks, Michelle Gill, Kevin Gasvoda John Olinski; S. Blair Abernathy; Lynnette Antosh; Samir Grover
333120274
11/5/2004
11/24/2004
GSAA 2005-11; GSAA 2005-14; GSAA 2005-15; GSAA 2006-2 GSAA 2007-6; GSAMP 2007-FM2; GSAMP 2007-HE1; GSAMP 2007-HE2; GSR 2007-OA1; GSR 2007-OA2 INDX 2005-AR18, INDX 2005-AR27
Daniel L. Sparks, Howard S. Altarescu, Peter C. Aberg, Robert J. Christie, Jonathan S. Sobel
333139817
1/5/2007
1/31/2007
Daniel L. Sparks, Michelle Gill, Kevin Gasvoda
333127556
8/15/2005
Not applicable
IndyMac MBS, Inc.
Not applicable
48.
The Prospectus Supplement for each Securitization describes the underwriting
guidelines that purportedly were used in connection with the origination of the underlying mortgage loans. In addition, the Prospectus Supplements purport to provide accurate statistics regarding the mortgage loans in each group, including the ranges of and weighted average FICO credit scores of the borrowers, the ranges of and weighted average loan-to-value ratios of the loans, the ranges of and weighted average outstanding principal balances of the loans, the debtto-income ratios, geographic distribution of the loans, and the extent to which the loans were for purchase or refinance purposes; information concerning whether the loans were secured by a property to be used as a primary residence, second home, or investment property; and information concerning whether the loans were delinquent. 44. The Prospectus Supplements associated with each Securitization were filed with
the SEC as part of the Registration Statements. The Form 8-Ks attaching the PSAs for each Securitization were also filed with the SEC. The date on which the Prospectus Supplement and Form 8-K containing the PSAs were filed for each Securitization, as well as the filing number of the Shelf Registration Statement related to each, are set forth in Table 3 below.
23
Table 3
Transaction ACCR 2005-4 AHMA 2006-1 FFML 2005-FF11 FFML 2005-FF8 FFML 2006-FF13 FHLT 2006-E GSAA 2005-11 GSAA 2005-14 GSAA 2005-15 GSAA 2006-11 GSAA 2006-2 GSAA 2006-4 GSAA 2006-5 GSAA 2006-8 GSAA 2007-6 GSAMP 2005-AHL2 GSAMP 2005-HE5 GSAMP 2005-HE6 GSAMP 2005-WMC2 GSAMP 2005-WMC3 GSAMP 2006-FM1 GSAMP 2006-FM2 GSAMP 2006-FM3 GSAMP 2006-HE3 GSAMP 2006-HE4 GSAMP 2006-HE5 GSAMP 2006-HE7 GSAMP 2006-HE8 GSAMP 2006-NC2 GSAMP 2007-FM1 GSAMP 2007-FM2 GSAMP 2007-HE1 GSAMP 2007-HE2 GSAMP 2007-NC1 GSR 2006-OA1 GSR 2007-AR2 GSR 2007-OA1 GSR 2007-OA2 INDX 2005-AR18 INDX 2005-AR27 Date Prospectus Supplement Filed 11/21/2005 5/26/2006 11/21/2005 9/29/2005 9/29/2006 12/7/2006 9/29/2005 11/23/2005 12/8/2005 7/3/2006 1/25/2006 3/6/2006 3/31/2006 5/1/2006 5/30/2007 12/23/2005 11/23/2005 12/27/2005 11/21/2005 12/23/2005 4/27/2006 10/22/2006 12/22/2006 5/25/2006 6/30/2006 8/25/2006 10/31/2006 12/27/2006 6/29/2006 2/1/2007 2/21/2007 2/26/2007 4/19/2007 2/21/2007 8/25/2006 5/29/2007 5/10/2007 11/1/2007 9/8/2005 10/31/2005 Date Form 8-K Attaching PSA Filed5 12/2/2005 7/25/2006 12/7/2005 10/14/2005 10/13/2006 12/20/2006 10/28/2005(*) 12/12/2005(*) 1/17/2006(*) 7/13/2006(*) 2/21/2006(*) 3/17/2006(*) 4/14/2006(*) 6/9/2006(*) 6/14/2007(*) 1/12/2006 12/7/2005 1/13/2006 12/8/2005 1/12/2006 5/18/2006 9/29/2006 1/8/2007 6/30/2006 7/19/2006 9/14/2006 11/15/2006 1/24/2007 3/12/2007 2/16/2007 3/28/2007 3/21/2007 5/24/2007 3/22/2007 9/11/2006(*) 6/8/2007(*) 5/29/2007(*) 11/13/2007(*) 1/24/2006 1/24/2006 Filing No. of Related Registration Statement 333-124435 333-131641 333-127620 333-127620 333-132809 333-132540 333-120274 333-120274 333-120274 333-132809 333-120274 333-127620 333-127620 333-132809 333-139817 333-127620 333-127620 333-127620 333-127620 333-127620 333-132809 333-132809 333-132809 333-132809 333-132809 333-132809 333-132809 333-132809 333-132809 333-132809 333-139817 333-139817 333-139817 333-132809 333-139817 333-139817 333-139817 333-139817 333-127556 333-127556
45.
The Certificates were issued pursuant to the PSAs, and Defendants Goldman,
Sachs & Co. and GS Mortgage Securities Corp. together offered, marketed, and sold the GSE Certificates to Fannie Mae and Freddie Mac in the primary market pursuant to the Registration Statements, which, as noted previously, included the Prospectuses and Prospectus Supplements.
An asterisk indicates that the relevant agreement was a Master Servicing and Trust Agreement, rather than a Pooling and Servicing Agreement.
24
II.
The Defendants Participation in the Securitization Process A. The Role of Each Defendant
49.
Each Defendant, including the Individual Defendants, had a role in the
securitization process and marketing of the Certificates, which included purchasing the mortgage loans from the originators, arranging the Securitizations, selling the mortgage loans to the depositor, transferring the mortgage loans to the trustee on behalf of the Certificateholders, underwriting the public offering of the Certificates, structuring and issuing the Certificates, and marketing and selling the Certificates to investors including Fannie Mae and Freddie Mac. 50. Depositors, underwriters, and Individual Defendants who signed the Registration
Statements, as well as Defendants who exercise control over their activities, are liable, jointly and severally, as participants in the registration, issuance and offering of Certificates, including issuing, causing, or making materially misleading statements in the Registration Statement, and omitting material facts required to be stated therein or necessary to make the statements contained therein not misleading. 1. 51. Goldman, Sachs & Co.
Defendant Goldman, Sachs & Co. was the lead underwriter in each of the
Securitizations. Fannie Mae and Freddie Mac purchased all of the GSE Certificates from Goldman, Sachs & Co. in the primary market. Goldman, Sachs & Co. is a wholly owned subsidiary of The Goldman Sachs Group, Inc. and is its principal U.S. broker-dealer. 52. As the lead underwriter for the Securitizations, Goldman, Sachs & Co. was
responsible for underwriting and managing the offer and sale of the Certificates to Fannie Mae and Freddie Mac and other investors. Goldman, Sachs & Co. was also obligated to conduct meaningful due diligence to ensure that the Registration Statements did not contain any material
25
misstatements or omissions, including as to the manner in which the underlying mortgage loans were originated, transferred and underwritten. 2. 53. GS Mortgage Securities Corp.
Defendant GS Mortgage Securities Corp. served as the depositor for 35 of the
Securitizations. GS Mortgage Securities Corp. is a wholly owned subsidiary of The Goldman Sachs Group, Inc. and an affiliate of Goldman, Sachs & Co. (the underwriter) and Goldman Sachs Mortgage Company (the sponsor). 54. GS Mortgage Securities Corp. is a special purpose entity formed solely for the
purpose of purchasing mortgage loans, filing registration statements with the SEC, forming RMBS trusts, assigning mortgage loans and all of its rights and interests in such mortgage loans to the trustee for the benefit of certificateholders, and depositing the underlying mortgage loans into the issuing trusts. 55. In its capacity as depositor, GS Mortgage Securities Corp. purchased mortgage
loans from Goldman Sachs Mortgage Company and then sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trusts. GS Mortgage Securities Corp., together with the Individual Defendants, Goldman Sachs Mortgage Company, and Goldman, Sachs & Co., was also responsible for preparing and filing the Registration Statements pursuant to which the Certificates issued by GS Mortgage Securities Corp. were offered for sale. GS Mortgage Securities Corp., as the depositor, is the issuer of the GSE Certificates within the meaning of Section 2(a)(4) of the Securities Act, 15 U.S.C. 77b(a)(4), and in accordance with Section 11(a), 15 U.S.C. 77k(a), of the Securities Act. GS Securities Mortgage Corp. was controlled by the Individual Defendants, who served as directors and/or officers of GS Securities Mortgage Corp.
26
3. 56.
Goldman Sachs Mortgage Company
Defendant Goldman Sachs Mortgage Corp. is the sponsor for 36 of the
Securitizations and is the parent company of GS Mortgage Securities Corp. (the depositor) and is an affiliate of Goldman, Sachs & Co. (the underwriter) through common ownership by their ultimate parent, The Goldman Sachs Group, Inc. As stated in the Prospectus Supplement for GSAMP 2007-NC1, by the end of 2006, Goldman Sachs Mortgage Company had sponsored the securitization of approximately $162 billion of residential mortgage loans, including prime, subprime, Alt-A, FHA/VA/RHS, second lien, and home equity lines of credit. See GSAMP 2007-NC1 Prospectus Supplement (filed Feb. 21, 2007). 57. As the sponsor for 36 of the Securitizations, Goldman Sachs Mortgage Company
determined the structure of each of those Securitizations, initiated the Securitization, purchased the mortgage loans to be securitized, determined the distribution of principal and interest, and provided data to the credit rating agencies to secure investment grade ratings for the GSE Certificates. Goldman Sachs Mortgage Company also selected, in 35 of the Securitizations, GS Mortgage Securities Corp. as the special purpose vehicle that would be used to transfer the mortgage loans from Goldman Sachs Mortgage Company to the trusts, and selected Goldman, Sachs & Co. as the lead underwriter for all the Securitizations. 58. Pursuant to certain mortgage loan purchase and warranties agreements, the
original loan sellers sold mortgage loans to Goldman Sachs Mortgage Company, which loans were subsequently conveyed to the depositor and then to the trust. Pursuant to assignment, assumption, and recognition agreements, Goldman Sachs Mortgage Company also conveyed certain of its rights with respect to the underlying mortgage loans to the depositor, which subsequently transferred these rights to the trust pursuant to the applicable PSA.
27
4. 59.
The Goldman Sachs Group, Inc.
Defendant The Goldman Sachs Group, Inc. is a bank holding company regulated
by the Board of Governors of the Federal Reserve System and is the ultimate parent company of its wholly owned subsidiaries Goldman, Sachs & Co., GS Mortgage Securities Corp, and Goldman Sachs Mortgage Company. 60. The Goldman Sachs Group, Inc. employed its wholly owned or controlled
underwriter, sponsor and depositor (each a defendant in this action) in key steps of the securitization process. Unlike typical arms length securitizations, the Securitizations here involved various Goldman Sachs subsidiaries and affiliates at virtually each step in the chain the sponsor and depositor were nearly always Goldman Sachs Mortgage Company and GS Mortgage Securities Corp., and the lead underwriter was always Goldman, Sachs & Co. 61. As the ultimate corporate parent of (i) Goldman Sachs Mortgage Company, (ii)
GS Mortgage Securities Corp., (iii) and Goldman, Sachs & Co., The Goldman Sachs Group, Inc. had the practical ability to direct and control the actions of the sponsor, depositor and underwriter in those Securitizations, and in fact exercised such direction and control by coordinating the activities of its subsidiaries related to the issuance and sale of the Certificates. 62. As detailed above, 35 of the Securitizations involved Goldman Sachs entities,
including the aforementioned subsidiaries of The Goldman Sachs Group, Inc., at virtually each step in the process. The Goldman Sachs Group, Inc. profited substantially from this vertically integrated approach to mortgage-backed securitization. Furthermore, The Goldman Sachs Group, Inc. shared overlapping management with other Defendant entities. For example, Defendant Kevin Gasvoda was a Director of GS Mortgage Securities Corp., in addition to serving as Managing Director for Goldmans Fixed Income, Currency, and Commodities business and Managing Director and head of Residential Whole Loan Trading. In addition, 28
Defendant David J. Rosenblum, who was Vice President and a Director of GS Mortgage Securities Corp., also served as head of Goldmans Collateralized Loan Obligation activities. Similarly, Defendant Jonathan S. Sobel, who was a Director of Defendant GS Mortgage Securities Corp., also headed Goldmans mortgage department. Likewise, Defendant Daniel L. Sparks, who was Chief Executive Officer, Vice President and a Director of GS Mortgage Securities, also headed Goldmans mortgage department. As the above clearly shows, there was significant overlap between the management of The Goldman Sachs Group, Inc., and the directors and officers of Defendant GS Mortgage Securities Corp. 5. 63. Goldman Sachs Real Estate Funding Corp.
Defendant Goldman Sachs Real Estate Funding Corp. is a wholly owned
subsidiary of Goldman Sachs Bank USA and is the general partner of Goldman Sachs Mortgage Company, the sponsor of the Securitizations. The parent company of Goldman Sachs Real Estate Funding Corp.Goldman Sachs Bank USAis itself a subsidiary of The Goldman Sachs Group, Inc. Goldman Sachs Real Estate Funding Corp. provided a vehicle for the ultimate controlling entityThe Goldman Sachs Group, Inc.further to direct the activities of the sponsor of the Securitizations, Goldman Sachs Mortgage Company. 6. 64. The Individual Defendants
Defendant Peter C. Aberg served at the time of the Securitizations as a Director of
Defendant GS Mortgage Securities Corp. Mr. Aberg signed the GS Mortgage Shelf Registration Statement under file number 333-120274 filed with the SEC on November 5, 2004 and, through a power of attorney, the related pre-effective amendment on Form S-3/A filed with the SEC on November 24, 2004. 65. Defendant Howard S. Altarescu served at the time of the Securitizations as Vice
President, Chief Financial Officer, and Chief Accounting Officer of Defendant GS Mortgage 29
Securities Corp. Mr. Altarescu signed the GS Mortgage Shelf Registration Statement under file number 333-120274 filed with the SEC on November, 5 2004 and the related pre-effective amendments on Form S-3/A filed with the SEC on November 24, 2004. 66. Defendant Robert J. Christie served at the time of the Securitizations as a Director
of Defendant GS Mortgage Securities Corp. Mr. Christie signed the GS Mortgage Shelf Registration Statement under file number 333-120274 filed with the SEC on November 5, 2004 and, through a power of attorney, the related pre-effective amendment on Form S-3/A filed with the SEC on November 24, 2004. 67. Defendant Kevin Gasvoda served at the time of the Securitizations as a Director
of Defendant GS Mortgage Securities Corp. and Managing Director for Goldmans Fixed Income, Currency, and Commodities business and head of Residential Whole Loan Trading. Mr. Gasvoda signed the GS Mortgage Shelf Registration Statement under file number 333-139817 filed with the SEC on January 5, 2007 and the related pre-effective amendment on Form S-3/A filed with the SEC on January 31, 2007. 68. Defendant Michelle Gill served at the time of the Securitizations as Vice
President and principal financial officer and principal accounting officer of Defendant GS Mortgage Securities Corp. Ms. Gill signed the GS Mortgage Shelf Registration Statement under file number 333-139817 filed with the SEC on January 5, 2007, and signed the related preeffective amendment on Form S-3/A filed with the SEC on January 31, 2007 in both her individual capacity and with a power of attorney on behalf of Defendant Daniel L. Sparks and Defendant Kevin Gasvoda. 69. Defendant David J. Rosenblum served at the time of the Securitizations as Vice
President and a Director of Defendant GS Mortgage Securities Corp., in addition to serving as
30
head of Goldmans Collateralized Loan Obligation activities. Mr. Rosenblum signed the GS Mortgage Shelf Registration Statement under file number 333-120274 filed with the SEC on November 5, 2004 and, through a power of attorney, the related pre-effective amendment on Form S-3/A filed with the SEC on November 24, 2004. Mr. Rosenblum further signed the GS Mortgage Shelf Registration Statement under file number 333-132809 filed with the SEC on March 29, 2006. 70. Defendant Jonathan S. Sobel served at the time of the Securitizations as a Director
of Defendant GS Mortgage Securities Corp. and headed Goldmans mortgage department. Mr. Sobel signed the GS Mortgage Shelf Registration Statement under file number 333-127620 filed with the SEC on August 17, 2005. Mr. Sobel further signed the GS Mortgage Shelf Registration Statement under file number 333-132809 filed with the SEC on March 29, 2006. Mr. Sobel also signed the GS Mortgage Shelf Registration Statement under file number 333-120274 filed with the SEC on November 5, 2004 and the related pre-effective amendment on Form S 3/A filed with the SEC on November 24, 2004. 71. Defendant Daniel L. Sparks served at the time of the Securitizations as Chief
Executive Officer, Vice President, and a Director of Defendant GS Mortgage Securities Corp., in addition to heading Goldmans mortgage department. Mr. Sparks signed the GS Mortgage Shelf Registration Statement under file number 333-120274 filed with the SEC on November 5, 2004 and signed through a power of attorney the related pre-effective amendment on Form S-3/A filed with the SEC on November 24, 2004. Mr. Sparks further signed the GS Mortgage Shelf Registration Statement under file number 333-127620 filed with the SEC on August 17, 2005. Mr. Sparks also signed the GS Mortgage Shelf Registration Statement under file number 333132809 filed with the SEC on March 29, 2006. Mr. Sparks further signed the GS Mortgage
31
Shelf Registration Statement under file number 333-139817 filed with the SEC on January 5, 2007 and signed the related pre-effective amendment on Form S-3/A filed with the SEC on January 31, 2007. 72. Defendant Mark Weiss served at the time of the Securitizations as Vice President
and principal financial officer and principal accounting officer of Defendant GS Mortgage Securities Corp. Mr. Weiss signed the GS Mortgage Shelf Registration Statement under file number 333-127620 filed with the SEC on August 17, 2005. Mr. Weiss further signed the GS Mortgage Shelf Registration Statement under file number 333-132809 filed with the SEC on March 29, 2006. B. 73. Defendants Failed To Conduct Proper Due Diligence
The Defendants failed to conduct adequate and sufficient due diligence to ensure
that the mortgage loans underlying the Securitizations complied with the statements in the Registration Statements. 74. During the time period in which the Certificates were issuedapproximately
2005 through 2007Goldmans involvement in mortgage-backed securitization increased dramatically as compared to prior years. For example, by the end of 2006, Goldman Sachs Mortgage Company had sponsored the securitization of approximately $162 billion of residential mortgage loans, including prime, subprime, Alt-A, FHA/VA/RHS, second lien, and home equity lines of credit. See GSAMP 2007-NC1 Prospectus Supplement (filed Feb. 21, 2007). In specific categories, such as subprime RMBS securitizations, Goldmans deal volume increased from $2.1 billion in 2003, to $9.7 billion in 2004, to $14.5 billion in 2005, to $15.0 billion in 2006. Id. Similarly, in ALT-A RMBS securitizations, Goldmans deal volume increased from $3.8 billion in 2004, to $10.4 billion in 2005, to a staggering $20.5 billion in 2006. See GSAA 2007-6 Prospectus Supplement (filed May 30, 2007). 32
75.
Defendants had enormous financial incentives to complete as many offerings as
quickly as possible without regard to ensuring the accuracy or completeness of the Registration Statements, or conducting adequate and reasonable due diligence. For example, the depositor in virtually all the Securitizations, GS Mortgage Securities Corp., was paid a percentage of the total dollar amount of the offering on completion of the Securitizations. Similarly, Goldman, Sachs & Co., as the underwriter, was paid a commission based on the amount it received from the sale of the Certificates to the public. 76. As revealed by the U.S. Senate Permanent Subcommittee on Investigations, a
March 9, 2007 e-mail from Defendant Daniel L. Sparks, who was both an officer and director of Defendant GS Mortgage Securities Corp., as well as the head of Goldmans mortgage department, demonstrates that Goldman put the highest priority on packaging and selling Goldmans warehoused mortgages, if for no other reason than to quickly get them off Goldmans books: Our current largest needs are to execute and sell our new issuesCDOs and RMBS and to sell our other cash trading positions. I cant overstate the importance to the business of selling these positions and new issues. U.S. Senate Permanent Subcommittee on Investigations, Hearing on Wall Street and the Financial Crisis: The Role of Investment Banks, Ex. 76 (Apr. 27, 2010). 77. The push to securitize large volumes of mortgage loans contributed to the absence
of controls needed to prevent the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. In particular, Defendants failed to conduct adequate diligence or otherwise to ensure the accuracy of the statements in the Registration Statements pertaining to the Securitizations.
33
78.
For instance, Goldman retained third-party due diligence providers such as
Clayton Holdings, Inc. (Clayton) and The Bohan Group, Inc. (Bohan) to analyze the loans it was considering placing in its securitizations, but waived a significant number of loans into the Securitizations that these firms had recommended for exclusion, and did so without taking adequate steps to ensure that these loans had in fact been underwritten in accordance with applicable guidelines or had compensating factors that excused the loans non-compliance with those guidelines. On January 27, 2008, Clayton revealed that it had entered into an agreement with the New York Attorney General (the NYAG) to provide documents and testimony regarding its due diligence reports, including copies of the actual reports provided to its clients. According to The New York Times, as reported on January 27, 2008, Clayton told the NYAG that starting in 2005, it saw a significant deterioration of lending standards and a parallel jump in lending expectations and some investment banks directed Clayton to halve the sample of loans it evaluated in each portfolio. 79. Goldman Sachs was negligent in allowing into the Securitizations a substantial
number of mortgage loans that, as reported to Goldman by third-party due diligence firms, did not conform to the underwriting standards stated in the Registration Statements, including the Prospectuses and Prospectus Supplements. Even upon learning from its third-party due diligence firms that there were high percentages of defective or at least questionable loans in the sample of loans reviewed by the third-party due diligence firms, Goldman failed to take any additional steps to verify that the population of loans in the Securitizations did not include a similar percentage of defective and/or questionable loans.
34
80.
The Financial Crisis Inquiry Commission (the FCIC)6 found that in the period
from the first quarter of 2006 to the second quarter of 2007, 23 percent of the mortgage loans Goldman submitted to Clayton to review in RMBS loan pools were rejected by Clayton as falling outside the applicable underwriting guidelines. Of the mortgage loans that Clayton found defective, 29 percent of the loans were subsequently waived in by Goldman without proper consideration and analysis of compensating factors and included in securitizations such as the ones in which Fannie Mae and Freddie Mac invested here. See The Financial Crisis Inquiry Report, at 167, Jan. 2011, available at http://fcic-static.law.stanford.edu/cdn_media/fcicreports/fcic_final_report_full.pdf. 81. As disclosed in a report as part of the NYAGs ongoing investigation of
investment banking misconduct in underwriting mortgage-backed securities, Clayton routinely provided investment banks with detailed reports of loans that were not compliant with underwriting guidelines, but the investment banks, including Goldman Sachs, routinely overrode the exclusion of a significant percentage of rejected loans from purchase and securitization. 82. Goldman has been the subject of numerous regulatory actions and investigations
for matters similar to those raised in this Complaint. In May 2009, the Massachusetts Attorney General announced a settlement agreement with Goldman arising out of an investigation into the role of Goldman and other banks in: (i) facilitating the origination of illegal or otherwise improper mortgages; (ii) failing to ascertain whether loans purchased from originators complied with stated underwriting guidelines; (iii) failing to prevent problem loans from being put into securitization collateral groups; (iv) failing to correct inaccurate information in securitization The Financial Crisis Inquiry Commission was created by the Fraud Enforcement and Recovery Act of 2009, and was established to examine the causes, domestic and global, of the current financial and economic crisis in the United States.
6
35
trustee reports concerning repurchases of bad loans; and (v) failing to disclose to investors the problems with loans placed into securitization collateral groups. The Massachusetts Attorney General, in announcing the settlement, specifically stated that Goldman did not take sufficient steps to avoid placing problem loans in securitization pools. As part of its settlement with the Massachusetts Attorney General, Goldman agreed to provide approximately $50 million in relief to homeowners and an additional $10 million to the Commonwealth of Massachusetts. See Attorney General Martha Coakley and Goldman Sachs Reach Settlement Regarding Subprime Lending Issues (May 11, 2009), available at http://www.mass.gov/Cago/docs/press/2009_ 05_07_goldman_settlement.pdf. 83. In addition, Goldman has been the subject of investigations by both the Securities
and Exchange Commission and the New York Attorney General. On July 15, 2010, the SEC announced that Goldman had agreed to pay $550 million to settle SEC charges that Goldman misled investors in a subprime mortgage product just as the U.S. housing market was starting to collapse. In agreeing to the SECs largest-ever penalty paid by a Wall Street firm, Goldman also acknowledged that its marketing materials for the subprime product contained incomplete information. See Goldman Sachs to Pay Record $550 Million to Settle SEC Charges Related to Subprime Mortgage CDO, SEC Litig. Release No. 21592 (July 15, 2010), available at http://www.sec.gov/litigation/litreleases/2010/lr21592.htm. 84. More recently, in May 2011, the New York Attorney General began investigating
Goldmans mortgage securities operations, including the pooling of mortgage loans. See Gretchen Morgenson, New York Investigates Banks Role in Financial Crisis, N.Y. Times, May 16, 2011, available at http://www.nytimes.com/2011/05/17/business/17bank.html. In June 2011,
36
the Manhattan District Attorneys Office issued a subpoena to Goldman in connection with its investigation of Goldmans mortgage-backed securities. Both investigations are ongoing. III. The Registration Statements and the Prospectus Supplements A. 85. Compliance with Underwriting Guidelines
The Prospectus Supplement for each Securitization describes the mortgage loan
underwriting guidelines pursuant to which mortgage loans underlying the related Securitizations were supposed to have been originated. These guidelines were intended to assess the creditworthiness of the borrower, the ability of the borrower to repay the loan, and the adequacy of the mortgaged property as security for the loan. 86. The statements made in the Prospectus Supplements, which, as discussed, formed
part of the Registration Statement for each Securitization, were material to a reasonable investors decision to purchase and invest in the Certificates because the failure to originate a mortgage loan in accordance with the applicable guidelines creates a higher risk of delinquency and default by the borrower, as well as a risk that losses upon liquidation will be higher, thus resulting in a greater economic risk to an investor. 87. The Prospectus Supplements for the Securitizations contained several key
statements with respect to the underwriting standards of the entities that originated the loans in the Securitizations. For example, the Prospectus Supplement for GSAMP 2006-HE7 stated that: The mortgage loans were originated or acquired generally in accordance with the underwriting guidelines of the original loan sellers.7 In that Securitization, Goldman Sachs Mortgage
7
In GSAMP 2006-HE7, the mortgage loans were primarily originated by, or sold through, the Goldman Sachs Mortgage Conduit Program, SouthStar Funding, LLC, Aames Capital Corporation, and NovaStar Mortgage, Inc. The securitization was sponsored by Goldman Sachs Mortgage Company, underwritten and sold to Fannie Mae by Goldman, Sachs & Co., and the depositor was GS Mortgage Securities Corp. 37
Company and GS Mortgage Securities Corp. acquired approximately 30.87 percent of the mortgage loans in the Securitization from SouthStar Funding, LLC. The Defendants represented in the Prospectus Supplement for this securitization that SouthStars guidelines are intended to evaluate the borrowers ability to repay the mortgage loan, evaluate the borrowers credit and evaluate the value and adequacy of the collateral. SouthStar does not approve mortgage loans based solely on the value of the collateral. In the Prospectus Supplement, Defendants further (a) described the level of documentation SouthStar required under its various documentation programs, and represented that the borrowers must show the ability to repay the mortgage loan, have acceptable credit, and acceptable collateral; (b) described the criteria for acceptable collateral; and (c) described the borrower eligibility criteria, including maximum debt-to-income ratios, minimum FICO scores, and valid credit scores, which must be met. SouthStar also stated that it realize[d] the soundness of a portfolio depends to a significant extent on the quality and accuracy of the real estate appraisal, and explained that its policy was to, among other things, comply with federal and state rules and use automated valuation models in the review process. 88. According to the Prospectus Supplements, many of the underlying mortgage loans
in the Securitizations were also acquired by Goldman Sachs Mortgage Company through its conduit programwhereby the loans were originated by third parties and sold or otherwise transferred to the sponsor. In those cases, although Goldman Sachs did not originate the loans, it generally made representations in the deal documents as to the creditworthiness of the borrower and the quality of the loans. 89. For example, the Prospectus Supplement for GSAMP 2006-HE4 stated that
[p]ursuant to the mortgage conduit program, the sponsor purchases mortgage loans originated
38
by the original loan sellers if the mortgage loans generally satisfy the sponsors underwriting guidelines. Further, that Prospectus Supplement stated that Goldman Sachs Mortgage Company would, [p]rior to acquiring any residential mortgage loans conduct a review of the related mortgage loan seller and that [a]ll of the mortgage loans that [Goldman Sachs Mortgage Companys] may acquire through its conduit program will be acquired generally in accordance with the underwriting criteria described in this section. The Prospectus Supplement further stated that the sponsors review process consists of reviewing select financial information for credit and risk assessment and underwriting guideline review, senior level management discussion and background checks. The scope of the mortgage loan due diligence will depend on the credit quality of the mortgage loans. 90. The Prospectus and Prospectus Supplement for each of the Securitizations had
similar statements to those quoted above. The relevant statements in the Prospectus and Prospectus Supplement pertaining to underwriting standards for each Securitization are reflected in Appendix A to this Complaint. As discussed in Section IV.B. below, in fact, the originators of the mortgage loans in the Supporting Loan Groups for the Securitizations did not adhere to their stated underwriting guidelines, thus rendering the description of those guidelines in the Prospectuses and Prospectus Supplements false and misleading. 91. Further, the Prospectuses and Prospectus Supplements included additional
representations by the sponsor regarding the purported quality of the mortgage loans that collateralized the Certificates. These representations and warranties were part of the PSAthe document that effected the transfer of the mortgage loans to the respective trustsbut were repeated in the Prospectuses and Prospectus Supplements prepared by the depositor, underwriter and others. In many cases, the Prospectuses and Prospectus Supplements stated that the
39
applicable representations and warranties were brought down as of the close of the Securitization, meaning that the representations and warranties were true as of the time the GSE Certificates were issued. See, e.g., GSR 2006-OA1 Prospectus Supplement (filed Aug. 26, 2006) (GSMC [Goldman Sachs Mortgage Company] will bring down all loan level representations and warranties through the Closing Date.). 92. These representations, which are described in greater detail for each
Securitization in Appendix A, included the following: Underwriting Guidelines. The Mortgage Loan was underwritten in accordance with the Sellers underwriting guidelines in effect at the time of origination with exceptions thereto exercised in a reasonable manner; and No Defaults. Except with respect to delinquencies identified on the Mortgage Loan schedule there is no default, breach, violation or event of acceleration existing under any mortgage or mortgage note and no event that, with the passage of time or with notice and the expiration of any grace or cure period, would constitute a default, breach, violation or event of acceleration . Id. The inclusion of these representations in the Prospectuses and Prospectus
93.
Supplements had the purpose and effect of providing additional assurances to investors regarding the quality of the mortgage collateral underlying the Securitizations and its compliance with the underwriting guidelines described in the Prospectuses and Prospectus Supplements. These representations were material to a reasonable investors decision to purchase the Certificates. B. 94. Statements Regarding Occupancy Status of Borrower
The Prospectus Supplements contained collateral group-level information about
the occupancy status of the borrowers of the loans in the Securitizations. Occupancy status refers to whether the property securing a mortgage is to be the primary residence of the borrower, a second home, or an investment property. The Prospectus Supplements for each of the Securitizations presented this information in tabular form, usually in a table entitled Occupancy or Occupancy Status. This table divided all the loans in the collateral group by 40
occupancy status, generally into the following categories: (i) Owner Occupied; (ii) Second Home; and (iii) Investor. For each category, the table stated the number of loans in that category. Occupancy statistics for the Supporting Loan Groups for each Securitization were reported in the Prospectus Supplements as follows:8
Table 4
Transaction ACCR 2005-4 AHMA 2006-1 FFML 2005-FF11 FFML 2005-FF8 FFML 2006-FF13 FHLT 2006-E GSAA 2005-11 GSAA 2005-14 GSAA 2005-15 GSAA 2006-11 GSAA 2006-2 GSAA 2006-4 GSAA 2006-5 GSAA 2006-8 GSAA 2007-6 GSAMP 2005-AHL2 GSAMP 2005-HE5 GSAMP 2005-HE6 GSAMP 2005-WMC2 GSAMP 2005-WMC3 GSAMP 2006-FM1 GSAMP 2006-FM2 GSAMP 2006-FM3 GSAMP 2006-HE3 GSAMP 2006-HE4 GSAMP 2006-HE5 GSAMP 2006-HE7 GSAMP 2006-HE8 GSAMP 2006-NC29 GSAMP 2007-FM1 GSAMP 2007-FM2 GSAMP 2007-HE1 Supporting Loan Group Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 3 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Owner Occupied (%) 94.21 57.90 94.06 95.99 100.00 86.23 55.48 44.48 68.42 74.48 97.51 78.06 67.10 52.80 57.94 90.70 88.94 91.70 95.91 95.32 94.38 88.84 89.25 89.27 86.04 94.48 91.04 87.74 92.16 88.31 89.84 89.48 Second Home (%) 0.97 7.41 0.67 0.00 0.00 1.37 3.44 12.20 8.54 7.11 2.49 9.22 5.65 11.09 5.15 0.61 3.30 1.76 2.76 2.99 0.83 1.26 0.89 2.66 2.54 1.15 1.40 1.68 0.81 1.19 1.40 1.32 Investor (%) 4.83 34.69 5.27 4.01 0.00 12.40 41.08 43.32 23.03 18.41 0.00 12.72 27.25 36.11 36.91 8.69 7.77 6.54 1.32 1.69 4.79 9.90 9.87 8.07 11.42 4.37 7.55 10.58 6.23 10.50 8.76 9.21
Each Prospectus Supplement provides the total number of loans and the number of loans in the following categories: owner occupied, second home, and investor. These numbers have been converted to percentages as set forth in Table 4. As described more fully in note 16, infra, the GSAMP 2006-NC2 Prospectus Supplement misstates all relevant characteristics for the Supporting Loan Group, by reporting the statistical and tabular information for the Securitization as a whole in place of the statistical and tabular information for Loan Group 1. Tables 47, infra, in the interest of avoiding further confusion, utilize the data in the GSAMP 2006-NC2 Prospectus Supplement that appears to have been intended to correspond to Loan Group 1, notwithstanding that this information is reported in a section of the Prospectus Supplement titled, All Collateral.
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Transaction GSAMP 2007-HE2 GSAMP 2007-NC1 GSR 2006-OA1 GSR 2007-AR2 GSR 2007-OA1 GSR 2007-OA2 INDX 2005-AR18 INDX 2005-AR27
Supporting Loan Group Group 1 Group 1 Group 1 Group 6 Group 1 Group 1 Group 1 Group 2
Owner Occupied (%) 88.04 91.80 79.40 83.85 70.61 66.22 90.69 83.19
Second Home (%) 2.74 1.08 3.91 11.20 6.04 6.09 2.48 4.79
Investor (%) 9.22 7.11 16.69 4.95 23.34 27.69 6.83 12.02
95.
As Table 4 makes clear, the Prospectus Supplements for each Securitization
reported that an overwhelming majority of the mortgage loans in the Supporting Loan Groups were owner occupied, while a small percentage were reported to be non-owner occupied (i.e., a second home or investment property). 96. The statements about occupancy status were material to a reasonable investors
decision to invest in the Certificates. Information about occupancy status is an important factor in determining the credit risk associated with a mortgage loan and, therefore, the securities that it collateralizes. Because borrowers who reside in mortgaged properties are less likely to default than borrowers who purchase homes as second homes or investments and live elsewhere, and are more likely to care for their primary residence, the percentage of loans in the collateral group of a securitization that are secured by mortgage loans on owner-occupied residences is an important measure of the risk of the certificates sold in that securitization. 97. All other things being equal, the higher the percentage of loans not secured by
owner-occupied residences, the greater the risk of loss to the certificateholders. Even small differences in the percentages of owner-occupied, second home, and investment properties in the collateral group of a securitization can have a significant effect on the risk of each certificate sold in that securitization, and thus, are important to the decision of a reasonable investor whether to purchase any such certificate. As discussed in Section IV.A.1. below, the Registration Statement for each Securitization materially overstated the percentage of loans in the Supporting Loan
42
Groups that were owner occupied, thereby misrepresenting and understating the degree of risk of the GSE Certificates. C. 98. Statements Regarding Loan-to-Value Ratios
The loan-to-value ratio of a mortgage loan, or LTV ratio, is the ratio of the
balance of the mortgage loan to the value of the mortgaged property when the loan is made. 99. The denominator in the LTV ratio is the value of the mortgaged property, and is
generally the lower of the purchase price or the appraised value of the property. In a refinancing or home-equity loan, there is no purchase price to use as the denominator, so the denominator is often equal to the appraised value at the time of the origination of the refinanced or home-equity loan. Accordingly, an accurate appraisal is essential to an accurate LTV ratio. In particular, an inflated appraisal will understate, sometimes greatly, the credit risk associated with a given loan. 100. The Prospectus Supplements for each Securitization also contained group-level
information about the LTV ratio for the underlying group of loans as a whole. The percentage of loans by aggregate principal balance with an LTV ratio at or less than 80 percent and the percentage of loans with an LTV ratio greater than 100 percent as reported in the Prospectus Supplements for the Supporting Loan Groups are reflected in Table 5 below.10
Table 5
Transaction ACCR 2005-4 AHMA 2006-1 10 Supporting Loan Group Group 1 Group 1 Percentage of loans, by aggregate principal balance, with LTV less than or equal to 80% 79.52 84.90 Percentage of loans, by aggregate principal balance, with LTV greater than 100% 0.00 0.00
As used in this Complaint, LTV refers to the original loan-to-value ratio for first lien mortgages and for properties with second liens that are subordinate to the lien that was included in the securitization (i.e., only the securitized lien is included in the numerator of the LTV calculation). However, for second lien mortgages, where the securitized lien is junior to another loan, the more senior lien has been added to the securitized one to determine the numerator in the LTV calculation (this latter calculation is sometimes referred to as the combined-loan-to-value ratio, or CLTV).
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Transaction FFML 2005-FF11 FFML 2005-FF8 FFML 2006-FF13 FHLT 2006-E GSAA 2005-11 GSAA 2005-14 GSAA 2005-15 GSAA 2006-11 GSAA 2006-2 GSAA 2006-4 GSAA 2006-5 GSAA 2006-8 GSAA 2007-6 GSAMP 2005-AHL2 GSAMP 2005-HE5 GSAMP 2005-HE6 GSAMP 2005-WMC2 GSAMP 2005-WMC3 GSAMP 2006-FM1 GSAMP 2006-FM2 GSAMP 2006-FM3 GSAMP 2006-HE3 GSAMP 2006-HE4 GSAMP 2006-HE5 GSAMP 2006-HE7 GSAMP 2006-HE8 GSAMP 2006-NC211 GSAMP 2007-FM1 GSAMP 2007-FM2 GSAMP 2007-HE1 GSAMP 2007-HE2 GSAMP 2007-NC1 GSR 2006-OA1 GSR 2007-AR2 GSR 2007-OA1 GSR 2007-OA2 INDX 2005-AR18 INDX 2005-AR27
Supporting Loan Group Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 3 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 6 Group 1 Group 1 Group 1 Group 2
Percentage of loans, by aggregate principal balance, with LTV less than or equal to 80% 91.49 56.61 68.93 54.11 88.20 93.87 89.93 91.47 60.24 94.93 94.71 79.43 96.98 57.58 68.15 51.58 70.77 70.06 60.16 66.94 60.86 67.69 57.61 67.62 61.99 61.21 56.07 56.47 57.71 39.37 46.03 58.37 93.41 84.03 82.23 83.17 96.84 93.95
Percentage of loans, by aggregate principal balance, with LTV greater than 100% 0.00 0.00 0.00 0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
101.
As Table 5 makes clear, the Prospectus Supplement for each Securitization
reported that many or most of the mortgage loans in the Supporting Loan Groups had an LTV ratio of 80 percent or less, and all but one of the Securitizations reported that zero mortgage loans in the Supporting Loan Group had an LTV ratio over 100 percent.12
11 12
See supra note 9.
The only Securitization reporting any mortgage loans with an LTV ratio over 100 percent was FHLT 2006-E, and in that case, only 0.01 percent of its mortgage loans were reported to have an LTV ratio in excess of 100 percent.
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102.
The LTV ratio is among the most important measures of the risk of a mortgage
loan, and thus, it is one of the most important indicators of the default risk of the mortgage loans underlying the Certificates. The lower the ratio, the less likely that a decline in the value of the property will wipe out an owners equity, and thereby give an owner an incentive to stop making mortgage payments and abandon the property. This ratio also predicts the severity of loss in the event of default. The lower the LTV ratio, the greater the equity cushion, so the greater the likelihood that the proceeds of foreclosure will cover the unpaid balance of the mortgage loan. 103. Thus, LTV ratio is a material consideration to a reasonable investor in deciding
whether to purchase a certificate in a securitization of mortgage loans. Even small differences in the LTV ratios of the mortgage loans in the collateral group of a securitization have a significant effect on the likelihood that the collateral groups will generate sufficient funds to pay certificateholders in that securitization, and thus are material to the decision of a reasonable investor whether to purchase any such certificate. As discussed in Section IV.A.2. below, the Registration Statements for the Securitizations materially overstated the percentage of loans in the Supporting Loan Groups with an LTV ratio at or less than 80 percent, and materially understated the percentage of loans in the Supporting Loan Groups with an LTV ratio over 100 percent, thereby misrepresenting and understating the degree of risk of the GSE Certificates. D. 104. Statements Regarding Credit Ratings
Credit ratings are assigned to the tranches of mortgage-backed securitizations by
the credit rating agencies, including Moodys Investors Service, Standard & Poors, and Fitch Ratings. Each credit rating agency uses its own scale with letter designations to describe various levels of risk. In general, AAA or its equivalent ratings are at the top of the credit rating scale and are intended to designate the safest investments. C and D ratings or their equivalents are at the bottom of the scale and refer to investments that are currently in default and exhibit little or 45
no prospect for recovery. At the time the GSEs purchased the GSE Certificates, investments with AAA or its equivalent ratings historically experienced loss rates of less than 0.05 percent. Investments with a BBB rating, or its equivalent, historically experienced loss rates of under one percent. As a result, securities with credit ratings between AAA through BBB- or their equivalents were generally referred to as investment grade. 105. Rating agencies determine the credit rating for each tranche of a mortgage-backed
securitization by comparing the likelihood of contractual principal and interest repayment to the credit enhancements available to protect investors. Rating agencies determine the likelihood of repayment by estimating cashflows based on the quality of the underlying mortgages by using sponsor provided loan-level data. Credit enhancements, such as subordination, represent the amount of cushion or protection from loss incorporated into a given securitization.13 This cushion is intended to improve the likelihood that holders of highly rated certificates receive the interest and principal to which they are contractually entitled. The level of credit enhancement offered is based on the make-up of the loans in the underlying collateral group and entire securitization. Riskier loans underlying the securitization necessitate higher levels of credit enhancement to insure payment to senior certificate holders. If the collateral within the deal is of a higher quality, then rating agencies require less credit enhancement for AAA or its equivalent rating. 106. Credit ratings have been an important tool to gauge risk when making investment
decisions. For almost a hundred years, investors like pension funds, municipalities, insurance Subordination refers to the fact that the certificates for a mortgage-backed securitization are issued in a hierarchical structure, from senior to junior. The junior certificates are subordinate to the senior certificates in that, should the underlying mortgage loans become delinquent or default, the junior certificates suffer losses first. These subordinate certificates thus provide a degree of protection to the senior certificates from losses on the underlying loans.
13
46
companies, and university endowments have relied heavily on credit ratings to assist them in distinguishing between safe and risky investments. Fannie Mae and Freddie Macs respective internal policies limited their purchases of private label residential mortgage-backed securities to those rated AAA (or its equivalent), and in very limited instances, AA or A bonds (or their equivalent). 107. Each tranche of the Securitizations received a credit rating upon issuance, which
purported to describe the riskiness of that tranche. The Defendants reported the credit ratings for each tranche in the Prospectus Supplements. The credit rating provided for each of the GSE Certificates was investment grade, always AAA or its equivalent. The accuracy of these ratings was material to a reasonable investors decision to purchase the Certificates. As set forth in Table 8 below, the ratings for the Securitizations were inflated as a result of Defendants provision of incorrect data concerning the attributes of the underlying mortgage collateral to the ratings agencies, and, as a result, Defendants marketed and sold the GSE Certificates as AAA (or its equivalent) when, in fact, they were not. IV. Falsity of Statements in the Registration Statements and Prospectus Supplements A. A Review of Loan-Level Data Indicates That the Statistical Data Provided in the Registration Statements and Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False
108.
A review of loan-level data was conducted in order to assess whether the
statistical information provided in the Prospectus Supplements was true and accurate. For each Securitization, the sample consisted of 1,000 randomly selected loans per Supporting Loan Group, or all of the loans in the group if there were fewer than 1,000 loans in the Supporting Loan Group. The sample data confirms, on a statistically significant basis, material misrepresentations of underwriting standards and of certain key characteristics of the mortgage 47
loans across the Securitizations. The review demonstrates that the data concerning owner occupancy and LTV ratios was materially false and misleading. 1. 109. Owner-Occupancy Data Was Materially False
The data review has revealed that the owner-occupancy statistics reported in the
Prospectus Supplements were materially false and inflated. In fact, far fewer underlying properties were occupied by their owners than disclosed in the Prospectus Supplements, and more correspondingly were held as second homes or investment properties. 110. To determine whether a given borrower actually occupied the property as
claimed, a number of tests were conducted, including, inter alia, whether, months after the loan closed, the borrowers tax bill was being mailed to the property or to a different address; whether the borrower had claimed a tax exemption on the property; and whether the mailing address of the property was reflected in the borrowers credit reports, tax records, or lien records. Failing two or more of these tests is a strong indication that the borrower did not live at the mortgaged property and instead used it as a second home or an investment property, both of which make it much less likely the borrower will repay the loan. 111. A significant number of the loans failed two or more of these tests, indicating that
the owner-occupancy statistics provided to Fannie Mae and Freddie Mac were materially false and misleading. For example, in GSAA 2006-4, for which Goldman Sachs Mortgage Company was the sponsor and Goldman, Sachs & Co. was the underwriter, the Prospectus Supplement stated that 21.94 percent of the underlying properties by loan count in the Supporting Loan Group were not owner-occupied, and therefore 78.06 percent were owner-occupied. The data review revealed that 17.07 percent of the properties represented as owner-occupied in the sample showed strong indications that their owners lived elsewhere. Therefore, recalculating that an additional 17.07 percent of the 78.06 percent of loans represented as owner occupied in the 48
Supporting Loan Group were in fact not owner occupied, indicates that the true percentage of non-owner-occupied properties was 35.27 percent, nearly double the percentage reported in the Prospectus Supplement.14 112. The data review revealed that for each Securitization, the Prospectus Supplement
misrepresented the percentage of non-owner-occupied properties, as determined by the data review. The true percentage of non-owner-occupied properties versus the percentage stated in the Prospectus Supplement for each Securitization is reflected in Table 6 below. Table 6 demonstrates that the Prospectus Supplements for each Securitization understated the percentage of non-owner-occupied properties by at least 5.96 percent, and for many Securitizations by 10 percent or more.
Table 6
Reported Percentage of NonOwner-Occupied Properties 5.79 42.10 5.94 4.01 0.00 13.77 44.52 55.52 31.58 25.52 2.49 21.94 32.90 47.20 Percentage of Properties Reported as Owner-Occupied With Strong Indication of NonOwner Occupancy15 11.10 19.96 8.25 10.96 10.56 12.09 16.67 13.39 14.48 16.23 12.00 17.07 13.17 12.38 Prospectus Percentage Understatement of Non-Owner-Occupied Properties 10.46 11.56 7.76 10.52 10.56 10.42 9.24 5.96 9.91 12.10 11.71 13.32 8.84 6.54
Transaction
Supporting Loan Group
Actual Percentage of Non-OwnerOccupied Properties 16.25 53.66 13.70 14.53 10.56 24.20 53.76 61.48 41.48 37.62 14.20 35.27 41.74 53.74
ACCR 2005-4 AHMA 2006-1 FFML 2005-FF11 FFML 2005-FF8 FFML 2006-FF13 FHLT 2006-E GSAA 2005-11 GSAA 2005-14 GSAA 2005-15 GSAA 2006-11 GSAA 2006-2 GSAA 2006-4 GSAA 2006-5 GSAA 2006-8
Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1
This conclusion is arrived at by summing (a) the stated non-owner-occupied percentage in the Prospectus Supplement (here, 21.94 percent) and (b) the product of (i) the stated owner-occupied percentage (here, 78.06 percent) and (ii) the percentage of the properties represented as owner-occupied in the sample that showed strong indications that their owners in fact lived elsewhere (here, 17.07 percent). As described more fully in paragraph 110, failing two or more tests of owner occupancy is a strong indication that the borrower did not live at the mortgaged property and instead used it as a second home or an investment property.
15
14
49
Transaction
Reported Percentage of NonOwner-Occupied Properties 42.06 9.30 11.06 8.30 4.09 4.68 5.62 11.16 10.75 10.73 13.96 5.52 8.96 12.26 7.04 11.69 10.16 10.52 11.96 8.20 20.60 16.15 29.39 33.78 9.31 16.81
GSAA 2007-6 GSAMP 2005-AHL2 GSAMP 2005-HE5 GSAMP 2005-HE6 GSAMP 2005WMC2 GSAMP 2005WMC3 GSAMP 2006-FM1 GSAMP 2006-FM2 GSAMP 2006-FM3 GSAMP 2006-HE3 GSAMP 2006-HE4 GSAMP 2006-HE5 GSAMP 2006-HE7 GSAMP 2006-HE8 GSAMP 2006-NC216 GSAMP 2007-FM1 GSAMP 2007-FM2 GSAMP 2007-HE1 GSAMP 2007-HE2 GSAMP 2007-NC1 GSR 2006-OA1 GSR 2007-AR2 GSR 2007-OA1 GSR 2007-OA2 INDX 2005-AR18 INDX 2005-AR27
Group 3 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 6 Group 1 Group 1 Group 1 Group 2
Percentage of Properties Reported as Owner-Occupied With Strong Indication of NonOwner Occupancy15 11.76 12.16 9.98 13.25 11.38 11.73 13.75 12.86 10.88 8.84 12.50 12.96 9.27 11.55 10.68 11.81 11.47 10.22 8.86 9.76 15.21 20.19 15.15 16.01 14.69 15.61
Actual Percentage of Non-OwnerOccupied Properties 48.88 20.33 19.94 20.44 15.00 15.86 18.59 22.58 20.46 18.62 24.71 17.77 17.39 22.39 16.97 22.12 20.47 19.66 19.76 17.15 32.68 33.08 40.09 44.38 22.63 29.79
Prospectus Percentage Understatement of Non-Owner-Occupied Properties 6.82 11.03 8.88 12.14 10.91 11.18 12.97 11.42 9.71 7.89 10.75 12.25 8.43 10.13 9.93 10.43 10.31 9.14 7.80 8.95 12.08 16.93 10.70 10.60 13.32 12.99
2. 113.
LTV Data Was Materially False
The data review has further revealed that the LTV ratios disclosed in the
Prospectus Supplements were materially false and understated as more specifically set out
As described in note 9, supra, the GSAMP 2006-NC2 Prospectus Supplement misstates all relevant characteristics associated with the Supporting Loan Group. Specifically, the section of the GSAMP 2006-NC2 Prospectus Supplement that purports to provide statistical information about Loan Group 1 (which collateralized the GSE Certificates that Fannie Mae purchased) in fact describes, not the applicable Supporting Loan Group, but the entire Securitization. As a consequence, the Prospectus Supplement misstates information about, among other things, the number of loans in the group, the distributions by LTV and CLTV, the distribution by owner occupancy, the distribution by current principal balance, the distribution by current principal rate, the distribution by FICO credit score, the distribution by lien, the distribution by documentation, the distribution by purpose of the loan, the distribution by property type, the distribution by state, the distribution by zip code, and numerous other relevant factors. Such gross misstatements of the relevant characteristics of the Securitizations collateral provide further evidence of Defendants lack of care and due diligence.
16
50
below. For each of the sampled loans, an industry standard automated valuation model (AVM) was used to calculate the value of the underlying property at the time the mortgage loan was originated. AVMs are routinely used in the industry as a way of valuing properties during prequalification, origination, portfolio review and servicing. AVMs rely upon similar data as appraisersprimarily county assessor records, tax rolls, and data on comparable properties.17 AVMs produce independent, statistically derived valuation estimates by applying modeling techniques to this data. 114. Applying the retroactive AVM to the available data for the properties securing the
sampled loans shows that the appraised value given to such properties at the time of origination was significantly higher than the actual value of such properties. The result of this overstatement of property values is a material understatement of the LTV ratios. That is, if a propertys true value is significantly less than the value used in the loan underwriting, then the loan represents a significantly higher percentage of the propertys value. This, of course, increases the risk a borrower will not repay the loan and the risk of greater losses in the event of a default. As stated in the Prospectus Supplement for GSAA 2006-8: Mortgage loans with higher original loan-tovalue ratios may present a greater risk of loss than mortgage loans with original loan-to-value ratios of 80% or below. 115. For GSAA 2006-2, for example, which was sponsored by Goldman Sachs
Mortgage Company and underwritten by Goldman, Sachs & Co., the Prospectus Supplement stated that no LTV ratios for the Supporting Loan Group were above 100 percent. In fact, 20.79 percent of the sample of loans included in the data review had LTV ratios above 100 percent, meaning that the amount of the underlying mortgage was more than the value of the property. In
17
Where no AVM data was available, the appraised value was used.
51
addition, the GSAA 2006-2 Prospectus Supplement stated that 60.24 percent of the loans had LTV ratios at or below 80 percent. The data review indicated that only 27.80 percent of the loans had LTV ratios at or below 80 percent. 116. The data review revealed that for each Securitization, the Prospectus Supplement
misstated several key statistics, including (i) the percentage of loans that had LTV ratios at or below 80 percent, and (ii) the percentage of loans that had LTV ratios above 100 percent. Table 7 reflects (i) the true percentage of mortgages in the Supporting Loan Group with LTV ratios at or below 80 percent, versus the percentage as reported in the Prospectus Supplement; and (ii) the true percentage of mortgages in the Supporting Loan Group with LTV ratios above 100 percent, versus the percentage as reported in the Prospectus Supplement. The percentages listed in Table 7 were calculated by aggregate principal balance.
Table 7
PROSPECTUS Percentage of Loans Reported to Have LTV Ratio At or Less Than 80% 79.52 84.90 91.49 56.61 68.93 54.11 88.20 93.87 89.93 91.47 60.24 94.93 94.71 79.43 96.98 57.58 68.15 51.58 70.77 DATA REVIEW True Percentage of Loans With LTV Ratio At or Less Than 80% 50.71 48.58 64.75 45.37 41.03 31.23 56.87 55.30 51.05 53.42 27.80 57.62 54.38 51.84 44.37 39.60 42.68 37.28 38.67 PROSPECTUS Percentage of Loans Reported to Have LTV Ratio Over 100 0.00 0.00 0.00 0.00 0.00 0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 DATA REVIEW True Percentage of Loans With LTV Ratio Over 100% 10.14 11.98 2.97 11.63 13.78 23.53 6.95 6.23 7.56 4.70 20.79 6.69 6.09 8.97 14.35 15.35 11.38 15.37 14.78
Transaction ACCR 2005-4 AHMA 2006-1 FFML 2005-FF11 FFML 2005-FF8 FFML 2006-FF13 FHLT 2006-E GSAA 2005-11 GSAA 2005-14 GSAA 2005-15 GSAA 2006-11 GSAA 2006-2 GSAA 2006-4 GSAA 2006-5 GSAA 2006-8 GSAA 2007-6 GSAMP 2005-AHL2 GSAMP 2005-HE5 GSAMP 2005-HE6 GSAMP 2005WMC2
Supporting Loan Group Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 3 Group 1 Group 1 Group 1 Group 1
52
Transaction GSAMP 2005WMC3 GSAMP 2006-FM1 GSAMP 2006-FM2 GSAMP 2006-FM3 GSAMP 2006-HE3 GSAMP 2006-HE4 GSAMP 2006-HE5 GSAMP 2006-HE7 GSAMP 2006-HE8 GSAMP 2006-NC218 GSAMP 2007-FM1 GSAMP 2007-FM2 GSAMP 2007-HE1 GSAMP 2007-HE2 GSAMP 2007-NC1 GSR 2006-OA1 GSR 2007-AR2 GSR 2007-OA1 GSR 2007-OA2 INDX 2005-AR18 INDX 2005-AR27
Supporting Loan Group Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 6 Group 1 Group 1 Group 1 Group 2
PROSPECTUS Percentage of Loans Reported to Have LTV Ratio At or Less Than 80% 70.06 60.16 66.94 60.86 67.69 57.61 67.62 61.99 61.21 56.07 56.47 57.71 39.37 46.03 58.37 93.41 84.03 82.23 83.17 96.84 93.95
DATA REVIEW True Percentage of Loans With LTV Ratio At or Less Than 80% 40.17 36.41 43.17 39.06 38.98 36.15 36.03 33.74 32.58 37.13 36.70 35.48 24.29 29.42 37.35 52.91 51.27 48.89 40.57 66.76 55.40
PROSPECTUS Percentage of Loans Reported to Have LTV Ratio Over 100 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
DATA REVIEW True Percentage of Loans With LTV Ratio Over 100% 14.63 20.59 15.49 19.51 16.21 13.36 18.14 18.13 21.33 19.54 23.44 23.20 27.36 23.20 20.65 8.39 5.74 16.45 22.50 5.70 5.87
117.
As Table 7 demonstrates, the Prospectus Supplements for all of the
Securitizations reported that only one of the mortgage loans in the Supporting Loan Groups had an LTV ratio over 100 percent.19 In contrast, the data review revealed that at least 2.97 percent of the mortgage loans for each Securitization had an LTV ratio over 100 percent, and for most Securitizations this figure was much larger. Indeed, for 28 of the 42 GSE Certificates, the data
As described in note 16, supra, the GSAMP 2006-NC2 Prospectus Supplement misstated all the statistical and tabular information about the Supporting Loan Group. As noted above, the only Securitization reporting in its respective Prospectus Supplement any mortgage loans with an LTV ratio over 100 percent was FHLT 2006-E, and in that case, only 0.01 percent of its mortgage loans were reported to have an LTV ratio in excess of 100 percent, in comparison to the 23.53 percent that the AVM revealed.
19
18
53
review revealed that at least 10 percent of the mortgages in the Supporting Loan Group had a true LTV ratio over 100 percent. For 10 of the 42 GSE Certificates, the data review revealed that at least 20 percent of the mortgages in the Supporting Loan Group had a true LTV ratio over 100 percent. 118. These inaccuracies with respect to reported LTV ratios also indicate that the
statements in the Registration Statements relating to appraisal practices were false, and that the appraisers themselves, in many instances, furnished appraisals that they understood were inaccurate and that they knew bore no reasonable relationship to the actual value of the underlying properties. Indeed, independent appraisers following proper practices, and providing genuine estimates as to valuation, would not systematically generate appraisals that deviate so significantly (and so consistently upward) from the true values of the appraised properties. This conclusion is further confirmed by the findings of the Financial Crisis Inquiry Commission, which identified inflated appraisals as a pervasive problem during the period of the Securitizations, and determined through its investigation that appraisers were often pressured by mortgage originators, among others, to produce inflated results. See Financial Crisis Inquiry Commission, Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (2011). B. 119. The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines
The Registration Statements contained material misstatements and omissions
regarding compliance with applicable underwriting guidelines. Indeed, the originators for the loans underlying the Securitizations systematically disregarded their respective underwriting guidelines in order to increase production and profits derived from their mortgage-lending businesses. This is confirmed by the systematically misreported owner occupancy and LTV 54
statistics, discussed above, and by (1) government investigations into originators underwriting practices, which have revealed widespread abandonment of originators reported underwriting guidelines during the relevant period; (2) the collapse of the GSE Certificates credit ratings; and (3) the surge in delinquency and default in the mortgages in the Securitizations. 1. Government Investigations Have Confirmed That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines
120.
The abandonment of underwriting guidelines is further confirmed by several
government reports and investigations that have described rampant underwriting failures throughout the period of the Securitizations, and, more specifically, have described underwriting failures by the very originators whose loans were included by the Defendants in the Securitizations. 121. For instance, in November 2008, the Office of the Comptroller of the Currency,
an office within the United States Department of the Treasury, issued a report identifying the Worst Ten mortgage originators in the Worst Ten metropolitan areas. The worst originators were defined as those with the largest number of non-prime mortgage foreclosures for 2005 2007 originations. Countrywide, Fremont, IndyMac, WMC, and GreenPoint, which originated many of the loans for the Securitizations at issue here, were on that list. See Worst Ten in the Worst Ten, Office of the Comptroller of the Currency Press Release (Nov. 13, 2008), available at http://www.occ.treas.gov/news-issuances/news-releases/2009/nr-occ-2009-112b.pdf. 122. Countrywide originated loans for at least 10 of the Securitizations. In January
2011, the FCIC issued its final report, which detailed, among other things, the collapse of mortgage underwriting standards and subsequent collapse of the mortgage market and wider economy. See Financial Crisis Inquiry Commission, Final Report of the National Commission
55
of the Causes of the Financial and Economic Crisis in the United States (2011) (FCIC Report). The FCIC Report singled out Countrywide for its role: Lenders made loans that they knew borrowers could not afford and that could cause massive losses to investors in mortgage securities. As early as September 2004, Countrywide executives recognized that many of the loans they were originating could result in catastrophic consequences. Less than a year later, they noted that certain high-risk loans they were making could result not only in foreclosures but also in financial and reputational catastrophe for the firm. But they did not stop. See FCIC Report, at xxii. 123. Countrywide has also been the subject of several investigations and actions
concerning its lax and deficient underwriting practices. In June 2009, for instance, the SEC initiated a civil action against Countrywide executives Angelo Mozilo (founder and Chief Executive Officer), David Sambol (Chief Operating Officer), and Eric Sieracki (Chief Financial Officer) for securities fraud and insider trading. In a September 16, 2010 opinion denying these defendants motions for summary judgment, the United States District Court for the Central District of California found that the SEC raised genuine issues of fact as to, among other things, whether the defendants had misrepresented the quality of Countrywides underwriting processes. The court noted that the SEC presented evidence that Countrywide routinely ignored its official underwriting to such an extent that Countrywide would underwrite any loan it could sell into the secondary mortgage market, and that a significant portion (typically in excess of 20%) of Countrywides loans were issued as exceptions to its official underwriting guidelines . The court concluded that a reasonable jury could conclude that Countrywide all but abandoned managing credit risk through its underwriting guidelines . SEC v. Mozilo, No. CV 09-3994, 2010 WL 3656068, at *10 (C.D. Cal. Sept. 16, 2010). Mozilo, Sambol, and Sieracki subsequently settled with the SEC. 56
124.
The testimony and documents only recently made available to the GSEs by way
of the SECs investigation confirm that Countrywide was systematically abusing exceptions and low-documentation processes in order to circumvent its own underwriting standards. For example, in an April 13, 2006 e-mail, Mozilo wrote to Sieracki and others that he was concerned that certain subprime loans had been originated with serious disregard for process [and] compliance with guidelines, resulting in the delivery of loans with deficient documentation. Mozilo further stated that I have personally observed a serious lack of compliance within our origination system as it relates to documentation and generally a deterioration in the quality of loans originated versus the pricing of those loan[s]. 125. On October 4, 2007, the Commonwealth of Massachusetts, through its Attorney
General, brought an enforcement action against Fremont, which originated loans for at least eight of the Securitizations, for an array of unfair and deceptive business conduct, on a broad scale. See Complaint, Commonwealth v. Fremont Inv. & Loan & Fremont Gen. Corp., No. 074373 (Mass. Super. Ct.) (Fremont Complaint). According to the complaint, Fremont (i) approve[ed] borrowers without considering or verifying the relevant documentation related to the borrowers credit qualifications, including the borrowers income; (ii) approv[ed] borrowers for loans with inadequate debt-to-income analyses that do not properly consider the borrowers ability to meet their overall level of indebtedness and common housing expenses; (iii) failed to meaningfully account for [ARM] payment adjustments in approving and selling loans; (iv) approved borrowers for these ARM loans based only on the initial fixed teaser rate, without regard for borrowers ability to pay after the initial two year period; (v) consistently failed to monitor or supervise brokers practices or to independently verify the information provided to Fremont by brokers; and (vi) ma[de] loans based on information that
57
Fremont knew or should have known was inaccurate or false, including, but not limited to, borrowers income, property appraisals, and credit scores. See Fremont Complaint. 126. On December 9, 2008, the Supreme Judicial Court of Massachusetts affirmed a
preliminary injunction that prevented Fremont from foreclosing on thousands of its loans issued to Massachusetts residents. As a basis for its unanimous ruling, the Supreme Judicial Court found that the record supported the lower courts conclusions that Fremont made no effort to determine whether borrowers could make the scheduled payments under the terms of the loan, and that Fremont knew or should have known that [its lending practices and loan terms] would operate in concert essentially to guarantee that the borrower would be unable to pay and default would follow. Commonwealth v. Fremont Inv. & Loan, 897 N.E.2d 548, 556 (Mass. 2008). The terms of the preliminary injunction were made permanent by a settlement reached on June 9, 2009. 127. IndyMac, which originated the loans for at least two of the Securitizations, was
the subject of a February 26, 2009 report issued by the Office of Inspector General (OIG) of the U.S. Department of Treasury entitled Safety and Soundness: Material Loss Review of IndyMac Bank, FSB (the OIG Report). The OIG Report found that IndyMac Bank had embarked on a path of aggressive growth that was supported by its high risk business strategy of originating Alt-A loans on a large scale and then packag[ing] them together in securities and selling them on the secondary market to investors. OIG Report at 2, 6, 7. The OIG Report further stated that: To facilitate this level of [loan] production IndyMac often did not perform adequate underwriting. Id. at 2. 128. A June 30, 2008 report issued by the Center for Responsible Lending (CRL)
also found that IndyMac Bank often ignored its stated underwriting and appraisal standards and
58
encouraged its employees to approve loans regardless of the borrowers ability to repay them. See Center for Responsible Lending, IndyMac: What Went Wrong? How an Alt-A Leader Fueled its Growth with Unsound and Abusive Mortgage Lending (Jun. 30, 2008) (the CRL Report). For example, the CRL Report noted that IndyMac Bank engaged in unsound and abusive lending practices and allowed outside mortgage brokers and in-house sales staffers to inflate applicants [financial information] [to] make them look like better credit risks. See CRL Report at 2, 8. 129. WMC, which originated the loans for at least two of the Securitizations, employed
reckless underwriting standards and practices, as described more fully below, that resulted in a huge amount of foreclosures, ranking WMC fourth in the report presented to the FCIC in April 2010 identifying the Worst Ten mortgage originators in the Worst Ten metropolitan areas. See Worst Ten in the Worst Ten, Office of the Comptroller of the Currency Press Release, November 13, 2008. General Electric, which had purchased WMC in 2004, closed down operations at WMC in late 2007 and took a $1.4 billion charge in the third quarter of that year. See, e.g., Diane Brady, Adventures of a Subprime Survivor, Bloomberg Businessweek, Oct. 29, 2007, available at http://www.businessweek.com/magazine/content/07_44/b4056074.htm. 130. WMCs reckless loan originating practices were noticed by regulatory authorities.
In June 2008, the Washington State Department of Financial Institutions, Division of Consumer Services filed a Statement of Charges and Notice of Intention to Enter an Order to Revoke License, Prohibit From Industry, Impose Fine, Order Restitution and Collect Investigation Fees (the Statement of Charges) against WMC Mortgage and its principal owners individually. See Statement of Charges, No. C-07-557-08-SC01, Jun. 4, 2008. The Statement of Charges included 86 loan files, which revealed that at least 76 loans were defective or otherwise in violation of
59
Washington state law. Id. Among other things, the investigation uncovered that WMC had originated loans with unlicensed or unregistered mortgage brokers, understated amounts of finance charges on loans, understated amounts of payments made to escrow companies, understated annual percentage rates to borrowers and committed many other violations of Washington State deceptive and unfair practices laws. Id. 131. GreenPoint, which originated the underlying mortgage loans for at least seven of
the Securitizations, systematically disregarded its underwriting standards, granted exceptions in the absence of compensating factors, required less documentation, and granted no-documentation or limited-documentation loans to individuals without sound credit histories. In November 2008, Businessweek Magazine reported that GreenPoints employees and independent mortgage brokers targeted borrowers who were less able to afford the loan payments they were required to make, and many had no realistic ability to pay back the loans. GreenPoint Mortgage Funding, Inc.s parent corporation, Capital One Financial Corp., eventually liquidated GreenPoint in December 2008, taking an $850 million write-down due to mortgage-related losses associated with GreenPoints origination business. 132. GreenPoints pervasive disregard of underwriting standards resulted in its
inclusion among the worst ten originators in the 2008 Worst Ten in the Worst Ten Report. GreenPoint was identified 7th worst in Stockton, California, and 9th worst in both Sacramento, California, and Las Vegas, Nevada. In the 2009 Worst Ten in the Worst Ten Report, GreenPoint was listed as 3rd worst in Modesto, California, 4th worst in Stockton, Merced, and Vallejo-Fairfield-Napa, California, 6th worst in Las Vegas, Nevada; and 9th in Reno, Nevada. 133. GreenPoint is now a defendant in numerous lawsuits alleging misrepresentations
regarding the quality of the loans GreenPoint underwrote and originated. For example, in U.S.
60
Bank Natl Assn v. GreenPoint Mortgage Funding, Inc., No. 09-600352 (N.Y. Sup. Ct. filed Apr. 22, 2009), a consultants investigation concluded that 93 percent of the loans that GreenPoint sold contained errors, omissions, misrepresentations, and negligence related to origination and underwriting. The investigation found that GreenPoint loans suffered from serious defects including: Pervasive misrepresentations and/or negligence with respect to the statement of the income, assets or employment of the borrower. Violations of GreenPoints own underwriting guidelines and prudent mortgage lending practices, including loans made to borrowers (i) who made unreasonable claims as to their income, (ii) with multiple, unverified social security numbers, (iii) with credit scores below the required minimum, (iv) with debt-to-income and/or loan-to-value ratios above the allowed maximum or (v) with relationships to GreenPoint or other non-arms-length relationships. Misrepresentations of the borrowers intent to occupy the property as the borrowers residence and subsequent failure to so occupy the property. Inflated appraisal values.
On March 3, 2010, the court denied GreenPoints motion to dismiss this claim, holding that discovery would be required to determine whether GreenPoint would be required under the parties contract to repurchase all 30,000 loans based on the deficiencies in individual loans identified by U.S. Bank. 134. New Century and its subsidiary, Home123, originated loans for at least one of the
Securitizations. As stated in the GSAMP 2006-NC2 Prospectus Supplement, [f]or the year ending December 31, 2005, New Century Financial Corporation originated $56.1 billion in mortgage loans. And before its collapse in the first half of 2007, New Century was one of the largest subprime lenders in the country. 135. In 2010, the OCC identified New Century as the worst subprime lender in the
country based on the delinquency rates of the mortgages it originated in the ten metropolitan 61
areas between 2005 and 2007 with the highest rates of delinquency. See Worst Ten in the Worst Ten, Office of the Comptroller of the Currency Press Release (Nov. 13, 2008), available at http://www.occ.treas.gov/news-issuances/news-releases/2009/nr-occ-2009-112b.pdf. Further, in January 2011, the FCIC issued its final report, which detailed, among other things, the collapse of mortgage underwriting standards and subsequent collapse of the mortgage market and wider economy. See FCIC Report. The FCIC Report singled out New Century for its role: New Centuryonce the nations second-largest subprime lenderignored early warnings that its own loan quality was deteriorating and stripped power from two risk-control departments that had noted the evidence. In a June 2004 presentation, the Quality Assurance staff reported they had found severe underwriting errors, including evidence of predatory lending, federal and state violations, and credit issues, in 25% of the loans they audited in November and December 2003. In 2004, Chief Operating Officer and later CEO Brad Morrice recommended these results be removed from the statistical tools used to track loan performance, and in 2005, the department was dissolved and its personnel terminated. The same year, the Internal Audit department identified numerous deficiencies in loan files; out of nine reviews it conducted in 2005, it gave the companys loan production department unsatisfactory ratings seven times. Patrick Flanagan, president of New Centurys mortgage-originating subsidiary, cut the departments budget, saying in a memo that the group was out of control and tries to dictate business practices instead of audit. 136. On February 29, 2008, after an extensive document review and conducting over
100 interviews, Michael J. Missal, the Bankruptcy Court Examiner for New Century, issued a detailed report on the various deficiencies at New Century, including lax mortgage standards and a failure to follow its own underwriting guidelines. Among his findings, the Examiner reported: New Century had a brazen obsession with increasing loan originations, without due regard to the risks associated with that business strategy . Although a primary goal of any mortgage banking company is to make more loans, New Century did so in an aggressive manner that elevated the risks to dangerous and ultimately fatal levels. New Century also made frequent exceptions to its underwriting guidelines for borrowers who might not otherwise qualify for a 62
particular loan. A senior officer of New Century warned in 2004 that the number one issue is exceptions to the guidelines. Moreover, many of the appraisals used to value the homes that secured the mortgages had deficiencies. New Century layered the risks of loan products upon the risks of loose underwriting standards in its loan originations to high risk borrowers.
Final Report of Michael J. Missal, Bankruptcy Examiner, In re New Century TRS Holdings, Inc., No. 07-10416 (KJC) (Bankr. Del. Feb. 29, 2008), available at http://graphics8.nytimes.com/ packages/pdf/business/Final_Report_New_Century.pdf. 137. On December 9, 2009, the SEC charged three of New Centurys top officers with
violations of federal securities laws. The SECs complaint details how New Centurys representations regarding its underwriting guidelines, e.g., that New Century was committed to adher[ing] to high origination standards in order to sell [its] loan products in the secondary market and only approv[ing] subprime loan applications that evidence a borrowers ability to repay the loan, were blatantly false. 138. Patricia Lindsay, a former Vice President of Corporate Risk at New Century,
testified before the FCIC in April 2010 that, beginning in 2004, underwriting guidelines had been all but abandoned at New Century. Ms. Lindsay further testified that New Century systematically approved loans with 100 percent financing to borrowers with extremely low credit scores and no supporting proof of income. See Written Testimony of Patricia Lindsay for the FCIC Hearing, April 7, 2010, http://fcic-static.law.stanford.edu/cdn-media/fcic.testimony/20100407-Lindsay.pdf, at 3. 139. The originators of the mortgage loans underlying the Securitizations went beyond
the systematic disregard of their own underwriting guidelines. Indeed, as the FCIC has confirmed, mortgage loan originators throughout the industry pressured appraisers, during the 63
period of the Securitizations, to issue inflated appraisals that met or exceeded the amount needed for the subject loans to be approved, regardless of the accuracy of such appraisals, and especially when the originators aimed at putting the mortgages into a package of mortgages that would be sold for securitization. This resulted in lower LTV ratios, discussed above, which in turn made the loans appear to the investors less risky than they were. 140. As described by New Centurys Patricia Lindsay, appraisers fear[ed] for their
livelihoods, and therefore cherry-picked data that would help support the needed value rather than finding the best comparables to come up with the most accurate value. See Written Testimony of Patricia Lindsay to the FCIC, at 5 (Apr. 7, 2010). Likewise, Jim Amorin, President of the Appraisal Institute, confirmed in his testimony that [i]n many cases, appraisers are ordered or severely pressured to doctor their reports and to convey a particular, higher value for a property, or else never see work from those parties again . [T]oo often state licensed and certified appraisers are forced into making a Hobsons Choice. See Testimony of Jim Amorin to the FCIC, available at www.appraisalinstitute.org/newsadvocacy/downloads/ltrs_tstmny/ 2009/AI-ASA-ASFMRA-NAIFATestimonyonMortgageReform042309final.pdf. Faced with this choice, appraisers systematically abandoned applicable guidelines and over-valued properties in order to facilitate the issuance of mortgages that could then be collateralized into mortgagebacked securities. 2. The Collapse of the GSE Certificates Credit Ratings Further Indicates that the Mortgage Loans Were not Originated in Adherence to the Stated Underwriting Guidelines
141.
The total collapse in the credit ratings of the GSE Certificates, typically from
AAA or its equivalent to non-investment speculative grade, is further evidence of the originators systematic disregard of underwriting guidelines, indicating that the GSE Certificates were impaired from the start. 64
142.
The GSE Certificates that Fannie Mae and Freddie Mac purchased were originally
assigned credit ratings of AAA or its equivalent, which purportedly reflected the description of the mortgage loan collateral and underwriting practices set forth in the Registration Statements. These ratings were artificially inflated, however, as a result of the very same misrepresentations that the Defendants made to investors in the Prospectus Supplements. 143. Goldman provided or caused to be provided loan-level information to the rating
agencies that they relied upon in order to calculate the Certificates assigned ratings, including the borrowers LTV ratio, debt-to-income ratio, owner-occupancy status, and other loan-level information described in aggregation reports in the Prospectus Supplements. Because the information that Goldman provided or caused to be provided was false, the ratings were inflated and the level of subordination that the rating agencies required for the sale of AAA or its equivalent certificates was inadequate to provide investors with the level of protection that those ratings signified. As a result, the GSEs paid Defendants inflated prices for purported AAA (or its equivalent) Certificates, unaware that those Certificates actually carried a severe risk of loss and inadequate credit enhancement. 144. Since the issuance of the GSE Certificates, the ratings agencies have dramatically
downgraded their ratings to reflect the revelations regarding the true underwriting practices used to originate the mortgage loans, and the true value and credit quality of the mortgage loans. Table 8 details the extent of the downgrades.20
Applicable ratings are shown in sequential order separated by forward slashes: Moodys/S&P/Fitch. A hyphen after a forward-slash indicates that the relevant agency did not provide a rating at issuance.
20
65
Table 8
Transaction ACCR 2005-4 AHMA 2006-1 AHMA 2006-1 FFML 2005-FF11 FFML 2005-FF8 FFML 2006-FF13 FHLT 2006-E GSAA 2005-11 GSAA 2005-14 GSAA 2005-14 GSAA 2005-15 GSAA 2006-11 GSAA 2006-2 GSAA 2006-4 GSAA 2006-5 GSAA 2006-8 GSAA 2007-6 GSAMP 2005-AHL2 GSAMP 2005-HE5 GSAMP 2005-HE6 GSAMP 2005-WMC2 GSAMP 2005-WMC3 GSAMP 2006-FM1 GSAMP 2006-FM2 GSAMP 2006-FM3 GSAMP 2006-HE3 GSAMP 2006-HE4 GSAMP 2006-HE5 GSAMP 2006-HE7 GSAMP 2006-HE8 GSAMP 2006-NC2 GSAMP 2007-FM1 GSAMP 2007-FM2 GSAMP 2007-HE1 GSAMP 2007-HE2 GSAMP 2007-NC1 GSR 2006-OA1 GSR 2007-AR2 GSR 2007-OA1 GSR 2007-OA2 INDX 2005-AR18 INDX 2005-AR27 Tranche A1 1A1 1A2 A1 A1 A1 1A1 1A1 1A1 1A2 1A1 1A1 1A1 1A1 1A1 1A1 3A1A A1A A1 A1 A1A A1A A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 1A1 6A1 1A1 1A1 1A1 2A1 Ratings at Issuance (Moodys/S&P/Fitch) Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/---/AAA/AAA Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Ratings as of July 31, 2011 (Moodys/S&P/Fitch) A3/AAA/-Ca/D/-Caa2/CCC/-Baa1/AAA/-A1/AAA/-Caa2/ CCC/-Ca/CCC/C B3/A+/-Caa3/B-/-C/CCC/-Caa2/CCC/-Ca/CCC/-Caa2/B/-Caa3/CCC/-Ca/CCC/-Ca/CCC/-Caa2/CCC/-Ba1/A/-Aa2/AAA/-A2/AA-/-Aaa/AAA/-Caa1/A-/-Ca/CCC/-Ca/CCC/-Ca/CCC/-Caa1/A-/-Caa2/BB+/-Caa1/BBB/-Caa2/CCC/-Caa3/B-/-Ca/CCC/-Ca/CCC/-Ca/CCC/-Caa3/BBB+/-Caa3/B-/-Ca/CCC/-Ca/CCC/---/CCC/C Caa3/CCC/-Ca/CCC/-Caa2/BB+/-Ca/D/--
3.
The Surge in Mortgage Delinquencies and Defaults Further Demonstrates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines
145.
Even though the Certificates purchased by Fannie Mae and Freddie Mac were
supposed to represent long-term, stable investments, a significant percentage of the mortgage loans backing the Certificates have defaulted, have been foreclosed upon, or are delinquent, resulting in massive losses to the Certificateholders. The overall poor performance of the
66
mortgage loans is a direct consequence of the fact that they were not underwritten in accordance with the applicable underwriting guidelines as represented in the Registration Statements. 146. Loan groups that were properly underwritten and contained loans with the
characteristics represented in the Registration Statements would have experienced substantially fewer payment problems and substantially lower percentages of defaults, foreclosures, and delinquencies than occurred here. Table 9 reflects the percentage of loans in the Supporting Loan Groups that are in default, have been foreclosed on, or are delinquent as of July 2011.
Table 9
Transaction ACCR 2005-4 AHMA 2006-1 FFML 2005-FF11 FFML 2005-FF8 FFML 2006-FF13 FHLT 2006-E GSAA 2005-11 GSAA 2005-14 GSAA 2005-15 GSAA 2006-11 GSAA 2006-2 GSAA 2006-4 GSAA 2006-5 GSAA 2006-8 GSAA 2007-6 GSAMP 2005-AHL2 GSAMP 2005-HE5 GSAMP 2005-HE6 GSAMP 2005-WMC2 GSAMP 2005-WMC3 GSAMP 2006-FM1 GSAMP 2006-FM2 GSAMP 2006-FM3 GSAMP 2006-HE3 GSAMP 2006-HE4 GSAMP 2006-HE5 GSAMP 2006-HE7 GSAMP 2006-HE8 GSAMP 2006-NC2 GSAMP 2007-FM1 GSAMP 2007-FM2 GSAMP 2007-HE1 GSAMP 2007-HE2 GSAMP 2007-NC1 GSR 2006-OA1 GSR 2007-AR2 GSR 2007-OA1 GSR 2007-OA2 INDX 2005-AR18 INDX 2005-AR27 Supporting Loan Group Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 3 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 6 Group 1 Group 1 Group 1 Group 2 Percentage of Delinquent/Defaulted/Foreclosed Loans (60 or more days delinquent) 31.20 31.90 50.20 46.30 50.20 55.70 27.30 22.80 40.70 47.50 53.40 40.80 40.40 43.70 40.20 37.70 49.90 38.50 47.00 53.20 53.40 55.50 53.60 50.50 43.90 45.90 47.60 48.50 36.20 54.50 50.90 51.50 46.00 49.30 47.60 14.50 45.30 51.50 34.30 24.70
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147.
The confirmed misstatements concerning owner occupancy and LTV ratios, the
confirmed systematic underwriting failures by the originators responsible for the mortgage loans across the Securitizations, and the extraordinary drop in credit ratings and rise in delinquencies across those Securitizations, all confirm that the mortgage loans in the Supporting Loan Groups, contrary to the representations in the Registration Statements, were not originated in accordance with the stated underwriting guidelines. V. 148. Goldman Sachs Knew Its Representations Were False The allegations in this Section V are made in support of Plaintiffs common law
fraud and aiding and abetting fraud claims, and not in support of Plaintiffs claims under (i) Sections 11, 12(a)(2) and 15 of the Securities Act, (ii) Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, (iii) Sections 31-5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, or (iv) negligent misrepresentation, which are based solely on strict liability and negligence. 149. The same evidence discussed above not only shows that the representations were
untrue, but also that Goldman Sachs knew, or was reckless in not knowing, that it was falsely representing the underlying process and riskiness of the mortgage loans that collateralized the GSE Certificates. As discussed above, such evidence includes: The startling discrepancies in basic information about the underlying mortgage loans, such as owner occupancy and LTV statistics, demonstrates a systemic underwriting failure about which Goldman knew or was reckless in not knowing. Clayton, who acted as credit risk manager in many of the Securitizations, admitted that in the period from the first quarter of 2006 to the second quarter of 2007, 23 percent of the mortgage loans Goldman submitted to Clayton to review in RMBS loan pools were rejected by Clayton as falling outside the applicable underwriting guidelines. Of the 23 percent of mortgage loans that Clayton found defective, 29 percent of the loans were subsequently waived in by Goldman without 68
proper consideration and analysis of compensating factors and included in securitizations such as the ones in which Fannie Mae and Freddie Mac invested here. Goldmans waiver of nearly a third of the defective loans shows that Goldman knew, or was reckless in not knowing, of the systemic failure in underwriting and misstatements in the offering materials received by the GSEs. A. 1. 150. Evidence Regarding Goldmans Due Diligence Goldmans Due Diligence Benefitted From a Direct Window Into the Originators Practices
Goldman benefited from a direct window into the lax origination practices that led
to the creation of the mortgage loans underlying the GSE Certificates. In connection with its purchase from the loan originators of the underlying mortgage loans in the 36 Securitizations it sponsored, Goldman performed due diligence to determine the quality of the loans it was purchasing. Goldman conducted due diligence on the originators it was purchasing loans from, and on the loans included in each offering to review compliance with the approved underwriting guidelines. 151. Goldman acquired the securitized loans through two primary channels: its
conduit program (pursuant to which it acquired mortgage loans from various banks, savings and loan associations, mortgage bankers and others) or bulk acquisitions in the secondary market. Goldmans offering materials represented that, in both channels, Goldman conducted due diligence on the lenders who originated the loans, and carefully inspected their underwriting standards: Prior to acquiring any residential mortgage loans, GSMC [Goldman Sachs Mortgage Company] will conduct a review of the related mortgage loan seller. GSMCs review process consists of reviewing select financial information for credit and risk assessment and underwriting guideline review, senior level management discussion and background checks. The scope of the mortgage loan due diligence will depend on the credit quality of the mortgage loans. GSAMP 2006-2 Prospectus Supplement, at S-62 (filed Jan. 26, 2006). The Prospectus Supplements 69
further provided that [t]he underwriting guideline review considers mortgage loan origination processes and systems. In addition, such review considers corporate policy and procedures relating to HOEPA [i.e., high-rate, high-fee loans] and state and federal predatory lending, origination practices by jurisdiction, historical loan level loss experience, quality control practices, significant litigation and material investors. Id. Similar representations were made in the Prospectus Supplements for the other GSE Certificates. 152. Goldman also stated that it re-underwrote sample pools of the loans it purchased
to determine whether they were originated in compliance with applicable underwriting guidelines. For example, in the GSAMP 2006-HE7 Prospectus Supplement, Goldman explained that it had the option to re-underwrite a sample of the RMBS loan pool: We may, in connection with the acquisition of mortgage loans, reunderwrite the mortgage loans based upon criteria we believe are appropriate depending to some extent on our or our affiliates prior experience with the lender and the servicer, as well as our prior experience with a particular type of loan or with loans relating to mortgaged properties in a particular geographical region. A standard approach to reunderwriting will be to compare loan file information and information that is represented to us on a tape with respect to a percentage of the mortgage loans we deem appropriate in the circumstances. GSAMP 2006-HE7 Prospectus Supplement, at S-29 (filed Oct. 31, 2006). Similar representations were made in the Prospectus Supplements relating to the other Goldmansponsored Securitizations. See also U.S. Senate Permanent Subcommittee on Investigations, Wall Street & The Financial Crisis: Anatomy of a Financial Collapse, at 483 (Apr. 13, 2011) (the Senate PSI Report) (Goldman, either directly or through a third party due diligence firm, routinely conducted due diligence review of the mortgage loan pools it bought from lenders or third party brokers for use in its securitizations .). Thus, Goldman had access to the true quality of the loans collateralizing the Securitizations it sponsored.
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153.
The initial step, in many of the Securitizations, was often done with Goldmans
funds, as Goldman provided warehouse lines of credit to originators. In other words, Goldman provided money to originators to fund the mortgages they were granting; Goldmans warehouse loan was then repaid when the originators loan pool was sold to Goldman for securitization. As the FCIC found: Under Paulsons leadership, Goldman Sachs had played a central role in the creation and sale of mortgage securities. From 2004 through 2006, the company provided billions of dollars in loans to mortgage lenders; most went to the subprime lenders Ameriquest, Long Beach, Fremont, New Century, and Countrywide through warehouse lines of credit, often in the form of repos. During the same period, Goldman acquired $53 billion of loans from these and other subprime loan originators, which it securitized and sold to investors. From 2004 to 2006, Goldman issued 318 mortgage securitizations totaling $184 billion (about a quarter were subprime) . FCIC Report, at 142. Consequently, Goldmans longstanding relationships with the problematic originators, and its numerous roles in the securitization chain, made it uniquely positioned to know the originators had abandoned their underwriting guidelines. 154. Goldmans privileged position as a source of warehouse lines of credit gave it
unique knowledge of the conditions under which mortgage loans were originated. The lines of credit allowed Goldman to control the origination practices of these lenders and gave Goldman an inside look into the true quality of the loans they originated. As one industry publication explained, warehouse lenders like Goldman have detailed knowledge of the lenders operations. Kevin Connor, Wall Street and the Making of the Subprime Disaster, at 11 (Nov. 2007). 155. These warehouse lines gave Goldman the inside track on acquiring the loans that
were generated using Goldman funds. Because of its financial arrangements with warehouse lenders, Goldman was essentially committed to buying the loans that secured its warehouse lines regardless of their quality and the results of Goldmans due diligence. Indeed, Goldman needed 71
to purchase the loans with little or no objection to keep the lenders supplied with capital to pay fees and interest owed on the lines of credit. It was also important to Goldman that it protect its business relationships with warehouse lenders in order to ensure a steady flow of loans for securitization. Therefore, Goldman was incentivized to allow defective mortgages to remain in the securitizations because: (i) mortgage originators would not maintain a relationship with a bank that consistently kicked out large numbers of loans; and (ii) the securitization became smaller as loans were kicked out, thus decreasing the underwriting fees and other fees. 2. 156. Goldman Had Actual Knowledge, on a Daily Basis, of the Number of Non-Performing Loans
Documents recently released by Goldmans third-party due diligence firm,
Clayton, confirm that Goldman was awareon a daily basisof the weakness in the loan pool and in the underwriting standards of the originators it used in its RMBS transactions. As discussed above, according to an internal Clayton Trending Report made public by the Government in conjunction with testimony given in September 2010, Goldman Sachs was informed that 23 percent of the loans Clayton reviewed for Goldman failed to meet guidelines. These loans were not subject to any proper exceptions, as they did not have any compensating factors. Rather, these loans were plainly defective. 157. Confronted with such a high failure rate, Goldman should have either rejected the
pool outright, or investigated whether that originator could be considered a trusted source of loans in the future. Even assuming Goldman incredibly believed a 23 percent failure rate could be chalked up to sampling error (e.g., due to the fact that Clayton Holdings did not review every loan in a pool), the proper response would have been to increase the sample size to test that hypothesis.
72
158.
Goldman not only continued to work with problematic originators, but, rather
than expanding the sample size to truly investigate the problems, Goldman simply ignored and did not disclose the red flags revealed by Claytons review. According to Claytons Trending Report, Goldman waived in to its pools 29 percent of those toxic loans that Clayton had identified as being outside the guidelines. 159. Claytons Trending Report provides compelling evidence that Goldman knew it
was securitizing defective loans and selling the resulting securities to investors like Fannie Mae and Freddie Mac. According to the September 23, 2010 testimony of Claytons Vice President Vicki Beal, through its numerous roles of underwriter, sponsor, and depositor, Goldman was made fully aware on a regular basis that a significant percentage of its loans failed to meet stated underwriting guidelines, but were being included anyway in the pools underlying securities sold to investors, such as those collateralizing the GSE Certificates. 160. Goldman was not content simply to let poor loans pass into its securitizations in
exchange for its fees and repayment of its warehouse loans. Goldman took the fraud further, affirmatively seeking to profit from this knowledge. According to the September 2010 FCIC testimony of Claytons former president, D. Keith Johnson, the investment banks would use the exception reports to force a lower price for itself, and not to benefit investors at all: I dont think that we added any value to the investor, the end investor, to get down to your point. I think only our value was done in negotiating the purchase between the seller and securitizer. Perhaps the securitizer was able to negotiate a lower price, and could maximize the line. We added no value to the investor, to the rating agencies. FCIC Staff Intv with D. Keith Johnson, Clayton Holdings, LLC (Sept. 2, 2010), available at http://fcic.law.stanford.edu/resource/interviews. In other words, rather than reject defective loans from collateral pools, or cease doing business with consistently failing originators,
73
investment banks like Goldman would instead use the Clayton data simply to insist on a lower price from the loan originators, leaving more room for its own profits while the defective loans were hidden from investors such as Fannie Mae and Freddie Mac in securitization pools. 161. Goldman further sought to leverage this information in its warehouse lending
business. Goldman used the discovery of poor lending practices to increase its profitsby charging higher warehouse fees to those originators identified as being problematic. See FCIC Report, at 484 n.2038 (citing Goldman email dated Feb. 2, 2007 which discussed proposal to charge higher warehouse fees to mortgage originators with higher EPD [early payment default] and drop out rates, including Fremont and New Century). 162. In light of the fact that Clayton was operating under extreme pressure from its
clients to allow as many loans as possible to remain in the securitization pools and to conduct increasingly cursory reviews, the high rejection and waiver rates are even more damning for Goldman. Based upon such pressure on Clayton, Goldman knew the true rates of defects were actually much higher than Clayton reported, and that it was allowing in even more defective loans than Claytons Trending Reports have since revealed. 163. For example, Melissa Toy and Irma Aninger, two contract risk analysts who
reviewed loan files for Bohan from 2004 to 2006a company that performed similar work to Claytonhave stated that their supervisors overrode the majority of their challenges to shaky loans on behalf of Goldman and other firms: They couldnt recall specific examples involving loans bought by Goldman, but they said their supervisors cleared half-million-dollar loans to a gardener, a housekeeper and a hairdresser. Aninger, whose job was to review the work of other contract analysts, said that she objected to numerous applications for loans that required no income verification, her supervisor would typically tell her, You cant call him a liar ... You have to take (his) word for it. (Alterations in original.) 74
I dont even know why I was there, she said, because the stuff was gonna get pushed through anyway. Toy said she concluded that the reviews were mostly for appearances, because the Wall Street firms planned to repackage bogus loans swiftly and sell them as bonds, passing any future liabilities to the buyers. The investment banks and mortgage lenders each seemed to be playing hot potato, trying to pass the risks before they got burned, she said. There was nobody involved in this who didnt know what was going on, no matter what they say, she said. We all knew.
Greg Gordon, Why Did Goldman Stop Scrutinizing Loans It Bought?, McClatchy Newspapers, Nov. 1, 2009, available at http://www.mcclatchydc.com/2009/11/01/77788/why-did-goldmanstop-scrutinizing.html. B. 164. Other Evidence Of Goldmans Willingness to Capitalize on Its Unique Knowledge at the Expense Of Investors
That Goldman knew of the originators abandonment of applicable underwriting
guidelines and of the true nature of the mortgage loans it was securitizing is further evidenced by how Goldman handled its own investments. Goldman internally characterized its offerings as junk, dogs, big old lemons, and monstrosities. FCIC Report at 23536. Nevertheless, it congratulated itself for successfully offloading such junk onto others. As the public learned in the FCICs Report, by January 2007, Daniel Sparks, the head of Goldmans mortgage department, extolled Goldmans success in reducing its subprime inventory, writing that the team had structured like mad and traveled the world, and worked their tails off to make some lemonade from some big old lemons. Id. at 236. 165. Even more damning than Goldmans decision to use securitization as a tool to
move declining loans off of Goldmans own books are the huge bets Goldman placed against the very mortgage-backed investments it sold to the GSEs and that are at issue in this Complaint. Goldman coupled those sales with an aggressive campaign to force lenders (the very same ones 75
who originated loans in the Certificates) to repurchase defective loans which, due to the slowing securitization market, had been stuck on Goldmans own books. 1. 166. Goldman Began Shorting Its Own Offerings Beginning in 2006
Beginning in 2005 and into 2006, Goldman began to take an increasingly
pessimistic view of the subprime mortgage market. Goldmans sophisticated and powerful proprietary models analyzed trends in the performance of the hundreds of thousands of mortgages that collateralized its RMBS, and those models and superior access to data regarding the underlying mortgage positions on its books gave Goldman unique knowledge that those securities were not as safe as their offering materials and ratings represented to investors. In fact, Goldmans models and data showed that the RMBS had declined up to 70 percent from their face amounts. In his book, Money and Power: How Goldman Sachs Came to Rule the World 49495 (2011) William D. Cohan explained: Goldmans RMBS model could analyze all the underlying mortgages and value the cash flows, as well as what would happen if interest rates changed, if prepayments were made, or if the mortgages were refinanced. The model could also spit out a valuation if defaults suddenly spiked upward . [Goldmans] proprietary model was telling [Goldman] that it would not take much to wipe out the value of tranches of a mortgage-backed security that had previously looked very safe, at least in the estimation of the credit-rating agencies that had been paid (by Wall Street) to rate them investment grade. By tweaking the various assumptions based on events that seemed increasingly likely, [Goldmans] models were showing a marked decrease in the value of mortgage-related securities. Goldmans models said even if you dont believe housing prices are going to go down, even if we apply low-probability scenarios about it going negative theres no way this stuff can be worth anywhere near one hundred [cents on the dollar]. [Goldmans] models had them pegged anywhere between 30 cents and 70 cents . According to a former Goldman employee, these models as well as other information in Goldmans exclusive possession showed it the writing on the wall in this market as early as 2005, Gretchen Morgenson & Louise Story, Banks Bundled Bad Debt, Bet Against It and Won, N.Y. Times, Dec. 24, 2009, and into the the early summer of 2006, Senate PSI Report at 398. 76
Goldman exploited its asymmetric access to, and possession of, information about the weakness in the mortgage loans collateralizing the Certificates it marketed and sold. 167. To reduce its massive financial exposure to the subprime mortgage market,
Goldman began looking for ways to short the market (i.e., to make investments which would rise in value and/or make payments to Goldman as the subprime mortgage market declined). Its shorting strategies included the purchase of credit default swap protection on the very RMBS positions it sold into the market. Goldman bet that the RMBS would decline in value and/or default; if so, its swap counterparty would be required to pay Goldman. 168. Goldman entered into swaps worth hundreds of millions of dollars during this
time period, where it stood of the short side of the transaction, while its counterparty went long. For example, according to the Senate PSI Report, Goldman underwrote GSAMP 2007FM2, a securitization it sold to Freddie Mac, and then turned around and bet against that same securitization through use of credit default swaps. As the Senate PSI Report explained: Goldman marketed and sold the Fremont securities to its customers, while at the same time purchasing $15 million in CDS contracts referencing some of the Fremont securities it underwrote. Seven months later, by October 2007, the ratings downgrades had begun; by August 2009, every tranche in the GSAMP securitization had been downgraded to junk status. Senate PSI Report at 516 (footnotes omitted). Goldmans shorting of GSAMP 2007-FM2 was emblematic of its approach to the Securitizations it marketed and sold to the GSEs. As a recent magazine article explained, Goldman was like a car dealership that realized it had a whole lot full of cars with faulty brakes. Instead of announcing a recall, it surged ahead with a two-fold plan to make a fortune: first, by dumping the dangerous products on other people, and second, by taking out life insurance against the fools who bought the deadly cars. Matt Taibbi, The People
77
vs. Goldman Sachs, Rolling Stone, May 26, 2011, available at http://www.rollingstone.com/ politics/news/the-people-vs-goldman-sachs-20110511. 169. Continuing from 2006 and 2007, Goldman used its shorting strategy as a way to
reduce its own mortgage risk while continuing to create and sell mortgage-related products to its clients. In 2006, Goldman made a massive $9 billion bet that the same type of assets it was selling to investors like Fannie Mae and Freddie Mac would collapse. See id. at 419. The $9 billion short bet was placed in 2006 by Goldmans mortgage department, the same department that oversaw the sale of the Certificates to the GSEs. Goldmans net short position in 2007 rose as high as $13.9 billion. Id. at 430. As the Senate PSI Report explained, Goldman sold RMBS and CDO securities to its clients without disclosing its own net short position against the subprime market or its purchase of CDS contracts to gain from the loss in value of some of the very securities it was selling to its client. Id. at 9. 170. On March 9, 2007, Goldmans Daniel Sparks wrote: Our current largest needs
are to execute and sell our new issuesCDOs and RMBSand to sell our other cash trading positions . I cant overstate the importance to the business of selling these positions and new issues. A leading structured finance expert reportedly called Goldmans practice the most cynical use of credit information that I have ever seen, and compared it to buying fire insurance on someone elses house and then committing arson. Senate PSI Hearing Ex. 4/2776. As the Senate PSI found, Goldman sold RMBS securities to customers at the same time it was shorting the securities and essentially betting that they would lose value. Senate PSI Report at 513.
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2.
Goldmans Targeted Campaign to Put Back Defective Loans to Originators Demonstrates That It Knew the Targeted Originators Loans Breached Underwriting Guidelines
171.
Another tactic that Goldman used to reduce its subprime exposure in 2006 was to
force originators from which it bought mortgages to buy them back. Goldmans repurchase rights arose from mortgage purchase agreements that it entered into with originators. These agreements typically required originators to warrant that their loans were underwritten according to standard guidelines and conformed to certain characteristics, including the accuracy of the mortgage loan schedule, the absence of fraud by the originator or borrower, and compliance with federal and state laws. If a representation was breached, Goldman (as sponsor) could demand that the originator repurchase the defective loans as required by the mortgage purchase agreement. Goldman hired third party re-underwriting firms to assist in this put back process and to find defects in the loans which would then be used as a basis to require their repurchase. 172. Goldman targeted its put back campaign at the originators whose loans
Goldman knew were most likely to yield underwriting breaches upon examination. Goldman had unique insight into the quality of the loans purchased from originators, arising from diligence on the originators themselves as well as their loans. Goldman knew based on its many years of dealing with originators such as New Century and Fremont that their loans were the worst on its books and thus the most likely to yield put back claims. 173. For example, the Senate PSI Report published a December 14, 2006 email from
Goldmans Daniel Sparks which told colleagues, stay focused and aggressive on MLN [Mortgage Lenders Network] . See Senate PSI Report at 405. On January 8, 2007, Daniel Sparks wrote to a colleague, I just cant see how any originator in the industry is worth a premium. Im also a bit scared of [A]ccredited [Aames parent company] and [N]ew [C]entury, and Im not sure about taking a bunch of new exposures. Id. at 484 n.2036. 79
174.
On February 2, 2007, Sparks identified other prime targets of Goldmans
repurchase campaign. He said that his team is working on putting loans in the deals back to the originators (New Century, WAMU [Long Beachs parent], and Fremont all real counterparties) as there seem to be issues potentially including some fraud at origination, but resolution will take months and be contentious. Id. at 484. 175. On March 7, 2007, Sparks continued emphasizing Goldmans priority in ridding
itself of loans issued by certain originators. He described Goldmans exposure as follows: As for the big 3 originators Accredited, New Century and Fremont, our real exposure is in the form of put-back claims. Basically, if we get nothing back we would lose around $60mm vs loans on our books (we have a reserve of $30mm) and the loans in the [CDO and RMBS] trusts could lose around $60mm (we probably suffer about 1/3 of this in ongoing exposures) . Id. at 485. 176. In March 2007, following an analysis of a pool of loans originated by Fremont,
Goldman concluded that about 50 percent of the 200 files reviewed look to be repurchase obligations. Id. at 486. Goldman made it a priority to re-underwrite and put back loans purchased from originators it considered weak. Id. at 485. 177. In total, between 2006 and 2007, Goldman made approximately $475 million in
repurchase claims to the originators and others for loans in its inventory. All told, Goldman recovered approximately $82 million from this process. Id. at 483. Among the securitizations for which Goldman put back (or tried to put back) loans out of its inventory was GSAMP 2006NC2, a deal Goldman sold to Fannie Mae. After reviewing the loan files in one New Century deal, Goldmans analysts recommended to Goldman putting back 26 percent of the loan pool. See Senate PSI Report at 48586.
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178.
Goldmans actions in 2006 and 2007 present compelling evidence of Goldmans
complete abandonment of its customers interests in its drive to rid itself of declining and defective mortgage assets. 179. Many of the Individual Defendants, who were officers and directors of Defendant
GS Mortgage Securities Corp. and therefore together with its parent company Goldman Sachs Mortgage Company controlled it, had extensive knowledge of the underlying collateral and therefore of Goldmans fraudulent scheme based on other positions they held at Goldman Sachs. For example, Daniel Sparks, was both head of Goldman Sachs Groups Inc.s Mortgage Department and also the CEO and Director of GS Mortgage Securities Corp. Kevin Gasvoda, the head of the Mortgage Departments Residential Whole Loan Trading Desk, which oversaw the purchase of mortgages and constructed and sold RMBS securitizations, was also director of GS Mortgage Securities Corp. Similarly, Michelle Gill, who worked on Goldmans put back campaign, was a vice president of GS Mortgage Securities Corp. and also a managing director of Goldman Sachs Group, Inc. 180. Each of these executives played critical roles in establishing and implementing
Goldmans de-risking strategies in 2006 and 2007. For example, in February 2007, Mr. Gasvoda issued a directive or axe to the Goldman sales force to sell the remaining RMBS securities from Goldman-originated RMBS securitizations. On February 9, 2007, the sales force reported a substantial number of sales, and Mr. Gasvoda replied: Great job syndicate and sales, appreciate the focus. Senate PSI Report at 408. Ms. Gill was responsible, in part, for Goldmans put back campaign in 2006, including the review of faulty Fremont loans. Id. at 484. Each worked under Sparks, who managed and coordinated Goldmans put back and other de-risking efforts. The Individual Defendants overlapping personnel and intertwined business strategies meant that
81
the entities they controlled and were affiliated with had the means and incentives to defraud the GSEs with respect to the Certificates. C. 181. Numerous Government Investigations Have Confirmed Goldman Acted With Scienter
Goldman is the subject of numerous criminal and regulatory probes related to its
mortgage underwriting practices. See Wall Street Probe Widens, The Wall Street Journal, May 12, 2010 (reporting on federal criminal and regulatory investigations of whether Goldman and others misled investors about their roles in mortgage-bond deals). These investigations further confirm that Goldmans misrepresentations were not mere isolated, innocent mistakes, but the result of the companys reckless or intentional misconduct. 182. For example, Goldmans misconduct prompted the Attorney General of
Massachusetts to examine whether Goldman: failed to ascertain whether loans purchased from originators complied with the originators stated underwriting guidelines; failed to take sufficient steps to avoid placing problem loans into securitization pools; failed to correct inaccurate information in securitization trustee reports concerning repurchases of loans; and failed to make available to potential investors certain information concerning allegedly unfair or problem loans, including information obtained during loan due diligence and the pre-securitization process, as well as information concerning Goldman Sachs practices in making repurchase claims relating to loans in and out of securitizations.
183.
Goldman settled with the Commonwealth of Massachusetts, paying it $60 million.
FCIC Report at 226. In announcing the settlement, the Massachusetts Attorney General stated that Goldman did not take sufficient steps to avoid placing problem loans in securitization pools. Goldman was also required to forgive all or portions of the balances on many loans it
82
had bought and securitized, which resulted in tens of millions of dollars in additional expenses to Goldman. 184. Similarly, the Senate PSI Report concluded that Goldman knowingly sold high
risk, poor quality mortgage products to clients around the world, saturating financial markets with complex, financially engineered instruments that magnified risk and losses when their underlying assets began to fail. Senate PSI Report at 476; see also id. at 513 (Goldman originated and sold RMBS securities that it knew had poor quality loans that were likely to incur abnormally high rates of default.) (emphasis added). 185. In addition, the Senate investigation revealed that Goldman had to disclose that
the GSE Certificates credit ratings were false and misleading because Defendants fed the same misinformation found in the term sheets and Prospectus Supplements to the credit rating agencies in an attempt to manufacture predetermined ratings. In testimony before the Senate Permanent Subcommittee on Investigations, Susan Barnes, the North American Practice Leader for RMBS at S&P from 2005 to 2008, confirmed that the rating agencies relied upon investment banks to provide accurate information about the loan pools: The securitization process relies on the quality of the data generated about the loans going into the securitizations. S&P relies on the data produced by others and reported to both S&P and investors about those loans . S&P does not receive the original loan files for the loans in the pool. Those files are reviewed by the arranger or sponsor of the transaction, who is also responsible for reporting accurate information about the loans in the deal documents and offering documents to potential investors. Senate Homeland Security and Governmental Affairs Subcommittee on Investigations, Hearing on Wall Street and the Financial Crisis: The Role of Credit Rating Agencies, Apr. 23, 2010 (emphasis added). As a result, the ratings themselves failed to reflect accurately the actual risk
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underlying the GSE Certificates because the ratings agencies were in fact analyzing a mortgage pool that had no relation to the pool that actually backed the Certificates purchased by the GSEs. 186. Even more recently, on September 1, 2011, the Federal Reserve Board sanctioned
Goldman Sachs for a pattern of misconduct and negligence relating to deficient practices in its former mortgage unit, Litton Loan Servicing LP., including those involving robo-signinga practice that often results in defective foreclosures. As a result of this sanction, Goldman must retain an independent consultant to review certain foreclosure proceedings initiated by Litton. The Federal Reserve has also announced that it believes monetary sanctions are appropriate against Goldman and plans to announce monetary penalties. Goldmans pattern of misconduct is further evidence that Goldman Sachs knew of the weakness in the mortgage loans collateralizing the Securitizations and had both an ability and willingness to exploit it. D. 187. Further Evidence that Goldman Knew the Appraisals Were Inflated
The appraised value of a mortgaged property is a key component in the stated
LTV ratios. Goldman knew at the time the appraisals were false and baseless, and thus did not genuinely believe at the time the disclosed statistics were accurate. This is supported by the extent of the wide disparities between reported and actual LTV information for the GSE Certificates, discovered through the use of loan-level, contemporaneous information. It is also supported by evidence of the other systemic problems at issue here, testimony and investigations into the originators at issue here, and other testimony that has been provided by industry insiders. 188. For instance, Richard Bitner, a former executive of a subprime lender for fifteen
years, testified in April 2010 before the FCIC that the appraisal process [was] highly susceptible to manipulation, and that the rise in property values was in part due to the subprime industrys acceptance of overvalued appraisals. Similarly, New Centurys Patricia Lindsay, a former wholesale lender, stated in her testimony to the FCIC that appraisers fear[ed] for their 84
livelihoods, and therefore cherry-picked data that would help support the needed value rather than finding the best comparables to come up with the most accurate value. See Written Testimony of Patricia Lindsay to the FCIC, at 5 (Apr. 7, 2010). Likewise, Jim Amorin, President of the Appraisal Institute, confirmed in his testimony that [i]n many cases, appraisers are ordered or severely pressured to doctor their reports and to convey a particular, higher value for a property, or else never see work from those parties again . [T]oo often state licensed and certified appraisers are forced into making a Hobsons Choice. See Testimony of Jim Amorin to the FCIC, available at www.appraisalinstitute.org/newsadvocacy/downloads/ltrs_tstmny/ 2009/AI-ASA-ASFMRA-NAIFATestimonyonMortgageReform042309final.pdf. 189. The FCICs January 2011 report recounts the similar testimony of Dennis J.
Black, an appraiser with 24 years of experience who held continuing education services across the country. He heard complaints from appraisers that they had been pressured to ignore missing kitchens, damaged walls, and inoperable mechanical systems. Black told the FCIC, The story I have heard most often is the client saying he could not use the appraisal because the value was [not] what they needed. The client would hire somebody else. 190. Such testimony provides further evidence that Goldmanas an industry insider
with a unique window into the quality of the underlying mortgage loans by virtue of its role as sponsor and depositor in many of the Securitizationsknew at the time it made representations to the GSEs regarding the strength of the Certificates and the underlying mortgage loans, that such representations were false when made. VI. 191. The GSEs Justifiably Relied on Goldman Sachss Representations Fannie Mae and Freddie Mac purchased the GSE Certificates based upon the
representations by Goldman Sachs as the sponsor, depositor, and lead and selling underwriter in all 36 of the Goldman-sponsored Securitizations. Goldman Sachs provided term sheets to the 85
GSEs that contained critical data as to the Securitizations, including with respect to anticipated credit ratings by the credit rating agencies, loan-to-value ratios for the underlying collateral, and owner-occupancy statistics. This data was subsequently incorporated into Prospectus Supplements that were received by the GSEs upon the close of each Securitization. 192. The GSEs relied upon the accuracy of the data transmitted to them and
subsequently reflected in the Prospectus Supplements. In particular, the GSEs relied upon the credit ratings that the credit rating agencies indicated they would bestow on the Certificates based on the information provided by Goldman Sachs Mortgage Company and Goldman, Sachs & Co. relating to the collateral quality of the underlying loans and the structure of the Securitization. These credit ratings represented a determination by the credit rating agencies that the GSE Certificates were AAA quality (or its equivalent)meaning the Certificates had an extremely strong capacity to meet the payment obligations described in the respective PSAs and Prospectus Supplements. 193. Goldman Sachs, as sponsor, depositor, and lead and selling underwriter in all 36
of the Goldman-sponsored Securitizations, provided detailed information about the underlying collateral and structure of each Securitization it sponsored to the credit rating agencies. The credit rating agencies based their ratings on the information provided to them by Goldman Sachs, and the agencies anticipated ratings of the Certificates were dependent on the accuracy of that information. The GSEs relied on the accuracy of the anticipated credit ratings and the actual credit ratings assigned to the Certificates by the credit rating agencies, and upon the accuracy of Goldmans representations in the term sheets and Prospectus Supplements. 194. The GSEs relied on the fact that the originators of the mortgage loans in the
Securitizations had acted in conformity with their underwriting guidelines, which were described
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in the Prospectus Supplements. Compliance with underwriting guidelines was a precondition to the GSEs purchase of the GSE Certificates in that the GSEs decision to purchase the Certificates was directly premised on their reasonable belief that the originators complied with applicable underwriting guidelines and standards. 195. In purchasing the GSE Certificates, the GSEs justifiably relied on Goldmans
false representations and omissions of material fact detailed above, including the misstatements and omissions in the term sheets about the underlying collateral, which were reflected in the Prospectus Supplements. 196. But for the above misrepresentations and omissions, the GSEs would not have
purchased or acquired the Certificates as they ultimately did, because those representations and omissions were material to their decision to acquire the GSE Certificates, as described above. VII. 197. Fannie Maes and Freddie Macs Purchases of the GSE Certificates and the Resulting Damages In total, between September 7, 2005 and October 29, 2007, Fannie Mae and
Freddie Mac purchased from Goldman Sachs over $11.1 billion in residential mortgage-backed securities issued in connection with the Securitizations. Table 10 reflects Freddie Macs purchases of the Certificates.21
Table 10
Transaction ACCR 2005-4 AHMA 2006-1 FFML 2005-FF11 FFML 2005-FF8 FHLT 2006-E GSAA 2005-14 GSAA 2005-14 GSAA 2006-8 21 CUSIP 004375EE7 02660WAA4 362341YA1 362341QL6 35729NAA3 362341ZS1 362341B32 362348AA2 Settlement Date of Purchase by Freddie Mac November 23, 2005 May 25, 2006 November 22, 2005 September 29, 2005 December 6, 2006 November 22, 2005 November 22, 2005 April 28, 2006 Initial Unpaid Principal Balance $354,752,000 $165,000,000 $240,920,000 $304,713,000 $468,289,000 $168,059,000 $18,674,000 $199,053,000 Purchase Price (% of Par) 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 Seller to Freddie Mac Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co.
Purchased securities in Tables 10 and 11 are stated in terms of unpaid principal balance of the relevant Certificates. Purchase prices are stated in terms of percentage of par.
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Transaction GSAA 2007-6 GSAMP 2005-HE5 GSAMP 2005-HE6 GSAMP 2006-FM2 GSAMP 2006-FM3 GSAMP 2006-HE3 GSAMP 2006-HE4 GSAMP 2006-HE5 GSAMP 2007-FM1 GSAMP 2007-FM2 GSAMP 2007-HE1 GSAMP 2007-HE2 GSR 2006-OA1 GSR 2007-OA1 GSR 2007-OA2 INDX 2005-AR18
CUSIP 36245RAD1 362341YW3 362341F87 36245DAA8 36245TAA3 36244KAA3 362439AA9 362437AA3 3622MAAA9 3622MHAA4 3622MDAA3 362440AA7 362631AA1 3622NAAA8 3622NCAA4 45660LVZ9
Settlement Date of Purchase by Freddie Mac May 30, 2007 November 22, 2005 December 29, 2005 September 29, 2006 December 21, 2006 May 26, 2006 June 29, 2006 August 25, 2006 January 30, 2007 February 21, 2007 February 23, 2007 April 20, 2007 August 25, 2006 May 8, 2007 October 29, 2007 September 7, 2005
Initial Unpaid Principal Balance $78,936,000 $405,564,000 $341,242,000 $351,611,000 $257,050,000 $304,472,000 $352,415,000 $241,582,000 $315,873,000 $351,823,000 $205,454,000 $370,801,000 $744,970,000 $374,616,000 $186,326,000 $314,827,000
Purchase Price (% of Par) 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 101.0625 100.0000
Seller to Freddie Mac Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co.
198.
Table 11 reflects Fannie Maes purchases of the Certificates:
Table 11
Settlement Date of Purchase by Fannie Mae May 25, 2006 September 28, 2006 September 29, 2005 December 29, 2005 June 30, 2006 February 6, 2006 March 2, 2006 March 30, 2006 December 28, 2005 November 23, 2005 December 28, 2005 April 27, 2006 November 22, 2006 December 27, 2006 June 29, 2006 February 20, 2007 May 24, 2007 October 28, 2005 Initial Unpaid Principal Balance $101,477,000 $244,303,000 $103,804,000 $241,820,000 $242,367,000 $148,331,000 $223,080,000 $186,376,000 $108,759,000 $266,290,000 $238,899,000 $241,822,000 $333,098,000 $353,741,000 $239,618,000 $479,787,000 $89,703,000 $136,304,000 Purchase Price (% of Par) 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.4648 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0586 100.5352
Transaction AHMA 2006-1 FFML 2006-FF13 GSAA 2005-11 GSAA 2005-15 GSAA 2006-11 GSAA 2006-2 GSAA 2006-4 GSAA 2006-5 GSAMP 2005AHL2 GSAMP 2005WMC2 GSAMP 2005WMC3 GSAMP 2006-FM1 GSAMP 2006-HE7 GSAMP 2006-HE8 GSAMP 2006-NC2 GSAMP 2007-NC1 GSR 2007-AR2 INDX 2005-AR27
CUSIP 02660WAB2 30247DAA9 362341NV7 362341D48 362367AA2 3623415N5 362334FD1 362334GQ1 362341B81 362341UV9 362341K99 362334PF5 36245EAA6 3622M8AA4 362463AA9 3622MGAA6 3622N6AL3 45660LN96
Seller to Fannie Mae Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co.
199.
The statements and assurances in the Registration Statements regarding the credit
quality and characteristics of the mortgage loans underlying the GSE Certificates, and the underwriting practices pursuant to which the mortgage loans were originated, which were summarized in such documents, were material to a reasonable investors decision to purchase the Certificates.
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200.
The false statements of material facts and omissions of material facts in the
Registration Statements, including the Prospectuses and Prospectus Supplements, directly caused Fannie Mae and Freddie Mac to suffer hundreds of millions of dollars in damages, including without limitation depreciation in the value of the Certificates. The mortgage loans underlying the GSE Certificates experienced defaults and delinquencies at a much higher rate than they would have had the loan originators adhered to the underwriting guidelines set forth in the Registration Statements, and the payments to the trusts were therefore much lower than they would have been had the loans been underwritten as described in the Registration Statements. 201. Fannie Maes and Freddie Macs losses have been much greater than they would
have been if the mortgage loans had the credit quality stated in the Registration Statements. 202. Goldman Sachs misstatements and omissions in the Registration Statements
regarding the true characteristics of the loans were the proximate cause of Fannie Maes and Freddie Macs losses relating to their purchases of the GSE Certificates. Based upon sales of the Certificates or similar certificates in the secondary market, Goldman proximately caused hundreds of millions of dollars in damages to Fannie Mae and Freddie Mac in an amount to be determined at trial.22 FIRST CAUSE OF ACTION Violation of Section 11 of the Securities Act of 1933 (Against Defendants GS Mortgage Securities Corp., Goldman, Sachs & Co., Kevin Gasvoda, Michelle Gill, David J. Rosenblum, Jonathan S. Sobel, Daniel L. Sparks, and Mark Weiss) 203. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes from this cause of action any allegation that could be Plaintiff does not bring claims in this Complaint against GS Mortgage Securities Corp. arising from GSAMP 2006-FM1, GSAMP 2006-FM2, GSAMP 2006-FM3, GSAMP 2007-FM1, and GSAMP 2007-FM2.
22
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construed as alleging fraudulent or intentional or reckless conduct. This cause of action specifically excludes the allegations as to Defendants scienter, including those set forth in Section V. 204. This claim is brought by Plaintiff pursuant to Section 11 of the Securities Act and
is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements. This claim is brought against Defendant Goldman, Sachs & Co. with respect to each of the Registration Statements. This claim is also brought against (i) Defendant GS Mortgage Securities Corp. and (ii) Defendants Kevin Gasvoda, Michelle Gill, David J. Rosenblum, Jonathan S. Sobel Daniel L. Sparks, and Mark Weiss (the foregoing Individual Defendants collectively referred to as the Section 11 Individual Defendants), each with respect to the Registration Statements filed by GS Mortgage Securities Corp. that registered securities that were bona fide offered to the public on or after September 6, 2005. 205. Defendant Goldman, Sachs & Co. is strictly liable for making false and materially
misleading statements in each of the Registration Statements, and for omitting facts necessary to make the facts stated therein not misleading. Defendant GS Mortgage Securities Corp. and the Section 11 Individual Defendants are strictly liable for making false and materially misleading statements in the GS Mortgage Shelf Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005, which are applicable to 31 of the 40 Securitizations (as specified in Tables 1 and 2 above), including the related Prospectus Supplements, and for omitting facts necessary to make the facts stated therein not misleading.
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206.
Goldman, Sachs & Co. served as the lead underwriter in each Securitization. As
an underwriter in each Securitization, Goldman, Sachs & Co. is strictly liable under Section 11 of the Securities Act for the misstatements and omissions in each Registration Statement. 207. GS Mortgage Securities Corp. filed four Registration Statements under which 35
of the 40 Securitizations were carried out. As depositor, GS Mortgage Securities Corp. is an issuer of the GSE Certificates issued pursuant to the Registration Statements it filed within the meaning of Section 2(a)(4) of the Securities Act, 15 U.S.C. 77b(a)(4), and in accordance with Section 11(a), 15 U.S.C. 77k(a). As such, it is liable under Section 11 of the Securities Act for the misstatements and omissions in the GS Mortgage Shelf Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005. 208. At the time GS Mortgage Securities Corp. filed four Registration Statements
applicable to 35 of the Securitizations, the Section 11 Individual Defendants were officers and/or directors of GS Mortgage Securities Corp. In addition, the Section 11 Individual Defendants signed those Registration Statements and either signed or authorized another to sign on their behalf the amendments to those Registration Statements. As such, the Section 11 Individual Defendants are liable under Section 11 of the Securities Act for the misstatements and omissions in those Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005. 209. At the time that they became effective, each Registration Statement contained
material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading, as set forth above. The facts misstated or omitted were material to a reasonable investor reviewing the Registration Statement, including to Fannie Mae and Freddie Mac.
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210.
The untrue statements of material facts and omissions of material facts in the
Registration Statements are set forth above in Section IV and pertain to, among other things, compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 211. Fannie Mae and Freddie Mac purchased or otherwise acquired the GSE
Certificates in the primary market pursuant to the materially false, misleading, and incomplete Registration Statements. At the time they purchased the GSE Certificates, Fannie Mae and Freddie Mac did not know, and in the exercise of reasonable diligence could not have known, of the facts concerning the false and misleading statements and omissions alleged herein, and if the GSEs had known those facts, they would not have purchased the GSE Certificates. 212. Goldman, Sachs & Co. owed to Fannie Mae, Freddie Mac, and other investors a
duty to make a reasonable and diligent investigation of the statements contained in the applicable Registration Statements at the time they became effective to ensure that such statements were true and correct and that there were no omissions of material facts required to be stated in order to make the statements contained therein not misleading. The Section 11 Individual Defendants owed the same duty with respect to the GS Mortgage Shelf Registration Statements that they signed that registered securities that were bona fide offered to the public on or after September 6, 2005, which are applicable to 31 of the Securitizations. 213. Goldman, Sachs & Co. and the Section 11 Individual Defendants did not exercise
such due diligence and failed to conduct a reasonable investigation. In the exercise of reasonable care, these Defendants should have known of the false statements and omissions contained in or omitted from such Registration Statements, as set forth herein. In addition, GS Mortgage
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Securities Corp., though subject to strict liability without regard to whether it performed diligence, also failed to take reasonable steps to ensure the accuracy of the representations. 214. Fannie Mae and Freddie Mac sustained substantial damages as a result of the
misstatements and omissions in the Registration Statements, for which they are entitled to compensation. 215. The time period from June 5, 2009 through August 30, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and The Goldman Sachs Group, Inc. (on its own behalf and on behalf of its affiliated entities). The time period from July 15, 2011 through August 30, 2011 has been tolled for statute of limitations purposes by virtue of a tolling agreement entered into among the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, and The Goldman Sachs Group, Inc. (on its own behalf and on behalf of its affiliated entities). This action is brought within three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). 216. By reason of the conduct herein alleged, Goldman, Sachs & Co., GS Mortgage
Securities Corp., and the Section 11 Individual Defendants are jointly and severally liable for their wrongdoing. SECOND CAUSE OF ACTION Violation of Section 12(a)(2) of the Securities Act of 1933 (Against GS Mortgage Securities Corp. and Goldman, Sachs & Co.) 217. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes from this cause of action any allegation that could be construed as alleging fraudulent or intentional or reckless conduct. This cause of action
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specifically excludes the allegations as to Defendants scienter, including those set forth in Section V. 218. This claim is brought by Plaintiff pursuant to Section 12(a)(2) of the Securities
Act of 1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements. 219. Defendant Goldman, Sachs & Co. negligently made false and materially
misleading statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as Prospectuses) for each Securitization. Defendant GS Mortgage Securities Corp. negligently made false and materially misleading statements in the Prospectuses for the Securitizations effected under the GS Mortgage Shelf Registration Statements, which are applicable to 35 of the Securitizations. 220. Goldman, Sachs & Co. is prominently identified in the Prospectuses, the primary
documents it used to sell the GSE Certificates. Goldman, Sachs & Co. offered the Certificates publicly, including selling to Fannie Mae and Freddie Mac the GSE Certificates, as set forth in the Method of Distribution or equivalent underwriting section of each Prospectus. 221. Goldman, Sachs & Co. offered and sold the GSE Certificates to Fannie Mae and
Freddie Mac by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. Goldman, Sachs & Co. reviewed and participated in drafting the Prospectuses. 222. Goldman, Sachs & Co. successfully solicited Fannie Maes and Freddie Macs
purchases of the GSE Certificates. As underwriter, Goldman, Sachs & Co. was paid a
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substantial commission based on the amount it received from the sale of the Certificates to the public. 223. Goldman, Sachs & Co. offered the GSE Certificates for sale, sold them, and
distributed them by the use of means or instruments of transportation and communication in interstate commerce, including communications between its representatives in New York and representatives of Fannie Mae in the District of Columbia and Freddie Mac in McLean, Virginia. 224. GS Mortgage Securities Corp. is prominently identified in the Prospectuses for
the Securitizations carried out under the GS Mortgage Shelf Registration Statements. These Prospectuses were the primary documents used to sell Certificates for the 35 Securitizations under the GS Mortgage Shelf Registration Statements. GS Mortgage Securities Corp. offered the Certificates publicly and actively solicited their sale, including to Fannie Mae and Freddie Mac. GS Mortgage Securities Corp. was paid a percentage of the total dollar amount of the offering upon completion of the Securitizations effected pursuant to the GS Mortgage Shelf Registration Statements. 225. With respect to the 35 Securitizations for which it filed the GS Mortgage Shelf
Registration Statements, including the related Prospectus Supplements, GS Mortgage Securities Corp. offered the GSE Certificates to Fannie Mae and Freddie Mac by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. GS Mortgage Securities Corp. reviewed and participated in drafting the Prospectuses. 226. GS Mortgage Securities Corp. offered the GSE Certificates for sale by the use of
means or instruments of transportation and communication in interstate commerce.
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227.
Each of Goldman, Sachs & Co. and GS Mortgage Securities Corp. actively
participated in the solicitation of the GSEs purchase of the GSE Certificates, and did so in order to benefit itself. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates. 228. Each of the Prospectuses contained material misstatements of fact and omitted
facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectuses, and specifically to Fannie Mae and Freddie Mac. 229. The untrue statements of material facts and omissions of material facts in the
Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 230. Goldman, Sachs & Co. and GS Mortgage Securities Corp. offered and sold the
GSE Certificates directly to Fannie Mae and Freddie Mac pursuant to the materially false, misleading, and incomplete Prospectuses. 231. Goldman, Sachs & Co. owed to Fannie Mae and Freddie Mac, as well as to other
investors in these trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. GS Mortgage Securities Corp. owed the same duty with respect to the Prospectuses for the Securitizations effected under the four GS Mortgage Shelf Registration Statements.
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232.
Goldman, Sachs & Co. and GS Mortgage Securities Corp. failed to exercise such
reasonable care. These defendants in the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations, as set forth above. 233. In contrast, Fannie Mae and Freddie Mac did not know, and in the exercise of
reasonable diligence could not have known, of the untruths and omissions contained in the Prospectuses at the time they purchased the GSE Certificates. If the GSEs had known of those untruths and omissions, they would not have purchased the GSE Certificates. 234. Fannie Mae and Freddie Mac acquired the GSE Certificates in the primary market
pursuant to the Prospectuses. 235. Fannie Mae and Freddie Mac sustained substantial damages in connection with
their investments in the GSE Certificates and have the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 236. The time period from June 5, 2009 through August 30, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and The Goldman Sachs Group, Inc. (on its own behalf and on behalf of its affiliated entities). The time period from July 15, 2011 through August 30, 2011 has been tolled for statute of limitations purposes by virtue of a tolling agreement entered into among the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, and The Goldman Sachs Group, Inc. (on its own behalf and on behalf of its affiliated entities). This action is brought within three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12).
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THIRD CAUSE OF ACTION Violation of Section 15 of the Securities Act of 1933 (Against Goldman Sachs Mortgage Company, The Goldman Sachs Group, Inc., Goldman Sachs Real Estate Funding Corp., and the Individual Defendants) 237. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes from this cause of action any allegation that could be construed as alleging fraudulent or intentional or reckless conduct. This cause of action specifically excludes the allegations as to Defendants scienter, including those set forth in Section V. 238. This claim is brought under Section 15 of the Securities Act against Goldman
Sachs Mortgage Company, The Goldman Sachs Group, Inc., Goldman Sachs Real Estate Funding Corp., and the Individual Defendants for controlling-person liability with regard to the Section 11 and Section 12(a)(2) causes of actions set forth above. 239. The Individual Defendants at all relevant times participated in the operation and
management of GS Mortgage Securities Corp. and its related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of GS Mortgage Securities Corp.s business affairs. Defendant Peter C. Aberg was a Director of Defendant GS Mortgage Securities Corp. Defendant Howard S. Altarescu was Vice President, Chief Financial Officer, and Chief Accounting Officer of Defendant GS Mortgage Securities Corp. Defendant Robert J. Christie was a Director of Defendant GS Mortgage Securities Corp. Defendant Kevin Gasvoda was a Director of Defendant GS Mortgage Securities Corp. and Managing Director for Goldmans Fixed Income, Currency, and Commodities business line and head of Residential Whole Loan Trading at Goldman Sachs. Defendant Michelle Gill was Vice President and principal financial officer and principal accounting officer of Defendant GS Mortgage Securities Corp. Defendant David J. Rosenblum was Vice President and a Director of Defendant GS Mortgage Securities 98
Corp., and also served as head of Goldmans Collateralized Loan Obligation activities. Defendant Jonathan S. Sobel was a Director of Defendant GS Mortgage Securities Corp. and headed Goldmans mortgage department. Defendant Daniel L. Sparks was Chief Executive Officer, Vice President and a Director of Defendant GS Mortgage Securities Corp., and also served as the head of Goldmans mortgage department. Defendant Mark Weiss was Vice President and principal financial officer and principal accounting officer of Defendant GS Mortgage Securities Corp. 240. Because of their positions of authority and control as senior officers and directors
of GS Mortgage Securities Corp., the Individual Defendants were able to, and in fact did, control the contents of the GS Mortgage Shelf Registration Statements, including the related Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 241. Defendant Goldman Sachs Mortgage Company was the sponsor for 36 of the
Securitizations, and culpably participated in the violations of Sections 11 and 12(a)(2) set forth above with respect to the offering of those GSE Certificates by initiating the Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting the depositor (which was Defendant GS Mortgage Securities Corp. in 35 of those Securitizations), and selecting Goldman, Sachs & Co. as the sole or lead underwriter for the Securitizations. In its role as sponsor, Goldman Sachs Mortgage Company knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. Goldman Sachs Mortgage Company also acted as the seller of the mortgage loans for 36 of the Securitizations, in that it conveyed such mortgage loans to the
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depositor, which, in 35 of the Securitizations, was its wholly owned subsidiary Defendant GS Mortgage Securities Corp. 242. Goldman Sachs Mortgage Company controlled all aspects of the business of GS
Mortgage Securities Corp., as that entity was merely a special purpose vehicle created to act as a pass-through for the issuance of the Certificates. In addition, because of its position as sponsor for 36 of the Securitizations, Goldman Sachs Mortgage Company was able to, and did in fact, control the contents of the Registration Statements filed by GS Mortgage Securities Corp., including the Prospectuses and Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 243. Defendant The Goldman Sachs Group, Inc. controlled the business operations of
each of Defendants Goldman Sachs Mortgage Company, GS Mortgage Securities Corp., Goldman, Sachs & Co., and Goldman Sachs Real Estate Funding Corp. The Goldman Sachs Group, Inc. is the ultimate corporate parent of its wholly owned subsidiaries Defendants Goldman Sachs Mortgage Company, GS Mortgage Securities Corp., Goldman, Sachs & Co., and Goldman Sachs Real Estate Funding Corp. As such, The Goldman Sachs Group, Inc. upon information and belief held the voting power and therefore the practical ability to direct and control the actions of GS Mortgage Securities Corp. and Goldman, Sachs & Co. in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of GS Mortgage Securities Corp. and Goldman, Sachs & Co. in connection with the issuance and sale of the Certificates. 244. The Goldman Sachs Group, Inc. expanded its share of the residential mortgage-
backed securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material
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facts and omissions of material facts in the Registration Statements. The Goldman Sachs Group, Inc. culpably participated in the violations of Section 11 and 12(a)(2) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as GS Mortgage Securities Corp. and the issuing trusts to serve as conduits for the mortgage loans. In addition, there was substantial overlap between the management of the business entities of The Goldman Sachs Group, Inc. and the directors and officers of Defendant GS Mortgage Securities Corp. For example, Defendant Kevin Gasvoda was a Director of GS Mortgage Securities Corp., in addition to serving as Managing Director for Goldmans Fixed Income, Currency, and Commodities business line and Managing Director and head of Residential Whole Loan Trading at Goldman Sachs. In addition, Defendant David J. Rosenblum, who was Vice President and a Director of GS Mortgage Securities Corp., also served as head of Goldmans Collateralized Loan Obligation activities. Similarly, Defendant Jonathan S. Sobel was a Director of Defendant GS Mortgage Securities Corp., and also headed Goldmans mortgage department. Likewise, Defendant Daniel L. Sparks was Chief Executive Officer, Vice President and a Director of GS Mortgage Securities, while also heading Goldmans mortgage department. Such overlapping control made The Goldman Sachs Group, Inc. a controlling person of Defendant GS Mortgage Securities Corp. for purposes of Section 15. 245. Defendant Goldman Sachs Real Estate Funding Corp. is a wholly owned
subsidiary of Goldman Sachs Bank USA and is the general partner of Goldman Sachs Mortgage Company, the sponsor of the Securitizations. The parent company of Goldman Sachs Real Estate Funding Corp.Goldman Sachs Bank USAis itself a subsidiary of The Goldman Sachs Group, Inc. Goldman Sachs Real Estate Funding Corp. provided a further vehicle for the
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ultimate controlling entityThe Goldman Sachs Group, Inc.to further direct the activities of the sponsor of the Securitizations, Goldman Sachs Mortgage Company. Defendant Goldman Sachs Real Estate Funding Corp., as the general partner of Goldman Sachs Mortgage Company, controlled Goldman Sachs Mortgage Company and was able to, and did in fact, control the contents of the Registration Statements, including the Prospectuses and Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 246. Goldman Sachs Mortgage Company, The Goldman Sachs Group, Inc., Goldman
Sachs Real Estate Funding Corp., and the Individual Defendants are controlling persons within the meaning of Section 15 of the Securities Act by virtue of their actual power over, control of, ownership of, and/or directorship of GS Mortgage Securities Corp. and Goldman, Sachs & Co. at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 247. Fannie Mae and Freddie Mac purchased in the primary market the GSE
Certificates, which were issued pursuant to the Registration Statements, including the Prospectuses and Prospectus Supplements, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements, and specifically to Fannie Mae and Freddie Mac. 248. Fannie Mae and Freddie Mac did not know, and in the exercise of reasonable
diligence could not have known, of the misstatements and omissions in the Registration Statements; had the GSEs known of those misstatements and omissions, they would not have purchased the GSE Certificates.
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249.
Fannie Mae and Freddie Mac have sustained substantial damages as a result of the
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and The Goldman Sachs Group, Inc. (on its own behalf and on behalf of its affiliated entities). The time period from July 15, 2011 through August 30, 2011 has been tolled for statute of limitations purposes by virtue of a tolling agreement entered into among the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, and The Goldman Sachs Group, Inc. (on its own behalf and on behalf of its affiliated entities). This action is brought within three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). FOURTH CAUSE OF ACTION Primary Violations of Section 13.1-522(A)(ii) of the Virginia Code (Against Goldman, Sachs & Co. and GS Mortgage Securities Corp.) 251. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes from this cause of action any allegation that could be construed as alleging fraudulent or intentional or reckless conduct. This cause of action specifically excludes the allegations as to Defendants scienter, including those set forth in Section V. 252. This claim is brought by Plaintiff pursuant to Section 13.1-522(A)(ii) of the
Virginia Code and is asserted on behalf of Freddie Mac. The allegations set forth in this cause of action pertain only to those GSE Certificates identified in Table 10 above that were purchased by Freddie Mac on or after September 6, 2006. 103
253.
Defendant Goldman, Sachs & Co. negligently made false and materially
misleading statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as Prospectuses) for each Securitization. Defendant GS Mortgage Securities Corp. negligently made false and materially misleading statements in the Prospectuses for the Securitizations effected under the GS Mortgage Shelf Registration Statements. 254. Goldman, Sachs & Co. is prominently identified in the Prospectuses, the primary
documents it used to sell the GSE Certificates. Goldman, Sachs & Co. offered the Certificates publicly, including selling to Freddie Mac the GSE Certificates, as set forth in the Method of Distribution or equivalent underwriting section of each Prospectus. 255. Goldman, Sachs & Co. offered and sold the GSE Certificates to Freddie Mac by
means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. Goldman, Sachs & Co. reviewed and participated in drafting the Prospectuses. 256. Goldman, Sachs & Co. successfully solicited Freddie Macs purchases of the GSE
Certificates. As underwriter, Goldman, Sachs & Co. was paid a substantial commission based on the amount it received from the sale of the Certificates to the public. 257. Goldman, Sachs & Co. offered the GSE Certificates for sale, sold them, and
distributed them to Freddie Mac in the State of Virginia. 258. GS Mortgage Securities Corp. is prominently identified in the Prospectuses for
the Securitizations carried out under the GS Mortgage Shelf Registration Statements. These Prospectuses were the primary documents used to sell Certificates for the Securitizations under
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the GS Mortgage Shelf Registration Statements. GS Mortgage Securities Corp. offered the Certificates publicly and actively solicited their sale, including to Freddie Mac. GS Mortgage Securities Corp. was paid a percentage of the total dollar amount of the offering upon completion of the Securitizations effected pursuant to the GS Mortgage Shelf Registration Statements. 259. With respect to the Securitizations for which it filed the GS Mortgage Shelf
Registration Statements, including the related Prospectus Supplements, GS Mortgage Securities Corp. offered the GSE Certificates to Freddie Mac by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. GS Mortgage Securities Corp. reviewed and participated in drafting the Prospectuses. 260. Each of Goldman, Sachs & Co. and GS Mortgage Securities Corp. actively
participated in the solicitation of Freddie Macs purchase of the GSE Certificates, and did so in order to benefit itself. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates. 261. Each of the Prospectuses contained material misstatements of fact and omitted
facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectuses, and specifically to Freddie Mac. 262. The untrue statements of material facts and omissions of material facts in the
Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings.
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263.
Goldman, Sachs & Co. and GS Mortgage Securities Corp. offered and sold the
GSE Certificates directly to Freddie Mac pursuant to the materially false, misleading, and incomplete Prospectuses. 264. Goldman, Sachs & Co. owed to Freddie Mac, as well as to other investors in these
trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. GS Mortgage Securities Corp. owed the same duty with respect to the Prospectuses for the Securitizations effected under the four GS Mortgage Shelf Registration Statements. 265. Goldman, Sachs & Co. and GS Mortgage Securities Corp. failed to exercise such
reasonable care. These Defendants in the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations, as set forth above. 266. In contrast, Freddie Mac did not know, and in the exercise of reasonable diligence
could not have known, of the untruths and omissions contained in the Prospectuses at the time it purchased the GSE Certificates. If Freddie Mac had known of those untruths and omissions, it would not have purchased the GSE Certificates. 267. Freddie Mac sustained substantial damages in connection with its investments in
the GSE Certificates and has the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 268. The time period from July 15, 2011 through August 30, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into among the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, and The Goldman Sachs Group, Inc. (on its
106
own behalf and on behalf of its affiliated entities). This action is brought within three years of the date that FHFA was appointed as Conservator of Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). FIFTH CAUSE OF ACTION Controlling Person Liability Under Section 13.1-522(C) of the Virginia Code (Against Goldman Sachs Mortgage Company, The Goldman Sachs Group, Inc., Goldman Sachs Real Estate Funding Corp., and the Individual Defendants) 269. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes from this cause of action any allegation that could be construed as alleging fraudulent or intentional or reckless conduct. This cause of action specifically excludes the allegations as to Defendants scienter, including those set forth in Section V. 270. This claim is brought under Section 13.1-522(C) of the Virginia Code and is
asserted on behalf of Freddie Mac. The allegations set forth in this cause of action pertain only to those GSE Certificates identified in Table 10 above that were purchased by Freddie Mac on or after September 6, 2006. This claim is brought against Goldman Sachs Mortgage Company, The Goldman Sachs Group, Inc., Goldman Sachs Real Estate Funding Corp., and the Individual Defendants for controlling-person liability with regard to the Fourth Cause of Action set forth above. 271. The Individual Defendants at all relevant times participated in the operation and
management of GS Mortgage Securities Corp. and its related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of GS Mortgage Securities Corp.s business affairs. Defendant Peter C. Aberg was a Director of Defendant GS Mortgage Securities Corp. Defendant Howard S. Altarescu was Vice President, Chief Financial Officer, and Chief Accounting Officer of Defendant GS Mortgage Securities Corp. Defendant Robert J. Christie 107
was a Director of Defendant GS Mortgage Securities Corp. Defendant Kevin Gasvoda was a Director of Defendant GS Mortgage Securities Corp. and Managing Director for Goldmans Fixed Income, Currency, and Commodities business line and head of Residential Whole Loan Trading at Goldman Sachs. Defendant Michelle Gill was Vice President and principal financial officer and principal accounting officer of Defendant GS Mortgage Securities Corp. Defendant David J. Rosenblum was Vice President and a Director of Defendant GS Mortgage Securities Corp., and also served as head of Goldmans Collateralized Loan Obligation activities. Defendant Jonathan S. Sobel was a Director of Defendant GS Mortgage Securities Corp. and headed Goldmans mortgage department. Defendant Daniel L. Sparks was Chief Executive Officer, Vice President and a Director of Defendant GS Mortgage Securities Corp., and also served as the head of Goldmans mortgage department. Defendant Mark Weiss was Vice President and principal financial officer and principal accounting officer of Defendant GS Mortgage Securities Corp. 272. Because of their positions of authority and control as senior officers and directors
of GS Mortgage Securities Corp., the Individual Defendants were able to, and in fact did, control the contents of the GS Mortgage Shelf Registration Statements, including the related Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 273. Defendant Goldman Sachs Mortgage Company culpably participated in the
violation of Section 13.1-522(A)(ii) set forth above with respect to the offering of GSE Certificates in transactions it sponsored by initiating the Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting the depositor (GS Mortgage Securities Corp.), and selecting Goldman, Sachs & Co. as the lead underwriter. In
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its role as sponsor, Goldman Sachs Mortgage Company knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. Goldman Sachs Mortgage Company also acted as the seller of the mortgage loans for the Securitizations it sponsored, in that it conveyed such mortgage loans to the depositor, which was generally its wholly owned subsidiary Defendant GS Mortgage Securities Corp. 274. Goldman Sachs Mortgage Company controlled all aspects of the business of GS
Mortgage Securities Corp., as that entity was merely a special purpose vehicle created to act as a pass-through for the issuance of the Certificates. In addition, because of its position as sponsor, Goldman Sachs Mortgage Company was able to, and did in fact, control the contents of the Registration Statements filed by GS Mortgage Securities Corp., including the Prospectuses and Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 275. Defendant The Goldman Sachs Group, Inc. controlled the business operations of
each of Defendants Goldman Sachs Mortgage Company, GS Mortgage Securities Corp., Goldman, Sachs & Co., and Goldman Sachs Real Estate Funding Corp. The Goldman Sachs Group, Inc. is the ultimate corporate parent of its wholly owned subsidiaries Defendants Goldman Sachs Mortgage Company, GS Mortgage Securities Corp., Goldman, Sachs & Co., and Goldman Sachs Real Estate Funding Corp. As such, The Goldman Sachs Group, Inc. upon information and belief held the voting power and therefore the practical ability to direct and control the actions of GS Mortgage Securities Corp. and Goldman, Sachs & Co. in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of GS
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Mortgage Securities Corp. and Goldman, Sachs & Co. in connection with the issuance and sale of the Certificates. 276. The Goldman Sachs Group, Inc. expanded its share of the residential mortgage-
backed securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. The Goldman Sachs Group, Inc. culpably participated in the violation of Section 13.1-522(A)(ii) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as GS Mortgage Securities Corp. and the issuing trusts to serve as conduits for the mortgage loans. 277. In addition, there was substantial overlap between the management of the
business entities of The Goldman Sachs Group, Inc. and the directors and officers of Defendant GS Mortgage Securities Corp. For example, Defendant Kevin Gasvoda was a Director of GS Mortgage Securities Corp., in addition to serving as Managing Director for Goldmans Fixed Income, Currency, and Commodities business line and Managing Director and head of Residential Whole Loan Trading at Goldman Sachs. In addition, Defendant David J. Rosenblum, who was Vice President and a Director of GS Mortgage Securities Corp., also served as head of Goldmans Collateralized Loan Obligation activities. Similarly, Defendant Jonathan S. Sobel was a Director of Defendant GS Mortgage Securities Corp., and also headed Goldmans mortgage department. Likewise, Defendant Daniel L. Sparks was Chief Executive Officer, Vice President and a Director of GS Mortgage Securities, while also heading Goldmans mortgage department. Such overlapping control made The Goldman Sachs Group, Inc. a
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controlling person of Defendant GS Mortgage Securities Corp. for purposes of Section 13.1522(C). 278. Defendant Goldman Sachs Real Estate Funding Corp. is a wholly owned
subsidiary of Goldman Sachs Bank USA and is the general partner of Goldman Sachs Mortgage Company, the sponsor of the Securitizations. The parent company of Goldman Sachs Real Estate Funding Corp.Goldman Sachs Bank USAis itself a subsidiary of The Goldman Sachs Group, Inc. Goldman Sachs Real Estate Funding Corp. provided a further vehicle for the ultimate controlling entityThe Goldman Sachs Group, Inc.to further direct the activities of the sponsor of the Securitizations, Goldman Sachs Mortgage Company. Defendant Goldman Sachs Real Estate Funding Corp., as the general partner of Goldman Sachs Mortgage Company, controlled Goldman Sachs Mortgage Company and was able to, and did in fact, control the contents of the Registration Statements, including the Prospectuses and Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 279. Goldman Sachs Mortgage Company, The Goldman Sachs Group, Inc., Goldman
Sachs Real Estate Funding Corp., and the Individual Defendants are controlling persons within the meaning of Section 13.1-522(C) of the Virginia Code by virtue of their actual power over, control of, ownership of, and/or directorship of GS Mortgage Securities Corp. and Goldman, Sachs & Co. at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 280. Freddie Mac purchased the GSE Certificates, which were issued pursuant to the
Registration Statements, including the Prospectuses and Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated
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therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements, and specifically to Freddie Mac. 281. Freddie Mac did not know, and in the exercise of reasonable diligence could not
have known, of the misstatements and omissions in the Registration Statements; had Freddie Mac known of those misstatements and omissions, it would not have purchased the GSE Certificates. 282. Freddie Mac has sustained substantial damages as a result of the misstatements
and omissions in the Registration Statements, for which it is entitled to compensation, and for which Goldman Sachs Mortgage Company, The Goldman Sachs Group, Inc., Goldman Sachs Real Estate Funding Corp., and the Individual Defendants are jointly and severally liable. 283. The time period from July 15, 2011 through August 30, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into among the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, and The Goldman Sachs Group, Inc. (on its own behalf and on behalf of its affiliated entities). This action is brought within three years of the date that FHFA was appointed as Conservator of Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). SIXTH CAUSE OF ACTION Primary Violations of Section 31-5606.05(a)(1)(B) of the District of Columbia Code (Against GS Mortgage Securities Corp. and Goldman, Sachs & Co.) 284. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes from this cause of action any allegation that could be construed as alleging fraudulent or intentional or reckless conduct. This cause of action specifically excludes the allegations as to Defendants scienter, including those set forth in Section V. 112
285.
This claim is brought by Plaintiff pursuant to Section 31-5606.05(a)(1)(B) of the
District of Columbia Code and is asserted on behalf of Fannie Mae. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 11 above that were purchased by Fannie Mae. 286. Defendant Goldman, Sachs & Co. negligently made false and materially
misleading statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as Prospectuses) for each Securitization. Defendant GS Mortgage Securities Corp. negligently made false and materially misleading statements in the Prospectuses for the Securitizations effected under the GS Mortgage Shelf Registration Statements. 287. Goldman, Sachs & Co. is prominently identified in the Prospectuses, the primary
documents it used to sell the GSE Certificates. Goldman, Sachs & Co. offered the Certificates publicly, including selling to Fannie Mae the GSE Certificates, as set forth in the Method of Distribution or equivalent underwriting section of each Prospectus. 288. Goldman, Sachs & Co. offered and sold the GSE Certificates to Fannie Mae by
means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. Goldman, Sachs & Co. reviewed and participated in drafting the Prospectuses. 289. Goldman, Sachs & Co. successfully solicited Fannie Maes purchases of the GSE
Certificates. As underwriter, Goldman, Sachs & Co. was paid a substantial commission based on the amount it received from the sale of the Certificates to the public.
113
290.
Goldman, Sachs & Co. offered the GSE Certificates for sale, sold them, and
distributed them to Fannie Mae in the District of Columbia. 291. GS Mortgage Securities Corp. is prominently identified in the Prospectuses for
the Securitizations carried out under the GS Mortgage Shelf Registration Statements. These Prospectuses were the primary documents used to sell Certificates for the Securitizations under the GS Mortgage Shelf Registration Statements. GS Mortgage Securities Corp. offered the Certificates publicly and actively solicited their sale, including to Fannie Mae. GS Mortgage Securities Corp. was paid a percentage of the total dollar amount of the offering upon completion of the Securitizations effected pursuant to the GS Mortgage Shelf Registration Statements. 292. With respect to the Securitizations for which it filed the GS Mortgage Shelf
Registration Statements, including the related Prospectus Supplements, GS Mortgage Securities Corp. offered the GSE Certificates to Fannie Mae by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. GS Mortgage Securities Corp. reviewed and participated in drafting the Prospectuses. 293. Each of Goldman, Sachs & Co. and GS Mortgage Securities Corp. actively
participated in the solicitation of Fannie Maes purchase of the GSE Certificates, and did so in order to benefit itself. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates. 294. Each of the Prospectuses contained material misstatements of fact and omitted
facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectuses, and specifically to Fannie Mae.
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295.
The untrue statements of material facts and omissions of material facts in the
Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 296. Goldman, Sachs & Co. and GS Mortgage Securities Corp. offered and sold the
GSE Certificates directly to Fannie Mae pursuant to the materially false, misleading, and incomplete Prospectuses. 297. Goldman, Sachs & Co. owed to Fannie Mae, as well as to other investors in these
trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. GS Mortgage Securities Corp. owed the same duty with respect to the Prospectuses for the Securitizations effected under the four GS Mortgage Shelf Registration Statements. 298. Goldman, Sachs & Co. and GS Mortgage Securities Corp. failed to exercise such
reasonable care. These Defendants in the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations, as set forth above. 299. In contrast, Fannie Mae did not know, and in the exercise of reasonable diligence
could not have known, of the untruths and omissions contained in the Prospectuses at the time it purchased the GSE Certificates. If Fannie Mae had known of those untruths and omissions, it would not have purchased the GSE Certificates.
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300.
Fannie Mae sustained substantial damages in connection with its investments in
the GSE Certificates and has the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 301. The time period from June 5, 2009 through August 30, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and The Goldman Sachs Group, Inc. (on its own behalf and on behalf of its affiliated entities). The time period from July 15, 2011 through August 30, 2011 has been tolled for statute of limitations purposes by virtue of a tolling agreement entered into among the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, and The Goldman Sachs Group, Inc. (on its own behalf and on behalf of its affiliated entities). This action is brought within three years of the date that FHFA was appointed as Conservator of Fannie Mae, and is thus timely under 12 U.S.C. 4617(b)(12). SEVENTH CAUSE OF ACTION Controlling Person Liability Under Section 31-5606.05(c) of the District of Columbia Code (Against Goldman Sachs Mortgage Company, The Goldman Sachs Group, Inc., Goldman Sachs Real Estate Funding Corp., and the Individual Defendants) 302. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes from this cause of action any allegation that could be construed as alleging fraudulent or intentional or reckless conduct. This cause of action specifically excludes the allegations as to Defendants scienter, including those set forth in Section V. 303. This claim is brought under Section 31-5606.05(c) of the District of Columbia
Code and is asserted on behalf of Fannie Mae. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 11 above that were purchased by Fannie Mae. This claim is brought against Goldman Sachs Mortgage Company, The Goldman 116
Sachs Group, Inc., Goldman Sachs Real Estate Funding Corp., and the Individual Defendants for controlling-person liability with regard to the Sixth Cause of Action set forth above. 304. The Individual Defendants at all relevant times participated in the operation and
management of GS Mortgage Securities Corp. and its related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of GS Mortgage Securities Corp.s business affairs. Defendant Peter C. Aberg was a Director of Defendant GS Mortgage Securities Corp. Defendant Howard S. Altarescu was Vice President, Chief Financial Officer, and Chief Accounting Officer of Defendant GS Mortgage Securities Corp. Defendant Robert J. Christie was a Director of Defendant GS Mortgage Securities Corp. Defendant Kevin Gasvoda was a Director of Defendant GS Mortgage Securities Corp. and Managing Director for Goldmans Fixed Income, Currency, and Commodities business line and head of Residential Whole Loan Trading at Goldman Sachs. Defendant Michelle Gill was Vice President and principal financial officer and principal accounting officer of Defendant GS Mortgage Securities Corp. Defendant David J. Rosenblum was Vice President and a Director of Defendant GS Mortgage Securities Corp., and also served as head of Goldmans Collateralized Loan Obligation activities. Defendant Jonathan S. Sobel was a Director of Defendant GS Mortgage Securities Corp. and headed Goldmans mortgage department. Defendant Daniel L. Sparks was Chief Executive Officer, Vice President and a Director of Defendant GS Mortgage Securities Corp., and also served as the head of Goldmans mortgage department. Defendant Mark Weiss was Vice President and principal financial officer and principal accounting officer of Defendant GS Mortgage Securities Corp. 305. Because of their positions of authority and control as senior officers and directors
of GS Mortgage Securities Corp., the Individual Defendants were able to, and in fact did, control
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the contents of the GS Mortgage Shelf Registration Statements, including the related Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 306. Defendant Goldman Sachs Mortgage Company culpably participated in the
violation of Section 31-5606.05(a)(1)(B) set forth above with respect to the offering of GSE Certificates in transactions it sponsored by initiating the Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting the depositor (GS Mortgage Securities Corp.), and selecting Goldman, Sachs & Co. as the lead underwriter. In its role as sponsor, Goldman Sachs Mortgage Company knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. Goldman Sachs Mortgage Company also acted as the seller of the mortgage loans for the Securitizations it sponsored, in that it conveyed such mortgage loans to the depositor, which was generally its wholly owned subsidiary Defendant GS Mortgage Securities Corp. 307. Goldman Sachs Mortgage Company controlled all aspects of the business of GS
Mortgage Securities Corp., as that entity was merely a special purpose vehicle created to act as a pass-through for the issuance of the Certificates. In addition, because of its position as sponsor, Goldman Sachs Mortgage Company was able to, and did in fact, control the contents of the Registration Statements filed by GS Mortgage Securities Corp., including the Prospectuses and Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading.
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308.
Defendant The Goldman Sachs Group, Inc. controlled the business operations of
each of Defendants Goldman Sachs Mortgage Company, GS Mortgage Securities Corp., Goldman, Sachs & Co., and Goldman Sachs Real Estate Funding Corp. The Goldman Sachs Group, Inc. is the ultimate corporate parent of its wholly owned subsidiaries Defendants Goldman Sachs Mortgage Company, GS Mortgage Securities Corp., Goldman, Sachs & Co., and Goldman Sachs Real Estate Funding Corp. As such, The Goldman Sachs Group, Inc. upon information and belief held the voting power and therefore the practical ability to direct and control the actions of GS Mortgage Securities Corp. and Goldman, Sachs & Co. in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of GS Mortgage Securities Corp. and Goldman, Sachs & Co. in connection with the issuance and sale of the Certificates. 309. The Goldman Sachs Group, Inc. expanded its share of the residential mortgage-
backed securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. The Goldman Sachs Group, Inc. culpably participated in the violation of Section 31-5606.05(a)(1)(B) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as GS Mortgage Securities Corp. and the issuing trusts to serve as conduits for the mortgage loans. 310. In addition, there was substantial overlap between the management of the
business entities of The Goldman Sachs Group, Inc. and the directors and officers of Defendant GS Mortgage Securities Corp. For example, Defendant Kevin Gasvoda was a Director of GS
119
Mortgage Securities Corp., in addition to serving as Managing Director for Goldmans Fixed Income, Currency, and Commodities business line and Managing Director and head of Residential Whole Loan Trading at Goldman Sachs. In addition, Defendant David J. Rosenblum, who was Vice President and a Director of GS Mortgage Securities Corp., also served as head of Goldmans Collateralized Loan Obligation activities. Similarly, Defendant Jonathan S. Sobel was a Director of Defendant GS Mortgage Securities Corp., and also headed Goldmans mortgage department. Likewise, Defendant Daniel L. Sparks was Chief Executive Officer, Vice President and a Director of GS Mortgage Securities, while also heading Goldmans mortgage department. Such overlapping control made The Goldman Sachs Group, Inc. a controlling person of Defendant GS Mortgage Securities Corp. for purposes of Section 315606.05(c). 311. Defendant Goldman Sachs Real Estate Funding Corp. is a wholly owned
subsidiary of Goldman Sachs Bank USA and is the general partner of Goldman Sachs Mortgage Company, the sponsor of the Securitizations. The parent company of Goldman Sachs Real Estate Funding Corp.Goldman Sachs Bank USAis itself a subsidiary of The Goldman Sachs Group, Inc. Goldman Sachs Real Estate Funding Corp. provided a further vehicle for the ultimate controlling entityThe Goldman Sachs Group, Inc.to further direct the activities of the sponsor of the Securitizations, Goldman Sachs Mortgage Company. Defendant Goldman Sachs Real Estate Funding Corp., as the general partner of Goldman Sachs Mortgage Company, controlled Goldman Sachs Mortgage Company and was able to, and did in fact, control the contents of the Registration Statements, including the Prospectuses and Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading.
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312.
Goldman Sachs Mortgage Company, The Goldman Sachs Group, Inc., Goldman
Sachs Real Estate Funding Corp., and the Individual Defendants are controlling persons within the meaning of Section 31-5606.05(c) of the District of Columbia Code by virtue of their actual power over, control of, ownership of, and/or directorship of GS Mortgage Securities Corp. and Goldman, Sachs & Co. at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 313. Fannie Mae purchased the GSE Certificates, which were issued pursuant to the
Registration Statements, including the Prospectuses and Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements, and specifically to Fannie Mae. 314. Fannie Mae did not know, and in the exercise of reasonable diligence could not
have known, of the misstatements and omissions in the Registration Statements; had Fannie Mae known of those misstatements and omissions, it would not have purchased the GSE Certificates. 315. Fannie Mae has sustained substantial damages as a result of the misstatements and
omissions in the Registration Statements, for which it is entitled to compensation, and for which Goldman Sachs Mortgage Company, The Goldman Sachs Group, Inc., Goldman Sachs Real Estate Funding Corp., and the Individual Defendants are jointly and severally liable. 316. The time period from June 5, 2009 through August 30, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and The Goldman Sachs Group, Inc. (on its own behalf and on behalf of its affiliated entities). The time period from July 15, 2011 through August 30, 2011 has been tolled for statute of limitations purposes by virtue of a tolling agreement entered into among the Federal Housing
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Finance Agency, Fannie Mae, Freddie Mac, and The Goldman Sachs Group, Inc. (on its own behalf and on behalf of its affiliated entities). This action is brought within three years of the date that FHFA was appointed as Conservator of Fannie Mae, and is thus timely under 12 U.S.C. 4617(b)(12). EIGHTH CAUSE OF ACTION Common Law Negligent Misrepresentation (Against GS Mortgage Securities Corp. and Goldman, Sachs & Co.) 317. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes from this cause of action any allegation that could be construed as alleging fraudulent or intentional or reckless conduct. This cause of action specifically excludes the allegations as to Defendants scienter, including those set forth in Section V. 318. This is a claim for common law negligent misrepresentation against Defendants
GS Mortgage Securities Corp. and Goldman, Sachs & Co. 319. Between September 7, 2005 and October 29, 2007, GS Mortgage Securities Corp.
and Goldman, Sachs & Co. sold the GSE Certificates to the GSEs as described above. Because GS Mortgage Securities Corp. owned and then conveyed the underlying mortgage loans that collateralized the Securitizations for which it served as depositor, GS Mortgage Securities Corp. had unique, exclusive, and special knowledge about the mortgage loans in the Securitizations through its possession of the loan files and other documentation. 320. Likewise, because Goldman, Sachs & Co. acted as underwriter for the
Securitizations it underwrote, under the Securities Act it was obligatedand had the opportunityto perform sufficient due diligence to ensure that the Registration Statements, including without limitation the relevant Prospectus Supplements, for which it served as
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underwriter did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. As a result of this privileged position as underwriterwhich gave it access to loan file information and obligated it to perform adequate due diligence to ensure the accuracy of the Registration StatementsGoldman, Sachs & Co. had unique, exclusive, and special knowledge about the underlying mortgage loans in the Securitizations. 321. Goldman, Sachs & Co. also had unique, exclusive, and special knowledge of the
work of third-party due diligence providers, such as Clayton, who identified significant failures of originators to adhere to the underwriting standards represented in the Registration Statements. The GSEs, like other investors, had no access to borrower loan files prior to the closing of the Securitizations and their purchase of the Certificates. Accordingly, when determining whether to purchase the GSE Certificates, the GSEs could not evaluate the underwriting quality or the servicing practices of the mortgage loans in the Securitizations on a loan-by-loan basis. The GSEs therefore reasonably relied on Goldman, Sachs & Co.s knowledge and its express representations made prior to the closing of the Securitizations regarding the underlying mortgage loans. 322. GS Mortgage Securities Corp. and Goldman, Sachs & Co. were aware that the
GSEs reasonably relied on GS Mortgage Securities Corp.s and Goldman, Sachs & Co.s reputations and unique, exclusive, and special expertise and experience, as well as their express representations made prior to the closing of the Securitizations, and depended upon these Defendants for complete, accurate, and timely information. The standards under which the underlying mortgage loans were actually originated were known to these Defendants and were not known, and could not be determined, by the GSEs prior to the closing of the Securitizations.
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In purchasing the GSE Certificates from GS Mortgage Securities Corp. and Goldman, Sachs & Co., the GSEs relied on their special relationship with those Defendants, and the purchases were made, in part, in reliance on that special relationship. 323. Based upon their unique, exclusive, and special knowledge and expertise about
the loans held by the trusts in the Securitizations, GS Mortgage Securities Corp. and Goldman, Sachs & Co. had a duty to provide the GSEs complete, accurate, and timely information regarding the mortgage loans and the Securitizations. GS Mortgage Securities Corp. and Goldman, Sachs & Co. negligently breached their duty to provide such information to the GSEs by instead making to the GSEs untrue statements of material facts in the Securitizations, or otherwise misrepresenting to the GSEs material facts about the Securitizations. The misrepresentations are set forth in Section IV above, and include misrepresentations as to the accuracy of the represented credit ratings, compliance with underwriting guidelines for the mortgage loans, and the accuracy of the owner-occupancy statistics and the loan-to-value ratios applicable to the Securitizations, as disclosed in the term sheets and Prospectus Supplements. 324. In addition, having made actual representations about the underlying collateral in
the Securitizations and the facts bearing on the riskiness of the Certificates, GS Mortgage Securities Corp. and Goldman, Sachs & Co. had a duty to correct misimpressions left by their statements, including with respect to any half truths. The GSEs were entitled to rely upon GS Mortgage Securities Corp. and Goldman, Sachs & Co.s representations about the Securitizations, and these Defendants failed to correct in a timely manner any of their misstatements or half truths, including misrepresentations as to compliance with underwriting guidelines for the mortgage loans.
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325.
The GSEs reasonably relied on the information GS Mortgage Securities Corp. and
Goldman, Sachs & Co. did provide, and GS Mortgage Securities Corp. and Goldman, Sachs & Co. knew that the GSEs were acting in reliance on such information. 326. The GSEs were damaged in an amount to be determined at trial as a direct,
proximate, and foreseeable result of GS Mortgage Securities Corp.s and Goldman, Sachs & Co.s misrepresentations, including any half truths. 327. The time period from June 5, 2009 through August 30, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and The Goldman Sachs Group, Inc. (on its own behalf and on behalf of its affiliated entities). The time period from July 15, 2011 through August 30, 2011 has been tolled for statute of limitations purposes by virtue of a tolling agreement entered into among the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, and The Goldman Sachs Group, Inc. (on its own behalf and on behalf of its affiliated entities). This action is brought within three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). NINTH CAUSE OF ACTION Common Law Fraud (Against Goldman Sachs Mortgage Company, GS Mortgage Securities Corp. and Goldman, Sachs & Co.) 328. forth herein. 329. This is a claim for common law fraud against Defendants Goldman Sachs Plaintiff realleges each allegation in paragraphs 1 through 202 above as if fully set
Mortgage Company, GS Mortgage Securities Corp. and Goldman, Sachs & Co. with respect to the Securitizations Goldman Sachs Mortgage Company sponsored.
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330.
The material representations set forth above were fraudulent, and Goldman, Sachs
& Co.s representations to the GSEs in the term sheets and Prospectus Supplements falsely and misleadingly misrepresented and omitted material statements of fact. The misrepresentations are set forth in Section IV above, and include misrepresentations as to the accuracy of the represented credit ratings, compliance with underwriting guidelines for the mortgage loans, and the accuracy of the owner-occupancy statistics and the loan-to-value ratios applicable to the Securitizations, as disclosed in the term sheets and Prospectus Supplements. The representations on which the GSEs relied were directly communicated to them by Goldman, Sachs & Co. Goldman, Sachs & Co. knew, or was reckless in not knowing, that its representations and omissions were false and/or misleading at the time they were made. Goldman, Sachs & Co. made the misleading statements for the purpose of inducing the GSEs to purchase the GSE Certificates. 331. The basis for the false representations in the term sheets and Prospectus
Supplements that Goldman, Sachs & Co. made to the GSEs was information that Goldman Sachs Mortgage Company and GS Mortgage Securities Corp. provided to Goldman, Sachs & Co. as to the strength of the collateral underlying the GSE Certificates and the structure of the Securitizations. Goldman Sachs Mortgage Company and GS Mortgage Securities Corp. communicated this information to Goldman, Sachs & Co. with the knowledge and intent that Goldman, Sachs & Co. would communicate this information to purchasers of the GSE Certificates. Goldman Sachs Mortgage Company and GS Mortgage Securities Corp. each had reason to expect that the GSEs were among the class of persons who would receive and rely on such representations.
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332.
Each of Goldman Sachs Mortgage Company, GS Mortgage Securities Corp. and
Goldman, Sachs & Co. intended that the above misleading statements were to be made for the purpose of inducing the GSEs to purchase the GSE Certificates. Goldman Sachs Mortgage Company made misleading statements with reason to expect that Fannie Mae and Freddie Mac would be among the class of persons who would receive and rely upon the statements. 333. The GSEs justifiably relied on Goldman Sachs Mortgage Company, GS Mortgage
Securities Corp. and Goldman, Sachs & Co.s false representations and misleading omissions. 334. Had the GSEs known the true facts regarding Goldmans underwriting practices
and the quality of the mortgage loans collateralizing the GSE Certificates, they would not have purchased the GSE Certificates. 335. As a result of the foregoing, the GSEs have suffered damages according to proof.
In the alternative, Plaintiff hereby demands rescission and makes any necessary tender of the GSE Certificates. 336. Goldman Sachs Mortgage Company, GS Mortgage Securities Corp. and
Goldman, Sachs & Co.s misconduct was intentional and wanton. The immediate victims of Goldman Sachs Mortgage Company, GS Mortgage Securities Corp. and Goldman, Sachs & Co.s fraud was Fannie Mae and Freddie Mac, two Government-sponsored entities whose primary mission is assuring affordable housing to millions of Americans. Further, the public nature of Goldman Sachs Mortgage Company, GS Mortgage Securities Corp. and Goldman, Sachs & Co.s harm is apparent inand conclusively demonstrated bythe congressional hearings and federal enforcement actions that have been pursued against Goldman as a direct result of the fraudulent conduct at issue in this Complaint. See, e.g., the Senate PSI Report at 376636; the FCIC Report, passim; Goldman Sachs to Pay Record $550 Million to Settle SEC
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Charges Related to Subprime Mortgage CDO, SEC Litig. Release No. 21592 (July 15, 2010). Punitive damages are therefore warranted for Goldman Sachs Mortgage Company, GS Mortgage Securities Corp. and Goldman, Sachs & Co.s actions in order to punish them, deter them from future misconduct, and protect the public. 337. The time period from June 5, 2009 through August 30, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and The Goldman Sachs Group, Inc. (on its own behalf and on behalf of its affiliated entities). The time period from July 15, 2011 through August 30, 2011 has been tolled for statute of limitations purposes by virtue of a tolling agreement entered into among the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, and The Goldman Sachs Group, Inc. (on its own behalf and on behalf of its affiliated entities). This action is brought within three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). TENTH CAUSE OF ACTION Aiding and Abetting Fraud (Against Goldman Sachs Mortgage Company and GS Mortgage Securities Corp.) 338. forth herein. 339. This is a claim for aiding and abetting fraud against Defendants Goldman Sachs Plaintiff realleges each allegation in paragraphs 1 through 202 above as if fully set
Mortgage Company and GS Mortgage Securities Corp. with respect to the Securitizations Goldman Sachs Mortgage Company sponsored. 340. Goldman Sachs Mortgage Company, as sponsor for 36 of the Securitizations,
substantially assisted Goldman, Sachs & Co.s fraud by choosing which mortgage loans would be included in those Securitizations. It also extended warehouse lines of credit to mortgage
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originators that it knew had shoddy standards with the intent of later purchasing and securitizing those loans to purchasers, such as the GSEs. Goldman Sachs Mortgage Companys action in assisting in the origination of, and then purchasing, poorly underwritten loans was an integral part of the Securitizations. 341. Likewise, GS Mortgage Securities Corp., as depositor for 35 of the
Securitizations, substantially assisted Goldman, Sachs & Co.s fraud by issuing the Registration Statements that were used to offer publicly the Certificates. As the issuer of the Certificates, GS Mortgage Securities Corp. was an integral part of Goldman, Sachs & Co.s sale of the Certificates to the GSEs. 342. As described above, Goldman, Sachs & Co. made fraudulent and untrue
statements of material fact and omitted to state material facts regarding the true credit quality of the GSE Certificates, the true rate of owner occupancy, the true LTV ratio of the underlying mortgage loans, and compliance by the originators with applicable underwriting guidelines. 343. Each of Goldman Sachs Mortgage Company and GS Mortgage Securities Corp.
had unique access to the loan files, and therefore was aware of the extreme weakness of the loans. In fact, Goldman Sachs during the same period it was selling the GSE Certificates to the GSEs was also shorting those same Certificates and engaging in put back requests with originators and other parties based upon the weakness of the underlying loans. Accordingly, Goldman Sachs Mortgage Company and GS Mortgage Securities Corp. were aware that the representations and omissions of Goldman, Sachs & Co. were fraudulent. 344. The central role of Goldman Sachs Mortgage Company and GS Mortgage
Securities Corp. in Goldman, Sachs & Co.s vertically integrated sales strategy substantially assisted Goldman, Sachs & Co. in its fraud. Goldman Sachs Mortgage Company, as the
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purchaser of the underlying mortgage loans, worked closely with GS Mortgage Securities Corp., as the vehicle for securitizing the mortgage loans, which in turn worked closely with Goldman, Sachs & Co., as the distribution arm for the Certificates that were collateralized by those mortgage loans and then sold to the GSEs. Goldman Sachs Mortgage Company and GS Mortgage Securities Corp. worked hand-in-glove to provide Goldman, Sachs & Co. with Certificates that it could fraudulently sell to the GSEs. 345. Goldman Sachs Mortgage Company and GS Mortgage Securities Corp.s
substantial assistance in Goldman, Sachs & Co.s fraud played a significant and material role in inducing the GSEs to purchase the GSE Certificates. As a direct, proximate and foreseeable result of Goldman Sachs Mortgage Company and GS Mortgage Securities Corp. aiding and abetting Goldman, Sachs & Co. in its fraud against the GSEs, the GSEs have been damaged in an amount to be determined at trial. 346. Because Goldman Sachs Mortgage Company and GS Mortgage Securities Corp.
aided and abetted Goldman, Sachs & Co.s fraud willfully and wantonly, and because, by their acts, Goldman Sachs Mortgage Company and GS Mortgage Securities Corp. knowingly affected the general public, including but not limited to all persons with interests in the Certificates, Plaintiff is entitled to recover punitive damages. 347. The time period from June 5, 2009 through August 30, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and The Goldman Sachs Group, Inc. (on its own behalf and on behalf of its affiliated entities). The time period from July 15, 2011 through August 30, 2011 has been tolled for statute of limitations purposes by virtue of a tolling agreement entered into among the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, and The Goldman Sachs Group, Inc. (on its own
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behalf and on behalf of its affiliated entities). This action is brought within three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). PRAYER FOR RELIEF WHEREFORE Plaintiff prays for relief as follows: 348. An award in favor of Plaintiff against all Defendants, jointly and severally, for all
damages sustained as a result of Defendants wrongdoing, in an amount to be proven at trial, but including: a. Rescission and recovery of the consideration paid for the GSE Certificates, with
interest thereon; b. Each GSEs monetary losses, including any diminution in value of the GSE
Certificates, as well as lost principal and lost interest payments thereon; c. d. e. f. Punitive damages; Attorneys fees and costs; Prejudgment interest at the maximum legal rate; and Such other and further relief as the Court may deem just and proper. JURY TRIAL DEMANDED 349. Pursuant to Federal Rule of Civil Procedure 38(b), Plaintiff hereby demands a
trial by jury on all issues triable by jury.
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UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK FEDERAL HOUSING FINANCE AGENCY, AS CONSERVATOR FOR THE FEDERAL NATIONAL MORTGAGE ASSOCIATION AND THE FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff, -againstFIRST HORIZON NATIONAL CORPORATION, FIRST TENNESSEE BANK NATIONAL ASSOCIATION, FTN FINANCIAL SECURITIES CORPORATION, FIRST HORIZON ASSET SECURITIES, INC., UBS SECURITIES, LLC, J.P. MORGAN SECURITIES LLC, CREDIT SUISSE SECURITIES (USA) LLC (f/k/a CREDIT SUISSE FIRST BOSTON LLC), MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., GERALD L. BAKER, PETER F. MAKOWIECKI, CHARLES G. BURKETT, AND THOMAS J. WAGEMAN, Defendants.
___ CIV. ___ (___)
TABLE OF CONTENTS NATURE OF ACTION ...................................................................................................................1 PARTIES .........................................................................................................................................5 The Plaintiff and the GSEs...................................................................................................5 The Defendants ....................................................................................................................6 JURISDICTION AND VENUE ....................................................................................................10 FACTUAL ALLEGATIONS ........................................................................................................11 I. THE SECURITIZATIONS................................................................................................11 A. B. C. Residential Mortgage-Backed Securitizations in General .....................................11 The Securitizations at Issue in this Case ................................................................12 The Securitization Process .....................................................................................13 1. 2. II. First Horizon Home Loan Groups Mortgage Loans in SpecialPurpose Trusts ............................................................................................13 The Trusts Issue Securities Backed By the Loans .....................................15
THE DEFENDANTS PARTICIPATION IN THE SECURITIZATION PROCESS ..........................................................................................................................17 A. The Role of Each Defendant ..................................................................................17 1. 2. 3. 4. 5. B. First Horizon Home Loan (now First Tennessee)......................................17 First Horizon Asset Securities ...................................................................18 First Horizon National ...............................................................................19 Underwriter Defendants .............................................................................20 Individual Defendants ................................................................................21
The Defendants Failure to Conduct Proper Due Diligence ..................................22 1. 2. 3. UBS ............................................................................................................24 Bear Stearns (now JP Morgan Securities) .................................................25 Credit Suisse ..............................................................................................27 i
4. C. III.
Merrill Lynch .............................................................................................29
Additional Allegations Regarding the Liability of JP Morgan Securities as Successor to Bear Stearns ......................................................................................31
THE REGISTRATION STATEMENT AND THE PROSPECTUS SUPPLEMENTS................................................................................................................33 A. B. C. D. Compliance With Underwriting Guidelines ..........................................................33 Statements Regarding the Occupancy Status of Borrowers ..................................35 Statements Regarding Loan-to-Value Ratios.........................................................37 Statements Regarding Credit Ratings ....................................................................39
IV.
THE FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENT AND PROSPECTUS SUPPLEMENTS ............................................................................41 A. The Statistical Data Provided in the Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False ....................................41 1. 2. B. Owner-Occupancy Data Was Materially False..........................................41 Loan-to-Value Data Was Materially False ................................................43
The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines .........................................................46 1. 2. First Horizon Home Loan Failed to Adhere to Its Underwriting Guidelines ..................................................................................................46 The Collapse of the Certificates Credit Ratings Further Indicates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines .................................................................48 The Surge in Mortgage Delinquencies and Defaults Further Indicates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines ....................................50
3.
V.
FANNIE MAES AND FREDDIE MACS PURCHASES OF THE GSE CERTIFICATES AND THE RESULTING DAMAGES .................................................51
FIRST CAUSE OF ACTION ........................................................................................................53 SECOND CAUSE OF ACTION ...................................................................................................55 THIRD CAUSE OF ACTION .......................................................................................................59 ii
FOURTH CAUSE OF ACTION ...................................................................................................64 FIFTH CAUSE OF ACTION ........................................................................................................68 SIXTH CAUSE OF ACTION .......................................................................................................72 PRAYER FOR RELIEF ................................................................................................................77 JURY TRIAL DEMANDED .........................................................................................................77
iii
Plaintiff Federal Housing Finance Agency (FHFA), as conservator of The Federal National Mortgage Association (Fannie Mae) and The Federal Home Loan Mortgage Corporation (Freddie Mac), by its attorneys, Quinn Emanuel Urquhart & Sullivan, LLP, for its Complaint herein against First Horizon National Corporation (First Horizon National), First Tennessee Bank National Association (First Tennessee) (successor to First Horizon Home Loan Corporation (First Horizon Home Loan)), FTN Financial Securities Corporation (FTN), First Horizon Asset Securities, Inc. (First Horizon Asset Securities) (collectively, First Horizon); UBS Securities, LLC (UBS); J.P. Morgan Securities LLC (JP Morgan Securities) (as successor to Bear, Stearns & Co. Inc. (Bear Stearns)); Credit Suisse Securities (USA) LLC (Credit Suisse) (f/k/a Credit Suisse First Boston LLC); Merrill Lynch, Pierce, Fenner & Smith, Inc. (Merrill Lynch); and Gerald L. Baker, Peter F. Makowiecki, Charles G. Burkett, and Thomas J. Wageman (the Individual Defendants) (all together, the Defendants) alleges as follows: NATURE OF ACTION 1. This action arises out of the Defendants actionable conduct in connection with
the offer and sale of certain residential mortgage-backed securities to Fannie Mae and Freddie Mac (collectively, the Government Sponsored Enterprises or GSEs). These securities were sold pursuant to a registration statement, including prospectuses and prospectus supplements that formed part of that registration statement, which contained materially false or misleading statements and omissions. Defendants falsely represented that the underlying mortgage loans complied with certain underwriting guidelines and standards, including representations that significantly overstated the ability of the borrowers to repay their mortgage loans. These representations were material to the GSEs, as reasonable investors, and their falsity violates Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77a et seq., Sections 311
5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, and constitutes commonlaw negligent misrepresentation. 2. Between September 30, 2005, and April 30, 2007, Fannie Mae and Freddie Mac
purchased $883 million in residential mortgage-backed securities (the GSE Certificates) issued in connection with five First Horizon-sponsored and First Horizon-underwritten securitizations.1 The GSE Certificates purchased by Freddie Mac, along with the date and amount of the purchases, are listed infra in Table 10. The GSE Certificates purchased by Fannie Mae, along with the date and amount of the purchases, are listed infra in Table 11. The five securitizations at issue are: (i) (ii) (iii) (iv) (v) First Horizon Alternative Mortgage Securities Trust 2005-AA9 (FHAMS 2005-AA9); First Horizon Alternative Mortgage Securities Trust 2005-AA10 (FHAMS 2005-AA10); First Horizon Alternative Mortgage Securities Trust 2005-AA11 (FHAMS 2005-AA11); First Horizon Alternative Mortgage Securities Trust 2005-AA12 (FHAMS 2005-AA12); and First Horizon Alternative Mortgage Securities Trust 2006-AA1 (FHAMS 2006-AA1)
(collectively, the Securitizations). 3. The Certificates were offered for sale pursuant to a shelf registration statement
(the Shelf Registration Statement) filed with the Securities and Exchange Commission (the SEC). Defendant First Horizon Asset Securities filed the Shelf Registration Statement on May 23, 2005 that pertained to the five Securitizations at issue in this action. An amendment was For purposes of this Complaint, the securities issued under the Registration Statement (as defined in note 2, infra) are referred to as Certificates, while the particular Certificates that Fannie Mae and Freddie Mac purchased are referred to as the GSE Certificates. Holders of Certificates are referred to as Certificateholders. 2
1
filed on July 29, 2005. The Shelf Registration Statement and amendment were signed by or on behalf of the Individual Defendants. With respect to all of the Securitizations, FTN was an underwriter, and, with respect to one of the Securitizations, FTN was also the lead underwriter and the underwriter who sold the GSE Certificates to Freddie Mac. 4. For each Securitization, a prospectus (Prospectus) and prospectus supplement
(Prospectus Supplement) were filed with the SEC as part of the Registration Statement2 for that Securitization. The GSE Certificates were marketed and sold to Fannie Mae and Freddie Mac pursuant to the Registration Statement, including the Shelf Registration Statement and the corresponding Prospectuses and Prospectus Supplements. 5. The Registration Statement contained statements about the characteristics and
credit quality of the mortgage loans underlying the Securitizations, the creditworthiness of the borrowers of those underlying mortgage loans, and the origination and underwriting practices used to make and approve the loans. Such statements were material to a reasonable investors decision to invest in mortgage-backed securities by purchasing the Certificates. Unbeknownst to Fannie Mae and Freddie Mac, these statements were materially false, as significant percentages of the underlying mortgage loans were not originated in accordance with the represented underwriting standards and origination practices, and had materially poorer credit quality than what was represented in the Registration Statement. 6. The Registration Statement also contained statistical summaries of the groups of
mortgage loans in each Securitization, such as the percentage of loans secured by owneroccupied properties and the percentage of the loan groups aggregate principal balance with
The term Registration Statement as used herein incorporates the Shelf Registration Statement, the Prospectus and the Prospectus Supplement for each referenced Securitization, except where otherwise indicated. 3
loan-to-value ratios within specified ranges. This information was also material to reasonable investors. However, a loan-level analysis of a sample of loans for each Securitizationa review that encompassed thousands of mortgages across all of the Securitizationshas revealed that these statistics were also false and omitted material facts due to inflated property values and misrepresentations of other key characteristics of the mortgage loans. 7. For example, the percentage of owner-occupied properties is a material risk factor
to the purchasers of Certificates, such as Fannie Mae and Freddie Mac, since a borrower who lives in a mortgaged property is generally less likely to stop paying his or her mortgage and more likely to take better care of the property. The loan-level review reveals that the true percentage of owner-occupied properties for the loans supporting the GSE Certificates was materially lower than what was stated in the Prospectus Supplements. Likewise, the Prospectus Supplements misrepresented other material factors, including the true value of the mortgaged properties relative to the amount of the underlying loans. 8. Defendants First Horizon Asset Securities (the depositor) and the Individual
Defendants (as signatories) are directly responsible for the misstatements and omissions of material fact contained in the Registration Statement because they prepared, signed, filed and/or used these documents to market and sell the Certificates to Fannie Mae and Freddie Mac. Defendants FTN, UBS, JP Morgan Securities (as successor-in-interest to Bear Stearns), Credit Suisse, and Merrill Lynch (collectively, the Underwriter Defendants) are also directly responsible for the misstatements and omissions of material fact contained in the Registration Statement for the Securitizations on which they were underwriters (as reflected in Table 1, infra) because they prepared and/or used the Registration Statement to market and sell the Certificates to Fannie Mae and Freddie Mac.
9.
Defendants First Tennessee (as successor-in-interest to First Horizon Home Loan)
and First Horizon National are also responsible for the misstatements and omissions of material fact contained in the Registration Statement by virtue of their direction and control over Defendants First Horizon Asset Securities and FTN. First Tennessee and First Horizon National directly participated in and exercised dominion and control over the business operations of Defendants First Horizon Asset Securities and FTN. 10. Fannie Mae and Freddie Mac purchased $883 million of the Certificates pursuant
to the Registration Statement filed with the SEC. The Registration Statement contained misstatements and omissions of material facts concerning the quality of the underlying mortgage loans, the creditworthiness of the borrowers, and the practices used to originate such loans. As a result of Defendants misstatements and omissions of material fact, Fannie Mae and Freddie Mac have suffered substantial losses as the value of their holdings has significantly deteriorated. 11. FHFA, as Conservator of Fannie Mae and Freddie Mac, brings this action against
Defendants for violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77k, 77l(a)(2), 77o, violations of Sections 31-5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, and for common-law negligent misrepresentation. PARTIES The Plaintiff and the GSEs 12. The Federal Housing Finance Agency is a federal agency located at 1700 G
Street, NW in Washington, D.C. FHFA was created on July 30, 2008, pursuant to the Housing and Economic Recovery Act of 2008 (HERA), Pub. L. No. 110-289, 122 Stat. 2654 (2008) (codified at 12 U.S.C. 4617), to oversee Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. On September 6, 2008, under HERA, the Director of FHFA placed Fannie Mae and Freddie Mac into conservatorship and appointed FHFA as conservator. In that capacity, FHFA 5
has the authority to exercise all rights and remedies of the GSEs, including, but not limited to, the authority to bring suits on behalf of and/or for the benefit of Fannie Mae and Freddie Mac. 12 U.S.C. 4617(b)(2). 13. Fannie Mae and Freddie Mac are government-sponsored enterprises chartered by
Congress with a mission to provide liquidity, stability, and affordability to the United States housing and mortgage markets. As part of this mission, Fannie Mae and Freddie Mac invested in residential mortgage-backed securities. Fannie Mae is located at 3900 Wisconsin Avenue, NW in Washington, D.C. Freddie Mac is located at 8200 Jones Branch Drive in McLean, Virginia. The Defendants 14. Defendant First Horizon National is a national financial services institution and
one of the largest bank holding companies in the United States. It is the parent company of Defendant First Tennessee; was the ultimate parent company of First Horizon Home Loan when First Horizon Home Loan had a separate corporate existence; and is the ultimate corporate parent of First Horizon Asset Securities and FTN. First Horizon Nationals principal office in the United States is located at 165 Madison Way, Memphis, Tennessee. 15. Defendant First Tennessee is engaged in a variety of capital markets-related
activities, including purchases and sales of loan portfolios, sales of assets for inclusion in securitizations, and origination and acquisition of loans. First Tennessee is a national banking association organized and existing under the laws of the United States with its principal place of business at 165 Madison Way, Memphis, Tennessee. 16. Defendant First Tennessee is the successor-in-interest to First Horizon Home
Loan, and thus all allegations herein against First Horizon Home Loan are made against First Tennessee. First Horizon Home Loan acted as the sponsor, seller, and master servicer of the Securitizations and was, at all relevant times, a wholly owned subsidiary of First Tennessee. 6
First Horizon Home Loan was the direct parent and controlling entity of the depositor First Horizon Asset Securities. It was pursuant to a merger effective May 31, 2007 that First Horizon Home Loan was merged into its parent, First Tennessee. Though it ceased to exist as a separate legal entity, First Horizon Home Loan continues to operate as a division of First Tennessee. In First Horizon Nationals Annual Report for 2007, First Horizon Home Loan is referenced as a division of First Tennessee Bank National Association. An affidavit filed by an employee of First Tennessee further confirms that First Horizon Home Loan is a division of First Tennessee Bank National Association[,] successor in interest by merger to First Horizon Home Loan Corporation. See Affidavit of Peggy M. Mullins, Read v. Teton Springs Golf & Casting Club, LLC, No. 4:08-CV-00099 (D. Idaho Mar. 31, 2010) (Docket No. 434). 17. Defendant FTN is an SEC-registered broker-dealer and, at all relevant times, was
an underwriter of mortgage and asset-backed securities in the United States. FTN is incorporated in Tennessee with its principal place of business at 845 Crossover Lane, Memphis, Tennessee. It maintains an office at 444 Madison Avenue, New York, New York. FTN is an indirect, wholly owned subsidiary of First Horizon National, and operates as a subsidiary of Defendant First Tennessee. FTN was the lead underwriter for the FHAMS 2005-AA10 Securitization, and also acted as underwriter for each of the offerings at issue in this action. As such, FTN was intimately involved in all the offerings. 18. Defendant First Horizon Asset Securities is incorporated in Delaware and has its
principal place of business at 4000 Horizon Way, Irving, Texas. First Horizon Asset Securities was, at all relevant times, a wholly owned subsidiary of First Horizon Home Loan. As a result of the merger of First Horizon Home Loan into First Tennessee, First Horizon Asset Securities is now a wholly owned subsidiary of First Tennessee. First Horizon Asset Securities was the
depositor for the Securitizations and, as depositor, was responsible for preparing and filing reports required under the Securities Exchange Act of 1934. 19. Defendant UBS is an SEC-registered broker-dealer and, at all relevant times, was
one of the leading underwriters of mortgage and asset-backed securities in the United States. UBS is a limited liability company incorporated in Delaware with its principal place of business at 677 Washington Boulevard, Stamford, Connecticut. It also maintains an office at 299 Park Avenue in New York, New York. UBS was the lead underwriter for FHAMS 2005-AA11 and was intimately involved in that offering. 20. Defendant JP Morgan Securities is an SEC-registered broker-dealer and the
successor-in-interest to Bear Stearns, and thus all allegations herein against Bear Stearns are made against JP Morgan Securities. Bear Stearns was a Delaware corporation with its principal place of business in New York, New York. It acted as the lead underwriter for FHAMS 2005AA12 and was intimately involved in that offering. Pursuant to a Merger Agreement effective May 30, 2008, Bear Stearns parent company, The Bear Stearns Companies Inc., merged with Bear Stearns Merger Corporation, a wholly owned subsidiary of JPMorgan Chase & Co. (JPMorgan Chase), making Bear Stearns a wholly owned indirect subsidiary of JPMorgan Chase. Following the merger, on or about October 1, 2008, Bear Stearns merged with a subsidiary of JPMorgan Chase, J.P. Morgan Securities Inc., which subsequently changed its name to J.P. Morgan Securities LLC. Thus, Bear Stearns is now doing business as Defendant JP Morgan Securities. Defendant JP Morgan Securities is a Delaware corporation with its principal place of business at 277 Park Avenue, New York, New York. 21. Defendant Credit Suisse (f/k/a Credit Suisse First Boston LLC) is a SEC-
registered broker-dealer primarily engaged in the business of investment banking. It is a
Delaware limited liability company with its principal place of business at 11 Madison Avenue, New York, New York. Defendant Credit Suisse acted as the lead underwriter for FHAMS 2006AA1 and was intimately involved in that offering. 22. Defendant Merrill Lynch is an SEC-registered broker-dealer and a Delaware
corporation with its principal place of business at 250 Vesey Street, New York, New York. It acted as the lead underwriter for FHAMS 2005-AA9 and was intimately involved in that offering. 23. Defendant Gerald L. Baker is an individual residing in Memphis, Tennessee. At
the time of the Securitizations, Mr. Baker was: (a) the Chief Executive Officer, President, and a Director of Defendant First Horizon Asset Securities; (b) the Chief Executive Officer and President of Defendant First Tennessee; and (c) the President and Chief Executive Officer of Defendant First Horizon National. Mr. Baker signed the Shelf Registration Statement and the amendment thereto. 24. Defendant Peter F. Makowiecki is an individual residing in Texas. At the time of
the Securitizations, Mr. Makowiecki was: (a) the Chief Financial Officer and Treasurer of Defendant First Horizon Asset Securities; and (b) the President and Chief Executive Officer of Defendant First Horizon Home Loan beginning in January 2006, after previously serving as its Chief Financial Officer. Mr. Makowiecki signed the Shelf Registration Statement and the amendment thereto. 25. Defendant Charles G. Burkett is an individual residing in Memphis, Tennessee.
At the time of the Securitizations, Mr. Burkett was: (a) a Director of First Horizon Asset Securities; (b) the President of Banking of Defendant First Tennessee; and (c) the President of
Banking of Defendant First Horizon National. Mr. Burkett signed the Shelf Registration Statement and the amendment thereto. 26. Defendant Thomas J. Wageman is an individual residing in Texas. At the time of
the Securitizations, Mr. Wageman was a Director of Defendant First Horizon Asset Securities. Mr. Wageman signed the Shelf Registration Statement and the amendment thereto. JURISDICTION AND VENUE 27. Jurisdiction of this Court is founded upon 28 U.S.C. 1345, which gives federal
courts original jurisdiction over claims brought by the FHFA in its capacity as conservator of Fannie Mae and Freddie Mac. 28. Jurisdiction of this Court is also founded upon 28 U.S.C. 1331 because the
Securities Act claims asserted herein arise under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77k, 77l(a)(2), 77o. This Court further has jurisdiction over the Securities Act claims subject matter of this action pursuant to Section 22 of the Securities Act of 1933, 15 U.S.C. 77v. 29. This Court has jurisdiction over the statutory claims of violations of Sections 31-
5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code pursuant to this Courts supplemental jurisdiction under 28 U.S.C. 1367(a). This Court also has jurisdiction over the common-law claim of negligent misrepresentation pursuant to this Courts supplemental jurisdiction under 28 U.S.C. 1367(a). 30. Venue is proper in this district pursuant to Section 22 of the Securities Act of
1933, 15 U.S.C. 77v and 28 U.S.C. 1391(b). Several Underwriter Defendants are principally located in this district, several of the other Defendants can be found or transact business in this district, and many of the acts and transactions alleged herein occurred in substantial part within this district. Defendants are also subject to personal jurisdiction in this district. 10
FACTUAL ALLEGATIONS I. THE SECURITIZATIONS A. 31. Residential Mortgage-Backed Securitizations in General Asset-backed securitization distributes risk by pooling cash-producing financial
assets and issuing securities backed by those pools of assets. In residential mortgage-backed securitizations, the cash-producing financial assets are residential mortgage loans. 32. The most common form of securitization of mortgage loans involves a sponsor
the entity that acquires or originates the mortgage loans and initiates the securitizationand the creation of a trust, to which the sponsor directly or indirectly transfers a portfolio of mortgage loans. The trust is established pursuant to a Pooling and Servicing Agreement entered into by, among others, the depositor for that securitization. In many instances, the transfer of assets to a trust is a two-step process: the financial assets are transferred by the sponsor first to an intermediate entity, often a limited purpose entity created by the sponsor . . . and commonly called a depositor, and then the depositor will transfer the assets to the [trust] for the particular asset-backed transactions. Asset-Backed Securities, Securities Act Release No. 33-8518, Exchange Act Release No. 34-50905, 84 SEC Docket 1624 (Dec. 22, 2004). 33. Residential mortgage-backed securities are backed by the underlying mortgage
loans. Some residential mortgage-backed securitizations are created from more than one pool of loans called collateral groups, in which case the trust issues securities backed by different groups. For example, a securitization may involve two groups of mortgages, with some securities backed primarily by the first group, and others primarily by the second group. Purchasers of the securities acquire an ownership interest in the assets of the trust, which in turn owns the loans. Within this framework, the purchasers of the securities acquire rights to the
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cashflows from the designated mortgage group, such as homeowners payments of principal and interest on the mortgage loans held by the related trust. 34. Residential mortgage-backed securities are issued pursuant to registration
statements filed with the SEC. These registration statements include prospectuses, which explain the general structure of the investment, and prospectus supplements, which contain detailed descriptions of the mortgage groups underlying the certificates. Certificates are issued by the trust pursuant to the registration statement and the prospectus and prospectus supplement. Underwriters sell the certificates to investors. 35. A mortgage servicer is necessary to manage the collection of proceeds from the
mortgage loans. The servicer is responsible for collecting homeowners mortgage loan payments, which the servicer remits to the trustee after deducting a monthly servicing fee. The servicers duties include making collection efforts on delinquent loans, initiating foreclosure proceedings, and determining when to charge off a loan by writing down its balance. The servicer is required to report key information about the loans to the trustee. The trustee (or trust administrator) administers the trusts funds and delivers payments due each month on the certificates to the investors. B. 36. The Securitizations at Issue in this Case This case involves the five Securitizations listed in paragraph 2 supra, which were
sponsored and structured by First Horizon Home Loan and underwritten by FTN and others. For each Securitization, Table 1 identifies the: (1) sponsor; (2) depositor; (3) underwriters; (4) principal amount issued for the tranches3 purchased by the GSEs; (5) date of issuance; and (6)
A tranche is one of a series of certificates or interests created and issued as part of the same transaction. 12
loan group backing the GSE Certificates for that Securitization (referred to as the Supporting Loan Group). Table 1
Principal Amount Issued ($) 214,030,000 Date of Issuance Sept. 30, 2005 Supporting Loan Group Group 2
Transaction FHAMS 2005-AA9 FHAMS 2005-AA10 FHAMS 2005-AA11 FHAMS 2005-AA12
Tranche II-A-1
Sponsor First Horizon Home Loan First Horizon Home Loan First Horizon Home Loan First Horizon Home Loan
Depositor First Horizon Asset Securities First Horizon Asset Securities First Horizon Asset Securities First Horizon Asset Securities
Underwriters Merrill Lynch, Citigroup, FTN FTN, Goldman Sachs UBS, Lehman Brothers, FTN Bear Stearns (now JP Morgan Securities), FTN Credit Suisse, FTN
I-A-1
140,430,000
Oct. 28, 2005
Group 1
I-A-1
128,755,000
Nov. 30, 2005
Group 1
II-A-1
213,133,000
Dec. 29, 2005
Group 2
FHAMS 2006-AA1
I-A-1
First Horizon Home Loan
First Horizon Asset Securities
230,020,000
Feb. 28, 2006
Group 1
C.
The Securitization Process 1. First Horizon Home Loan Groups Mortgage Loans in SpecialPurpose Trusts
37.
As the sponsor for the Securitizations, First Horizon Home Loan originated or
purchased the mortgage loans after they were originated, either directly from the originators or through affiliates of the originators. 38. Pursuant to a Mortgage Loan Purchase Agreement, First Horizon Home Loan
then sold the mortgage loans to the depositor, which was its affiliate, Defendant First Horizon Asset Securities. (In FHAMS 2005-AA10, the loans were passed first to Defendant First Tennessee under a FTBNA Purchase Agreement, then to the depositor pursuant to a Depositor Purchase Agreement.) The Mortgage Loan Purchase Agreement and the FTBNA
13
Purchase Agreement contained representations and warranties regarding the characteristics of the mortgage loans. The Depositor Purchase Agreement in FHAMS 2005-AA10 assigned the rights to the representations and warranties in the FTBNA Purchase Agreement to the depositor. 39. Defendant FTN was either the lead or an additional underwriter for each of the
Securitizations, and it was the selling underwriter for FHAMS 2005-AA10. 40. First Horizon Asset Securities was First Horizon Home Loans wholly owned,
limited-purpose financial subsidiary. The sole purpose of First Horizon Asset Securities as depositor was to act as a conduit through which loans originated or acquired by the sponsor First Horizon Home Loan could be securitized and sold to investors. 41. As depositor for the Securitizations, First Horizon Asset Securities transferred the
relevant mortgage loans to the trusts, pursuant to a Pooling and Servicing Agreement (PSA) that contained various representations and warranties regarding the mortgage loans for the Securitizations, and/or assigned the rights to the representations and warranties in the Mortgage Loan Purchase Agreement (or, in the case of FHAMS 2005-AA10, in the FTBNA Purchase Agreement) to the trusts. 42. As part of each of the five Securitizations, the trustee, on behalf of the
Certificateholders, executed a PSA with First Horizon Home Loan and First Horizon Asset Securities, the parties responsible for monitoring and servicing the mortgage loans in the Securitizations. The trust, administered by the trustee, held the mortgage loans pursuant to the related PSA and issued Certificates, including the GSE Certificates backed by such loans. The GSEs purchased the GSE Certificates, through which they obtained an ownership interest in the assets of the trust, including the mortgage loans.
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2. 43.
The Trusts Issue Securities Backed By the Loans
PSAs, each trust issued Certificates backed by the underlying mortgage loans. The Certificates were then sold to investors like Fannie Mae and Freddie Mac, which thereby acquired an ownership interest in the assets of the corresponding trust. Each Certificate entitles its holder to a specified portion of the cash flows from the underlying mortgages in the Supporting Loan Group. The level of risk inherent in the Certificates was a function of the capital structure of the related transaction and the credit quality of the underlying mortgages. 44. The Certificates were issued pursuant to a Shelf Registration Statement filed with
the SEC on a Form S-3. The Shelf Registration Statement was amended by a Form S-3/A filed with the SEC (the Amendment). Each Individual Defendant signed the Shelf Registration Statement that was filed by First Horizon Asset Securities. Defendant Baker signed the Amendment in his capacity as President and Chief Executive Officer of First Horizon Asset Securities, and on behalf of Defendants Makowiecki, Burkett, and Wageman, as their attorneyin-fact, pursuant to a power of attorney duly executed by each and previously filed. 45. The SEC filing number, registrant, signatories, and filing dates of the Shelf
Registration Statement and Amendment, as well as the Certificates covered, are reflected in Table 2 below. Table 2
Date Registration Statement Filed May 23, 2005 Date Amended Registration Statement Filed July 29, 2005 Signatories of Registration Statement and Amendment Gerald Baker Peter Makowiecki Charles Burkett Thomas Wageman
SEC File No. 333125158
Registrant
First Horizon Asset Securities
FHAMS 2005-AA9 FHAMS 2005-AA10 FHAMS 2005-AA11 FHAMS 2005-AA12 FHAMS 2006-AA1
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46.
guidelines that purportedly were used in connection with the origination of the underlying mortgage loans. In addition, the Prospectus Supplements purport to provide accurate statistics regarding the mortgage loans in each group, including the ranges of and weighted average FICO credit scores of the borrowers, the ranges of and weighted average loan-to-value ratios of the loans, the ranges of and weighted average outstanding principal balances of the loans, the debtto-income ratios, the geographic distribution of the loans, the extent to which the loans were for purchase or refinance purposes, information concerning whether the loans were secured by a property to be used as a primary residence, second home, or investment property, and information concerning whether the loans were delinquent. 47. The Prospectus Supplement associated with each Securitization was filed with the
SEC as part of the Shelf Registration Statement. The Form 8-K attaching the PSA for FHAMS 2006-AA1 was also filed with the SEC. The date on which the Prospectus Supplement and that Form 8-K, as well as the filing number of the Shelf Registration Statement related to each, are set forth in Table 3 below. Table 3
Transaction FHAMS 2005-AA9 FHAMS 2005-AA10 FHAMS 2005-AA11 FHAMS 2005-AA12 FHAMS 2006-AA1 Date Prospectus Supplement Filed Sept. 28, 2005 Oct. 26, 2005 Nov. 29, 2005 Dec. 23, 2005 Mar. 1, 2006 Date Form 8-K Attaching PSA Filed N/A N/A N/A N/A Mar. 14, 2006 Filing No. of Related Registration Statement 333-125158 333-125158 333-125158 333-125158 333-125158
48.
The Certificates were issued pursuant to the PSAs, and Defendant First Horizon
Asset Securities and the Underwriter Defendants offered and sold the GSE Certificates to Fannie
16
Mae or Freddie Mac pursuant to the Registration Statement, which, as noted previously, included the Prospectuses and Prospectus Supplements. II. THE DEFENDANTS PARTICIPATION IN THE SECURITIZATION PROCESS A. 49. The Role of Each Defendant Each Defendant, including the Individual Defendants, had a role in the
securitization process and the marketing for at least one of the Certificates, which included either originating or purchasing the mortgage loans from the originators, arranging the Securitizations, selling the mortgage loans to the depositor, transferring the mortgage loans to the trustee on behalf of the Certificateholders, underwriting the public offering of the Certificates, structuring and issuing the Certificates, and marketing and selling the Certificates to investors such as Fannie Mae and Freddie Mac. 50. With respect to each Securitization, the depositor, the underwriter, and the
Individual Defendants who signed the Registration Statement, as well as the Defendants who exercised control over their activities, are liable, jointly and severally, as participants in the registration, issuance, and offering of the Certificates, including issuing, causing, or making materially misleading statements in the Registration Statement, and omitting material facts required to be stated therein or necessary to make the statements contained therein not misleading. 1. 51. First Horizon Home Loan (now First Tennessee)
First Horizon Home Loan (now First Tennessee) was, at all relevant times, in the
business of originating, purchasing, selling, and servicing mortgage loans. As of June 30, 2005, First Horizon Home Loan provided servicing for mortgage loans with an aggregate principal balance of approximately $90.73 billion.
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52.
First Horizon Home Loan was the sponsor of the Securitizations. In that capacity,
First Horizon Home Loan determined the structure of the Securitizations, initiated the Securitizations, originated or purchased the mortgage loans to be securitized, and determined the distribution of principal and interest. First Horizon Home Loan also selected First Horizon Asset Securities as the special-purpose vehicle that would be used to transfer the mortgage loans from First Horizon Home Loan to the trusts, and selected FTN and the other Underwriter Defendants as underwriters for the Securitizations. In its role as sponsor, First Horizon Home Loan knew and intended that the mortgage loans it originated and purchased would be sold in connection with the securitization process, and that certificates representing such loans would be issued by the relevant trusts. 53. As sponsor of the Securitizations, First Horizon Home Loan also conveyed the
mortgage loans to First Horizon Asset Securities, as depositor, pursuant to Mortgage Loan Purchase Agreements. In these agreements, First Horizon Home Loan made certain representations and warranties to First Horizon Asset Securities regarding the groups of loans collateralizing the Certificates. These representations and warranties were assigned by First Horizon Asset Securities to the trustees for the benefit of the Certificateholders. 2. 54. First Horizon Asset Securities
Defendant First Horizon Asset Securities is a wholly owned limited purpose
finance subsidiary of First Tennessee. It is a special-purpose vehicle formed solely for the purpose of purchasing mortgage loans, filing registration statements with the SEC, forming issuing trusts, assigning mortgage loans and all of its rights and interests in such mortgage loans to the trustee for the benefit of the certificateholders, and depositing the underlying mortgage loans into the issuing trusts.
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55.
Defendant First Horizon Asset Securities was the depositor for the
Securitizations. In its capacity as depositor, First Horizon Asset Securities purchased the mortgage loans from First Horizon Home Loan (as sponsor) pursuant to the Mortgage Loan Purchase Agreements.4 First Horizon Asset Securities then sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trusts. First Horizon Asset Securities, together with the other Defendants, was also responsible for preparing and filing the Registration Statement pursuant to which the Certificates were offered for sale. The trusts in turn held the mortgage loans for the benefit of the Certificateholders, and issued the Certificates in public offerings for sale to investors such as Fannie Mae and Freddie Mac. 3. 56. First Horizon National
Defendant First Horizon National employed its wholly owned subsidiaries in the
key steps of the securitization process. Unlike typical arms-length transactions, the Securitizations here involved various First Horizon National subsidiaries and affiliates at virtually every step in the process. The sponsor for the Securitizations was First Horizon Home Loan, the depositor was First Horizon Asset Securities, and one of the underwritersthe lead underwriter in the case of FHAMS 2005-AA10was FTN. 57. First Horizon National profited substantially from this vertically integrated
approach to mortgage-backed securitization. First Horizon Home Loan, First Horizon Asset Securities, and FTN are all included in First Horizon Nationals 2005 annual report as its principal corporate subsidiaries. Further, First Horizon National shares and, on information and belief, shared, overlapping management with the other First Horizon Defendants. For instance, Defendant Baker was (a) the Chief Executive Officer, President, and a Director of In some of the Securitizations, First Horizon Asset Securities actually purchased the loans from First Tennessee, to which First Horizon Home Loan had previously sold the loans. 19
4
Defendant First Horizon Asset Securities; (b) the Chief Executive Officer and President of Defendant First Tennessee; and (c) the President and Chief Executive Officer of Defendant First Horizon National. 58. As the corporate parent of First Horizon Asset Securities and FTN, and the former
corporate parent of First Horizon Home Loan, First Horizon National had the practical ability to direct and control the actions of First Horizon Home Loan, First Horizon Asset Securities, and FTN related to the Securitizations, and in fact exercised such direction and control over the activities of these entities related to the issuance and sale of the Certificates. 4. 59. Underwriter Defendants
FTN, UBS, Bear Stearns (now JP Morgan Securities), Credit Suisse, and Merrill
Lynch were, at all relevant times, registered broker/dealers, and were all among the leading underwriters of mortgage and other asset-backed securities in the United States. 60. Defendant FTN was the lead underwriter for the FHAMS 2005-AA10
Securitization, and it acted as an additional underwriter for the remaining four Securitizations. In these roles, FTN was responsible for underwriting the offer of the Certificates issued in all of the Securitizations, as well as for managing the sale of the Certificates issued in the FHAMS 2005AA10 Securitization to Fannie Mae, Freddie Mac, and other investors. 61. Defendant UBS was the lead underwriter for the FHAMS 2005-AA11
Securitization. In that role, UBS was responsible for underwriting the offer of the Certificates issued in that Securitization, as well as for managing the sale of the Certificates to Fannie Mae, Freddie Mac, and other investors. 62. Bear Stearns, now Defendant JP Morgan Securities, was the lead underwriter for
the FHAMS 2005-AA12 Securitization. In that role, Bear Stearns was responsible for
20
underwriting the offer of the Certificates issued in that Securitization, as well as for managing the sale of the Certificates to Fannie Mae, Freddie Mac, and other investors. 63. Defendant Credit Suisse was the lead underwriter for the FHAMS 2006-AA1
Securitization. In that role, Credit Suisse was responsible for underwriting the offer of the Certificates issued in that Securitization, as well as for managing the sale of the Certificates to Fannie Mae, Freddie Mac, and other investors. 64. Defendant Merrill Lynch was the lead underwriter for the FHAMS 2005-AA9
Securitization. In that role, Merrill Lynch was responsible for underwriting the offer of the Certificates issued in that Securitization, as well as for managing the sale of the Certificates to Fannie Mae, Freddie Mac, and other investors. 65. Each of the Underwriter Defendants was obligated to conduct meaningful due
diligence to ensure that the Registration Statement for the Securitizations they underwrote did not contain any material misstatements or omissions, including the manner in which the underlying mortgage loans were originated, transferred, and underwritten. 5. 66. Individual Defendants
At the time of the Securitizations, Defendant Gerald L. Baker was (a) the Chief
Executive Officer, President, and a Director of Defendant First Horizon Asset Securities; (b) the Chief Executive Officer and President of Defendant First Tennessee; and (c) the President and Chief Executive Officer of Defendant First Horizon National. Mr. Baker signed the Shelf Registration Statement and the amendment thereto. 67. At the time of the Securitizations, Defendant Peter F. Makowiecki was (a) the
Chief Financial Officer and Treasurer of Defendant First Horizon Asset Securities; and (b) the President and Chief Executive Officer of Defendant First Horizon Home Loan beginning in
21
January 2006, after previously serving as its Chief Financial Officer. Mr. Makowiecki signed the Shelf Registration Statement and the amendment thereto. 68. At the time of the Securitizations, Defendant Charles G. Burkett was (a) a
Director of First Horizon Asset Securities; (b) the President of Banking of Defendant First Tennessee, and (c) the President of Banking of Defendant First Horizon National. Mr. Burkett signed the Shelf Registration Statement and the amendment thereto. 69. At the time of the Securitizations, Defendant Thomas J. Wageman was a Director
of Defendant First Horizon Asset Securities. Mr. Wageman signed the Shelf Registration Statement and the amendment thereto. B. 70. The Defendants Failure to Conduct Proper Due Diligence The Defendants failed to conduct adequate and sufficient due diligence to ensure
that the mortgage loans underlying the Securitizations complied with the representations in the Registration Statement. 71. During the time period in which the Certificates were issuedapproximately
2005 through 2006First Horizon was well-established in the mortgage-backed securitization market. In an effort to increase revenue and profits in an rapidly expanding market, First Horizon National increased the volume of mortgages it securitized through its subsidiaries First Tennessee and First Horizon Home Loan. In 2005, First Horizon securitized $892.66 million of mortgage loans. In 2006, that figure nearly doubled, to $1.74 billion. 72. Defendants had enormous financial incentives to complete as many offerings as
quickly as possible, without regard to ensuring the accuracy or completeness of the Registration Statement or conducting adequate and reasonable due diligence. First Horizon Asset Securities, as the depositor, was paid a percentage of the total dollar amount of the offerings upon
22
completion of the Securitizations and the Underwriter Defendants were paid commissions based on the amount they received from the sale of the Certificates to the public. 73. The push to securitize large volumes of mortgage loans contributed to the absence
of controls needed to prevent the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statement. In particular, Defendants failed to conduct adequate due diligence or to otherwise ensure the accuracy of the statements in the Registration Statement pertaining to the Securitizations. 74. For instance, the Underwriter Defendants routinely retained third parties,
including Clayton Holdings, Inc. (Clayton), to analyze the loans they were considering placing in their securitizations, but waived a significant number of loans into securitizations that these firms had recommended for exclusion, and did so without taking adequate steps to ensure that these loans had in fact been underwritten in accordance with applicable guidelines or had compensating factors that excused the loans non-compliance with those guidelines. On January 27, 2008, Clayton revealed that it had entered into an agreement with the New York Attorney General (the NYAG) to provide documents and testimony regarding its due diligence reports, including copies of the actual reports provided to its clients. According to The New York Times, as reported on January 27, 2008, Clayton told the NYAG that starting in 2005, it saw a significant deterioration of lending standards and a parallel jump in lending expectations, and some investment banks directed Clayton to halve the sample of loans it evaluated in each portfolio. The Underwriter Defendants were negligent in allowing into their securitizations a substantial number of mortgage loans that, as reported to them by third-party due diligence firms, did not conform to the underwriting standards stated in the registration statements pursuant to
23
which they made offerings, including the prospectuses and prospectus supplements that formed part of those registration statements. 75. As set forth in detail below, numerous other facts confirm that the Underwriter
Defendants failed to perform adequate due diligence when underwriting securitizations of mortgage-backed securities, because each was engaged in a push to expand its role in the mortgage-backed securities market. 1. 76. UBS
UBS was negligent in allowing into its securitizations a substantial number of
mortgage loans that, as reported to it by third-party due diligence firms, did not conform to the underwriting standards stated in the registration statements pursuant to which it made offerings, including the prospectuses and prospectus supplements that formed part of those registration statements. Claytons trending reports revealed that, in the period from the first quarter of 2006 to the second quarter of 2007, 20 percent of the mortgage loans UBS submitted to Clayton to review in residential mortgage-backed securities groups were rejected by Clayton as falling outside the applicable underwriting guidelines. Of the mortgage loans that Clayton found defective, 33 percent of the loans were subsequently waived in by UBS without proper consideration and analysis of compensating factors and included in securitizations such as the ones in which Fannie Mae and Freddie Mac invested here. See Clayton Trending Reports, available at http://fcic.law.stanford.edu/hearings/testimony/the-impact-of-the-financial-crisissacramento#documents. 77. According to news reports, on December 24, 2007, Swiss regulators announced
that the Swiss banking department charged with oversight of Swiss investment banks would be initiating a full investigation into how UBS AG, the ultimate corporate parent of UBS, incurred
24
massive losses in connection with the subprime markets in the United States, resulting in it taking a $10 billion write-down in its mortgage backed investments.5 78. On January 30, 2008, UBS AG pre-announced its fourth-quarter 2007 and full-
year 2007 results, disclosing an additional $4 billion in write-downs in positions related to the U.S. residential mortgage market. See UBS Pre-Announcement (Jan. 30, 2008), available at http://www.ubs.com/1/e/about/news.html?newsId=135568. 79. In April 2008, UBS AG presented Swiss banking regulators with a report
detailing the reasons for its massive losses related to the U.S. subprime mortgage market. In that report, UBS AG admitted that its losses in the U.S. subprime mortgage market were due to a litany of errors, including inadequate risk management and a focus on revenue growth, which contributed to the weaknesses in its substantial subprime portfolio. The report is available at http://www.ubs.com/1/e/investors/releases?newsIs Archive=Yes. 2. 80. Bear Stearns (now JP Morgan Securities)
Bear Stearns was negligent in allowing into its securitizations a substantial
number of mortgage loans that, as reported to it by third-party due diligence firms, did not conform to the underwriting standards stated in the registration statements pursuant to which it made offerings, including the prospectuses and prospectus supplements that formed part of those registration statements. Claytons trending reports revealed that, in the period from the first quarter of 2006 to the second quarter of 2007, 16 percent of the mortgage loans Bear Stearns submitted to Clayton to review in residential mortgage-backed securities groups were rejected by Clayton as falling outside the applicable underwriting guidelines. Of the mortgage loans that
See, e.g., Paul Verschuur, Swiss Regulator to See What Caused Subprime Loss (Dec. 24, 2007), Bloomberg News, available at http://www.bloomberg.com/apps/news?pid= newsarchive&sid=aD6AJy16qjgg. 25
Clayton found defective, 42 percent of the loans were subsequently waived in by Bear Stearns without proper consideration and analysis of compensating factors and included in securitizations such as the ones in which Fannie Mae and Freddie Mac invested here. See Clayton Trending Reports, available at http://fcic.law.stanford.edu/hearings/testimony/theimpact-of-the-financial-crisis-sacramento#documents. 81. In connection with a civil case brought against Bear Stearns affiliate EMC
Mortgage Corporation, certain previously internal documents were made public in 2010. Internal Bear Stearns communications demonstrate that the third-party due diligence process was failing. Jeffrey Verschleiser, who at the time was a Senior Managing Director at Bear Stearns, in e-mails to another Senior Managing Director, stated in 2006 that [w]e are wasting too much money on Bad Due Diligence and that [w]e are just burning money hiring [third-party due diligence firms]. 82. Similarly, starting in April 2005, the former head of Bear Stearns due diligence
department, John Mongelluzzo, repeatedly implored the co-heads of the mortgage finance department, Mary Haggerty and Baron Silverstein, to revise the due diligence protocols of Bear Stearns affiliate, EMC Mortgage Corp. Recognizing that the existing protocols allowed for the purchase and securitization of defective loans, Mr. Mongelluzzo proposed to rank loans slotted for due diligence by risk criteria, and apply incremental resources to the review of each successive gradation of loan. But Ms. Haggerty and Mr. Silverstein rejected this proposal. 83. Other documents recently made public in the EMC Mortgage litigation revealed
that, around May 2005, Ms. Haggerty and Mr. Silverstein had also rejected Mr. Mongelluzzos proposal to track loans that are overridden by our due diligence managers and track the performance of those loans.
26
84.
Further demonstrating problems within Bear Stearns due diligence processes is
the recent revelation that, by 2006, the accrued number of non-compliant loans purchased by the Bear Stearns affiliate EMC Mortgage Corp. was so high that its quality control and claims departments were overwhelmed by the sheer volume of repurchase claims that needed to be processed. A recently publicized February 28, 2006 internal audit report identified a significant backlog for collecting from and submitting 9,000 outstanding repurchase claims to sellers, worth over $720 million. The report went on to conclude that the procedures in place were insufficient to process, resolve, and monitor so many claims. 85. Other internal communications further confirm that the Bear Stearns enterprise
was securitizing large numbers of defective loans amid a breakdown in its due diligence processes. In a March 2006 email only recently made public, Bear Stearns Vice President Robert Durden admitted: I agree the flow loans were not flagged appropriately and we securitized many of them which are still to this day not cleared. I think the ball was dropped big time on the flow processes involved in the post close [due diligence], from start to finish. 3. 86. Credit Suisse
Credit Suisse touted that, by 2007, it had become a major arranger and marketer
of residential mortgage-backed securities. It prominently displays on its website an award by Tradeweb, naming Credit Suisse the #1 MBS Dealer overall for 2007, 2008, 2009, and 2010. See https://www.credit-suisse.com/investment_banking/fixed_income/en/structured_ products.jsp. Credit Suisse further stated in its 2009 Annual Report (at 27) that it was [r]anked number one by Tradeweb in RMBS pass-through trading, with 19% market share for 2009. The report is available at https://www.credit-suisse.com/investors/doc/ar09/csg_ar_2009_en.pdf. 87. When the securitization machine stopped, Credit Suisse was forced to take
massive write-downs on its books. On February 19, 2008, Credit Suisse announced write-downs 27
of $2.8 billion in positions related to mortgage-backed securities and collateralized debt obligations. The announcement is available at https://www.credit-suisse.com/investors/doc/ 2007_4q_supplement_ upd_feb19.pdf. 88. According to news reports, the SEC has subpoenaed Credit Suisse Group AG,
seeking documents relating to securitized home loans. See, e.g., Jody Shenn and Shannon D. Harrington, SEC Subpoenas Credit Suisse Over Mortgages, MBIA Says (May 5, 2011), at http://www.bloomberg.com/news/2011-05-05/sec-subpoenas-credit-suisse-over-mortgagesmbia-says-in-n-y-court-filing.html. 89. MBIA Insurance Corp. (MBIA), which provided insurance coverage for some
of Credit Suisses securitizations, has filed suit alleging that Credit Suisse, in seeking financial guaranty insurance for its securitizations, misrepresented the quality of the underlying mortgage loans. See MBIA v. Credit Suisse Sec., No. 603751/09 (N.Y. Sup. Ct. Dec. 14, 2009). MBIA, which gained access to the loan origination files, found that over 80 percent of the loans in the pools underlying securitizations sponsored and underwritten by Credit Suisse entities were not originated in compliance with the applicable underwriting guidelines. In a suit brought by another monoline insurer against Credit Suisse, Ambac v. DLJ Mortgage Capital et al., No. 600070/2010 (N.Y. Sup. Ct. Jan. 22, 2010), Credit Suisse has produced documents demonstrating that when faced with alarming early payment default rates on loans that it planned to securitize, Credit Suisse employees sought quality control reports. Those reports showed that substantial percentages of the delinquencies had been caused by substandard underwriting, misstated incomes, and undisclosed debts. 90. Credit Suisse was negligent in allowing into its securitizations a substantial
number of mortgage loans that, as reported to it by third-party due diligence firms, did not
28
conform to the underwriting standards stated in the registration statements pursuant to which it made offerings, including the prospectuses and prospectus supplements that formed part of those registration statements. Claytons trending reports revealed that, in the period from the first quarter of 2006 to the second quarter of 2007, 32 percent of the mortgage loans Credit Suisse submitted to Clayton to review in residential mortgage-backed securities groups were rejected by Clayton as falling outside the applicable underwriting guidelines. Of the mortgage loans that Clayton found defective, 33 percent of the loans were subsequently waived in by Credit Suisse without proper consideration and analysis of compensating factors and included in securitizations such as the ones in which Fannie Mae and Freddie Mac invested here. See Clayton Trending Reports, available at http://fcic.law.stanford. edu/hearings/testimony/theimpact-of-the-financial-crisis-sacramento#documents. 4. 91. Merrill Lynch
From approximately 2004, Merrill Lynch made it its mission to increase its share
of the mortgage-backed securities market. In his book, David Faber describes Merrill Lynchs focus on mortgage-backed securities in the heyday of this business: As Merrill headed into 2007, it had . . . a mission to get even bigger in the one area that had been so instrumental to all its success: mortgages. It wanted to originate more mortgages, buy more mortgages, package more mortgages into securities, and package more of those securities into [collateralized debt obligations]. And of course, it wanted to sell those securities and CDOs as fast as it possibly could, because thats where the money was . . . . David Faber, And Then The Roof Caved In: How Wall Streets Greed and Stupidity Brought Capitalism to its Knees 131 (Wiley 2009). 92. In its quest to increase its market share, Merrill Lynch faced fierce competition
from an increasing number of market players. The push to securitize large volumes of mortgage loans contributed to the absence of controls needed to ensure that the loans conformed to its 29
representations. In particular, Merrill Lynch was negligent in allowing into its securitizations a substantial number of mortgage loans that, as reported to it by third-party due diligence firms, did not conform to the underwriting standards stated in the registration statements pursuant to which it made offerings, including the prospectuses and prospectus supplements that formed part of those registration statements. Claytons trending reports revealed that, in the period from the first quarter of 2006 to the second quarter of 2007, 23 percent of the mortgage loans Merrill Lynch submitted to Clayton to review in residential mortgage-backed securities groups were rejected by Clayton as falling outside the applicable underwriting guidelines. Of the mortgage loans that Clayton found defective, 32 percent of the loans were subsequently waived in by Merrill Lynch without proper consideration and analysis of compensating factors and included in securitizations such as the ones in which Fannie Mae and Freddie Mac invested here. See Clayton Trending Reports, available at http://fcic.law.stanford.edu/hearings/testimony/theimpact-of-the-financial-crisis-sacramento#documents. 93. Within only a few short years, Merrill was one of the top underwriters of
mortgage-backed securities. As Faber explains, Merrill Lynchs Chief Executive Officer, Stanley ONeal, had increased profitability by having Merrill Lynch take on more and more risk. The company dove headlong into a mortgage market that was poised to collapse. And Then the Roof Caved In, at 133. This level of risk gave Merrill Lynch a huge incentive to securitize mortgage loans and offload mortgage-backed securities as quickly as it could, without conducting adequate due diligence. 94. Merrill Lynchs underwriting and due diligence practices with respect to
mortgage-backed securities are currently being investigated by the SEC. In October 2007, the SEC launched an informal investigation into Merrill Lynchs underwriting of mortgage-backed
30
securities. See, e.g., Associated Press, Merrill Lynch Acknowledges SEC Investigation (Nov. 7, 2007), at http://www.msnbc.msn.com/id/21680312/ns/business-us_business/t/merrill-lynchacknowledges-sec-investigation/#.TkDMnmEniSo. That investigation was upgraded to a formal inquiry in early 2008. See, e.g., Amir Efrati, Susan Pulliam, Kara Scannel and Craig Karmin, Prosecutors Widen Probes Into SubprimeU.S. Attorneys Office Seeks Merrill Material; SEC Upgrades Inquiry, Wall St. J., Feb. 8, 2008. C. 95. Additional Allegations Regarding the Liability of JP Morgan Securities as Successor to Bear Stearns On March 16, 2008, Bear Stearns parent company, The Bear Stearns Companies
Inc., entered into an Agreement and Plan of Merger with JPMorgan Chase for the purpose of consummating a strategic business combination transaction between the two entities. 96. It was pursuant to this Agreement that, as described supra at paragraph 20, The
Bear Stearns Companies Inc. merged with Bear Stearns Merger Corporation, a wholly owned subsidiary of JPMorgan Chase, making The Bear Stearns Companies Inc. a wholly owned subsidiary of JPMorgan Chase. As such, upon the May 30, 2008 effective date of the merger, JPMorgan Chase became the ultimate corporate parent of The Bear Stearns Companies Inc.s subsidiaries, including Bear Stearns. 97. According to The New York Times in an article published on April 6, 2008,
JPMorgan took immediate control of The Bear Stearns Companies Inc.s business and personnel decisions. The article cited an internal JPMorgan memo, revealing that JPMorgan Chase, which is taking over the rival investment bank Bear Stearns, will dominate the management ranks of the combined investment banking and trading businesses. It was planned that of the 26 executive positions in the newly merged investment banking and trading division, only five would be drawn from Bear Stearns. 31
98.
In a June 30, 2008 press release describing internal restructuring to be undertaken
pursuant to the merger, JPMorgan stated its intent to assume Bear Stearns and its debts, liabilities, and obligations as follows: Following completion of this transaction, Bear Stearns plans to transfer its brokerdealer subsidiary Bear, Stearns & Co. Inc. to JPMorgan Chase, resulting in a transfer of substantially all of Bear Stearns assets to JPMorgan Chase. In connection with such transfer, JPMorgan Chase will assume (1) all of Bear Stearns then-outstanding registered U.S. debt securities; (2) Bear Stearns obligations relating to trust preferred securities; (3) Bear Stearns thenoutstanding foreign debt securities; and (4) Bear Stearns guarantees of thenoutstanding foreign debt securities issued by subsidiaries of Bear Stearns, in each case, in accordance with the agreements and indentures governing these securities. 99. Bear Stearns & Co., Inc. subsequently merged with J.P. Morgan Securities Inc.
and is now doing business as J.P. Morgan Securities Inc. JPMorgans 2008 Annual Report described the transaction as a merger, stating that [o]n October 1, 2008, J.P. Morgan Securities Inc. merged with and into Bear, Stearns & Co. Inc., and the surviving entity changed its name to J.P. Morgan Securities Inc. 100. Further, the former Bear Stearns website, www.bearstearns.com, redirects Bear
Stearns visitors to J.P. Morgan Securities Inc.s website. 101. J.P. Morgan Securities Inc. was fully aware of the pending and potential claims
against Bear Stearns when it consummated the merger. J.P. Morgan Securities Inc. has further evinced its intent to assume Bear Stearns liabilities by paying to defend and settle lawsuits brought against Bear Stearns. 102. J.P. Morgan Securities Inc. later announced its intention to convert to a limited
liability company, effective September 1, 2010, as part of which it changed its name to J.P. Morgan Securities LLC.
32
103.
As a result of the merger, Defendant JP Morgan Securities is the successor-in-
interest to Bear Stearns, and is jointly and severally liable for the misstatements and omissions of material fact alleged herein of Bear Stearns & Co., Inc. This action is brought against JP Morgan Securities as successor to Bear Stearns. III. THE REGISTRATION STATEMENT AND THE PROSPECTUS SUPPLEMENTS A. 104. Compliance With Underwriting Guidelines The Prospectus and Prospectus Supplement for each Securitization describe the
mortgage loan underwriting guidelines pursuant to which the mortgage loans underlying the related Securitizations were to have been originated. These guidelines were intended to assess the creditworthiness of the borrower, the ability of the borrower to repay the loan, and the adequacy of the mortgaged property as security for the loan. 105. The statements made in the Prospectus and Prospectus Supplements, which, as
discussed, formed part of the Registration Statement for each Securitization, were material to a reasonable investors decision to purchase and invest in the Certificates because the failure to originate a mortgage loan in accordance with the applicable guidelines creates a higher risk of delinquency and default by the borrower, as well as a risk that losses upon liquidation will be higher, thus resulting in a greater economic risk to an investor. 106. The Prospectuses and Prospectus Supplements for the Securitizations contained
several key statements with respect to the underwriting standards of First Horizon Home Loan, which originated or acquired the loans in the Securitizations. For example, the Prospectus Supplements represented that the underlying mortgage loans were underwritten in accordance with First Horizon Home Loans Super Expanded Underwriting Guidelines (the Guidelines). Though those Guidelines were less restrictive than First Horizon Home Loans standard guidelines, the Prospectusesto which the Prospectus Supplements referredconfirmed that 33
they generally include a set of specific criteria pursuant to which the underwriting evaluation is made, and which are intended to evaluate the prospective mortgagors credit standing and repayment ability, and the value and adequacy of the proposed property as collateral. 107. Likewise, the Prospectuses provided that exceptions could be made to the
Guidelines on a case-by-case basis, only where compensating factors exist and if the mortgage loan was in substantial compliance with the underwriting standards: [A] mortgage loan will be considered to be originated in accordance with a given set of underwriting standards if, based on an overall qualitative evaluation, the loan substantially complies with the underwriting standards. For example, a mortgage loan may be considered to comply with a set of underwriting standards, even if one or more specific criteria included in the underwriting standards were not satisfied, if other factors compensated for the criteria that were not satisfied or if the mortgage loan is considered to be in substantial compliance with the underwriting standards. (Emphasis added). 108. With respect to the information evaluated by First Horizon Home Loan in
deciding whether to give a loan, each Prospectus represented that: In the loan application process, prospective mortgagors will be required to provide information regarding such factors as their assets, liabilities[,] income, credit history, employment history, and other related items. Each prospective mortgagor will also provide an authorization to apply for a credit report which summarizes the mortgagors credit history. 109. Additionally, each Prospectus claimed that, [i]n determining the adequacy of the
property as collateral, an independent appraisal is made of each property considered for financing. It further represented that [t]he value of the Property being financed, as indicated by the appraisal, must be such that it currently supports, and is anticipated to support in the future, the outstanding loan balance.
34
110.
The Prospectuses also stated that, even when the loans were not originated by
First Horizon, a review may have been conducted by First Horizon itselfdepending on factors relating to the experience of the seller, characteristics of the specific mortgage loan, including the principal loan balance, the Loan-to-Value Ratio, the loan type or loan program, and the applicable credit score of the related mortgagor used in connection with the origination of the mortgage loan, as determined based on a credit scoring model acceptable to First Horizon. 111. As discussed infra at paragraphs 129 to 152, in fact the originators of the
mortgage loans in the Supporting Loan Groups for the Securitizations did not adhere to the stated underwriting guidelines, thus rendering the description of those guidelines in the Prospectuses and Prospectus Supplements false and misleading. 112. Further, the Prospectuses described additional representations and warranties
concerning the mortgage loans backing the Securitizations that were made by the seller, including that all of the mortgage loans in the mortgage pool complied in all material respects with all applicable local, state and federal laws at the time of origination. 113. The inclusion of this representation in the Prospectuses had the purpose and effect
of providing additional assurance to investors regarding the quality of the mortgage collateral underlying the Securitizations. This representation was material to a reasonable investors decision to purchase the Certificates. B. 114. Statements Regarding the Occupancy Status of Borrowers The Prospectus Supplements contained collateral group-level information about
the occupancy status of the borrowers of the loans in the Securitizations. Occupancy status refers to whether the property securing a mortgage is to be the primary residence of the borrower, a second home, or an investment property. The Prospectus Supplement for each Securitization presented this information in tabular form in a table entitled Occupancy Types 35
for the Mortgage Loans. This table divided all the loans in the collateral group into categories reflecting occupancy status: (i) Primary Residence, (ii) Second Residence, and (iii) Investor Property. 115. For each category, the table stated the number of loans in that category.
Occupancy statistics for the Supporting Loan Groups for each Securitization were reported in the Prospectus Supplements as follows:6 Table 4
Transaction FHAMS 2005-AA9 FHAMS 2005-AA10 FHAMS 2005-AA11 FHAMS 2005-AA12 FHAMS 2006-AA1 Supporting Loan Group Group 2 Group 1 Group 1 Group 2 Group 1 Primary Residence (%) 53.69 49.94 51.50 60.88 46.25 Second Residence (%) 7.70 9.11 6.15 5.28 7.89 Investor Property (%) 38.60 40.95 42.35 33.84 45.86
116.
reported that a significant percentage of the mortgage loans in the Supporting Loan Groups were owner occupied. Indeed, in three of the Securitizations, the Prospectus Supplement represented that the majority of loans in the Supporting Loan Groups were owner occupied. 117. The statements about occupancy status were material to a reasonable investors
decision to invest in the Certificates. Information about occupancy status is an important factor in determining the credit risk associated with a mortgage loan, and therefore, the securitization that it collateralizes. Because borrowers who reside in mortgaged properties are more likely to care for their primary residence and less likely to default than borrowers who purchase homes as second homes or investments and live elsewhere, the percentage of loans in the collateral group Each Prospectus Supplement provides the total number of loans and the number of loans in each category. These numbers have been converted into percentages. 36
6
of a securitization that are secured by mortgage loans on owner-occupied residences is an important measure of the risk of the certificates sold in that securitization. 118. All other things being equal, the higher the percentage of loans not secured by
owner-occupied residences, the greater the risk of loss to the certificateholders. Even small differences in the percentages of owner-occupied, second home, and investment properties in the collateral group of a securitization can have a significant effect on the risk of each certificate sold in that securitization, and thus, are important to a reasonable investors decision as to whether to purchase any such certificate. As discussed infra at paragraphs 130 to 133, the Registration Statement for the Securitizations materially overstated the percentage of loans in the Supporting Loan Groups that were owner occupied, thereby misrepresenting the degree of risk of the GSE Certificates. C. 119. Statements Regarding Loan-to-Value Ratios The loan-to-value ratio of a mortgage loan, or LTV ratio, is the ratio of the
generally the lower of the purchase price or the appraised value of the property. In a refinancing or home-equity loan, there is no purchase price to use as the denominator, so the denominator is often equal to the appraised value at the time of the origination of the refinanced loan. Accordingly, an accurate appraisal is essential to an accurate LTV ratio. In particular, an inflated appraisal will understate, sometimes greatly, the credit risk associated with a given loan by artificially lowering the LTV ratio. 121. The Prospectus Supplement for each Securitization also contained group-level
information about the LTV ratio for the underlying group of loans as a whole. The percentage of
37
loans with an LTV ratio at or less than 80 percent, and the percentage of loans with an LTV ratio greater than 95 percent, as reported in the Prospectus Supplements for the Supporting Loan Groups, are reflected in Table 5 below. Table 5
Percentage of Loans, By Aggregate Principal Balance, With LTV Ratios Less than or Equal to 80% 97.76 97.22 98.27 98.26 97.64 Percentage of Loans, By Aggregate Principal Balance, With LTV Ratios Greater than 95% 0.00 0.00 0.00 0.00 0.00
Transaction
Group 2 Group 1 Group 1 Group 2 Group 1
122.
reported that the vast majority of the mortgage loans in the Supporting Loan Groups had LTV ratios of 80 percent or less, and zero mortgage loans in the Supporting Loan Groups had LTV ratios over 95 percent. 123. The LTV ratio is among the most important measures of the risk of a mortgage
loan, and thus, it is one of the most important indicators of the default risk of the mortgage loans underlying the Certificates. The lower the ratio, the less likely that a decline in the value of the property will wipe out an owners equity, and thereby give an owner an incentive to stop making mortgage payments and abandon the property. This ratio also predicts the severity of loss in the event of default. The lower the LTV ratio, the greater the equity cushion, so the greater the likelihood that the proceeds of foreclosure will cover the unpaid balance of the mortgage loan. 124. Thus, a reasonable investor considers LTV ratios material to the decision of
whether to purchase a certificate in a mortgage-backed securitization. Even small differences in
38
the LTV ratios of the mortgage loans in the collateral group of a securitization have a significant effect on the likelihood that the collateral groups will generate sufficient funds to pay certificateholders. As discussed at paragraphs 134 to 139 infra, the Registration Statement for the Securitizations materially overstated the percentage of loans in the Supporting Loan Groups with an LTV ratio at or less than 80 percent, and materially understated the percentage of loans in the Supporting Loan Groups with an LTV ratio over 95 percent, thereby misrepresenting the degree of risk of the GSE Certificates. D. 125. Statements Regarding Credit Ratings Credit ratings are assigned to the tranches of mortgage-backed securitizations by
the credit rating agencies, including Moodys Investors Service, Standard & Poors, and Fitch Ratings. Each credit rating agency uses its own scale with letter designations to describe various levels of risk. In general, AAA or its equivalent ratings are at the top of the credit rating scale and are intended to designate the safest investments. C and D ratings are at the bottom of the scale and refer to investments that are currently in default and exhibit little or no prospect for recovery. At the time the GSEs purchased the GSE Certificates, investments with AAA or its equivalent ratings historically experienced a loss rate of less than .05 percent. Investments with a BBB rating, or its equivalent, historically experienced a loss rate of less than one percent. As a result, securities with credit ratings between AAA or its equivalent through BBB- or its equivalent were generally referred to as investment grade. 126. Rating agencies determine the credit rating for each tranche of a mortgage-backed
securitization by comparing the likelihood of contractual principal and interest repayment to the credit enhancements available to protect investors. Rating agencies determine the likelihood of repayment by estimating cashflows based on the quality of the underlying mortgages by using sponsor-provided loan-level data. Credit enhancements, such as subordination, represent the 39
amount of cushion or protection from loss incorporated into a given securitization.7 This cushion is intended to improve the likelihood that holders of highly rated certificates receive the interest and principal to which they are contractually entitled. The level of credit enhancement offered is based on the make-up of the loans in the underlying collateral group. Riskier loans underlying the securitization necessitate higher levels of credit enhancement to insure payment to senior certificateholders. If the collateral within the deal is of a higher quality, then rating agencies require less credit enhancement for AAA or its equivalent rating. 127. Credit ratings have been an important tool to gauge risk when making investment
decisions. For almost a hundred years, investors like pension funds, municipalities, insurance companies, and university endowments have relied heavily on credit ratings to assist them in distinguishing between safe and risky investments. Fannie Maes and Freddie Macs respective internal policies limited their purchases of private label residential mortgage-backed securities to those rated AAA (or its equivalent), and in very limited instances, AA or A bonds (or their equivalent). 128. Each tranche of the Securitizations received a credit rating upon issuance, which
purported to describe the riskiness of that tranche. Defendants reported the credit ratings for each tranche in the Prospectus Supplements. The credit rating provided for each of the GSE Certificates was AAA or its equivalent. The accuracy of these ratings was material to a reasonable investors decision to purchase the GSE Certificates. As set forth in Table 8, infra, the ratings for the Securitizations were inflated as a result of Defendants provision of incorrect
Subordination refers to the fact that the certificates for a mortgage-backed securitization are issued in a hierarchical structure, from senior to junior. The junior certificates are subordinate to the senior certificates in that, should the underlying mortgage loans become delinquent or default, the junior certificates suffer losses first. These subordinate certificates thus provide a degree of protection to the senior certificates from losses on the underlying loans. 40
data concerning the attributes of the underlying mortgage collateral to the ratings agencies, and, as a result, Defendants sold and marketed the GSE Certificates as AAA (or its equivalent) when, in fact, they were not. IV. THE FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENT AND PROSPECTUS SUPPLEMENTS A. 129. The Statistical Data Provided in the Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False A review of loan-level data was conducted in order to assess whether the
statistical information provided in the Prospectus Supplements was true and accurate. For each Securitization, a sample of 1,000 randomly selected loans per Supporting Loan Group, or all of the loans in the group if there were fewer than 1,000 loans in the Supporting Loan Group, was reviewed. The sample data confirms, on a statistically significant basis, material misrepresentations of underwriting standards and of certain key characteristics of the mortgage loans across the Securitizations. The data review demonstrates that the data concerning owner occupancy and LTV ratios was materially false and misleading. 1. 130. Owner-Occupancy Data Was Materially False
Prospectus Supplements were materially false and inflated. In fact, significantly fewer underlying properties were occupied by their owners than disclosed in the Prospectus Supplements, and correspondingly, more were held as second homes or investment properties. 131. To determine whether a given borrower actually occupied the property as
claimed, a number of tests were conducted, including, inter alia, whether, months after the loan closed, the borrowers tax bill was being mailed to the property or to a different address; whether the borrower had claimed a tax exemption on the property; and whether the mailing address of the property was reflected in the borrowers credit reports, tax records, or lien records. Failing 41
two or more of these tests is a strong indication that the borrower did not live at the mortgaged property and instead used it as a second home or an investment property, both of which make it much more likely that a borrower will not repay the loan. A significant number of the loans failed two or more of these tests, indicating that the owner-occupancy statistics provided to investors, like Fannie Mae and Freddie Mac, were materially false and misleading. 132. For example, for the FHAMS 2005-AA10 Securitization, for which First Horizon
Home Loan was the sponsor and FTN was the lead underwriter, the Prospectus Supplement stated that 50.06 percent of the underlying properties by loan count in the Supporting Loan Group were not owner-occupied. But the data review revealed that 13.87 percent of the properties represented as owner-occupied in the sample showed strong indications that their owners in fact lived elsewhere, suggesting that the true percentage of non-owner-occupied properties was 56.99 percent, a significantly higher percentage than was reported in the Prospectus Supplement.8 133. The data review revealed that, for each Securitization, the Prospectus Supplement
misrepresented the percentage of non-owner-occupied properties. The true percentage of nonowner-occupied properties, as determined by the data review, versus the percentage stated in the Prospectus Supplements for each Securitization, is reflected in Table 6 below. Table 6 demonstrates that the Prospectus Supplements for each Securitization understated the percentage of non-owner-occupied properties by at least 6 percent, and for two of the Securitizations, by 7.5 percent or more.
This conclusion is arrived at by summing (a) the stated non-owner-occupied percentage in the Prospectus Supplement (here, 50.06) and (b) the product of (i) the stated owner-occupied percentage (here, 49.94) and (ii) the percentage of the properties represented as owner-occupied in the sample that showed strong indications that their owners in fact lived elsewhere (here, 13.87 percent). 42
Table 6
Percentage of Properties Reported as OwnerOccupied With Strong Indication of Non-OwnerOccupancy9 12.50 13.87 14.64 14.18 13.43
Transaction
Reported Percentage of Non-OwnerOccupied Properties
Actual Percentage of Non-OwnerOccupied Properties
Prospectus Percentage Understatement of Non-OwnerOccupied Properties 6.71 6.93 7.54 8.63 6.21
46.31 50.06 48.50 39.12 53.75
53.02 56.99 56.04 47.75 59.96
2. 134.
Loan-to-Value Data Was Materially False
The data review has revealed further that the LTV ratios disclosed in the
Prospectus Supplements were materially false and understated, as more specifically set out below. For each of the sampled loans, an industry-standard automated valuation model (AVM) was used to calculate the value of the underlying property at the time the mortgage loan was originated. AVMs are routinely used in the industry as a way of valuing properties during prequalification, origination, portfolio review and servicing. AVMs rely upon similar data as appraisersprimarily, county assessor records, tax rolls, and data on comparable properties. AVMs produce independent, statistically derived valuation estimates by applying modeling techniques to this data. 135. Applying the AVM to the available data for the properties securing the sampled
loans shows that the appraised values given to such properties were significantly higher than their actual values. The result of this overstatement of property values is a material
9
Strong indication is defined for purposes of this Complaint as failing two or more owner-occupancy tests, as explained supra. 43
understatement of LTV ratios. That is, if a propertys true value is significantly less than the value used in the loan underwriting, then the loan represents a significantly higher percentage of the propertys value. This, of course, increases the risk a borrower will not repay the loan and the risk of greater losses in the event of a default. 136. For example, for the FHAMS 2005-AA10 Securitization, which was sponsored by
First Horizon Home Loan and underwritten by FTN, the Prospectus Supplement stated that no mortgage loan had an LTV ratio above 95 percent. In fact, 10.69 percent of the sample of loans included in the data review, based on total principal balance, had LTV ratios above 95 percent. In addition, the Prospectus Supplement stated that 97.76 percent of the loans had LTV ratios at or below 80 percent. The data review indicated that only 60.44 percent of the loans had LTV ratios at or below 80 percent. 137. The data review revealed that for each Securitization, the Prospectus Supplement
misrepresented the percentage of loans with an LTV ratio that were above 95 percent, as well the percentage of loans that had an LTV ratio at or below 80 percent. Table 7 reflects (i) the true percentage of mortgages in the Supporting Loan Group with LTV ratios above 95 percent, versus the percentage reported in the Prospectus Supplement; and (ii) the true percentage of mortgages in the Supporting Loan Group with LTV ratios at or below 80 percent, versus the percentage reported in the Prospectus Supplement. The percentages listed in Table 7 were calculated by aggregated principal balance.
44
Table 7
PROSPECTUS Percentage of Loans Reported to Have LTV Ratios At or Less than 80% 97.76 97.22 98.27 98.26 97.64 DATA REVIEW True Percentage of Loans With LTV Ratios At or Less than 80% 60.44 60.62 61.85 62.10 66.27 PROSPECTUS Percentage of Loans Reported to Have LTV Ratios Over 95% 0.00 0.00 0.00 0.00 0.00 DATA REVIEW Percentage of Loans With LTV Ratios Over 95% 7.29 10.69 8.54 7.87 9.93
Transaction
138.
As Table 7 demonstrates, the Prospectus Supplements for the Securitizations
reported that none of the mortgage loans in the Supporting Loan Groups had LTV ratios over 95 percent. In contrast, the data review revealed that at least seven percent of the mortgage loans for each Securitization had LTV ratios over 95 percent. 139. These inaccuracies with respect to reported LTV ratios also indicate that the
representations in the Registration Statement relating to appraisal practices were false, and that the appraisers themselves, in many instances, furnished appraisals that they understood were inaccurate and that they knew bore no reasonable relationship to the actual value of the underlying properties. Indeed, independent appraisers following proper practices, and providing genuine estimates as to valuation, would not systematically generate appraisals that deviate so significantly (and so consistently upward) from the true values of the appraised properties. This conclusion is further confirmed by the findings of the Financial Crisis Inquiry Commission (FCIC), which identified inflated appraisals as a pervasive problem during the period of the
45
Securitizations, and determined through its investigation that appraisers were often pressured by mortgage originators, among others, to produce inflated results. See FCIC, Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (January 2011). B. 140. The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines The Registration Statement contained material misstatements and omissions
regarding compliance with underwriting guidelines. Indeed, the originators for the loans underlying the Securitizations systematically disregarded their underwriting guidelines in order to increase production and profits derived from their respective mortgage lending businesses. This is confirmed by the systematically misreported owner-occupancy and LTV statistics, discussed above, and by (1) admissions of First Horizon and allegations made in other suits that have revealed First Horizons widespread abandonment of reported underwriting guidelines during the relevant period; (2) the collapse of the Certificates credit ratings; and (3) the surge in delinquencies and defaults in the mortgage loans in the Supporting Loan Groups. 1. 141. First Horizon Home Loan Failed to Adhere to Its Underwriting Guidelines
First Horizons abandonment of underwriting guidelines is confirmed by reports,
lawsuits, and other sources that have described rampant underwriting failures by First Horizon throughout the period of the Securitizations. 142. On May 9, 2008, a group of plaintiffs filed a class action suit against First
Horizon National, First Tennessee, and Individual Defendants Baker, Makowiecki and Burkett, among others, for ERISA violations based on their investment of employee retirement plans in First Horizon Nationals own stock. See Sims v. First Horizon Natl Corp., No. 08-cv-2293 (W.D. Tenn. May 9, 2008). The plaintiffs claimed that First Horizon required plan participants 46
to invest in the companys stock, which was imprudent because First Horizon was lowering its underwriting standards, and increasing its use of off-balance sheet transactions. In their Third Amended Complaint, the plaintiffs alleged: First Horizons national expansion strategy consisted primarily of opening offices around the country, while failing to create an appropriate credit review structure, audit and accounting infrastructure to provide adequate oversight for the greatly increased production. First Horizon placed insufficient emphasis on such functions as internal audit and accounting and governmental compliance, while pouring resources into production. As of the beginning of 2006, First Horizons real estate valuation processes did not comply with regulatory guidance. While this significant problem was the subject of numerous regulatory examinations and communications, the flaws in First Horizons processes were so serious that the company failed to attain compliance with applicable regulatory guidance during 2006 into 2007. Internal reporting cited the fact that First Horizon did not have accurate locations recorded for all real estate collateral, and was unable to keep up with the identification of problem assets in the residential commercial real estate portfolio, which delayed timely recognition of losses and appropriate provisioning. The appraisal processes also had serious flaws which caused significant problems in the valuation of real estate. First Horizons compensation practices and staffing favored short-term product growth over proper risk management. As of January 1, 2006, compensation was not aligned with the prudent management of the institution and its risks. Product sales staff were hired without regard to whether First Horizon had sufficient management to oversee, account, and reserve for the risks of such sales. Once First Horizon began to use more appropriate methodologies and data analytics in internal auditing, audit reporting described significant problems and issued unsatisfactory ratings, including in the processes, procedures and controls used in consumer appraisal ordering, compliance with loan collateral requirements, and customer/credit risk due diligence for certain products, among other matters. On September 30, 2009, the District Court for the Western District of Tennessee
143.
denied in part the defendants motions to dismiss the plaintiffs claims, holding that the plaintiffs had adequately pleaded that the defendants breached their fiduciary duties to the plaintiffs by investing in First Horizon stock when it was no longer prudent to do so. See generally Sims v. First Horizon Natl Corp., No. 08-cv-2293, 2009 WL 3241689 (W.D. Tenn. Sept. 30, 2009). On 47
October 10, 2010, the Court confirmed that order, denying the defendants request for reconsideration. 144. First Horizons poor origination practices eventually caught up to the company,
and many entities that purchased loans from First Horizon forced the company to buy them back. As stated in its 2008 Annual Report (available at http://ir.fhnc.com/annuals.cfm): In addition to the negative aspects of asset quality on FHNs loan portfolio, increased repurchase and makewhole claims from agency and private purchasers of loans originated and subsequently sold by FHN hampered earnings as FHN recorded $148.5 million in charges for its obligations related to these assets. In First Horizons 2010 Annual Report (available at http://ir.fhnc.com/ annuals.cfm), First Horizon admitted that it had observed loss severities ranging between 50 percent and 60 percent of the principal balance of the repurchased loans and rescission rates between 30 and 40 percent of the repurchase and make-whole requests. 145. Additionally, in June 2010, shareholders filed a derivative suit against Defendant
First Horizon National and Individual Defendant Baker, alleging that First Horizon National engaged in unlawful origination activities, failed to disclose the true risks and losses as a result of such unlawful origination activities, and failed to implement and follow controls designed to minimize risk and loss. See Reid v. First Horizon Natl, et al., No. 10-cv-02413 (W.D. Tenn. 2010). Though the complaint was dismissed on statute of limitations grounds, its allegations corroborate FHFAs claim here that First Horizon systematically failed to adhere to its underwriting guidelines. 2. The Collapse of the Certificates Credit Ratings Further Indicates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines
146.
The total collapse of the credit ratings of the GSE Certificates, from AAA or its
equivalent to non-investment speculative grade, is further evidence of the originators systematic 48
disregard of underwriting guidelines, amplifying that the GSE Certificates were impaired from the start. 147. The GSE Certificates that Fannie Mae and Freddie Mac purchased were originally
assigned credit ratings of AAA or its equivalent, which purportedly reflected the description of the mortgage loan collateral and underwriting practices set forth in the Registration Statement. These ratings were artificially inflated, however, as a result of the very same misrepresentations that Defendants made to investors in the Prospectus Supplements. 148. Defendants provided or caused to be provided loan-level information to the rating
agencies that they relied upon in order to calculate the Certificates assigned ratings, including the borrowers LTV ratio, owner-occupancy status, and other loan-level information described in aggregation reports in the Prospectus Supplements. Because the information that Defendants provided or caused to be provided was false, the ratings were inflated and the level of subordination that the rating agencies required for the sale of AAA (or its equivalent) certificates was inadequate to provide investors with the level of protection that those ratings signified. As a result, the GSEs paid Defendants inflated prices for purported AAA (or its equivalent) Certificates, unaware that those Certificates actually carried a severe risk of loss and carried inadequate credit enhancement. 149. Since the issuance of the Certificates, the ratings agencies have dramatically
Applicable ratings are shown in sequential order separated by forward slashes: Moodys/S&P/Fitch. Hyphens indicate that the relevant agency did not provide a rating at issuance. 49
10
Table 8
Transaction FHAMS 2005-AA9 FHAMS 2005-AA10 FHAMS 2005-AA11 FHAMS 2005-AA12 FHAMS 2006-AA1 Tranche II-A-1 I-A-1 I-A-1 II-A-1 I-A-1 Rating at Issuance (Moodys/S&P/Fitch) Aaa/--/AAA Aaa/AAA/-Aaa/--/AAA Aaa/AAA/-Aaa/--/AAA Rating at July 31, 2011 (Moodys/S&P/Fitch) Caa3/--/D Caa3/D/-Caa3/--/D Caa3/D/-Ca/--/D
3.
The Surge in Mortgage Delinquencies and Defaults Further Indicates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines
150.
supposed to represent long-term, stable investments, a significant percentage of the mortgage loans backing the Certificates have defaulted, have been foreclosed upon, or are delinquent, resulting in massive losses to the Certificateholders. The overall poor performance of the mortgage loans is further evidence of and a direct consequence of the fact that they were not underwritten in accordance with applicable underwriting guidelines as represented in the Registration Statement. 151. Loan groups that were properly underwritten and contained loans with the
characteristics represented in the Registration Statement would have experienced substantially fewer payment problems and substantially lower percentages of defaults, foreclosures, and delinquencies than occurred here. Table 9 reflects the percentage of loans in the Supporting Loan Groups that are in default, have been foreclosed upon, or are delinquent as of July 2011.
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Table 9
Percentage of Delinquent/Defaulted/Foreclosed Loans 23.46 26.02 24.52 27.05 30.70
Transaction FHAMS 2005-AA9 FHAMS 2005-AA10 FHAMS 2005-AA11 FHAMS 2005-AA12 FHAMS 2006-AA1
Supporting Loan Group Group 2 Group 1 Group 1 Group 2 Group 1
152.
The confirmed misstatements concerning owner occupancy and LTV ratios; the
confirmed systemic underwriting failures by First Horizon; and the extraordinary drop in credit ratings and rise in delinquencies across the Securitizations, all confirm that the mortgage loans in the Supporting Loan Groups, contrary to the representations in the Registration Statement, were not originated in accordance with the stated underwriting guidelines. V. FANNIE MAES AND FREDDIE MACS PURCHASES OF THE GSE CERTIFICATES AND THE RESULTING DAMAGES 153. In total, between September 30, 2005, and April 30, 2007, Fannie Mae and
Freddie Mac purchased $883 million in residential mortgage-backed securities issued in connection with the Securitizations. Table 10 reflects each of Freddie Macs purchases of the Certificates.11 Table 10
Settlement Date of Purchase By Freddie Mac Sept. 30, 2005 Oct. 28, 2005 Initial Unpaid Principal Balance $191,439,000 $22,591,000 Purchase Price (% of Par) 101.482 100.805 Seller to Freddie Mac Merrill Lynch Merrill Lynch
Transaction FHAMS 2005AA9
Tranche II-A-1 II-A-1
CUSIP 32051GXE0 32051GXE0
Purchased securities in Tables 10 and 11 are stated in terms of unpaid principal balance of the relevant Certificates. Purchase prices are stated in terms of percentage of par. 51
11
Transaction FHAMS 2005AA10 FHAMS 2005AA11
Tranche I-A-1 I-A-1
CUSIP 32051GA54 32051GH40
Settlement Date of Purchase By Freddie Mac Oct. 31, 2005 Nov. 30, 2005
Initial Unpaid Principal Balance $140,430,000 $128,755,000
Purchase Price (% of Par) 100.945 100.467
Seller to Freddie Mac FTN UBS
154.
Table 11 reflects each of Fannie Maes purchases of the Certificates:
Table 11
Settlement Date of Purchase By Fannie Mae Apr. 30, 2007 Initial Unpaid Principal Balance $160,535,700 Purchase Price (% of Par) 100.8281 Seller to Fannie Mae Bear Stearns (now JPM Securities) Credit Suisse
Transaction FHAMS 2005AA12 FHAMS 2006AA1
Tranche II-A-1
CUSIP 32051GQ81
I-A-1
32051GV28
Feb. 28, 2006
$230,020,000
101.2578
155.
The statements and assurances in the Registration Statement regarding the credit
quality and characteristics of the mortgage loans underlying the GSE Certificates, and the origination and underwriting practices pursuant to which the mortgage loans were originated, which were summarized in such documents, were material to a reasonable investors decision to purchase the GSE Certificates. 156. The false statements of material facts and omissions of material facts in the
Registration Statement, including the Prospectuses and Prospectus Supplements, directly caused Fannie Mae and Freddie Mac to suffer hundreds of millions of dollars in damages. The mortgage loans underlying the GSE Certificates experienced defaults and delinquencies at a much higher rate than they would have had the loan originators adhered to the underwriting guidelines set forth in the Registration Statement, and the payments to the trusts were therefore much lower than they would have been had the loans been underwritten as described in the Registration Statement. 52
157.
Fannie Maes and Freddie Macs losses have been much greater than they would
have been if the mortgage loans had the credit quality represented in the Registration Statement. 158. Defendants misstatements and omissions in the Registration Statement regarding
the true characteristics of the loans were the proximate cause of Fannie Maes and Freddie Macs losses relating to their purchases of the GSE Certificates. Based upon sales of the Certificates or similar certificates in the secondary market, Defendants proximately caused hundreds of millions of dollars in damages to Fannie Mae and Freddie Mac in an amount to be determined at trial. FIRST CAUSE OF ACTION Violation of Section 11 of the Securities Act of 1933 (Against the Underwriter Defendants) 159. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes from this cause of action any allegation that could be construed as alleging fraudulent or intentional or reckless conduct. 160. This claim is brought by Plaintiff pursuant to Section 11 of the Securities Act of
1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statement for the Securitizations listed in paragraph 2. 161. This claim is predicated upon the strict liability of the Underwriter Defendants
FTN, UBS, JP Morgan Securities (as successor-in-interest to Bear Stearns), Credit Suisse, and Merrill Lynch for making false and materially misleading statements in the Registration Statement, as applicable to one or more Securitizations and for omitting facts necessary to make the facts stated therein not misleading. 162. FTN, UBS, JP Morgan Securities (as successor-in-interest to Bear Stearns), Credit
Suisse, and Merrill Lynch served as underwriters for one or more Securitizations (as specified in
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Table 1, supra at paragraph 36), within the meaning of Section 2(a)(11) of the Securities Act, 15 U.S.C. 77b(a)(11). and as such, are liable for the misstatements and omissions in the Registration Statement under Section 11 of the Securities Act. As discussed supra at paragraphs 95 to 103, JP Morgan Securities is the successor-in-interest to Bear Stearns liabilities. 163. At the time it became effective, the Registration Statement contained material
misstatements of fact and omitted information necessary to make the facts stated therein not misleading, as set forth above. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectuses, and specifically to Fannie Mae and Freddie Mac. 164. The untrue statements of material facts and omissions of material fact in the
Registration Statement are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 165. Fannie Mae and Freddie Mac purchased or otherwise acquired the GSE
Certificates pursuant to the materially false, misleading, and incomplete Registration Statement. At the time they purchased the GSE Certificates, Fannie Mae and Freddie Mac did not know, and in the exercise of reasonable diligence could not have known, of the facts concerning the false and misleading statements and omissions alleged herein, and if the GSEs had known those facts, they would not have purchased the GSE Certificates. 166. The Underwriter Defendants FTN, UBS, JP Morgan Securities (as successor-in-
interest to Bear Stearns), Credit Suisse, and Merrill Lynch owed to Fannie Mae, Freddie Mac, and other investors a duty to make a reasonable and diligent investigation of the statements contained in the applicable Registration Statement at the time it became effective to ensure that such statements were true and correct and that there were no omissions of material facts required to be stated in order to make the statements contained therein not misleading.
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167.
The Underwriter Defendants did not exercise such due diligence and failed to
conduct a reasonable investigation. In the exercise of reasonable care, these Defendants should have known of the false statements and omissions contained in or omitted from the Registration Statement, as set forth herein. 168. Fannie Mae and Freddie Mac sustained substantial damages as a result of the
misstatements and omissions in the Registration Statement, for which they are entitled to compensation. 169. This action is brought within three years of the date that the FHFA was appointed
as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). In addition, the time period from July 29, 2011 through August 29, 2011 has been tolled for statute of limitation purposes as against Credit Suisse by virtue of a tolling agreement entered into between FHFA, Fannie Mae, Freddie Mac, and Credit Suisse (USA) Inc. 170. By reason of the conduct herein alleged the Underwriter Defendants are jointly
and severally liable for their wrongdoing. SECOND CAUSE OF ACTION Violation of Section 12(a)(2) of the Securities Act of 1933 (Against First Horizon Asset Securities, FTN, UBS, Credit Suisse, and Merrill Lynch) 171. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes from this cause of action any allegation that could be construed as alleging fraudulent or intentional or reckless conduct. 172. This claim is brought by Plaintiff pursuant to Section 12(a)(2) of the Securities
Act of 1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statement in the Securitizations listed in paragraph 2.
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173.
This claim is predicated upon the negligence of Underwriter Defendants FTN,
UBS, Credit Suisse, and Merrill Lynch (the Section 12 Underwriter Defendants) for making false and materially misleading statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as Prospectuses) for one or more Securitizations. This cause of action is asserted against each Section 12 Underwriter Defendant only for the Securitizations in which that underwriter is listed as the seller to Fannie Mae or Freddie Mac in Tables 10 and 11, supra at paragraphs 153 to 154. This cause of action is asserted against Defendant First Horizon Asset Securities for all of the Securitizations except FHAMS 2005-AA12, for negligence in making false and materially misleading statements in those securitizations Prospectuses. 174. Each of the Section 12 Underwriter Defendants is prominently identified in the
Prospectuses, the primary documents they used to sell the GSE Certificates. The Section 12 Underwriter Defendants offered the Certificates publicly, including selling to Fannie Mae and Freddie Mac their GSE Certificates, as set forth in the Method of Distribution sections of the Prospectuses. 175. The Section 12 Underwriter Defendants offered and sold the GSE Certificates to
Fannie Mae and Freddie Mac by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. The Section 12 Underwriter Defendants reviewed and participated in drafting the Prospectuses. 176. The Section 12 Underwriter Defendants successfully solicited Fannie Maes and
Freddie Macs purchases of the GSE Certificates. As underwriters, the Section 12 Underwriter
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Defendants obtained substantial commissions based upon the amount received from the sale of the Certificates to the public. 177. The Section 12 Underwriter Defendants offered the GSE Certificates for sale, sold
them, and distributed them by the use of means or instruments of transportation and communication in interstate commerce 178. First Horizon Asset Securities is prominently identified in the Prospectuses for all
of the Securitizations. These prospectuses were the primary documents used to sell the GSE Certificates. First Horizon Asset Securities offered the Certificates publicly and actively solicited their sale, including to Fannie Mae and Freddie Mac. First Horizon Asset Securities was paid a percentage of the total dollar amount of the offering upon completion of the Securitizations effected pursuant to the Shelf Registration Statement. 179. First Horizon Asset Securities offered and sold the GSE Certificates to Fannie
Mae and Freddie Mac by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. First Horizon Asset Securities reviewed and participated in drafting the Prospectuses. 180. First Horizon Asset Securities offered the GSE Certificates for sale by the use of
means or instruments of transportation and communication in interstate commerce. 181. Each of the Section 12 Underwriter Defendants and First Horizon Asset Securities
actively participated in the solicitation of the GSEs purchase of the GSE Certificates, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statement, filing the Registration Statement, and assisting in marketing the GSE Certificates.
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182.
Each of the Prospectuses contained material misstatements of fact and omitted
facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectuses, and specifically to Fannie Mae and Freddie Mac. 183. The untrue statements of material facts and omissions of material fact in the
Registration Statement, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 184. The Section 12 Underwriter Defendants and Defendant First Horizon Asset
Securities offered and sold the GSE Certificates directly to Fannie Mae and Freddie Mac pursuant to the false and misleading Prospectuses. 185. The Section 12 Underwriter Defendants and Defendant First Horizon Asset
Securities owed to Fannie Mae and Freddie Mac, as well as to other investors in these trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. 186. The Section 12 Underwriter Defendants and Defendant First Horizon Asset
Securities failed to exercise such reasonable care. These Defendants, in the exercise of reasonable care, should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations, as set forth above.
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187.
In contrast, Fannie Mae and Freddie Mac did not know, and in the exercise of
reasonable diligence could not have known, of the untruths and omissions contained in the Prospectuses at the time they purchased the GSE Certificates. If the GSEs had known of those untruths and omissions, they would not have purchased the GSE Certificates. 188. Fannie Mae and Freddie Mac acquired the GSE Certificates in the primary market
their investments in the GSE Certificates and have the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 190. This action is brought within three years of the date that the FHFA was appointed
as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). In addition, the time period from July 29, 2011 through August 29, 2011 has been tolled for statute of limitation purposes as against Credit Suisse by virtue of a tolling agreement entered into between FHFA, Fannie Mae, Freddie Mac, and Credit Suisse (USA) Inc. THIRD CAUSE OF ACTION Violation of Section 15 of the Securities Act of 1933 (Against First Horizon National, First Tennessee, and the Individual Defendants) 191. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes from this cause of action any allegation that could be construed as alleging fraudulent or intentional or reckless conduct. 192. This claim is brought under Section 15 of the Securities Act of 1933, 15 U.S.C.
77o (Section 15), against First Horizon National, First Tennessee, and the Individual Defendants for controlling-person liability with regard to the Section 12(a)(2) cause of action set forth above. This claim is also against First Horizon National, First Tennessee, Defendant
59
Gerald L. Baker, and Defendant Charles G. Burkett with regard to the Section 11 cause of action set forth above. 193. The Individual Defendants at all relevant times participated in the operation and
management of First Horizon Asset Securities, and conducted and participated, either directly or indirectly, in the conduct of First Horizon Asset Securities business affairs. Further, Defendants Gerald L. Baker and Charles G. Burkett at all relevant times participated in the operation and management of FTN, and conducted and participated, either directly or indirectly, in the conduct of FTNs business affairs. 194. At the time of the Securitizations, Individual Defendant Gerald L. Baker was: (a)
the Chief Executive Officer, President, and a Director of Defendant First Horizon Asset Securities; (b) the Chief Executive Officer and President of Defendant First Tennessee; and (c) the President and Chief Executive Officer of Defendant First Horizon National. 195. At the time of the Securitizations, Individual Defendant Peter F. Makowiecki was:
(a) the Chief Financial Officer and Treasurer of Defendant First Horizon Asset Securities; and (b) the President and Chief Executive Officer of Defendant First Horizon Home Loan beginning in January 2006, after previously serving as its Chief Financial Officer. 196. At the time of the Securitizations, Individual Defendant Charles G. Burkett was:
(a) a Director of First Horizon Asset Securities; (b) the President of Banking of Defendant First Tennessee, and (c) the President of Banking of Defendant First Horizon National. 197. At the time of the Securitizations, Individual Defendant Thomas J. Wageman was
a Director of Defendant First Horizon Asset Securities. 198. Because of their positions of authority and control as senior officers and directors,
the Individual Defendants were able to, and in fact did, control the contents of the Shelf
60
Registration Statement, including the related Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 199. First Horizon Home Loan (now Defendant First Tennessee) was the sponsor of
the Securitizations carried out under the Registration Statement and culpably participated in the violations of Sections 11 and 12(a)(2) set forth above by initiating the Securitizations, originating or purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting the depositor First Horizon Asset Securities as the special-purpose vehicle, and selecting the underwriters. In its role as sponsor, First Horizon Home Loan knew and intended that the mortgage loans it originated or purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 200. First Horizon Home Loan (now Defendant First Tennessee) also acted as the
seller of the mortgage loans for the Securitizations in that it conveyed such mortgage loans to Defendant First Horizon Asset Securities, its wholly owned subsidiary, pursuant to a Mortgage Loan Purchase Agreement. 201. First Horizon Home Loan (now Defendant First Tennessee) also controlled all
aspects of the business of First Horizon Asset Securities because First Horizon Asset Securities was merely a special-purpose vehicle that was created for the purpose of acting as a pass-through for the issuance of the Certificates. Upon information and belief, the officers and directors of First Horizon Home Loan, as well as its former parent companies First Tennessee and First Horizon National, overlapped with the officers and directors of First Horizon Asset Securities. In addition, because of its position as sponsor, First Horizon Home Loan was able to, and did in fact, control the contents of the Registration Statement filed by First Horizon Asset Securities,
61
including the Prospectuses and Prospectus Supplements, which pertained to each of the Securitizations and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 202. Defendant First Tennessee is also liable for the control it exercised at the time of
the Securitizations. It was the custodian of the loan files in all of the Securitizations, and even passed title to the loans in the FHAMS 2005 AA10 transaction. Further, as the direct parent and controlling entity of First Horizon Home Loan and the parent of Defendant FTN, First Tennessee had the practical ability to direct and control the actions of First Horizon Asset Securities and FTN in issuing, selling, and underwriting the Certificates, and in fact exercised such direction and control over the activities of First Horizon Asset Securities and FTN in connection with the issuance and sale of the Certificates. 203. Thus, in addition to its liability as successor to First Horizon Home Loan, First
Tennessee culpably participated in the violations of Section 11 and 12(a)(2) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statement and establish special-purpose financial entities such as First Horizon Asset Securities and the issuing trusts to serve as conduits for the mortgage loans. 204. Defendant First Horizon National controlled the business operations of First
Horizon Asset Securities and FTN. As the sole owner and ultimate corporate parent of First Horizon Asset Securities and FTN, First Horizon National had the practical ability to direct and control the actions of First Horizon Asset Securities and FTN in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of First Horizon Asset Securities and FTN in connection with the issuance and sale of the Certificates.
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205.
First Horizon National expanded its share of the residential mortgage-backed
securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statement. 206. First Horizon National culpably participated in the violations of Section 11 and
12(a)(2) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statement and establish special-purpose financial entities such as First Horizon Asset Securities and the issuing trusts to serve as conduits for the mortgage loans. 207. First Horizon National, First Tennessee (including as successor to First Horizon
Home Loan), and the Individual Defendants are controlling persons within the meaning of Section 15 by virtue of their actual power over, control of, ownership of, and/or directorship of First Horizon Asset Securities, First Horizon Home Loan, and FTN at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statement. 208. Fannie Mae and Freddie Mac purchased in the primary market Certificates issued
pursuant to the Registration Statement, including the Prospectuses and Prospectus Supplements, which, at the time it became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statement, and specifically to Fannie Mae and Freddie Mac. 209. Fannie Mae and Freddie Mac did not know, and in the exercise of reasonable
diligence could not have known, of the misstatements and omissions in the Registration
63
Statement; had the GSEs known of those misstatements and omissions, they would not have purchased the GSE Certificates. 210. Fannie Mae and Freddie Mac have sustained substantial damages as a result of the
misstatements and omissions in the Registration Statement, for which they are entitled to compensation. 211. This action is brought within three years of the date that the FHFA was appointed
as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). FOURTH CAUSE OF ACTION Violation of Section 31-5606.05(a)(1)(B) of the District of Columbia Code (Against First Horizon Asset Securities, JP Morgan Securities, and Credit Suisse) 212. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes from this cause of action any allegation that could be construed as alleging fraudulent or intentional or reckless conduct. 213. This claim is brought by Plaintiff pursuant to Section 31-5606.05(a)(1)(B) of the
District of Columbia Code and is asserted on behalf of Fannie Mae. This cause of action is asserted against Defendant JP Morgan Securities (as successor-in-interest to Bear Stearns) only with respect to the FHAMS 2005-AA12 Securitization, against Defendant Credit Suisse only with respect to the FHAMS 2006-AA1 Securitization, and against Defendant First Horizon Asset Securities with respect to both of these Securitizations. 214. This claim is predicated upon the negligence of Underwriter Defendants JP
Morgan Securities (as successor-in-interest to Bear Stearns) and Credit Suisse for making false and materially misleading statements in the Prospectuses for one of these Securitizations. Bear Stearns and Credit Suisse negligently made false and materially misleading statements in the
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Prospectuses for the Securitizations. As discussed supra at paragraphs 95 to 103, JP Morgan Securities is the successor-in-interest to Bear Stearns liabilities. Defendant First Horizon Asset Securities was also negligent in making false and materially misleading statements in the Prospectuses applicable to these two Securitizations. 215. Bear Stearns (now JP Morgan Securities) and Credit Suisse are prominently
identified in the Prospectuses, the primary documents they used to sell the GSE Certificates. Bear Stearns and Credit Suisse offered the Certificates publicly, including selling to Fannie Mae their GSE Certificates, as set forth in the Method of Distribution sections of the Prospectuses. 216. Bear Stearns (now JP Morgan Securities) and Credit Suisse offered and sold the
GSE Certificates to Fannie Mae by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. Bear Stearns and Credit Suisse reviewed and participated in drafting the Prospectuses. 217. Bear Stearns (now JP Morgan Securities) and Credit Suisse successfully solicited
Fannie Maes purchases of the GSE Certificates. As underwriters, Bear Stearns and Credit Suisse obtained substantial commissions based upon the amount received from the sale of the Certificates to the public. 218. Bear Stearns (now JP Morgan Securities) and Credit Suisse offered the GSE
Certificates for sale, sold them, and distributed them to Fannie Mae in the District of Columbia. 219. First Horizon Asset Securities is prominently identified in the Prospectuses for
FHAMS 2005-AA12 and FHAMS 2006-AA1. These Prospectuses were the primary documents used to sell the GSE Certificates to Fannie Mae. First Horizon Asset Securities offered the Certificates publicly and actively solicited their sale, including to Fannie Mae. First Horizon
65
Asset Securities was paid a percentage of the total dollar amount of the offering upon completion of the Securitizations effected pursuant to the Shelf Registration Statement. 220. First Horizon Asset Securities offered and sold the GSE Certificates to Fannie
Mae by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. First Horizon Asset Securities reviewed and participated in drafting the Prospectuses. 221. Each of Bear Stearns, Credit Suisse, and First Horizon Asset Securities actively
participated in the solicitation of the Fannie Maes purchase of the GSE Certificates, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statement, filing the Registration Statement, and assisting in marketing the GSE Certificates. 222. Each of the Prospectuses contained material misstatements of fact and omitted
facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectuses, and specifically to Fannie Mae. 223. The untrue statements of material facts and omissions of material fact in the
Registration Statement, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 224. Bear Stearns (now JP Morgan Securities), Credit Suisse, and First Horizon Asset
Securities offered and sold the GSE Certificates directly to Fannie Mae pursuant to the false and misleading Prospectuses.
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225.
Bear Stearns (now JP Morgan Securities), Credit Suisse, and First Horizon Asset
Securities owed to Fannie Mae, as well as to other investors in these trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. 226. Bear Stearns (now JP Morgan Securities), Credit Suisse, and First Horizon Asset
Securities failed to exercise such reasonable care. These Defendants, in the exercise of reasonable care, should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations, as set forth above. 227. In contrast, Fannie Mae did not know, and in the exercise of reasonable diligence
could not have known, of the untruths and omissions contained in the Prospectuses at the time they purchased the GSE Certificates. If Fannie Mae had known of those untruths and omissions, it would not have purchased the GSE Certificates. 228. Fannie Mae sustained substantial damages in connection with their investments in
the GSE Certificates and has the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 229. This action is brought within three years of the date that the FHFA was appointed
as Conservator of Fannie Mae, and is thus timely under 12 U.S.C. 4617(b)(12). In addition, the time period from July 29, 2011 through August 29, 2011 has been tolled for statute of limitation purposes as against Credit Suisse by virtue of a tolling agreement entered into between FHFA, Fannie Mae, Freddie Mac, and Credit Suisse (USA) Inc.
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FIFTH CAUSE OF ACTION Violation of Section 31-5606.05(c) of the District of Columbia Code (Against First Horizon National, First Tennessee, and the Individual Defendants) 230. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes from this cause of action any allegation that could be construed as alleging fraudulent or intentional or reckless conduct. 231. This claim is brought under Section 31-5606.05(c) of the District of Columbia
Code and is asserted on behalf of Fannie Mae, which purchased the FHAMS 2005-AA12 and FHAMS 2006-AA1 GSE Certificates. This claim is brought against First Horizon National, First Tennessee, and the Individual Defendants for controlling-person liability with regard to the Fourth Cause of Action set forth above. 232. The Individual Defendants at all relevant times participated in the operation and
management of First Horizon Asset Securities, and conducted and participated, either directly or indirectly, in the conduct of First Horizon Asset Securities business affairs. 233. At the time of the Securitizations, Individual Defendant Gerald L. Baker was: (a)
the Chief Executive Officer, President, and a Director of Defendant First Horizon Asset Securities; (b) the Chief Executive Officer and President of Defendant First Tennessee; and (c) the President and Chief Executive Officer of Defendant First Horizon National. 234. At the time of the Securitizations, Individual Defendant Peter F. Makowiecki was:
(a) the Chief Financial Officer and Treasurer of Defendant First Horizon Asset Securities; and (b) the President and Chief Executive Officer of Defendant First Horizon Home Loan beginning in January 2006, after previously serving as its Chief Financial Officer.
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235.
At the time of the Securitizations, Individual Defendant Charles G. Burkett was:
(a) a Director of First Horizon Asset Securities; (b) the President of Banking of Defendant First Tennessee, and (c) the President of Banking of Defendant First Horizon National. 236. At the time of the Securitizations, Individual Defendant Thomas J. Wageman was
a Director of Defendant First Horizon Asset Securities. 237. Because of their positions of authority and control as senior officers and directors,
the Individual Defendants were able to, and in fact did, control the contents of the Shelf Registration Statement, including the related Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 238. First Horizon Home Loan (now Defendant First Tennessee) was the sponsor of
the Securitizations carried out under the Registration Statement and culpably participated in the violations of Section 31-5606.05(a)(1)(B) set forth above by initiating the Securitizations, originating or purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting the depositor First Horizon Asset Securities as the special-purpose vehicle, and selecting Bear Stearns (now JP Morgan Securities) and Credit Suisse as underwriters. In its role as sponsor, First Horizon Home Loan knew and intended that the mortgage loans it originated or purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 239. First Horizon Home Loan (now Defendant First Tennessee) also acted as the
seller of the mortgage loans for the Securitizations in that it conveyed such mortgage loans to Defendant First Horizon Asset Securities, its wholly owned subsidiary, pursuant to a Mortgage Loan Purchase Agreement.
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240.
First Horizon Home Loan (now Defendant First Tennessee) also controlled all
aspects of the business of First Horizon Asset Securities because First Horizon Asset Securities was merely a special-purpose vehicle that was created for the purpose of acting as a pass-through for the issuance of the Certificates. Upon information and belief, the officers and directors of First Horizon Home Loan, as well as its former parent companies First Tennessee and First Horizon National, overlapped with the officers and directors of First Horizon Asset Securities. In addition, because of its position as sponsor, First Horizon Home Loan was able to, and did in fact, control the contents of the Registration Statement filed by First Horizon Asset Securities, including the Prospectuses and Prospectus Supplements, which pertained to each of the Securitizations and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 241. Defendant First Tennessee is also liable for the control it exercised at the time of
the Securitizations. It was the custodian of the loan files. Further, as the direct parent and controlling entity of First Horizon Home Loan, First Tennessee had the practical ability to direct and control the actions of First Horizon Asset Securities in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of First Horizon Asset Securities in connection with the issuance and sale of the Certificates. 242. Thus, in addition to its liability as successor to First Horizon Home Loan, First
Tennessee culpably participated in the violations of Section 31-5606.05(a)(1)(B) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statement and establish special-purpose financial entities such as First Horizon Asset Securities and the issuing trusts to serve as conduits for the mortgage loans.
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243.
Defendant First Horizon National controlled the business operations of First
Horizon Asset Securities. As the sole owner and ultimate corporate parent of First Horizon Asset Securities, First Horizon National had the practical ability to direct and control the actions of First Horizon Asset Securities in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of First Horizon Asset Securities in connection with the issuance and sale of the Certificates. 244. First Horizon National expanded its share of the residential mortgage-backed
securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statement. 245. First Horizon National culpably participated in the violations of Section 31-
5606.05(a)(1)(B) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statement and establish special-purpose financial entities such as First Horizon Asset Securities and the issuing trusts to serve as conduits for the mortgage loans. 246. First Horizon National, First Tennessee (including as successor to First Horizon
Home Loan), and the Individual Defendants are controlling persons within the meaning of Section 31-5606.05(c) of the District of Columbia Code by virtue of their actual power over, control of, ownership of, and/or directorship of First Horizon Asset Securities and First Horizon Home Loan at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statement. 247. Fannie Mae purchased the GSE Certificates, which were issued pursuant to the
Registration Statement, including the Prospectuses and Prospectus Supplements, which, at the
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time it became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statement, and specifically to Fannie Mae. 248. Fannie Mae did not know, and in the exercise of reasonable diligence could not
have known, of the misstatements and omissions in the Registration Statement; had it known of those misstatements and omissions, it would not have purchased the GSE Certificates. 249. Fannie Mae has sustained substantial damages as a result of the misstatements and
omissions in the Registration Statement, for which it is entitled to compensation. 250. This action is brought within three years of the date that the FHFA was appointed
as Conservator of Fannie Mae, and is thus timely under 12 U.S.C. 4617(b)(12). SIXTH CAUSE OF ACTION Common-Law Negligent Misrepresentation (Against First Horizon Asset Securities and the Underwriter Defendants) 251. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 252. This is a claim for common-law negligent misrepresentation against Defendant
First Horizon Asset Securities and the Underwriter Defendants. This cause of action is asserted against each Underwriter Defendant only for the Securitizations in which that underwriter is listed as the seller to Fannie Mae or Freddie Mac in Tables 10 and 11, supra at paragraphs 153 to 154. As discussed supra at paragraphs 95 to 103, JP Morgan Securities is the successor-ininterest to Bear Stearns liabilities. 253. Between September 30, 2005 and April 30, 2007, First Horizon Asset Securities
and the Underwriter Defendants sold the GSE Certificates to the GSEs as described above. Because First Horizon Asset Securities owned and then conveyed the underlying mortgage loans
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that collateralized the Securitizations, it had unique, exclusive, and special knowledge about the mortgage loans in the Securitizations through its possession of the loan files and other documentation. 254. Likewise, because the Underwriter Defendants acted as underwriters for the
Securitizations they underwrote, under the Securities Act they were obligatedand had the opportunityto perform sufficient due diligence to ensure that the Registration Statement for the transaction on which they served as underwriter, including without limitation the corresponding Prospectus Supplement, did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. As a result of this privileged position as underwriterwhich gave them access to loan file information and obligated them to perform adequate due diligence to ensure the accuracy of the Registration Statementthe Underwriter Defendants had unique, exclusive, and special knowledge about the underlying mortgage loans in the Securitizations. 255. The GSEs, like other investors, had no access to borrower loan files prior to the
closing of the Securitizations and their purchase of the Certificates. Accordingly, when determining whether to purchase the GSE Certificates, the GSEs could not evaluate the underwriting quality or the servicing practices of the mortgage loans in the Securitizations on a loan-by-loan basis. The GSEs therefore reasonably relied on First Horizon Asset Securities and the Underwriter Defendants knowledge and their express representations made prior to the closing of the Securitizations regarding the underlying mortgage loans. 256. First Horizon Asset Securities and the Underwriter Defendants were aware that
the GSEs reasonably relied on their reputations and unique, exclusive, and special expertise and experience, as well as their express representations made prior to the closing of the
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Securitizations, and that the GSEs depended upon these Defendants for complete, accurate, and timely information. The standards under which the underlying mortgage loans were actually originated were known to these Defendants and were not known, and could not be determined, by the GSEs prior to the closing of the Securitizations. In purchasing the GSE Certificates from First Horizon Asset Securities and the Underwriter Defendants, the GSEs relied on their special relationship with those Defendants, and the purchases were made, in part, in reliance on that special relationship. 257. Based upon their unique, exclusive, and special knowledge and expertise about
the loans held by the trusts in the Securitizations, First Horizon Asset Securities and the Underwriter Defendants had a duty to provide the GSEs complete, accurate, and timely information regarding the mortgage loans and the Securitizations. First Horizon Asset Securities and the Underwriter Defendants negligently breached their duty to provide such information to the GSEs by instead making to the GSEs untrue statements of material facts in the Securitizations, or otherwise misrepresenting to the GSEs material facts about the Securitizations. The misrepresentations are set forth in Section IV above, and include misrepresentations as to the accuracy of the represented credit ratings, compliance with underwriting guidelines for the mortgage loans, and the accuracy of the owner-occupancy statistics and the loan-to-value ratios applicable to the Securitizations, as disclosed in the term sheets and Prospectus Supplements. 258. In addition, having made actual representations about the underlying collateral in
the Securitizations and the facts bearing on the riskiness of the Certificates, First Horizon Asset Securities and the Underwriter Defendants had a duty to correct misimpressions left by their statements, including with respect to any half truths. The GSEs were entitled to rely upon First
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Horizon Asset Securities and the Underwriter Defendants representations about the Securitizations, and these Defendants failed to correct in a timely manner any of their misstatements or half truths, including misrepresentations as to compliance with underwriting guidelines for the mortgage loans. 259. Fannie Mae and Freddie Mac purchased the GSE Certificates based upon the
Underwriter Defendants representations, as underwriters (including lead and selling underwriters), as applicable to one or more of the Securitizations. For instance, the GSEs received term sheets containing critical data as to the Securitizations, including with respect to anticipated credit ratings by the credit rating agencies, loan-to-value and combined loan-to-value ratios for the underlying collateral, and owner occupancy statistics, which term sheets were delivered, upon information and belief, by the Underwriter Defendants. This data was subsequently incorporated into Prospectus Supplements that were received by the GSEs upon the close of each Securitization. 260. The GSEs relied upon the accuracy of the data transmitted to them and
subsequently reflected in the Prospectus Supplements. In particular, the GSEs relied upon the credit ratings that the credit rating agencies indicated they would bestow on the Certificates based on the information provided by First Horizon. These credit ratings represented a determination by the credit rating agencies that the GSE Certificates were AAA quality (or its equivalent)meaning the Certificates had an extremely strong capacity to meet the payment obligations described in the respective PSAs. 261. Detailed information about the underlying collateral and structure of each
Securitization was provided or caused to be provided by, upon information and belief, First Horizon. The credit rating agencies based their ratings on this information, and the agencies
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ratings of the Certificates were dependent on the accuracy of that information. The GSEs relied on the accuracy of the credit ratings and the actual credit ratings assigned to the Certificates by the credit rating agencies, and upon the representations in the term sheets and Prospectus Supplements. 262. In addition, the GSEs relied on the fact that the originators of the mortgage loans
in the Securitizations had acted in conformity with their underwriting guidelines, which were described in the Prospectus Supplements. Compliance with underwriting guidelines was a precondition to the GSEs purchase of the GSE Certificates in that the GSEs decision to purchase the Certificates was directly premised on their reasonable belief that the originators complied with applicable underwriting guidelines and standards. 263. In purchasing the GSE Certificates, the GSEs justifiably relied on First Horizon
Asset Securities and the Underwriter Defendants false representations and omissions of material fact detailed above, including the misstatements and omissions in the term sheets about the underlying collateral, which were reflected in the Prospectus Supplements. 264. But for the above misrepresentations and omissions, the GSEs would not have
purchased or acquired the Certificates as they ultimately did, because those representations and omissions were material to their decision to acquire the GSE Certificates, as described above. 265. The GSEs were damaged in an amount to be determined at trial as a direct,
proximate, and foreseeable result of First Horizon Asset Securities and the Underwriter Defendants misrepresentations, including any half truths. 266. This action is brought within three years of the date that the FHFA was appointed
as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). In addition, the time period from July 29, 2011 through August 29, 2011 has been
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tolled for statute of limitation purposes as against Credit Suisse by virtue of a tolling agreement entered into between FHFA, Fannie Mae, Freddie Mac, and Credit Suisse (USA) Inc. PRAYER FOR RELIEF WHEREFORE Plaintiff prays for relief as follows: 267. An award in favor of Plaintiff against all Defendants, jointly and severally, for all
Certificates, as well as lost principal and lost interest payments thereon; c. d. e. Attorneys fees and costs; Prejudgment interest at the maximum legal rate; and Such other and further relief as the Court may deem just and proper. JURY TRIAL DEMANDED 268. Pursuant to Federal Rule of Civil Procedure 38(b), Plaintiff hereby demands a
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SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK FEDERAL HOUSING FINANCE AGENCY, AS CONSERVATOR FOR THE FEDERAL NATIONAL MORTGAGE ASSOCIATION AND THE FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff, -againstMORGAN STANLEY, MORGAN STANLEY & CO., INC., MORGAN STANLEY MORTGAGE CAPITAL HOLDINGS LLC d/b/a MORGAN STANLEY MORTGAGE CAPITAL, INC., MORGAN STANLEY ABS CAPITAL I, INC., MORGAN STANLEY CAPITAL I, INC., SAXON CAPITAL, INC., SAXON FUNDING MANAGEMENT LLC f/k/a SAXON FUNDING MANAGEMENT, INC., SAXON ASSET SECURITIES COMPANY, CREDIT SUISSE SECURITIES (USA) LLC f/k/a CREDIT SUISSE FIRST BOSTON LLC, RBS SECURITIES, INC. d/b/a RBS GREENWICH CAPITAL and f/k/a GREENWICH CAPITAL MARKETS, INC., GAIL P. MCDONNELL, HOWARD HUBLER, CRAIG S. PHILLIPS, ALEXANDER C. FRANK, DAVID R. WARREN, JOHN E. WESTERFIELD, and STEVEN S. STERN, Defendants. COMPLAINT
Index No. ____
TABLE OF CONTENTS Page NATURE OF ACTION ...................................................................................................................1 PARTIES .........................................................................................................................................5 Plaintiff and the GSEs..........................................................................................................5 Defendants ...........................................................................................................................5 Morgan Stanley Defendants.................................................................................................5 Non-MS Defendants ............................................................................................................8 Individual Defendants..........................................................................................................8 Non-Party Originators........................................................................................................10 JURISDICTION AND VENUE ....................................................................................................10 FACTUAL ALLEGATIONS ........................................................................................................11 I. FACTUAL ALLEGATIONS APPLICABLE TO ALL CLAIMS....................................11 A. The Securitizations.................................................................................................11 1. 2. 3. Residential Mortgage-Backed Securitizations Generally ..........................11 Securitizations At Issue In This Case ........................................................13 Securitization Process ................................................................................17 a. b. B. The Sponsors Grouped Mortgage Loans in Special Purpose Trusts..............................................................................................17 The Trusts Issued Securities Backed by the Loans........................18
DEFENDANTS PARTICIPATION IN THE SECURITIZATION PROCESS ..............................................................................................................22 1. 2. 3. 4. Defendant MS ............................................................................................23 Defendant SCI............................................................................................24 Defendants MSMC and SFM.....................................................................24 Defendants MSAC, MSC, and SASC........................................................26
5. 6. 7. C.
Defendant MS&Co. ...................................................................................26 Non-MS Defendants ..................................................................................27 Individual Defendants................................................................................27
STATEMENTS IN THE PROSPECTUS SUPPLEMENTS.................................28 1. 2. 3. 4. Compliance With Underwriting Guidelines ..............................................28 Occupancy Status of Borrower ..................................................................31 Loan-to-Value Ratios.................................................................................33 Credit Ratings ............................................................................................36
D.
FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS .....................................38 1. The Statistical Data Provided in the Prospectus Supplements Concerning Owner-Occupancy and Loan-To-Value Ratios Was Materially False .........................................................................................38 a. b. 2. Owner-Occupancy Data was Materially False ..............................39 Loan-to-Value Data was Materially False .....................................41
The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines .............................................44 a. Government and Private Investigations Confirm That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines ......................................................................................45 i. ii. iii. iv. b. New Century Violated Its Underwriting Guidelines .........46 WMC Violated Its Underwriting Guidelines .....................49 IndyMac Violated Its Underwriting Guidelines ................50 Wilmington Violated Its Underwriting Guidelines............51
The Collapse of the Certificates Credit Ratings Further Shows that the Mortgage Loans were not Originated in Adherence to the Stated Underwriting Guidelines ........................52 The Surge in Mortgage Delinquency and Default Further Demonstrates that the Mortgage Loans Were Not
c.
ii
Originated in Adherence to the Stated Underwriting Guidelines ......................................................................................54 E. F. FANNIE MAES AND FREDDIE MACS PURCHASES OF THE CERTIFICATES....................................................................................................56 FANNIE MAE AND FREDDIE MAC WERE DAMAGED BY DEFENDANTS VIOLATIONS OF SECTIONS 11, 12, AND 15 OF THE SECURITIES ACT .......................................................................................57
II.
ADDITIONAL FACTUAL ALLEGATIONS ..................................................................58 A. B. C. D. Defendants Were Incentivized to Fund Risky Residential Mortgage Loans and To Securitize and Sell Them to Investors ......................................................59 Defendants Material Misrepresentations and Omissions in the Offering Materials ................................................................................................................63 The Fraud Defendants Knew or Were Reckless in Not Knowing That Their Representations Were False and Misleading ..............................................68 Fannie Mae and Freddie Mac Justifiably Relied on the Misrepresentations and Omissions in the Offering Materials and Were Damaged by Defendants Fraudulent Conduct ...........................................................................77
FIRST CAUSE OF ACTION ........................................................................................................79 SECOND CAUSE OF ACTION ...................................................................................................82 THIRD CAUSE OF ACTION .......................................................................................................85 FOURTH CAUSE OF ACTION ...................................................................................................88 FIFTH CAUSE OF ACTION ........................................................................................................91 SIXTH CAUSE OF ACTION .......................................................................................................94 SEVENTH CAUSE OF ACTION .................................................................................................97 EIGHTH CAUSE OF ACTION ..................................................................................................100 NINTH CAUSE OF ACTION.....................................................................................................101 TENTH CAUSE OF ACTION ....................................................................................................103 PRAYER FOR RELIEF ..............................................................................................................105
iii
Plaintiff Federal Housing Finance Agency (Plaintiff or FHFA), as Conservator of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), by its attorneys Kasowitz, Benson, Torres & Friedman LLP, for its Complaint against the defendants named herein (Defendants), alleges as follows: NATURE OF ACTION 1. This action arises from false and misleading statements and omissions in
registration statements, prospectuses, and other offering materials pursuant to which certain residential mortgage-backed securities (RMBS) were purchased by Fannie Mae and Freddie Mac (together, the Government-Sponsored Enterprises or GSEs). Among other things, these documents falsely represented that the mortgage loans underlying the RMBS complied with certain underwriting guidelines and standards, and presented a false picture of the characteristics and riskiness of those loans. These representations were material to the GSEs, as they would have been to any reasonable investor, and their falsity violates Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77a et seq., as well as Sections 13.1-522(A)(ii) and 13.1522(C) of the Virginia Code and Sections 31-5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code. The GSEs justifiably relied on Defendants misrepresentations and omissions of material fact to their detriment. In addition to their strict statutory liability under federal securities law and liability under state law, Defendants statements and omissions give rise to liability under state common law.
2.
Between September 12, 2005 and September 27, 2007, Fannie Mae and Freddie
Mac purchased over $10.58 billion in Certificates issued in connection with 33 securitizations that were virtually all sponsored and underwritten by Morgan Stanley entities.1 3. The Certificates were offered for sale pursuant to one of seven shelf registration
statements (the Shelf Registration Statements) filed with the Securities and Exchange Commission (the SEC). For each of the 33 securitizations sold to Fannie Mae and Freddie Mac (the Securitizations), a prospectus (Prospectus) and prospectus supplement (Prospectus Supplement) were filed with the SEC as part of the Registration Statement for that Securitization.2 The Certificates were marketed and sold to Fannie Mae and Freddie Mac pursuant to the Registration Statements. 4. The Registration Statements contained representations concerning, among other
things, the characteristics and credit quality of the mortgage loans underlying the Securitizations, the creditworthiness of the borrowers on those underlying mortgage loans, and the origination and underwriting practices used to make and approve the loans. Such representations were material to a reasonable investors decision to invest in the Certificates, and they were material to the GSEs. Unbeknownst to Fannie Mae and Freddie Mac, those representations were false because, among other reasons, material percentages of the underlying mortgage loans were not originated in accordance with the represented underwriting standards and origination practices, and did not have the credit and other characteristics set forth in the Registration Statements.
For purposes of this Complaint, the securities issued under the Registration Statements (defined in note 2, infra) are generally referred to as Certificates. Holders of Certificates are referred to as Certificateholders.
2
The term Registration Statement as used herein and in Appendix A incorporates the Shelf Registration Statement, the Prospectus and the Prospectus Supplement for each referenced Securitization, except where otherwise indicated.
5.
Among other things, the Registration Statements presented the loan origination
guidelines of the mortgage loan originators who originated the loans that underlay the Certificates. The Registration Statements falsely represented that those guidelines were adhered to except in specified circumstances, when in fact the guidelines systematically were disregarded in that the loans were not originated in accordance with those guidelines. 6. The Registration Statements also set forth for each Securitization statistical
summaries of the characteristics of the underlying mortgage loans, such as the percentage of loans secured by owner-occupied properties and the percentage of the loan groups aggregate principal balance with loan-to-value ratios within specified ranges. This information was material to reasonable investors, and it was material to the GSEs. However, a loan-level analysis of a sample of loans for each Securitization -- a review that encompassed in the aggregate thousands of mortgages across all of the Securitizations -- has revealed that for each Securitization the statistical summaries were false and misleading. The statistics reflected or were based upon misrepresentations of other key characteristics of the mortgage loans and inflated property values. 7. For example, the percentage of owner-occupied properties in the loan pool
underlying a RMBS is a material risk factor to the purchasers of certificates, such as Fannie Mae and Freddie Mac, because a borrower who actually lives in a mortgaged property is generally less likely to stop paying the mortgage and more likely to take care of the property. The loanlevel review revealed that the true percentage of owner-occupied properties for the loans supporting the Certificates was materially lower than that represented in the Prospectus Supplements. Likewise, the Prospectus Supplements misrepresented such material information as loan-to-value ratios -- that is, the relationship between the principal amount of the loans and
the true value of the mortgaged properties securing those loans -- and the ability of the individual mortgage holders to satisfy their debts. 8. The Registration Statements also set forth ratings for each of the Securitizations.
Those AAA ratings were material to a reasonable investors decision to purchase the Certificates, and they were material to the GSEs. The ratings for the Securitizations were materially inaccurate and were based upon false information supplied by Defendants. Upon information and belief, neither the Defendants nor the rating agencies who issued the ratings believed or had any sound basis to believe in their truthfulness. 9. Defendants, who are issuers, sponsors, and/or underwriters of the Certificates
purchased by the GSEs, or signatories of the Registration Statements pursuant to which the Certificates purchased by the GSEs were offered, are liable for the misstatements and omissions of material fact contained in the Registration Statements and other offering materials because they prepared, signed, filed and/or used these documents to market and sell the Certificates to Fannie Mae and Freddie Mac, or because they directed and controlled the entities that did so.3 10. Defendants misstatements and omissions of material facts have caused loss and
injury to the GSEs. The GSEs purchased the highest tranches of Certificates offered for sale by Defendants. Fannie Mae and Freddie Mac would not have purchased these Certificates but for Defendants material misrepresentations and omissions concerning the mortgage loans underlying the RMBS. As the truth concerning the misrepresented and omitted facts has come to light, and as the hidden risks have materialized, the market value of Certificates purchased by Fannie Mae and Freddie Mac has declined. Fannie Mae and Freddie Mac have suffered
The Certificates purchased by Fannie Mae and Freddie Mac are identified infra in Tables 10 and 11.
enormous financial losses as a result of the Defendants misrepresentations and omissions. FHFA, as Conservator for the GSEs, now seeks rescission and damages for those losses. PARTIES Plaintiff and the GSEs 11. Plaintiff Federal Housing Finance Agency is a federal agency located at 1700 G
Street, NW in Washington, D.C. FHFA was created on July 30, 2008, pursuant to the Housing and Economic Recovery Act of 2008 (HERA), Pub L. No. 110-289, 122 Stat. 2654, codified at 12 U.S.C. 4617 et seq. (HERA), to oversee Fannie Mae, Freddie Mac and the Federal Home Loan Banks. On September 6, 2008, the Director of FHFA, also pursuant to HERA, placed Fannie Mae and Freddie Mac into conservatorship and appointed FHFA as Conservator. In that capacity, FHFA has the authority to exercise all rights and remedies of Fannie Mae and Freddie Mac, including but not limited to, the authority to bring suits on behalf of and/or for the benefit of the GSEs. 12 U.S.C. 4617(b)(2). 12. Fannie Mae and Freddie Mac are government-sponsored enterprises chartered by
Congress with a mission to provide liquidity, stability and affordability to the United States housing and mortgage markets. As part of this mission, Fannie Mae and Freddie Mac invested in RMBS. Fannie Mae is located at 3900 Wisconsin Avenue, NW in Washington, D.C. Freddie Mac is located at 8200 Jones Branch Drive in McLean, Virginia. Defendants Morgan Stanley Defendants 13. Defendant Morgan Stanley (MS) is a financial holding company regulated by
the Board of Governors of the Federal Reserve System, and an SEC-registered broker-dealer. Morgan Stanley is a Delaware corporation with its principal place of business at 1585 Broadway, New York, New York 10036. MS is a global financial services firm that trades on the New York
Stock Exchange under the ticker MS. MSs business units include its Institutional Securities division which, among other things, acts as an underwriter of RMBS, provides warehouse lending to subprime and other mortgage originators, trades, makes markets and takes proprietary positions in RMBS, and structures debt securities and derivatives involving mortgage-related securities. 14. Defendant Morgan Stanley & Co., Inc. (MS&Co.) is a wholly-owned subsidiary
of MS, incorporated in the State of Delaware, with its principal offices at 1585 Broadway, New York, New York 10036. Defendant MS&Co. was the lead or co-lead underwriter for 30 of the 33 Securitizations. Fannie Mae and Freddie Mac purchased the Certificates for 30 of the 33 Securitizations from MS&Co. in its capacity as lead or co-lead underwriter for the Securitizations. 15. Defendant Morgan Stanley ABS Capital I, Inc. (MSAC) is a wholly-owned
subsidiary of MS, incorporated in the State of Delaware, with its principal offices at 1585 Broadway, New York, New York 10036. Defendant MSAC was the depositor for 16 of the 33 Securitizations. As depositor, MSAC was responsible for preparing and filing reports required under the Securities Exchange Act of 1934. 16. Defendant Morgan Stanley Capital I, Inc. (MSC) is a wholly-owned subsidiary
of MS incorporated in the State of Delaware with its principal offices located at 1585 Broadway, New York, New York 10036. Defendant MSC was the depositor for 10 Securitizations. As depositor, MSC was responsible for preparing and filing reports required under the Securities Exchange Act of 1934 with respect to the Securitizations. 17. Defendant Morgan Stanley Mortgage Capital Holdings LLC d/b/a Morgan
Stanley Mortgage Capital, Inc. (MSMC) is a New York limited liability company, and a
wholly-owned subsidiary of MS with its principal offices at 1221 Avenue of the Americas, New York, New York 10020. Defendant MSMC was the sponsor of one of the Securitizations. By virtue of a June 17, 2007 merger, Defendant MSMC became the successor-in-interest to Morgan Stanley Mortgage Capital, Inc. (MCI) (the term MSMC/MCI is used herein to refer to MSMC on its own behalf and as successor-in-interest to MCI), which was the sponsor of 20 of the Securitizations. Defendant MSMC is liable as a matter of law as successor to MCI as the surviving entity in its direct merger with MCI. Defendant MSMC is also the direct parent and sole owner of Defendant Saxon Capital, Inc. (SCI). Defendant MS is the direct parent and sole owner of Defendants MS&Co., MSAC, MSC, and MSMC. 18. SCI is a Maryland corporation with an office located at 300 International Drive,
100, Williamsville, New York 14421. On December 4, 2006, SCI merged with Angle Merger Subsidiary Corporation, which was a wholly-owned subsidiary of MCI. As Defendant MSMC is the successor-in-interest to MCI, Defendant SCI is now a wholly-owned subsidiary of MSMC. Defendant SCI is the sole owner and direct parent of Defendant Saxon Funding Management LLC (SFM). 19. SFM, a wholly-owned subsidiary of Defendant SCI, is a Delaware limited
liability company registered to do business in New York. Prior to December 4, 2006 when Defendant SCI merged with a MS subsidiary, SFM was known as Saxon Funding Management, Inc. Defendant SFM was the sponsor of two Securitizations. 20. Defendant Saxon Asset Securities Company (SASC) is a wholly-owned
subsidiary of Defendant SFM incorporated in the State of Virginia. Defendant SASC was the depositor for four Securitizations and transacted business in New York. SASC, as depositor, was also responsible for preparing and filing reports required under the Securities Exchange Act of
1934. Defendants MS, MS&Co., MSAC, MSC, MSMC, SCI, SFM and SASC are referred to together herein as Morgan Stanley. Non-MS Defendants 21. Defendant Credit Suisse Securities (USA) LLC (Credit Suisse) is a corporation
organized and existing under the laws of the State of Delaware with its principal place of business at 11 Madison Ave., New York, New York 10010. Prior to January 16, 2006, Credit Suisse was known as Credit Suisse First Boston LLC. Credit Suisse is an SEC-registered brokerdealer, and was the co-lead underwriter for four of the Securitizations. The GSEs purchased the Certificates for two Securitizations from Credit Suisse. 22. Defendant RBS Securities, Inc., doing business as RBS Greenwich Capital
(RBS), is an SEC-registered broker-dealer incorporated in the State of Delaware with offices located at 101 Park Avenue, New York, New York 10178. Prior to April 2009, RBS was known as Greenwich Capital Markets, Inc. RBS was co-lead underwriter for three Securitizations and sold the Certificates for one Securitization to Freddie Mac. Individual Defendants 23. Defendant Gail P. McDonnell (Ms. McDonnell) is an individual residing in
New York, New York. Ms. McDonnell was a Managing Director and Head of the Securitized Products group at Defendant MS. She also served as a Director at Defendant MSAC. Ms. McDonnell signed two of the Shelf Registration Statements and the amendments thereto. 24. Defendant Howard Hubler (Mr. Hubler) is an individual residing in Rumson,
New Jersey. Mr. Hubler was a Managing Director at the Proprietary Trading group at Defendant MS and transacted business in New York. He also served as a Director at Defendant MSAC. Mr. Hubler signed one Shelf Registration Statement and the amendments thereto.
25.
Defendant Craig S. Phillips (Mr. Phillips) is an individual residing in New
Canaan, Connecticut. Mr. Phillips was a Managing Director and Global Head of the Securitized Products group at Defendant MS and transacted business in New York. He also served as President and Director at Defendant MSAC. Mr. Phillips signed two of the Shelf Registration Statements and the amendments thereto. 26. Defendant Alexander C. Frank (Mr. Frank) is an individual residing in New
York, New York. Mr. Frank was a Treasurer, a Managing Director and the Head of Operational Risk Management at Defendant MS from 1985 through 2008. He also served as Treasurer at Defendant MSAC. Mr. Frank signed one Shelf Registration Statement and the amendment thereto. 27. Defendant David R. Warren (Mr. Warren) is an individual residing in New
York, New York. Mr. Warren was a Managing Director in the Mortgage Capital Markets group and the Global Head of the Structured Credit Trading group at Defendant MS. He also served as President and Director at Defendant MSC. Mr. Warren signed three of the Shelf Registration Statements and the amendments thereto. 28. Defendant John E. Westerfield (Mr. Westerfield) is an individual residing in
Bronxville, New York. Mr. Westerfield was Global Head of Real Estate Lending and Global Head of Commercial Mortgage Backed Securities at Defendant MS from 1985 through 2008. He also served as a Director at Defendant MSC. Mr. Westerfield signed one Shelf Registration Statement and the amendments thereto. 29. Defendant Steven S. Stern (Mr. Stern) is an individual residing in Connecticut.
Mr. Stern was Global Head of Real Estate Lending at Defendant MS, is currently employed in the Global Commercial Mortgage-Backed Securities group at Defendant MS, and transacted
business in New York. He also served as a Director at Defendant MSC. Mr. Stern signed one Shelf Registration Statement and the amendments thereto. Messrs. Hubler, Phillips, Frank, Warren, Westerfield, and Stern, and Ms. McDonnell are together referred to herein as the Individual Defendants. Non-Party Originators 30. The loans underlying the Certificates were acquired by the sponsor for each
Securitization from third-party mortgage originators, including Aames Capital Corporation (Aames Capital); Accredited Home Lenders, Inc. (Accredited Home); Wilmington Finance Inc. (Wilmington); American Home Mortgage Corporation (American Home); Decision One Mortgage Company, LLC (Decision One); First National Bank of Nevada (First National); First NLC Financial Services LLC (First NLC); GreenPoint Mortgage Funding Inc. (GreenPoint); Hemisphere National Bank (Hemisphere); New Century Mortgage Corporation (New Century) and its subsidiary Home 123 Corporation (Home123); IndyMac Federal Savings Bank (IndyMac); Meritage Mortgage Corporation (Meritage); MortgageIT, Inc. (MortgageIT); Wachovia Mortgage Corporation (Wachovia); and WMC Mortgage Corp. (WMC). Morgan Stanley Credit Corporation (MSCC) and SMI, both subsidiaries of MS, also originated some of the loans underlying the Certificates for the Securitizations. Together, the entities identified in this paragraph are referred to as the Non-Party Originators. JURISDICTION AND VENUE 31. This Court has jurisdiction over this action pursuant to Section 22 of the
Securities Act of 1933, 15 U.S.C. 77v, and Section 7 of Article VI of the New York State Constitution.
10
32. 301 and 302. 33.
This Court has personal jurisdiction over the Defendants pursuant to C.P.L.R.
Venue is proper in this district pursuant to C.P.L.R. 503 because one or more of
the parties resides in New York County, New York. The underwriters reside or have their principal place of business in this district and many of the alleged acts and transactions, including the preparation and dissemination of the Registration Statements, occurred in substantial part within New York County, New York. FACTUAL ALLEGATIONS I. FACTUAL ALLEGATIONS APPLICABLE TO ALL CLAIMS 34. The factual allegations set forth in paragraphs 35 through 133 below are made
with respect to all causes of action against Defendants and are sufficient to establish Defendants strict statutory liability under the federal Securities Act, and the Securities Acts of the District of Columbia and Virginia. With respect to such liability, no allegations are made or intended, and none are necessary, concerning Defendants state of mind. Defendants are strictly liable, without regard to intent on their part or reliance on Freddie Macs part, for the misstatements in, and material omissions from, the Registration Statements under Sections 11 and 12 and, for control person defendants, under Section 15, of the Securities Act, as well as Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code and Sections 31-5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code. A. The Securitizations 1. 35. Residential Mortgage-Backed Securitizations Generally
Asset-backed securitization involves pooling cash-producing financial assets and
issuing securities backed by those pools of assets. In residential mortgage-backed securitizations, the cash-producing financial assets are residential mortgage loans.
11
36.
In the most common form of securitization of mortgage loans, a sponsor -- the
entity that acquires or originates the mortgage loans and initiates the securitization -- directly or indirectly transfers a portfolio of mortgage loans to a trust. In many instances, the transfer of assets to the trust is a two-step process in which the sponsor first transfers the financial assets to an intermediate entity, typically referred to as a depositor, and then the depositor transfers the assets to a trust. The trust is established pursuant to a pooling and servicing agreement or trust indenture entered into by, among others, the depositor for that securitization. 37. RMBS are the securities backed by the underlying mortgage loans in the trust.
Some residential mortgage-backed securitizations are created from more than one cohort of loans, called collateral groups, in which case the trust issues different tranches of securities backed by different groups of loans. For example, a securitization may involve two groups of mortgages, with some securities backed primarily by the first group, and others primarily by the second group. Purchasers of the securities (in the form of certificates) acquire an ownership interest in the assets of the trust, which in turn owns the loans. These purchasers are thus dependent for repayment of principal and payment of interest upon the cash-flows from the designated group of mortgage loans -- primarily mortgagors payments of principal and interest on the mortgage loans held by the related trust. 38. RMBS are generally issued and sold pursuant to registration statements filed with
the SEC. These registration statements include prospectuses, which describe the general structure of the investment, and prospectus supplements, which set forth detailed descriptions of, among other things, the mortgage groups underlying the certificates. Certificates are issued by the trust and sold pursuant to the registration statement, the prospectus and prospectus
12
supplement. Underwriters purchase the certificates from the trust and then offer, sell or distribute the certificates to investors. 39. A mortgage servicer manages the collection of proceeds from the mortgage loans.
The servicer is responsible for collecting homeowners mortgage loan payments, which the servicer remits to the trustee after deducting a monthly servicing fee. The servicers duties include making collection efforts on delinquent loans, initiating foreclosure proceedings, and determining when to charge off a loan by writing down its balance. The servicer is required to report key information about the loans to the trustee. The trustee (or trust administrator) administers the trust funds and delivers payments due each month on the certificates to the investors. 2. 40. Securitizations At Issue In This Case
This case involves the following 33 Securitizations: i. ii. iii. iv. v. vi. vii. viii. Aames Mortgage Investment Trust 2005-4, Mortgage Backed Notes (AMIT 2005-4); Morgan Stanley ABS Capital I Inc. Trust, Mortgage Pass-Through Certificates, Series 2005-HE5 (MSAC 2005-HE5); Morgan Stanley ABS Capital I Inc. Trust, Mortgage Pass-Through Certificates, Series 2005-HE6 (MSAC 2005-HE6); Morgan Stanley ABS Capital I Inc. Trust, Mortgage Pass-Through Certificates, Series 2006-HE6 (MSAC 2006-HE3); Morgan Stanley ABS Capital I Inc. Trust, Mortgage Pass-Through Certificates, Series 2006-HE5 (MSAC 2006-HE5) Morgan Stanley ABS Capital I Inc. Trust, Mortgage Pass-Through Certificates, Series 2006-HE6 (MSAC 2006-HE6); Morgan Stanley ABS Capital I Inc. Trust, Mortgage Pass-Through Certificates, Series 2006-HE8 (MSAC 2006-HE8); Morgan Stanley Capital I Inc. Trust, Mortgage Pass-Through Certificates, Series 2006-NC2 (MSC 2006-NC2);
13
ix. x. xi. xii. xiii. xiv. xv. xvi. xvii. xviii. xix. xx. xxi. xxii. xxiii. xxiv.
Morgan Stanley ABS Capital I Inc. Trust, Mortgage Pass-Through Certificates, Series 2006-NC3 (MSAC 2006-NC3); Morgan Stanley ABS Capital I Inc. Trust, Mortgage Pass-Through Certificates, Series 2006-NC4 (MSAC 2006-NC4); Morgan Stanley ABS Capital I Inc. Trust, Mortgage Pass-Through Certificates, Series 2006-WMC2 (MSAC 2006-WMC2); Morgan Stanley ABS Capital I Inc. Trust, Mortgage Pass-Through Certificates, Series 2007-HE1 (MSAC 2007-HE1); Morgan Stanley ABS Capital I Inc. Trust, Mortgage Pass-Through Certificates, Series 2007-HE5 (MSAC 2007-HE5); Morgan Stanley ABS Capital I Inc. Trust, Mortgage Pass-Through Certificates, Series 2007-HE7 (MSAC 2007-HE7); Morgan Stanley ABS Capital I Inc. Trust, Mortgage Pass-Through Certificates, Series 2007-NC1 (MSAC 2007-NC1); Morgan Stanley Capital I Inc. Trust, Mortgage Pass-Through Certificates, Series 2006-HE2 (MSC 2006-HE2); Morgan Stanley Mortgage Loan Trust, Mortgage Pass-Through Certificates, Series 2005-10 (MSM 2005-10); Morgan Stanley Mortgage Loan Trust, Mortgage Pass-Through Certificates, Series 2005-7 (MSM 2005-7); Morgan Stanley Mortgage Loan Trust, Mortgage Pass-Through Certificates, Series 2006-2 (MSM 2006-2); Morgan Stanley Mortgage Loan Trust, Mortgage Pass-Through Certificates, Series 2006-16AX (MSM 2006-16AX); Morgan Stanley Mortgage Loan Trust, Mortgage Pass-Through Certificates, Series 2007-2AX (MSM 2007-2AX); Morgan Stanley Mortgage Loan Trust, Mortgage Pass-Through Certificates, Series 2007-7AX (MSM 2007-7AX); Morgan Stanley Mortgage Loan Trust, Mortgage Pass-Through Certificates, Series 2007-5AX (MSM 2007-5AX); Morgan Stanley Home Equity Loan Trust, Mortgage Pass-Through Certificates, Series 2005-4 (MSHEL 2005-4);
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xxv. xxvi. xxvii. xxviii. xxix. xxx. xxxi. xxxii. xxxiii. 41.
New Century Home Equity Loan Trust, Asset Backed Pass-Through Certificates, Series 2005-B (NCHET 2005-B); New Century Home Equity Loan Trust, Asset Backed Pass-Through Certificates, Series 2005-C (NCHET 2005-C); New Century Home Equity Loan Trust, Asset Backed Pass-Through Certificates, Series 2005-D (NCHET 2005-D); Saxon Asset Securities Trust, Mortgage Loan Asset Backed Notes, Series 2005-3 (SAST 2005-3); Saxon Asset Securities Trust, Mortgage Loan Asset Backed Notes, Series 2006-1 (SAST 2006-1); Saxon Asset Securities Trust, Mortgage Loan Asset Backed Notes, Series 2006-2 (SAST 2006-2); Saxon Asset Securities Trust, Mortgage Loan Asset Backed Notes, Series 2007-1 (SAST 2007-1); Saxon Asset Securities Trust, Mortgage Loan Asset Backed Notes, Series 2007-2 (SAST 2007-2); and Saxon Asset Securities Trust, Mortgage Loan Asset Backed Notes, Series 2007-3 (SAST 2007-3).
For each of the 33 Securitizations, Table 1 identifies the: (1) sponsor;
(2) depositor; (3) underwriter; (4) principal amount issued for the tranches4 purchased by the GSEs; (5) date of issuance; and (6) the loan group or groups backing the Certificate for that Securitization (referred to as the Supporting Loan Groups).
A tranche is one of the classes of debt securities issued as part of a single bond or instrument. Securities are often issued in tranches to meet different investor objectives for portfolio diversification.
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Table 1
Transaction AMIT 2005-4 Tranche 1A1 Sponsor Aames Investment Depositor MSAC Underwriters MS&Co. Bear RBS Citi MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. Bear MS&Co. Principal Amount Issued ($) 446,899,000.00 Date of Issuance 09/12/05 Supporting Loan Group(s) Group 1
MSAC 2005-HE5 MSAC 2005-HE6 MSAC 2006-HE3 MSAC 2006-HE5 MSAC 2006-HE6 MSAC 2006-HE8 MSC 2006-NC2 MSAC 2006-NC3 MSAC 2006-NC4 MSAC 2006-WMC2 MSAC 2007-HE1 MSAC 2007-HE5 MSAC 2007-HE7 MSAC 2007-NC1 MSC 2006-HE2 MSHEL 2005-4 MSM 2005-10 MSM 2005-7 MSM 2006-16AX MSM 2006-2 MSM 2007-2AX MSM 2007-5AX MSM 2007-7AX NCHET 2005-B
A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 3A 5A 1A 7A1 7A2 1A 1A 1A A1
MSMC MSMC MSMC MSMC MSMC MSMC MSMC MSMC MSMC MSMC MSMC MSMC MSMC MSMC MSMC MSMC MSMC MSMC MSMC MSMC MSMC MSMC MSMC MSMC NC Capital Corporation NC Capital Corporation NC Capital Corporation SFM
NCHET 2005-C
A1
NCHET 2005-D
A1
SAST 2005-3
A1A
MSAC MSAC MSAC MSAC MSAC MSAC MSC MSAC MSAC MSAC MSAC MSAC MSAC MSAC MSC MSAC MSC MSC MSC MSC MSC MSC MSC MSC New Century Mortgage Securities, Inc. New Century Mortgage Securities, Inc. New Century Mortgage Securities, Inc. SASC
441,470,000.00 337,122,000.00 381,635,000.00 319,485,000.00 324,649,000.00 226,710,000.00 430,640,000.00 426,670,000.00 536,150,000.00 581,960,000.00 309,100,000.00 119,919,000.00 670,205,000.00 320,559,000.00 435,720,000.00 335,337,000.00 40,296,000.00 26,951,000.00 182,501,000.00 31,903,000.00 3,545,000.00 157,974,000.00 127,608,000.00 177,425,000.00 590,249,000.00
10/28/05 11/29/05 05/25/06 06/30/06 09/27/06 11/29/06 03/30/06 04/28/06 06/23/06 06/28/06 01/26/07 04/26/07 09/28/07 01/26/07 04/28/06 11/29/05 11/30/05 10/31/05 10/31/06 01/31/06 01/31/06 01/31/07 02/28/07 04/30/07 09/29/05
Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group 3 Group 5 Group 1 Group 7 Group 7 Group 1 Group 1 Group 1 Group I
549,534,000.00
12/06/05
Group I
SAST 2006-1
A1
SFM
SASC
MS&Co. Credit Suisse Deutsche Bank RBS BOA Credit Suisse Merrill Credit Suisse BOA RBS JPM Merrill
411,566,000.00
12/28/05
Group I
360,900,000.00
09/29/05
Group 1
199,612,000.00
05/02/06
Group 1
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Transaction SAST 2006-2
Tranche A2
Sponsor SFM
Depositor SASC
Underwriters Credit Suisse BOA RBS JPM Merrill Credit Suisse BOA RBS JPM Merrill MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co.
Principal Amount Issued ($) 197,374,000.00
Date of Issuance 06/07/06
Supporting Loan Group(s) Group 2
A1
SFM
SASC
197,376,000.00
06/07/06
Group 1
SAST 2007-1 SAST 2007-2 SAST 2007-3
A1 A1 1A 1M1 1M2 1M3 1M4 1M5 1M6
SFM SFM SFM SFM SFM SFM SFM SFM SFM
SASC SASC SASC SASC SASC SASC SASC SASC SASC
209,071,000.00 192,705,000.00 569,917,000.00 36,690,000.00 33,021,000.00 21,198,000.00 17,937,000.00 17,937,000.00 16,307,000.00
03/07/07 04/30/07 08/03/07 08/03/07 08/03/07 08/03/07 08/03/07 08/03/07 08/03/07
Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1
3.
Securitization Process a. The Sponsors Grouped Mortgage Loans in Special Purpose Trusts
42.
In each case the sponsor purchased the mortgage loans underlying the Certificates
purchased by the GSEs for its Securitizations either directly from the originators or through affiliates of the originators. Defendant MSMC/MCI sponsored 23 Securitizations; Defendant SFM sponsored six Securitizations; and the remaining four Securitizations were sponsored by non-parties. 43. For the 20 Securitizations that they sponsored, MSMC and SFM sold the
mortgage loans to Defendants MSAC, MSC and SASC, the depositors. MSAC also acted as the depositor for one additional Securitization sponsored by non-party Aames Investment Corporation. 44. As depositors for 30 of the 33 Securitizations, Defendants MSC, MSAC and
SASC transferred the relevant mortgage loans to the respective trusts for each of those
17
Securitizations, in each case pursuant to Assignment and Recognition Agreements or Mortgage Loan Purchase Agreements that contained various representations and warranties regarding the mortgage loans for the Securitizations. 45. As part of each Securitization, the trustee for that Securitization, on behalf of the
Certificateholders, executed a Pooling and Servicing Agreement (PSA) with the relevant depositor and the relevant servicer. In each case, the trust, administered by the trustee, was required to hold the mortgage loans, pursuant to the related PSA and issued Certificates backed by such loans. b. 46. The Trusts Issued Securities Backed by the Loans
PSAs, each trust issued Certificates backed by the underlying mortgage loans. The Certificates were then sold to investors, including Fannie Mae and Freddie Mac, who purchased the highest tranches of the Certificates. Each Certificate entitles its holder to a specified portion of the cash flows from the underlying mortgages in the supporting loan group for that Certificate. Therefore, the value of the Certificates, derived in part from the likelihood of payment of principal and interest on the Securitizations, depends upon the credit quality of the underlying mortgages, i.e., the risk of default by borrowers and the recovery value upon default of foreclosed-upon properties. 47. The Certificates purchased by the GSEs were issued and sold pursuant to Shelf
Registration Statements filed with the SEC on a Form S-3.5 The Shelf Registration Statements
Defendant MSAC filed two Shelf Registration Statements that were used to market 16 of the Securitizations; Defendant MSC filed two Shelf Registration Statements that were used to market eight of the Securitizations; and Defendant SASC filed two Shelf Registration Statements that were used to market six of the Securitizations. The remaining Registration Statement was 18
(S-3) were amended by one or more Forms S-3/A (the Amendments or S-3/A) filed with the SEC. The Individual Defendants signed six of the seven total Shelf Registration Statements (and amendments thereto) that were filed, in each case, by MSAC, MSC or SASC. The SEC filing number, registrants, signatories, and filing dates for all seven Shelf Registration Statements with Amendments, as well as the Certificates purchased by the GSEs covered by each Shelf Registration Statement, are reflected in Table 2 below.
filed by non-party New Century Mortgage Securities, Inc. and was used to market three of the Securitizations.
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Table 2
SEC File No. 333-130694 Date S-3 Filed 12/23/05 Date(s) S-3/A(s) Filed 02/21/06 03/10/06 Registrants MSAC Covered Certificates MSAC 2006-HE3 MSAC 2006-HE5 MSAC 2006-HE6 MSAC 2006-HE8 MSAC 2006-NC3 MSAC 2006-NC4 MSAC 2006-WMC2 MSAC 2007-HE1 MSAC 2007-HE5 MSAC 2007-HE7 MSAC 2007-NC1 MSAC 2005-HE5 MSAC 2005-HE6 MSHEL 2005-4 AMIT 2005-4 Signatories of S-3 Steven Shapiro Anthony Tufariello William Forsell Gail P. McDonnell Howard Hubler Signatories of S-3/A(s)6 Steven Shapiro Anthony Tufariello William Forsell Gail P. McDonnell Howard Hubler
333-121914
01/07/05
05/06/05
MSAC
333-125593
06/07/05
06/28/05 06/30/05
333-130684
12/23/05
02/17/06 03/14/06
333-123394
03/17/05
MSC 2006-HE2 MSC 2006-NC2 MSM 2005-10 MSM 2005-7 MSM 2006-2 MSC MSM 2006-16AX MSM 2007-2AX MSM 2007-5AX MSM 2007-7AX New Century NCHET 2005-B NCHET 2005-C NCHET 2005-D SASC SAST 2005-3
MSC
Steven Shapiro Craig S. Phillips Alexander C. Frank Gail P. McDonnell David R. Warren David R. Warren Craig S. Phillips John E. Westerfield William J. Forsell David R. Warren William J. Forsell Anthony B. Tufariello Steven S. Stern Kevin Cloyd Brad A. Morrice Patrick J. Flanagan Edward F. Gotschall Ernest G. Bretana Michael L. Sawyer Dean A. Christiansen Ernest G. Bretana Michael L. Sawyer Orlando Figueroa
Steven Shapiro Craig S. Phillips Alexander C. Frank Gail P. McDonnell David R. Warren David R. Warren Craig S. Phillips John E. Westerfield William J. Forsell Anthony B. Tufariello William J. Forsell Steven S. Stern
333-111832
01/09/04
01/21/04
Ernest G. Bretana
333-131712
02/09/06
03/17/06 03/30/06
SASC
SAST 2006-1 SAST 2006-2 SAST 2007-1 SAST 2007-2 SAST 2007-3
Ernest G. Bretana Michael L. Sawyer Orlando Figueroa Robert B. Eastep Jennifer Sebastian
48.
The Prospectus Supplement for each Securitization describes the loan
underwriting guidelines that purportedly were used in connection with the origination of the underlying mortgage loans. In addition, the Prospectus Supplements purport to provide accurate
6
Some Individual Defendants signed certain S-3/As through a power of attorney.
20
statistics regarding the mortgage loans in each group, including: the ranges of and weighted average FICO credit scores of the borrowers, the ranges of and weighted average loan-to-value (LTV) ratios of the loans, the ranges of and weighted average outstanding principal balances of the loans, the debt-to-income ratios of the borrowers, the geographic distribution of the loans, the extent to which the loans were for purchase or refinance purposes, information concerning whether the loans were secured by a property to be used as a primary residence, second home, or investment property, and information concerning whether the loans were delinquent. 49. The Prospectus Supplement for each Securitization was filed with the SEC as part
of the Registration Statements. The Form 8-Ks attaching the PSAs for each Securitization were also filed with the SEC. The date on which the Prospectus Supplement and Form 8-K were filed for each Securitization, as well as the filing number of the Shelf Registration Statement related to each, are set forth in Table 3 below. Table 3
Date Prospectus Supplement Filed 09/13/05 10/31/05 11/29/05 05/26/06 06/30/06 09/22/06 11/22/06 03/30/06 04/26/06 06/20/06 06/23/06 01/26/07 04/25/07 09/28/07 01/26/07 04/26/06 11/23/05 12/01/05 10/31/05 10/30/06 Date Form 8-K Attaching PSA 09/26/05 11/15/05 12/12/05 06/09/06 07/17/06 10/13/06 12/14/06 04/14/06 05/15/06 07/11/06 07/20/06 02/12/07 05/16/07 10/16/07 02/12/07 05/15/06 12/14/05 01/13/06 01/13/06 01/25/07 Filing No. of Related Registration Statement 333-121914 333-121914 333-121914 333-130694 333-130694 333-130694 333-130694 333-125593 333-130694 333-130694 333-130694 333-130694 333-130694 333-130694 333-130694 333-125593 333-121914 333-125593 333-125593 333-130684
Transaction AMIT 2005-4 MSAC 2005-HE5 MSAC 2005-HE6 MSAC 2006-HE3 MSAC 2006-HE5 MSAC 2006-HE6 MSAC 2006-HE8 MSC 2006-NC2 MSAC 2006-NC3 MSAC 2006-NC4 MSAC 2006-WMC2 MSAC 2007-HE1 MSAC 2007-HE5 MSAC 2007-HE7 MSAC 2007-NC1 MSC 2006-HE2 MSHEL 2005-4 MSM 2005-10 MSM 2005-7 MSM 2006-16AX
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Transaction MSM 2006-2 (7A1 & 7A2) MSM 2007-2AX MSM 2007-5AX MSM 2007-7AX NCHET 2005-B NCHET 2005-C NCHET 2005-D SAST 2005-3 SAST 2006-1 SAST 2006-2 (A1 & A2) SAST 2007-1 SAST 2007-2 SAST 2007-3 (1A & 1M1-1M6)
Date Prospectus Supplement Filed 02/02/06 01/29/07 02/28/07 04/30/07 09/28/05 12/05/05 12/27/05 09/30/05 05/01/06 06/07/06 06/07/06 03/07/07 04/27/07
Date Form 8-K Attaching PSA 01/24/07 02/16/07 04/17/07 09/19/07 10/17/05 12/23/05 01/09/06 10/13/05 05/08/06 06/21/06 06/21/06 03/22/07 05/11/07
Filing No. of Related Registration Statement 333-125593 333-130684 333-130684 333-130684 333-123394 333-123394 333-123394 333-111832 333-131712 333-131712 333-131712 333-131712 333-131712
B. 50.
DEFENDANTS PARTICIPATION IN THE SECURITIZATION PROCESS Each of the Defendants, including the Individual Defendants, played a role in the
securitization process and the marketing for some or all of the Certificates purchased by the GSEs, which included purchasing the mortgage loans from the originators, arranging the Securitizations, selling the mortgage loans to the depositor, transferring the mortgage loans to the trustee on behalf of the Certificateholders, underwriting the public offering of the Certificates, structuring and issuing the Certificates, and marketing and selling the Certificates to Fannie Mae and Freddie Mac. 51. The Defendants are liable, jointly and severally, as participants in the registration,
issuance and offering of the Certificates purchased by the GSEs, including issuing, causing, or making materially misleading statements in the Registration Statements, and omitting material facts required to be stated therein or necessary to make the statements contained therein not misleading.
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1. 52.
Defendant MS
Defendant MS wholly owns Defendants MS&Co., MSAC, MSC and MSMC, and
is the ultimate parent of Defendants SCI, SFM and SASC. The chart below indicates the corporate structure of the Morgan Stanley Defendants.
MS
MS & Co.
(underwriter)
MSAC (depositor)
MSC (depositor)
MSMC
(successor in interest to MCI) (sponsor)
SCI SFM
(f/k/a SFM Inc.) (sponsor)
SASC
(depositor)
53.
MS employed its subsidiaries or affiliates, MS&Co., MSAC, MSC, MSMC, SCI,
SFM and SASC to effectuate the securitization process. Unlike typical arms-length transactions, the Securitizations here involved MS subsidiaries or affiliates at virtually each step in the chain. For 29 of the 33 Securitizations, MSMC/MCI or SFM served as the sponsor, and MSAC, MSC or SASC served as the depositor. For 26 of those 29 Securitizations, and the remaining four of the 33 total Securitizations, MS&Co. was also the selling underwriter. 54. As the corporate parent of MS&Co., MSAC, MSC and MSMC, and the ultimate
parent of SCI, SFM and SASC, MS had the practical ability to direct and control the actions of
23
these subsidiaries in issuing and selling the Certificates purchased by the GSEs, and in fact exercised such direction and control over the activities of these entities related to the Securitizations, and the issuance and sale of the Certificates purchased by the GSEs. 55. As detailed, supra, the Securitizations involved MS-related entities at virtually
each step in the process, and MS profited substantially from this vertically-integrated approach to mortgage-backed securitization. Furthermore, on information and belief, MS currently shares, and at all relevant times shared, overlapping management with the other Morgan Stanley entities. For instance, Defendant Phillips was, at all relevant times, the Global Head of Securitized Products at MS while also serving as the President and CEO at Defendant MSAC. Similarly, Defendant Warren was, at all relevant times, the Global Head of Structured Credit Trading at Defendant MS while also serving as the President and Director at Defendant MSC. 2. 56. Defendant SCI
SCI is the corporate parent of SFM and SASC and controlled the business
operations of SFM and SASC. As the corporate parent of SFM and SASC, SCI had the practical ability to direct and control the actions of SFM and SASC in issuing and selling the Certificates purchased by the GSEs, and in fact exercised such direction and control over the activities of SFM and SASC in connection with the issuance and sale of the Certificates purchased by the GSEs. 3. 57. Defendants MSMC and SFM
MSMC was the sponsor of one Securitization. Through a June 17, 2007 merger,
MSMC became the successor-in-interest to MCI, which served as the sponsor of 20 of the Securitizations. SFM was the sponsor of six of the 33 Securitizations. MSMC and SFM are referred to herein together as the Sponsors.
24
58.
MCI was formed in 1985 as a wholly-owned subsidiary of MS for the sole
purpose of issuing RMBS through its affiliates MSAC and MSC and during the relevant time period, MCI was a leading sponsor of RMBS in the nation. As stated in the September 28, 2007 Prospectus Supplement for the MSAC 2007-HE7 Securitization, from the period January 2000 through August 2007, MCI securitized residential mortgage loans with an aggregate principal balance of $116.2 billion, including securitizing residential mortgage loans totaling $11.32 billion in 2003, $27.02 billion in 2004, $23.09 billion in 2005, and $29.99 billion in 2006. 59. As the sponsor of 27 of the 33 Securitizations, MSMC/MCI and SFM determined
the structure of the Securitizations, initiated the Securitizations, purchased the mortgage loans to be securitized, determined distribution of principal and interest, and provided data to the rating agencies to secure investment grade ratings for the Certificates purchased by the GSEs. MSMC/MCI and SFM also selected MSAC, MSC, or SASC as the special-purpose vehicles that would be used to transfer the mortgage loans from MSMC, MCI or SFM to the trusts, and selected MS&Co. Credit Suisse, or RBS as the selling underwriter for the Securitizations. In its role as sponsor, MSMC/MCI and SFM knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing such loans would be issued by the relevant trusts. 60. For the 27 Securitizations that they sponsored, MSMC/MCI and SFM also
conveyed the mortgage loans to MSAC, MSC, and SASC as depositors, pursuant to an Assignment and Recognition Agreement or a Mortgage Loan Purchase Agreement. In these agreements, MSMC/MCI and SFM made certain representations and warranties to MSAC, MSC, and SFM regarding the groups of loans collateralizing the Certificates purchased by the GSEs.
25
These representations and warranties were assigned by MSAC, MSC, and SFM to the trustees for the benefit of the Certificateholders. 4. 61. Defendants MSAC, MSC, and SASC
MSAC and MSC are wholly-owned subsidiaries of MS, and SASC is a subsidiary
of MS and a wholly-owned subsidiary of SFM. MSAC, MSC and SASC (together, the Depositors) were all formed as special-purpose entities for the sole purpose of purchasing mortgage loans, filing registration statements with the SEC, forming issuing trusts, assigning mortgage loans and all of its rights and interests in such mortgage loans to the trustee for the benefit of the Certificateholders, and depositing the underlying mortgage loans into the issuing trusts. MSAC, MSC and SASC were the depositors for 30 of the 33 Securitizations. In their capacity as depositors, MSAC, MSC and SASC purchased the mortgage loans from MSMC/MCI and SFM, pursuant to the applicable Assignment and Recognition Agreement or a Mortgage Loan Purchase Agreement. MSAC, MSC, and SASC then sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trusts. Together with the other Defendants, MSAC, MSC and SASC also were responsible for preparing and filing the Registration Statements pursuant to which the Certificates purchased by the GSEs were offered for sale. The trusts, in turn held the mortgage loans for the benefit of the Certificateholders, and issued the Certificates in public offerings for sale to investors, including Fannie Mae and Freddie Mac. 5. 62. Defendant MS&Co.
MS&Co. is a wholly-owned subsidiary of MS. MS&Co. is and was, at all
relevant times, an SEC-registered broker-dealer and one of the leading underwriters of mortgage and other asset-backed securities in the United States. According to Inside Mortgage Finance, MS&Co. was the 10th largest non-agency RMBS underwriter in 2006, underwriting over $53.9
26
billion of RMBS, and the 8th largest RMBS underwriter in 2007, underwriting over $39.9 billion.7 63. As co-lead underwriter -- and the selling underwriter -- for 30 of the 33
Securitizations MS&Co. was responsible for underwriting and managing the offer and sale of Certificates to Fannie Mae and Freddie Mac and other investors. MS&Co. was also obligated to conduct due diligence to ensure that the Registration Statements did not contain any material misstatements or omissions, including misstatements or omissions concerning the origination, transfer, and underwriting. 6. 64. Non-MS Defendants
Credit Suisse and RBS were among the nations largest non-agency mortgage-
backed securities underwriters between 2004 through 2007. Credit Suisse and RBS were the selling underwriters for three Securitizations in which SFM was the sponsor and SASC was the depositor. Credit Suisse and RBS were responsible for underwriting and managing the offer and sale of Certificates to the GSEs. These underwriter Defendants also were obligated to conduct due diligence to ensure that the Registration Statements did not contain any material misstatements or omissions, including as to the manner in which the underlying mortgage loans were originated, transferred and underwritten. 7. 65. Individual Defendants
Each of the Individual Defendants signed at least one of the seven Shelf
Registration Statements and/or the amendments thereto. Because they prepared, signed, filed and/or used these documents to market and sell Certificates to Fannie Mae and Freddie Mac,
7
Agency mortgage-backed securities are guaranteed by a government agency or government-sponsored enterprise such as Fannie Mae or Freddie Mac, while non-agency mortgage-backed securities are issued by banks and financial companies not associated with a government agency or government sponsored enterprise.
27
each Individual Defendant is directly responsible for misstatements and omissions of material fact contained in the Registration Statements. 66. Further, certain of the Individual Defendants, through their positions at Morgan
Stanley, including Defendants MS, MSAC, MSC, SCI, and SASC had the practical ability to direct and control the actions of the Morgan Stanley Defendants and Defendants SCI, SFM, and SASC in issuing and selling the Certificates, and in fact, exercised such direction and control over the activities of these entities in connection with the issuance and sale of Certificates to the GSEs. 67. As alleged supra, many of the Individual Defendants simultaneously held
management positions at MS and MSAC or MSC, or SCI and SASC. For example, during the relevant period, Ms. McDonnell, and Messrs. Hubler, Phillips, Frank, Warren, Westerfield, and Stern all simultaneously held management positions at both MS and MSs subsidiaries, MSAC or MSC, and signed the Registration Statements filed by MSAC or MSC. C. 68. STATEMENTS IN THE PROSPECTUS SUPPLEMENTS Plaintiff relies for its claims, in part, upon the Registration Statements in their
entirety. Specific representations and warranties in the Registration Statements that form the basis for the claims herein are set forth for each Securitization in Appendix A hereto. 1. 69. Compliance With Underwriting Guidelines
The Prospectus Supplement for each of the Securitizations contained detailed
descriptions of the underwriting guidelines used to originate the mortgage loans included in the Securitizations. Because payment on, and the value of, the Certificates is based on the cash flows from the underlying mortgage pool, representations concerning compliance with the stated underwriting guidelines were material to reasonable investors. Investors, including the GSEs,
28
did not have access to information concerning the collateral pool, and were required to rely on the representations in the Prospectus Supplements concerning that collateral. 70. Among other consequences, the failure to originate mortgage loans in accordance
with stated guidelines diminishes the value of the Certificates by increasing the risk that an investor will not be paid its principal and interest. Misrepresentations concerning, or failure accurately to disclose, borrower, loan and property characteristics bearing on the risk of default by the borrower as well as the severity of losses given default can artificially inflate the perceived value of the securities. Without complete and accurate information regarding the collateral pool, reasonable investors, including the GSEs, are unable accurately and independently to assess whether the price of an RMBS adequately accounts for the risks they are assuming when they purchase the security. 71. The Prospectus Supplements for each of the Securitizations contained several key
statements with respect to the loan purchasing and underwriting standards of the entities that originated the loans in the Securitizations. For example, with respect to the MSAC 2006-HE8 Securitization -- for which MS&Co. was the underwriter, MSAC was the depositor, and New Century was the originator -- the Prospectus Supplement states: The mortgage loans will have been originated in accordance with the New Century Underwriting Guidelines and that [t]he New Century Underwriting Guidelines are primarily intended to assess the borrowers ability to repay the mortgage loan, to assess the value of the mortgaged property and to evaluate the adequacy of the property as collateral for the mortgage loan. (Emphasis added). 72. With respect to the information evaluated by the originator (in this example, New
Century), the Prospectus Supplement for the MSAC 2006-HE8 Securitization stated that: Each applicant completes an application which includes information with respect to the applicants liabilities, income, credit history, employment history and personal information. The New Century Underwriting Guidelines require a credit report on each applicant from a credit reporting
29
company. The report typically contains information relating to matters such as credit history with local and national merchants and lenders, installment debt payments and any record of defaults, bankruptcies, repossessions or judgments. (Emphasis added). 73. states: The New Century Underwriting Guidelines require that mortgage loans be underwritten in a standardized procedure which complies with applicable federal and state laws and regulations and requires New Centurys underwriters to be satisfied that the value of the property being financed, as indicated by an appraisal and a review of the appraisal, currently supports the outstanding loan balance. 74. The Prospectus Supplements for each of the Securitizations made similar The Prospectus Supplement for the MSAC 2006-HE8 Securitization further
representations with respect to the underwriting guidelines employed by each of the originators in the Securitizations, which included: Aames Capital, Accredited Home, Wilmington, American Home, Decision One, First National, First NLC, GreenPoint, Hemisphere, New Century and its subsidiary, Home123, IndyMac, Meritage, MortgageIT, Wachovia, WMC, MSCC and SMI. See Appendix A. 75. Contrary to those representations, however, these originators routinely and
egregiously departed from, or abandoned completely, their stated underwriting guidelines, as discussed in Section (I)(D)(2), infra. As a result, the representations concerning compliance with underwriting guidelines and the inclusion and descriptions of those guidelines in the Prospectus Supplements were false and misleading, and the actual mortgages underlying each Securitization exposed the purchasers, including the GSEs, to a materially greater risk to investors than that represented in the Prospectus Supplements. 76. As reflected more fully in the Appendix, for the vast majority of the
Securitizations, the Prospectus Supplements included representations that: (i) the mortgage loans were underwritten in accordance with each originators underwriting guidelines in effect at the
30
time of origination, subject only to limited exceptions; and (ii) the origination and collection practices used by the originator with respect to each mortgage note and mortgage were in all respects legal, proper and customary in the mortgage origination and servicing business. 77. The inclusion of these representations in the Prospectus Supplements had the
purpose and effect of providing assurances to investors regarding the quality of the mortgage collateral underlying the Securitizations. These representations were material to a reasonable investors decisions to purchase the Certificates, and they were material to the GSEs. As alleged more fully below, Defendants representations were materially false. 2. 78. Occupancy Status of Borrower
The Prospectus Supplements for each Securitization set forth information about
the occupancy status of the borrowers of the loans underlying the Securitization; that is, whether the property securing a mortgage is (i) the borrowers primary residence; (ii) a second home, or (iii) an investment property. This information was presented in tables, typically titled Occupancy Status of the Mortgage Loans, that assigned all the properties in the collateral group to one of the following categories: (i) Primary, or Owner-Occupied; (ii) Second Home, or Secondary; and (iii) Investor or Non-Owner. For each category, the table stated the number of loans purportedly in that category. Occupancy statistics for the Supporting Loan Groups for each Securitization were reported in the Prospectus Supplements as follows:8 Table 4
Transaction AMIT 2005-4 MSAC 2005-HE5
8
Supporting Loan Group Group I Group I
Primary or Owner-Occupied 94.48% 94.14%
Second Home / Secondary 0.88% 2.58%
Investor 4.64% 3.28%
Each Prospectus Supplement provides the total number of loans and the number of loans in the following categories: owner-occupied, investor, and second home. These numbers have been converted to percentages for ease of comparison.
31
Transaction MSAC 2005-HE6 MSAC 2006-HE3 MSAC 2006-HE5 MSAC 2006-HE6 MSAC 2006-HE8 MSC 2006-NC2 MSAC 2006-NC3 MSAC 2006-NC4 MSAC 2006-WMC2 MSAC 2007-HE1 MSAC 2007-HE5 MSAC 2007-HE7 MSAC 2007-NC1 MSC 2006-HE2 MSHEL 2005-4 MSM 2005-10 MSM 2005-7 MSM 2006-16AX MSM 2006-2 (7A1 & A2) MSM 2007-2AX MSM 2007-5AX MSM 2007-7AX NCHET 2005-B NCHET 2005-C NCHET 2005-D SAST 2005-3 SAST 2006-1 SAST 2006-2 SAST 2006-2 SAST 2007-1 SAST 2007-2 SAST 2007-3 (1A & 1M1-1M6)
Supporting Loan Group Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group 3 Group 5 Group 1 Group 7 Group 1 Group 1 Group 1 Group I Group I Group I Group 1 Group 1 Group 2 Group 1 Group 1 Group 1 Group 1
Primary or Owner-Occupied 92.66% 94.93% 95.02% 87.61% 92.06% 86.31% 83.30% 87.40% 93.64% 84.76% 96.87% 88.98% 84.87% 97.59% 96.17% 100.00% 100.00% 53.46% 100.00% 44.72% 54.19% 68.30% 85.20% 83.31% 86.02% 96.50% 94.53% 91.88% 94.07% 92.83% 91.53% 90.37%
Second Home / Secondary 1.02% 0.64% 0.73% 4.01% 1.02% 3.94% 3.03% 3.79% 4.24% 2.68% 1.50% 1.35% 4.46% 0.82% 0.96% 0.00% 0.00% 5.72% 0.00% 8.31% 6.29% 5.14% 4.59% 2.75% 3.50% 0.46% 1.18% 0.70% 0.35% 0.66% 0.30% 0.97%
Investor 6.32% 4.43% 4.25% 8.38% 6.92% 9.75% 13.67% 8.81% 2.12% 12.56% 1.63% 9.67% 10.67% 1.59% 2.87% 0.00% 0.00% 40.82% 0.00% 46.97% 39.52% 26.56% 10.21% 13.94% 10.49% 3.03% 4.30% 7.42% 5.58% 6.51% 8.17% 8.66%
79.
As Table 4 makes clear, the Prospectus Supplements reported that 30 of the 34
Supporting Loan Groups contained at least 80 percent owner-occupied loans, and 20 of the 34 Supporting Loan Groups contained at least 90 percent owner-occupied loans. 80. Because information about occupancy status is an important factor in determining
the credit risk associated with a mortgage loan -- and, therefore, the securitization that it backs -the statements in the Prospectus Supplements concerning occupancy status were material to a reasonable investors decision to invest in the Certificates, and they were material to the GSEs.
32
These statements were material because, among other reasons, borrowers who live in mortgaged properties are substantially less likely to default and more likely to care for their primary residence than borrowers who purchase properties as second homes or investments and live elsewhere. For example, as stated in the Prospectus Supplement for the SAST 2006-1 Securitization and other Securitizations: Mortgage loans secured by properties acquired by investors for the purpose of rental income or capital appreciation, or properties acquired as second homes, tend to have higher severities of default than properties that are regularly occupied by the related borrowers. Accordingly, the percentage of loans in the collateral group of a securitization that are secured by mortgage loans on owner-occupied residences is an important measure of the risk of the certificates sold in that securitization. 81. Other things being equal, the lower the percentage of loans secured by owner-
occupied residences, the greater the risk of loss to Certificateholders. Even modest differences in the percentages of primary/owner-occupied, second home/secondary, and investment properties in the collateral group of a securitization can have a significant effect on the risk of each certificate sold in that securitization, and thus, are important to the decision of a reasonable investor whether to purchase any such certificate. As discussed infra at paragraphs 94 through 97, the Prospectus Supplements for each Securitization materially overstated the percentage of loans in the Supporting Loan Groups that were owner-occupied, thereby misrepresenting the degree of risk of the Certificates purchased by the GSEs. 3. 82. Loan-to-Value Ratios
generally the lower of the purchase price or the appraised value of the property. In a refinancing
33
or home-equity loan, there is no purchase price to use as the denominator, so the denominator is often equal to the appraised value at the time of the origination of the refinanced loan or homeequity loan. Accordingly, an accurate appraisal is essential to an accurate LTV ratio. In particular, an inflated appraisal will understate, sometimes greatly, the credit risks associated with a given loan. 84. The Prospectus Supplements for the Securitizations contain information about the
LTV ratio for each Supporting Loan Group. Table 5 below reflects two categories of important information reported in the Prospectus Supplements concerning the LTV ratios for each Supporting Loan Group: (i) the percentage of loans with an LTV ratio of 80 percent or less; and (ii) the percentage of loans with an LTV ratio greater than 100 percent.9 Table 5
Supporting Loan Group Group I Group I Group I Group I Group I Group I Group I Group 1 Group I Group I Group I Group I Percentage of loans, by aggregate principal balance, with LTV less than or equal to 80% 77.40% 59.42% 64.31% 60.73% 51.21% 62.20% 56.24% 57.13% 53.43% 60.48% 70.46% 52.24% Percentage of loans, by aggregate principal balance, with LTV greater than 100% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Transaction AMIT 2005-4 MSAC 2005-HE5 MSAC 2005-HE6 MSAC 2006-HE3 MSAC 2006-HE5 MSAC 2006-HE6 MSAC 2006-HE8 MSC 2006-NC2 MSAC 2006-NC3 MSAC 2006-NC4 MSAC 2006-WMC2 MSAC 2007-HE1
As used in this Complaint, LTV refers to the loan-to-value ratio for first lien mortgages and for properties with second liens subordinate to the lien included in the securitization (i.e., only the securitized lien is included in the numerator of the LTV calculation). Where the securitized lien is junior to another loan, the more senior lien has been added to the securitized one to determine the numerator in the LTV calculation (this latter calculation is sometimes referred to as the combined-loan-to-value ratio, or CLTV).
34
Transaction MSAC 2007-HE5 MSAC 2007-HE7 MSAC 2007-NC1 MSC 2006-HE2 MSHEL 2005-4 MSM 2005-10 MSM 2005-7 MSM 2006-16AX MSM 2006-2 (7A1 & A2) MSM 2007-2AX MSM 2007-5AX MSM 2007-7AX NCHET 2005-B NCHET 2005-C NCHET 2005-D SAST 2005-3 SAST 2006-1 SAST 2006-2 SAST 2006-2 SAST 2007-1 SAST 2007-2 SAST 2007-3 (1A & 1M1-1M6)
Supporting Loan Group Group I Group I Group I Group I Group I Group 3 Group 5 Group 1 Group 7 Group 1 Group 1 Group 1 Group I Group I Group I Group 1 Group 1 Group 2 Group 1 Group 1 Group 1 Group 1
Percentage of loans, by aggregate principal balance, with LTV less than or equal to 80% 54.79% 51.48% 56.89% 66.14% 59.99% 97.71% 97.49% 92.54% 95.03% 96.65% 90.17% 83.36% 61.84% 54.64% 58.60% 57.66% 59.06% 61.06% 61.77% 54.21% 45.15% 53.38%
Percentage of loans, by aggregate principal balance, with LTV greater than 100% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
85.
loan for several reasons. First, the LTV ratio is a strong indicator of the likelihood of default, because a higher LTV ratio makes it more likely that a decline in the value of a property will completely eliminate a borrowers equity, and will incentivize the borrower to stop making mortgage payments and abandon the property. Second, the LTV ratio is a strong predictor of the severity of loss in the event of a default because the higher the LTV ratio, the smaller the equity cushion, and the greater the likelihood that the proceeds of foreclosure will not cover the unpaid balance of the mortgage loan.
35
86.
Thus, the LTV ratios were material to a reasonable investors investment decision
with respect to the Certificates, and they were material to the GSEs. Even small differences between the LTV ratios of the mortgage loans in the collateral group of a securitization have a significant effect on the likelihood that collateral groups will generate sufficient funds to pay certificateholders in that securitization. Such differences are important to the decision of a reasonable investor on whether to purchase any such certificate, and they affect the intrinsic value of the certificate. 87. As Table 5 makes clear, the Prospectus Supplements for all of the Securitizations
reported that the majority of the mortgage loans in the Supporting Loan Groups had an LTV ratio of 80 percent or less. The Prospectus Supplements also reported that none of the Supporting Loan Groups contained a single loan with an LTV ratio over 100 percent. 88. As discussed infra at paragraphs 98 through 103, the Prospectus Supplements for
the Securitizations materially overstated the percentage of loans in the Supporting Loan Groups with an LTV ratio at or less than 80 percent, and materially understated the percentage of loans in the Supporting Loan Groups with an LTV ratio over 100 percent, thereby misrepresenting the degree of risk to Certificateholders. 4. 89. Credit Ratings
the credit rating agencies, including Standard & Poors, Moodys Investors Service, and Fitch Ratings. Each credit rating agency uses its own scale with letter designations to describe various levels of risk. In general, AAA or its equivalent ratings are at the top of the credit rating scale and are intended to designate the safest investments. C and D ratings are at the bottom of the scale and refer to investments that are currently in default and exhibit little or no prospect for recovery. At the time Fannie Mae and Freddie Mac purchased the Certificates, investments with
36
AAA or its equivalent ratings historically experienced a loss rate of less than .05 percent. Investments with a BBB rating, or its equivalent, historically experienced a loss rate of less than one percent. As a result, securities with credit ratings between AAA or its equivalent through BBB- or its equivalent were generally referred to as investment grade. 90. Rating agencies determine the credit rating for each tranche of a mortgage-backed
securitization by comparing the likelihood of contractual principal and interest repayment to the credit enhancements available to protect investors. Rating agencies determine the likelihood of repayment by estimating cash flows based on the quality of the underlying mortgages by using sponsor-provided loan-level data. Credit enhancements, such as subordination, represent the amount of cushion or protection from loss incorporated into a given securitization.10 This cushion is intended to improve the likelihood that holders of highly-rated certificates receive the interest and principal to which they are contractually entitled. The level of credit enhancement offered is based on the composition of the loans in the underlying collateral group and entire securitization. Riskier loans underlying the securitization necessitate higher levels of credit enhancement to insure payment to senior certificate holders. If the collateral within the deal is of a higher quality, then rating agencies require less credit enhancement for an AAA or its equivalent rating. 91. For almost a hundred years, investors like pension funds, municipalities,
insurance companies, and university endowments have relied heavily on credit ratings to assist them in distinguishing between safe and risky investments.
10
Subordination refers to the fact that the certificates for a mortgage-backed securitization are issued in a hierarchical structure, from senior to junior. The junior certificates are subordinate to the senior certificates in that, should the underlying mortgage loans become delinquent or default, the junior certificates suffer losses first. These subordinate certificates thus provide a degree of protection to the senior certificates from certain losses on the underlying loans.
37
92.
Each tranche of the Securitizations received a credit rating before issuance, which
purported to describe the riskiness of that tranche. Defendants reported the credit ratings for each tranche in the Prospectus Supplements. For each of the Certificates purchased by the GSEs the credit rating provided was virtually always AAA or its equivalent.11 The accuracy of these ratings was material to a reasonable investors decision to purchase the Certificates, and it was material to the GSEs. Among other things, the ratings provided additional assurance that investors in the Certificates would receive the expected interest and principal payments. As set forth in Table 8, infra at paragraph 125, the ratings for most of the Securitizations were severely downgraded to well below investment grade after the GSEs purchase of the Certificates. Upon information and belief, the initial ratings were based in substantial part upon the materially inaccurate and incomplete information in the Registration Statements and related information provided to the ratings agencies. D. FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS 1. The Statistical Data Provided in the Prospectus Supplements Concerning Owner-Occupancy and Loan-To-Value Ratios Was Materially False
93.
A review of loan-level data was conducted to assess whether the statistical
information provided in the Prospectus Supplements was true and accurate. For each Securitization, the review included an analysis either of: (i) a sample of 1,000 loans randomly selected from the Supporting Loan Group; or (ii) all the loans in the Supporting Loan Group, if there were fewer than 1,000 such loans. The review of sample data has confirmed, on a statistically-significant basis, that the data provided in the Prospectus Supplements concerning
11
With the exception of six tranches of SAST 2007-3 Certificates, as noted in Table 8 infra, all of which were rated higher than A3/A-/A.
38
owner-occupancy and LTV ratios was materially false, and that the Prospectus Supplements contained material misrepresentations with respect to the underwriting standards employed by the originators, and certain key characteristics of the mortgage loans across the Securitizations. a. 94. Owner-Occupancy Data was Materially False
Prospectus Supplements were materially false and inflated. Indeed, the Prospectus Supplements over-reported the number of underlying properties that were occupied by their owners, and underreported the number of underlying properties held as second homes or investment properties. 95. To determine whether a given borrower actually occupied the property as
claimed, a number of tests were conducted, including, inter alia, whether, months after the loan closed, the borrowers tax bill was being mailed to the property or to a different address, whether the borrower had claimed a tax exemption on the property, and whether the mailing address of the property was reflected in the borrowers credit reports, tax records, or lien records. Failing two or more of these tests constitutes strong evidence that the borrower did not live at the mortgaged property and instead used it as a second home or an investment property, rendering it much more likely that a borrower will not repay the loan. 96. For each Securitization, a significant number of the underlying loans failed two or
more of these tests, indicating that the owner-occupancy statistics provided to investors, such as Fannie Mae and Freddie Mac, were materially false and misleading. For example, the Prospectus Supplement for the MSAC 2006-HE8 Securitization -- for which MCI was the sponsor and MS&Co. was the underwriter -- stated that 7.94 percent of the underlying properties by loan count in the Supporting Loan Group were second homes or investment properties. But the data review revealed that the true percentage of non-owner-occupied properties was 20.19
39
percent,12 over 250 percent greater than the percentage reported in the Prospectus Supplement because for 13.3 percent of the properties represented as owner-occupied, the owners lived elsewhere 97. The data review revealed that for each Securitization, the Prospectus Supplement
misrepresented the percentage of non-owner-occupied properties. The true percentage of nonowner-occupied properties, as determined by the data review, versus the percentage stated in the Prospectus Supplement for each Securitization, is reflected in Table 6 below. Table 6 demonstrates that the Prospectus Supplements for each Securitization significantly understated the percentage of non-owner-occupied properties. Table 6
A Reported Percentage of Non-OwnerOccupied Properties 5.52% 5.86% 7.34% 5.07% 4.98% 12.39% 7.94% 13.69% 16.70% 12.60% 6.36% 15.24% 3.13% 11.02% 15.13% B % of Properties Reported as Owner-Occupied in the Offering Materials with Strong Indication of Non-OwnerOccupancy 8.66% 14.38% 11.66% 13.12% 11.80% 11.58% 13.30% 11.03% 11.11% 10.07% 12.49% 8.66% 10.60% 12.02% 9.48% C Actual Percentage of Non-OwnerOccupied Properties 13.70% 19.40% 18.15% 17.53% 16.19% 22.54% 20.19% 23.21% 25.95% 21.40% 18.05% 22.59% 13.40% 21.71% 23.18% D Understatement of Non-OwnerOccupied Properties in the Offering Materials 8.18% 13.54% 10.81% 12.46% 11.21% 10.15% 12.25% 9.52% 9.25% 8.80% 11.69% 7.35% 10.27% 10.69% 8.05%
Transaction
AMIT 2005-4 MSAC 2005-HE5 MSAC 2005-HE6 MSAC 2006-HE3 MSAC 2006-HE5 MSAC 2006-HE6 MSAC 2006-HE8 MSC 2006-NC2 MSAC 2006-NC3 MSAC 2006-NC4 MSAC 2006-WMC2 MSAC 2007-HE1 MSAC 2007-HE5 MSAC 2007-HE7 MSAC 2007-NC1
12
Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I
The true percentage of non-owner-occupied properties (Table 6 Column C) is calculated by adding the percentage reported in the Prospectus Supplement (Table 6 Column A) to the product of owner-occupied properties reported in the Prospectus Supplement (100 minus Column A) and the percentage of properties reported as owner-occupied but with strong indication of non-owner occupancy (Table 6 Column B).
40
A Reported Percentage of Non-OwnerOccupied Properties 2.41% 3.83% 0.00% 0.00% 46.54% 0.00% 55.28% 45.81% 31.70% 14.80% 16.69% 13.98% 3.50% 5.47% 8.12% 5.93% 7.17% 8.46% 9.63%
Transaction
MSC 2006-HE2 MSHEL 2005-4 MSM 2005-10 MSM 2005-7 MSM 2006-16AX MSM 2006-2 (7A1 & 7A2) MSM 2007-2AX MSM 2007-5AX MSM 2007-7AX NCHET 2005-B NCHET 2005-C NCHET 2005-D SAST 2005-3 SAST 2006-1 SAST 2006-2 SAST 2006-2 SAST 2007-1 SAST 2007-2 SAST 2007-3 (1A & 1M1-1M6)
Group I Group I Group 3 Group 5 Group 1 Group 7 Group 1 Group 1 Group 1 Group I Group I Group I Group 1 Group 1 Group 2 Group 1 Group 1 Group 1 Group 1
B % of Properties Reported as Owner-Occupied in the Offering Materials with Strong Indication of Non-OwnerOccupancy 11.74% 11.54% 14.35% 11.45% 14.03% 15.15% 14.03% 14.23% 13.82% 13.09% 12.12% 11.80% 8.81% 9.92% 10.93% 8.73% 10.74% 9.32% 9.66%
C Actual Percentage of Non-OwnerOccupied Properties 13.86% 14.93% 14.35% 11.45% 54.04% 15.15% 61.55% 53.52% 41.14% 25.95% 26.78% 24.14% 12.00% 14.85% 18.16% 14.14% 17.14% 16.99% 18.36%
D Understatement of Non-OwnerOccupied Properties in the Offering Materials 11.45% 11.10% 14.35% 11.45% 7.50% 15.15% 6.27% 7.71% 9.44% 11.15% 10.09% 10.16% 8.50% 9.38% 10.04% 8.21% 9.97% 8.53% 8.73%
b. 98.
Loan-to-Value Data was Materially False
Prospectus Supplements were materially false and understated, as more specifically set out below. For each of the sampled loans, an industry standard automated valuation model (AVM) was used to calculate the value of the underlying property at the time the mortgage loan was originated. AVMs are routinely used in the industry as a way of valuing properties during prequalification, origination, portfolio review, and servicing. AVMs rely upon similar data as appraisers -- primarily county assessor records, tax rolls, and data on comparable properties. AVMs produce independent, statistically-derived valuation estimates by applying modeling techniques to this data.
41
99.
Applying the AVM to the available data for the properties securing the sampled
loans shows that the retroactive appraised value given to such properties was significantly higher than the actual value of such properties. The result of this overstatement of property values is a material understatement of LTV. That is, if a propertys true value is significantly less than the value used in the loan underwriting, then the loan represents a significantly higher percentage of the propertys value. This, of course, increases the risk a borrower will not repay the loan and the risk of greater losses in the event of a default. As stated in the Prospectus Supplement for MSAC 2006-HE8: Mortgage loans with higher loan-to-value ratios may present a greater risk of loss than mortgage loans with loan-to-value ratios of 80 percent or below. 100. For example, for the MSAC 2007-HE5 Securitization, which was sponsored by
MCI and underwritten by MS&Co., the Prospectus Supplement stated that no LTV ratios for the Supporting Loan Group were above 100 percent. In fact, 31.13 percent of the sample of loans included in the data review had LTV ratios above 100 percent; that is, mortgage loans with no equity cushion whatsoever. The Prospectus Supplement for the MSAC 2007-HE5 Securitization contained equally false statements with respect to the percentage of loans with an equity cushion of 20 percent or more. Specifically, whereas the Prospectus Supplement stated that 54.79 percent of the loans had LTV ratios at or below 80 percent, the data review indicated that only 28.12 percent of the loans had LTV ratios at or below 80 percent. 101. The data review revealed that for each Securitization, the Prospectus Supplement
misrepresented the percentage of loans with an LTV ratio that were above 100 percent, as well the percentage of loans that had an LTV ratio at or below 80 percent. Table 7 reflects (i) the true percentage of mortgages in the Supporting Loan Group with LTV ratios above 100 percent, versus the percentage reported in the Prospectus Supplement; and (ii) the true percentage of
42
mortgages in the Supporting Loan Group with LTV ratios at or below 80 percent, versus the percentage reported in the Prospectus Supplement. The percentages listed in Table 7 were calculated by aggregated principal balance. Table 7
PROSPECTUS Supporting Loan Group Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group 3 Group 5 Group 1 Group 7 Group 1 Group 1 Group 1 Group I Group I Group I Group 1 Group 1 Group 2 Group 1 Group 1 Group 1 Group 1 Percentage of Loans reported to Have LTV Ratio at or Less than 80% 77.40% 59.42% 64.31% 60.73% 51.21% 62.20% 56.24% 57.13% 53.43% 60.48% 70.46% 52.24% 54.79% 51.48% 56.89% 66.14% 59.99% 97.71% 97.49% 92.54% 95.03% 96.65% 90.17% 83.36% 61.84% 54.64% 58.60% 57.66% 59.06% 61.06% 61.77% 54.21% 45.15% 53.38% DATA REVIEW True Percentage of Loans with LTV Ratio at or Less than 80% 46.39% 41.78% 49.07% 43.14% 32.43% 40.66% 36.37% 42.29% 41.33% 42.18% 38.82% 32.48% 28.12% 32.73% 33.41% 41.00% 40.31% 64.07% 56.49% 51.38% 57.69% 57.18% 45.69% 46.71% 41.58% 42.36% 44.33% 46.69% 42.54% 42.29% 40.62% 36.30% 27.43% 35.17% PROSEPCTUS Percentage of Loans Reported to have LTV Ratio Over 100% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% DATA REVIEW True Percentage of Loans with LTV Ratio Over 100% 7.82% 12.07% 11.96% 12.10% 21.00% 18.89% 22.65% 15.57% 17.45% 14.01% 16.08% 19.28% 31.13% 22.18% 20.12% 16.50% 12.66% 3.12% 3.46% 8.29% 1.11% 10.50% 12.77% 15.20% 11.73% 13.73% 12.71% 13.95% 15.46% 17.07% 17.03% 21.96% 31.79% 27.46%
Transaction
AMIT 2005-4 MSAC 2005-HE5 MSAC 2005-HE6 MSAC 2006-HE3 MSAC 2006-HE5 MSAC 2006-HE6 MSAC 2006-HE8 MSC 2006-NC2 MSAC 2006-NC3 MSAC 2006-NC4 MSAC 2006-WMC2 MSAC 2007-HE1 MSAC 2007-HE5 MSAC 2007-HE7 MSAC 2007-NC1 MSC 2006-HE2 MSHEL 2005-4 MSM 2005-10 MSM 2005-7 MSM 2006-16AX MSM 2006-2 (7A1 & 7A2) MSM 2007-2AX MSM 2007-5AX MSM 2007-7AX NCHET 2005-B NCHET 2005-C NCHET 2005-D SAST 2005-3 SAST 2006-1 SAST 2006-2 SAST 2006-2 SAST 2007-1 SAST 2007-2 SAST 2007-3 (1A & 1M1-1M6)
43
102.
Securitizations falsely reported that none of the mortgage loans in the Supporting Loan Groups had an LTV ratio over 100 percent: the data review revealed that: (i) for 29 of the 34 Supporting Loan Groups, at least 10 percent of the loans had an LTV ratio over 100 percent; and (ii) for 18 of the 33 Supporting Loan Groups, at least 15 percent of the loans had an LTV ratio over 100 percent. 103. These misrepresentations with respect to reported LTV ratios also demonstrate
that the representations in the Registration Statements relating to appraisal practices were false, and that the appraisers, in many instances, furnished appraisals that they understood were inaccurate and that they knew bore no reasonable relationship to the actual value of the underlying properties. Indeed, independent appraisers following proper practices, and providing genuine estimates as to valuation, would not systematically generate appraisals that deviate so significantly (and so consistently upward) from the true values of the appraised properties. The Financial Crisis Inquiry Commission (FCIC), created by Congress to investigate the mortgage crisis and attendant financial collapse in 2008, identified inflated appraisals as a pervasive problem during the period of the Securitizations, and determined through its investigation that appraisers were often pressured by mortgage originators, among others, to produce inflated results. (See Financial Crisis Inquiry Commission, Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (2011) (FCIC Report), at 91.) 2. 104. The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines
The Prospectus Supplements each contained numerous material misstatements
and omissions concerning the underwriting guidelines used by the originators of the loans
44
included in the Securitizations, defined herein as the Non-Party Originators. Among other things, the Prospectus Supplements stated that the Non-Party Originators underwrote all loans in compliance with their respective underwriting guidelines. See Appendix A, Sections I-XXXIII at Subsections B. These statements were materially false. 105. The Non-Party Originators -- companies such as New Century, WMC, Decision
One, and others -- systematically disregarded their respective underwriting guidelines, as confirmed not only by the pervasively false owner-occupancy and LTV figures alleged supra, but also by: (1) government investigations and private actions relating to their underwriting practices, which have revealed widespread abandonment of their reported underwriting guidelines during the period of the Securitizations; (2) the collapse of the credit ratings of Certificates purchased by the GSEs; and (3) the surge in delinquencies and defaults in the mortgages in the Securitizations. a. Government and Private Investigations Confirm That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines
106.
An extraordinary volume of publicly-available information, including government
reports and investigations, confirms that the originators whose loans were included by the Defendants in the Securitizations abandoned their loan origination guidelines throughout the period of the Securitizations. 107. For example, in November 2008, the Office of the Comptroller of the Currency
(OCC), an office within the United States Department of the Treasury, issued a report identifying the Worst Ten mortgage originators in the Worst Ten metropolitan areas. The worst originators were defined as those with the largest number of non-prime mortgage foreclosures for 2005-2007 originations. New Century, WMC, IndyMac, Decision One, GreenPoint and American Home -- the companies that originated the loans for two-thirds of the
45
Securitizations at issue here -- were all on that list. See Worst Ten in the Worst Ten, Office of the Comptroller of the Currency Press Release. November 13, 2008. Several of the Non-Party Originators -- including New Century, WMC, IndyMac, and Wilmington -- have been the target of government investigations or private actions that allege a complete abandonment of their reported underwriting guidelines. i. 108. New Century Violated Its Underwriting Guidelines
New Century and its subsidiary, Home123, originated loans for at least 14 of the
33 Securitizations. As stated in the Prospectus Supplement for the 2007-NC1 Securitization, [f]or the nine months ending September 20, 2006, New Century Financial Corporation originated $45.4 billion in mortgage loans. By the end of 2006, New Century was the third largest subprime mortgage loan originator in the United States, with a loan production volume that year of $51.6 billion. And before its collapse in the first half of 2007, New Century was one of the largest subprime lenders in the country. New Century filed for protection from its
creditors under Chapter 11 of the federal Bankruptcy Code on April 2, 2007. 109. In 2010, the OCC identified New Century as the worst subprime lender in the
country based on the delinquency rates of the mortgages it originated in the 10 metropolitan areas between 2005 and 2007 with the highest rates of delinquency. See Worst Ten in the Worst Ten: Update, Office of the Comptroller of Currency Press Release, March 22, 2010. Further, in January 2011, the FCIC Report detailed, among other things, the collapse of mortgage underwriting standards and subsequent collapse of the mortgage market and wider economy. See FCIC Report. The FCIC Report singled out New Century for its role: New Centuryonce the nations second-largest subprime lenderignored early warnings that its own loan quality was deteriorating and stripped power from two risk-control departments that had noted the evidence. In a June 2004 presentation, the Quality Assurance staff reported they had found severe underwriting errors, including evidence of predatory lending,
46
federal and state violations, and credit issues, in 25% of the loans they audited in November and December 2003. In 2004, Chief Operating Officer and later CEO Brad Morrice recommended these results be removed from the statistical tools used to track loan performance, and in 2005, the department was dissolved and its personnel terminated. The same year, the Internal Audit department identified numerous deficiencies in loan files; out of nine reviews it conducted in 2005, it gave the companys loan production department unsatisfactory ratings seven times. Patrick Flanagan, president of New Centurys mortgage-originating subsidiary, cut the departments budget, saying in a memo that the group was out of control and tries to dictate business practices instead of audit. 110. On February 29, 2008, after an extensive document review and conducting over
100 interviews, Michael J. Missal, the Bankruptcy Court Examiner for New Century, issued a detailed report on the various deficiencies at New Century, including lax mortgage standards and a failure to follow its own underwriting guidelines. Among his findings, the Examiner reported: New Century had a brazen obsession with increasing loan originations without due regard for the risks associated with that business strategy. . . . Although the primary goal of any mortgage banking company is to make more loans, New Century did so in an aggressive manner that elevated the risks to dangerous and ultimately to fatal levels. New Century also made frequent exceptions to its underwriting guidelines for borrowers who might not otherwise qualify for a particular loan. A Senior Officer of New Century warned in 2004 that the number one issue is exceptions to the guidelines. Moreover, many of the appraisals used to value the homes that secured the mortgages had deficiencies. New Century . . . layered the risks of loan products upon the risks of loose underwriting standards in its loan originations to high risk borrowers. Final Report of Michael J. Missal, Bankruptcy Examiner, In re New Century TRS Holdings, Inc., No. 07-10416 (KJC) (Bankr. Del. Feb. 29, 2008). 111. On December 9, 2009, the SEC charged three of New Centurys top officers with
violations of federal securities laws. The SECs complaint details the falsity of New Centurys representations regarding its underwriting guidelines -- for example, its representations that it was committed to adher[ing] to high origination standards in order to sell [its] loan products in
47
the secondary market and to only approv[ing] subprime loan applications that evidence a borrowers ability to repay the loan. 112. New Centurys failure to adhere to its underwriting guidelines is further reflected
in allegations made by the Attorney General of Massachusetts in In re: Morgan Stanley & Co. Inc., Civil Action No. 10-2538 (Suffolk Cnty. Super. Ct. June 24, 2010). The Massachusetts Attorney General alleged in his Assurance of Discontinuance that: New Centurys stretch[ed] underwriting guidelines to encompass or approve loans not written in accordance with the guidelines. (Id. 17, 23.) One recurring issue identified by Morgan Stanley was New Centurys origination of loans that violated Massachusetts Division of Banks borrowers best interest standard []. (Id. 18.) During the period 2006-2007, 91 percent of the loans approved for securitization that did not meet New Centurys underwriting guidelines did not have sufficient compensating factors to offset such exceptions. (Id. 27.) In the last three quarters of 2006, Morgan Stanley waived more than half of all material exceptions found by Clayton . . ., and purchased a substantial number of New Century loans found by Clayton to violate guidelines without sufficient compensating factors. (Id. 28. The loans originated by New Century were unfair loans to Massachusetts borrowers and were in violation of Massachusetts law . . . . (Id. 43-44.) In settlement of the Massachusetts Attorney Generals charges, on or about June
113.
24, 2010, Morgan Stanley agreed to drastic changes in its underwriting practices and paid $102 million. 114. Patricia Lindsay, a former Vice President of Corporate Risk at New Century,
testified before the FCIC in April 2010 that, beginning in 2004, underwriting guidelines had been all but abandoned at New Century. Ms. Lindsay further testified that New Century systematically approved loans with 100 percent financing to borrowers with extremely low credit scores and no supporting proof of income. (See Written Testimony of Patricia Lindsay for the
48
FCIC Hearing, April 7, 2010 (Lindsay Testimony), http://fcic-static.law.stanford.edu/cdnmedia/fcic.testimony/2010-0407-Lindsay.pdf, at 3.) 115. Ms. Lindsay also testified that appraisers fear[ed] for their livelihoods, and
therefore cherry-picked data that would help support the needed value rather than finding the best comparables to come up with the most accurate value. (See Written Testimony of Patricia Lindsay to the FCIC, April 7, 2010, at 5.) Indeed, on May 7, 2007, The Washington Post reported that a former New Century appraiser, Maggie Hardiman, recounted how she didnt want to turn away a loan because all hell would break loose and that when she did reject a loan, her bosses often overruled her and found another appraiser to sign off on it. (David Cho, Pressure at Mortgage Firm Led to Mass Approval of Bad Loans, The Washington Post (May 7, 2007).) ii. 116. WMC Violated Its Underwriting Guidelines
WMC, which originated the loans for nine of the 33 Securitizations, employed
reckless underwriting standards and practices, as described more fully below, that resulted in a huge number of foreclosures, ranking WMC fourth in the report presented to the FCIC in April 2010 identifying the Worst Ten mortgage originators in the Worst Ten metropolitan areas. (See Worst Ten in the Worst Ten, Office of the Comptroller of the Currency Press Release, November 13, 2008.) General Electric, which had purchased WMC in 2004, closed down operations at WMC in late 2007 and took a $1.4 billion charge in the third quarter of that year. (See, e.g., Diane Brady, Adventures of a Subprime Survivor, Bloomberg Businessweek, Oct. 29, 2007 (available at http://www.businessweek.com/magazine/content/07_44/b4056074.htm).) 117. WMCs reckless loan originating practices were noticed by regulatory authorities.
In June 2008, the Washington State Department of Financial Institutions, Division of Consumer Services filed a Statement of Charges and Notice of Intention to Enter an Order to Revoke
49
License, Prohibit From Industry, Impose Fine, Order Restitution and Collect Investigation Fees (the Statement of Charges) against WMC Mortgage and its principal owners individually. (See Statement of Charges, No. C-07-557-08-SC01, Jun. 4, 2008.) The Statement of Charges included 86 loan files, which revealed that at least 76 loans were defective or otherwise in violation of Washington State law. (Id.) Among other things, the investigation uncovered that WMC had originated loans with unlicensed or unregistered mortgage brokers, understated amounts of finance charges on loans, understated amounts of payments made to escrow companies, understated annual percentage rates to borrowers and committed many other violations of Washington State deceptive and unfair practices laws. (Id.) iii. 118. IndyMac Violated Its Underwriting Guidelines
IndyMac, which originated the loans for one of the Securitizations, was the
subject of a February 26, 2009 report issued by the Office of Inspector General (OIG) of the U.S. Department of Treasury entitled Safety and Soundness: Material Loss Review of IndyMac Bank, FSB (the OIG Report). The OIG Report found that IndyMac Bank had embarked on a path of aggressive growth that was supported by its high-risk business strategy of originating Alt-A loans on a large scale and then packag[ing] them together in securities and selling them on the secondary market to investors. (OIG Report at 2, 6, 7.) The OIG Report further stated that: To facilitate this level of [loan] production . . . IndyMac often did not perform adequate underwriting. (Id. at 2 (emphasis added).) 119. A June 30, 2008 report by the Center for Responsible Lending found that
IndyMac Bank often ignored its stated underwriting and appraisal standards and encouraged its employees to approve loans regardless of a borrowers ability to repay them. (See IndyMac: What Went Wrong? How an Alt-A Leader Fueled its Growth with Unsound and Abusive Mortgage Lending (the CRL Report).) The CRL Report noted that IndyMac Bank engaged in
50
unsound and abusive lending practices and allowed outside mortgage brokers and in-house sales staffers to inflate applicants [financial information] . . . [to] make them look like better credit risks. (See CRL Report at 2, 8.) iv. 120. Wilmington Violated Its Underwriting Guidelines
Wilmington was an originator for three of the Securitizations purchased by the
GSEs. As disclosed in the Prospectus Supplement to the MSHEL 2005-4 Securitization, Wilmington originated $2.2 billion in mortgage loans in 2003, $10.3 billion in mortgage loans in 2004 and $7.2 billion in mortgage loans during the period commencing on January 1, 2005 and ending on June 30, 2005. 121. Wilmington and other affiliated companies, including its parent company AIG
Federal Savings Bank (AIG FSB), were the subject of a government investigation into their lending practices. The Office of Thrift Supervision, based on the exercise of its regulatory responsibilities, determined that AIG FSB failed to manage and control the mortgage lending activities outsourced to [Wilmington] in a safe and sound manner . . . . (Supervisory Agreement at 1.) The stated purpose of the Supervisory Agreement was, among other things, to correct and remediate the negative financial impact to certain borrowers from the insufficiently supervised lending activities of [AIG FSB] outsourced to [Wilmington]. . . . (Id. at 2.) Thus, pursuant to that agreement, Wilmington and its affiliates established a $128 million reserve to cover, among other things, costs associated with providing affordable loans to borrowers whose creditworthiness was not adequately evaluated at the time the loan was originated. (Id.) Moreover, AIG FSB agreed to improving its mortgage loan origination polices to enhance its compliance will applicable laws and regulations. (Id.)
51
b.
The Collapse of the Certificates Credit Ratings Further Shows that the Mortgage Loans were not Originated in Adherence to the Stated Underwriting Guidelines
122.
The total collapse in the credit ratings of the Certificates invested in by the GSEs,
typically from AAA or its equivalent to non-investment speculative grade, is further evidence of the originators systematic disregard of underwriting guidelines, underscoring that these Certificates were impaired from the start. 123. The Certificates purchased by the GSEs originally were assigned credit ratings of
AAA or its equivalent, which purportedly reflected the description of the mortgage loan collateral and underwriting practices set forth in the Registration Statements. Those ratings artificially were inflated, however, upon information and belief in part as a result of the same misrepresentations that the Defendants made to investors in the Prospectus Supplements. 124. Upon information and belief, Morgan Stanley provided information to the rating
agencies, including LTV ratios, owner-occupancy rates and other loan statistics, that the agencies used in part to calculate the assigned ratings of the Certificates purchased by the GSEs. Upon information and belief, because the information that Morgan Stanley provided, which information included, among other things, the Registration Statements or portions thereof, the ratings were inflated. As a result, the Certificates were offered and purchased at prices suitable for investment grade securities, when in fact the Certificates carried a severe risk of loss and inadequate credit enhancement. 125. Since the issuance of the Certificates purchased by the GSEs, the ratings agencies
have downgraded their ratings dramatically to reflect the revelations regarding the true
52
underwriting practices used to originate the mortgage loans, and the true value and credit quality of the mortgage loans. Table 8 details the extent of the downgrades.13 Table 8
Transaction AMIT 2005-4 MSAC 2005-HE5 MSAC 2005-HE6 MSAC 2006-HE3 MSAC 2006-HE5 MSAC 2006-HE6 MSAC 2006-HE8 MSC 2006-NC2 MSAC 2006-NC3 MSAC 2006-NC4 MSAC 2006-WMC2 MSAC 2007-HE1 MSAC 2007-HE5 MSAC 2007-HE7 MSAC 2007-NC1 MSC 2006-HE2 MSHEL 2005-4 MSM 2005-10 MSM 2005-7 MSM 2006-16AX MSM 2006-2 MSM 2006-2 MSM 2007-2AX MSM 2007-5AX MSM 2007-7AX NCHET 2005-B NCHET 2005-C NCHET 2005-D SAST 2005-3 SAST 2006-1 SAST 2006-2 Tranche 1A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 3A 5A 1A 7A1 7A2 1A 1A 1A A1 A1 A1 A1A A1 A2 Rating at Issuance (Moodys/S&P/Fitch) Aaa/AAA/ -Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/-Aaa/AAA/AAA Rating as of July 31, 2011 (Moodys/S&P/Fitch) Aaa/AAA/-Aa1/AAA/AAA A1/AAA/A Caa2/CCC/CC Ca/B-/C Ca/CCC/C Ca/CCC/-Caa3/B-/CC Caa1/B+/CC Caa3/CCC/CC Ca/CCC/C Ca/CCC/-Ca/CCC/-Caa3/CCC/-Ca/CCC/-Caa2/CCC/CC A2/AAA/A Caa2/CC/-Caa2/CC/-Ca/CCC/-Caa2/CC/-C/CC/-Ca/CCC/-Ca/CCC/-Ca/CCC/-Ba1/AA/-B3/CCC/-Caa2/B-/-Aaa/AAA/AA Aa2/A-/-Ba3/BB+/CCC
13
Applicable ratings are shown in sequential order separated by forward slashes: S&P/Moodys/Fitch. A double-hyphen indicates that the relevant agency did not provide a rating at issuance.
53
Transaction SAST 2006-2 SAST 2007-1 SAST 2007-2 SAST 2007-3 SAST 2007-3 SAST 2007-3 SAST 2007-3 SAST 2007-3 SAST 2007-3 SAST 2007-3
Tranche A1 A1 A1 1A 1M1 1M2 1M3 1M4 1M5 1M6
Rating at Issuance (Moodys/S&P/Fitch) Aaa/AAA/AAA Aaa/AAA/-Aaa/AAA/-Aaa/AAA/AAA Aa1/AA+/AA+ Aa2/AA/AA+ Aa3/AA-/AA A1/A+/AAA2/2/A+ A3/A-/A
Rating as of July 31, 2011 (Moodys/S&P/Fitch) Ba3/BB/CCC Caa3/CCC/-Caa2/CCC/-Caa2/CCC/CC C/CCC/C C/CCC/C C/CCC/C C/CCC/C C/CCC/C C/CC/C
c.
The Surge in Mortgage Delinquency and Default Further Demonstrates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines
126.
Even though the Certificates were marketed as long-term, stable investments, a
significant percentage of the mortgage loans backing the Certificates have defaulted, have been foreclosed upon, or are delinquent, resulting in massive losses to the Certificateholders. The overall poor performance of the mortgage loans is a direct consequence of the fact that their underlying mortgage loans were not underwritten in accordance with applicable underwriting guidelines as represented in the Prospectus Supplements. 127. Loan groups that were underwritten properly and contained loans with the
characteristics represented in the Prospectus Supplements would have experienced substantially fewer payment problems and substantially lower percentages of defaults, foreclosures, and delinquencies than occurred here. Table 9 reflects the percentage of loans in the Supporting Loan Groups that are in default, have been foreclosed upon, or are delinquent as of July 2011. Table 9
Transaction AMIT 2005-4 MSAC 2005-HE5 Supporting Loan Group Group I Group I Percentage of Delinquent/Defaulted/Foreclosed Loans 42.6% 53.4%
54
Transaction MSAC 2005-HE6 MSAC 2006-HE3 MSAC 2006-HE5 MSAC 2006-HE6 MSAC 2006-HE8 MSC 2006-NC2 MSAC 2006-NC3 MSAC 2006-NC4 MSAC 2006-WMC2 MSAC 2007-HE1 MSAC 2007-HE5 MSAC 2007-HE7 MSAC 2007-NC1 MSC 2006-HE2 MSHEL 2005-4 MSM 2005-10 MSM 2005-7 MSM 2006-16AX MSM 2006-2 (7A1) MSM 2006-2 (7A2) MSM 2007-2AX MSM 2007-5AX MSM 2007-7AX NCHET 2005-B NCHET 2005-C NCHET 2005-D SAST 2005-3 SAST 2006-1 SAST 2006-2 SAST 2006-2 SAST 2007-1 SAST 2007-2 SAST 2007-3 (A1, 1M1-1M6)
Supporting Loan Group Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group 3 Group 5 Group 1 Group 7 Group 7 Group 1 Group 1 Group 1 Group I Group I Group I Group 1 Group 1 Group 2 Group 1 Group 1 Group 1 Group 1
Percentage of Delinquent/Defaulted/Foreclosed Loans 45.6% 42.8% 62.9% 70.0% 42.0% 39.9% 33.3% 45.4% 49.8% 53.8% 56.4% 50.0% 54.0% 44.3% 33.7% 19.7% 11.8% 47.1% 16.1% 16.1% 33.9% 49.7% 44.2% 37.3% 47.1% 50.6% 35.5% 39.8% 39.3% 39.8% 41.2% 31.0% 39.8%
128.
The confirmed misstatements concerning owner-occupancy and LTV ratios; the
confirmed systematic underwriting failures by the originators responsible for the mortgage loans across the Securitizations; and the extraordinary drop in credit rating and rise in delinquencies across those Securitizations all indicate that the mortgage loans in the Supporting Loan Groups,
55
contrary to the representations in the Registration Statements, were not originated in accordance with the stated underwriting guidelines. E. 129. FANNIE MAES AND FREDDIE MACS PURCHASES OF THE CERTIFICATES Between September 12, 2005 and September 28, 2007, Freddie Mac and Fannie
Mae purchased over $10.58 billion in RMBS issued in connection with the Securitizations. Tables 10 and 11 reflect each of Freddie Macs and Fannie Maes purchases of the Certificates, respectively.14 To date, the GSEs have not sold any of the Certificates. Table 10
Transaction AMIT 2005-4 MSAC 2005-HE5 MSAC 2005-HE6 MSAC 2006-HE6 MSC 2006-NC2 MSAC 2006-NC3 MSAC 2006-NC4 MSAC 2006-WMC2 MSAC 2007-HE1 MSAC 2007-NC1 MSHEL 2005-4 MSM 2005-10 MSM 2005-7 MSM 2006-16AX MSM 2006-2 MSM 2006-2 MSM 2007-2AX MSM 2007-7AX NCHET 2005-B NCHET 2005-C NCHET 2005-D SAST 2005-3 SAST 2006-1 SAST 2006-2 SAST 2007-1 Tranche 1A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 3A 5A 1A 7A1 7A2 1A 1A A1 A1 A1 A1A A1 A2 A1 CUSIP 00252FDF5 61744CUN4 61744CVT0 61750FAA8 617451EB1 61744CYZ3 61748LAA0 61749KAA1 617526AA6 617505AA0 61744CVE3 61748HSG7 61748HPE5 617487AA1 61748HVY4 61748HVZ1 61751TAA7 61754HAA0 64352VNE7 64352VNU1 64352VPK1 805564SM4 80556UAA1 80556XAB3 80556BAA3 Settlement Date of Purchase by Freddie Mac 09/12/05 10/28/05 11/29/05 09/27/06 03/30/06 04/28/06 06/23/06 06/28/06 01/26/07 01/26/07 11/29/05 11/30/05 10/31/05 10/31/06 02/28/06 02/28/06 01/31/07 04/30/07 09/29/05 12/06/05 12/28/05 09/29/05 05/02/06 06/07/06 03/07/07 Initial Unpaid Principal Balance 446,899,000.00 441,470,000.00 337,122,000.00 324,649,000.00 886,897.00 426,670,000.00 536,150,000.00 581,960,000.00 309,100,000.00 320,559,000.00 335,337,000.00 40,296,000.00 26,951,000.00 182,501,000.00 31,903,000.00 3,545,000.00 157,974,000.00 177,425,000.00 590,249,000.00 549,534,000.00 411,566,000.00 360,900,000.00 199,612,000.00 197,374,000.00 209,071,000.00 Purchase Price (% of Par) 100 100 100 100 100 100 100 100 100 100 100 99.7421875 99.640625 100 100.265625 100.265625 100 100 100 100 100 100 100 100 100 Seller to Freddie Mac MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. RBS Credit Suisse Credit Suisse MS&Co.
14
Purchases and holdings of securities in Table 10 are stated in terms of UPB of the relevant Certificates. Purchase prices are stated in terms of percentage of par.
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Table 11
Transaction MSAC 2006-HE3 MSAC 2006-HE5 MSAC 2006-HE8 MSAC 2007-HE5 MSAC 2007-HE7 MSC 2006-HE2 MSM 2007-5AX SAST 2006-2 SAST 2007-2 SAST 2007-3 SAST 2007-3 SAST 2007-3 SAST 2007-3 SAST 2007-3 SAST 2007-3 SAST 2007-3 Tranche A1 A1 A1 A1 A1 A1 1A A1 A1 1A 1M1 1M2 1M3 1M4 1M5 1M6 CUSIP 61749HAA8 61749NAA5 61750SAA0 61753KAA4 61756YAA1 617451ER6 61751GAA5 80556XAB3 80556YAA3 80557BAA2 80557BAF1 80557BAH7 80557BAK0 80557BAM6 80557BAP9 80557BAR5 Settlement Date of Purchase by Fannie Mae 05/25/06 06/30/06 11/29/06 04/26/07 09/28/07 04/28/06 02/28/07 06/07/06 04/30/07 08/03/07 08/03/07 08/03/07 08/03/07 08/03/07 08/03/07 08/03/07 Initial Unpaid Principal Balance 381,635,000.00 319,485,000.00 226,710,000.00 119,919,000.00 670,205,000.00 435,720,000.00 127,608,000.00 197,374,000.00 192,705,000.00 569,917,000.00 36,690,000.00 33,021,000.00 21,198,000.00 17,937,000.00 17,937,000.00 16,307,000.00 Purchase Price (% of Par) 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 98.9544 Seller to Fannie Mae MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. Credit Suisse MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co. MS&Co.
F.
FANNIE MAE AND FREDDIE MAC WERE DAMAGED BY DEFENDANTS VIOLATIONS OF SECTIONS 11, 12, AND 15 OF THE SECURITIES ACT The statements and information in the Registration Statements regarding the
130.
credit quality and characteristics of the mortgage loans underlying the GSE-purchased Certificates, and the origination and underwriting practices pursuant to which the mortgage loans purportedly were originated, were material to a reasonable investor. But for the misrepresentations and omissions in the Registration Statements concerning those matters, Fannie Mae and Freddie Mac would not have purchased the Certificates. 131. Based upon sales of the Certificates or similar certificates in the secondary
market, or other indications of value, the GSEs have incurred substantial losses on the Certificates due to a decline in value that is directly attributable to Defendants material misrepresentations and omissions. Among other things, the mortgage loans underlying the Certificates experienced defaults and delinquencies at a higher rate than would have been the
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case had the loans underlying the Certificates actually conformed to the origination guidelines, and had the Certificates merited the credit ratings set forth in the Registration Statement. 132. Defendants misstatements and omissions in the Registration Statement were the
direct, proximate and actual cause of the GSEs losses resulting from their purchase of the Certificates. Although clearly significant, the precise extent of Freddie Macs injuries will be proven at trial. 133. At the time of their purchases of the Certificates, Fannie Mae and Freddie Mac
were unaware of Defendants misrepresentations, omissions and/or untrue statements. Plaintiff was appointed Conservator of Fannie Mae and Freddie Mac less than one year after the discovery of the untrue statements and omissions contained in the Registration Statements and within three years of the Certificates being offered for sale to the public. Despite the exercise of reasonable diligence, Fannie Mae and Freddie Mac could not reasonably have discovered the untrue statements and omissions in the Registration Statements more than one year prior to the appointment of the Plaintiff as Conservator. This action is timely pursuant to 12 U.S.C. 4617(b)(12) and (13), which provides for extension and tolling of all time periods applicable to the claims brought herein. Moreover, the time period since June 5, 2009 has been tolled for statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and Defendants MS&Co., MSAC, MSMC, SFM and SCI. II. ADDITIONAL FACTUAL ALLEGATIONS 134. The allegations in paragraphs 135 through 138 below addressing Defendants
knowledge or recklessness concerning the information set forth in or omitted from the Registration Statements and any other materials provided to Freddie Mac are made solely with respect to Plaintiffs common law claims.
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A.
Defendants Were Incentivized to Fund Risky Residential Mortgage Loans and To Securitize and Sell Them to Investors Securitizing large volumes of loans was a highly lucrative and competitive
135.
business for the Defendants. All of the underwriter defendants engaged in this business on a massive scale, each doing multiple billions of dollars worth of securitizations during the period when they sold the Certificates to the GSEs. Fees, which were a percentage of the balance of the loan pool being purchased, and other transaction revenues associated with the Certificates at issue here, and the RMBS securitization business generally, accounted for a substantial portion of the underwriter (and other) Defendants earnings in the relevant time period. The more and the larger the securitizations the Defendants arranged and participated in, the greater their earnings. This financial motive accounts for Defendants willingness, intentionally or recklessly, to make false statements in, or to omit material facts from, the Registration Statements and other offering materials. In furtherance of this motive, the Defendant underwriters took measures and entered into arrangements designed to ensure that a continuous and high volume of mortgage loans would be available for securitization. 136. Thus, among other things, the Defendant banks provided warehouse funding to
mortgage originators to enable these originators to make, and to continue to make, loans. These subprime mortgage originators used those funds to make large numbers of loans, which they then turned around and sold back to the banks whose funds enabled them to make the loans in the first place. The banks then securitized the loans they effectively funded, and transferred the risk to investors like Fannie Mae and Freddie Mac through the sale of the RMBS resulting from the securitizations. 137. These arrangements between the banks and loan originators undermined the
underwriting process for the Certificates because the Defendant underwriters had no incentive to
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identify and exclude from the securitizations loans that did not conform to the loan originators stated guidelines. To the contrary, the Defendants had the motive to, and did, include loans that they knew -- or were reckless in not knowing -- did not conform to those guidelines, and that lacked the characteristics or merited the ratings set forth in the Registration Statement. 138. The originator responsible for the largest of loans underlying the Certificates was
New Century, now known to be one of the worst subprime lenders. 139. MS&Co., Credit Suisse, Citigroup, Bear Stearns, Merrill Lynch, Bank of
America, and Deutsche Bank -- all of whom were underwriters of the Securitizations -- provided billions of dollars of warehouse lending to New Century. In 2006, MS&Co. provided $3 billion and $650 million in warehouse loans to New Century and American Home, respectively. (Assurance of Discontinuance 12.) 140. In addition to MS&Co., the other underwriters of the Securitizations engaged in
warehouse lending as well. From 2000 to 2010, Citi extended warehouse lines of credit of up to $7 billion to unaffiliated originators, including $950 million to New Century and over $3.5 billion to Ameriquest. (FCIC Report at 113.) Citi and JPM lent their own mortgage origination subsidiaries at least $26.3 billion and $30 billion, respectively, between 2005 and 2007. (See Who is Behind The Financial Meltdown: The Top 25 Subprime Lenders and their Wall Street Backers, The Center for Integrity, available at http://www.publicintegrity.org/investigations/economic_meltdown/the_subprime_25/.) Upon information and belief, RBS also engaged in the same warehouse lending practices. 141. The lending relationship between the investment banks and the originators did not
merely assure that there would be a high volume of loans generally available to securitize. It also gave the banks the inside track on acquiring for securitization the loans generated with their
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funds. Thus, for example, according to the Assurance of Discontinuance filed by the Massachusetts Attorney General, Morgan Stanley sometimes would commit to buying loans from New Century months in advance, such that New Century was often originating loans for the purpose of fulfilling its commitment to Morgan Stanley. (Assurance of Discontinuance 12). Morgan Stanleys warehouse loan was then repaid when the originators loan pool was sold to Morgan Stanley for securitization. 142. To make matters worse, upon information and belief, because Morgan Stanley
had agreed in advance to buy the loans securing its warehouse lines, it was committed to purchasing the loans regardless of their credit quality or despite the results of its own due diligence. If Morgan Stanley were to reject too many loans, it would jeopardize its relationship with lenders, such as New Century, and also decrease its own profits because of the resulting reduction in the size of the securitizations. Thus, for example, in one instance, after New Century complained to Morgan Stanley about the rate of loan rejection and suggested that New Century would shift its business to other buyers, Morgan Stanley purchased the loans that its internal due diligence team initially had rejected. (Assurance of Discontinuance 24-25.) 143. In a March 21, 2007 earnings conference call, Morgan Stanley highlighted its
integrated approach to RMBS, without disclosing the inherent conflicts of interest: We participate in the subprime mortgage market in a number of ways. Through our securitized product groups we purchased loans from originators and originate loans, including through Saxon, which closed this quarter. We are active in the structuring, securitization, and distribution of subprime products, including CLOs and CDOs. Third, we manage our risk through a variety of hedging strategies and we also take proprietary risk positions. In the aggregate, these activities were a significant contributor to our results this quarter. In addition, we extend loans and lending commitments to clients that are secured by assets of the borrower such as loan pools. At the end of the quarter, whereas [sic] lending commitments to the subprime lenders totaled $5.2 billion, of which $2.3 billion was funded and fully collateralized. The largest component of this was the New Century. Our current
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funded balance with New Century is $2.5 billion. Finally, through our acquisition of Saxon, we have servicing capabilities. (Morgan Stanley F1Q07 (Qtr End 2/28/07) Earnings Call Transcript, March 21, 2007, http://seekingalpha.com/article/30299-morgan-stanley-f1q07-qtr-end-2-28-07-earnings-calltranscript (last visited Aug. 19, 2011).) 144. Morgan Stanley and other underwriters of the Securitizations were therefore
motivated to churn out and securitize as many mortgages as possible because they earned so much in revenues on both ends of the securitization process, without bearing the ultimate risk of default. Indeed, MS&Co. and each of the other underwriters ranked in the top ten of the nations largest underwriters of RMBS between 2004 and 2007, according to Inside Mortgage Finance. The three underwriters that sold the Certificates to Fannie Mae and Freddie Mac -- Morgan Stanley, Credit Suisse, and RBS -- were especially prolific. 145. From 2005 through 2007, when the Certificates were issued and subsequently
purchased by Fannie Mae and Freddie Mac, Morgan Stanley greatly increased the volume of RMBS it issued by, among other things, acquiring Defendant SCI and its subsidiaries SMI, SFM, and SASC, which acted as originator, sponsor, and depositor for RMBS, respectively. Thus, whereas the approximate initial principal amount of securities backed by mortgage loans that Morgan Stanley initially issued was relatively small -- roughly $0.4 billion in 2000 -- by 2006, the amount had ballooned to $26 billion. By 2007, Morgan Stanley ranked tenth with $26.8 billion in transactions, RBS was fifth with $50.3 billion, and Credit Suisse ranked sixth with $44.1 billion. (2011 Mortgage Market Statistical Annual, Vol. II (Inside Mortgage Finance Publns, Inc., 2011).)
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B. 146.
Defendants Material Misrepresentations and Omissions in the Offering Materials In connection with the sale of the Certificates, the selling underwriters MS&Co.,
Credit Suisse and RBS; the depositors MSAC, MSC and SASC; and the sponsors MSMC and SFM (together, the Fraud Defendants) each made misrepresentations and omissions of material fact to Fannie Mae and Freddie Mac in term sheets, Registration Statements, Prospectuses, Prospectus Supplements, and other draft and final written offering documents (the Offering Materials) These Offering Materials described the credit quality and other characteristics of the underlying mortgage loans on an aggregate basis and were provided to investors, including the GSEs. 147. Accordingly, Fannie Mae and Freddie Mac required the Fraud Defendants to
provide representations and warranties regarding the origination and quality of the mortgage loans, including that the mortgage loans had been underwritten by the loan originators pursuant to extensive guidelines. 148. Through term sheets or other offering documents, the Fraud Defendants also
furnished the GSEs with anticipated credit ratings on the proposed pool of mortgage loans intended for securitization. 149. On information and belief, the Fraud Defendants solicited anticipated ratings from
credit rating agencies based on misrepresentations by Defendants as to the credit quality of the proposed pool of mortgage loans intended for securitization, and the amount of the overcollateralization in the deal. Virtually all the Securitizations had anticipated ratings of at least AAA or its equivalent.
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150.
Furthermore, the Fraud Defendants delivered Prospectus Supplements to the
GSEs that included more specific information about the loans underlying the Certificates in each Securitization. 151. The materially false and misleading information contained in the initial and final
Prospectus Supplements that the Fraud Defendants provided to the GSEs included reproductions of the same schedules that the Fraud Defendants provided to the GSEs, containing false data about LTV ratios and owner-occupancy statistics. 152. The Offering Materials, among other things, (1) misrepresented the loans and loan
originators adherence to the stated underwriting guidelines; (2) overstated the number of loans for owner-occupied properties; (3) understated the loan pools average LTV ratios; and (4) failed to disclose that the credit ratings of the Certificates were based on false information. Each misrepresentation and omission created an additional, hidden layer of risk well beyond that known to be associated with non-agency loans or subprime loans. 153. First, the Fraud Defendants statements regarding the mortgage pools compliance
with stated underwriting guidelines were false. The falsity of such representations is evident from disclosures concerning the originators systematic disregard of their stated underwriting guidelines, as well as the Certificates high default rates and plummeting credit ratings. Indeed, of the 18 originators whose loans were sold into the Securitizations, six were cited as one of the worst ten in the worst ten metropolitan areas: American Home, Decision One, Greenpoint, IndyMac, New Century, and WMC. Government and private investigations have confirmed that these originators failed to apply any standards at all when making high-risk loans. Moreover, the subsequent high default rates and ultimately lowered credit ratings on the Certificates confirm that the loans were not properly underwritten in the first place. As shown in Tables 8 and 9, the
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average rate of default across the Securitizations is 41.7 percent, and although 35 of the tranches of Certificates purchased by the GSEs had been rated AAA (or its equivalent) at the time of purchase, by July 31, 2011, all but two had been had been downgraded, and most had been downgraded to junk or nearly junk-bond status, with 25 downgraded to CCC (or its equivalent), the lowest rating above junk. See supra Part (I)(D)(2). 154. These misstatements were material because as discussed above, the quality of
loans in the pool determined the risk of the Certificates backed by those loans. Because a reasonable underwriting process had not been followed, the entire loan pool was much riskier and more prone to default and market losses than represented. The systemic underwriting failures decreased the reliability of all the information provided to the GSEs about the loans, and thus increased the actual risk to investors. As a result of those failures, the value of the Certificates was substantially lower than the price paid by Fannie Mae and Freddie Mac for those Certificates. 155. Second, as shown in Table 6, the Fraud Defendants materially understated the
non-owner-occupied status for each Securitization by an average of 10.1 percent. 156. Third, the Fraud Defendants understated the loan pools average LTV ratios,
which overstated the borrowers equity cushion in the property. As Table 7 demonstrates, on average, only 42.4 percent of the loans actually had LTV ratios of less than 80 percent, as opposed to 65.7 percent as represented in the Prospectus Supplements. Moreover, while all of the Certificates purchased by the GSEs were represented to have no loans with an LTV over 100 percent, in reality, all but five deals contained at least 10.5 percent loans with greater than 100 percent LTV, with an average of 15.55 percent. In other words, in almost all of the Securitizations, a significant percentage of the mortgage loans either were under-secured or
65
under water from the start. The understatement of LTV ratios was misleading because it misrepresented the risk of a borrower abandoning a property if the value dropped below the unpaid balance of the loan, as well as the risk that proceeds from a foreclosure sale would fail to cover the unpaid balance. 157. Further, the Fraud Defendants failed to disclose that the Certificates credit ratings
were false and misleading because Defendants provided to the ratings agencies the same misinformation found in the Offering Materials in an attempt to manufacture predetermined ratings. In testimony before the Senate Permanent Subcommittee on Investigations (SPSI), Susan Barnes, the North American Practice Leader for RMBS at S&P from 2005 to 2008, confirmed that the rating agencies relied upon investment banks to provide accurate information about the loan pools: The securitization process relies on the quality of the data generated about the loans going into the securitizations. S&P relies on the data produced by others and reported to both S&P and investors about those loans . . . . S&P does not receive the original loan files for the loans in the pool. Those files are reviewed by the arranger or sponsor of the transaction, who is also responsible for reporting accurate information about the loans in the deal documents and offering documents to potential investors. (SPSI hearing testimony, April 23, 2010) (emphasis added). As a result, the ratings failed to reflect accurately the actual risk underlying the Certificates purchased by the GSEs because the ratings agencies were analyzing a mortgage pool that had no relation to the pool that actually backed the Certificates purchased by the GSEs. 158. Senior executives at Moodys also confirmed that they were fed and relied on
false information that affected their ratings: Were on notice that a lot of the things that we relied on before just werent true. Theres a lot of fraud thats involve there, things we dont see. . . . Were sort of retooling [our methodologies and approaches] to make sure that we capture a lot
66
of things that we relied on in the past that we cant rely on, on a going forward basis. Its actually quite interesting that were being asked to figure out how much everybody lied. . . . I mean, if all of the information was truthful and comprehensive and complete, we wouldnt have an issue here. The AAA (or equivalent) anticipated and final credit ratings were material to
159.
Fannie Mae and Freddie Mac, because the ratings provided additional assurances that the GSEs would receive the expected interest and principal payments. Fannie Mae and Freddie Mac would not have purchased the Certificates without the proper ratings and would not have paid as much for them without the investment grade status. 160. Each of the Fraud Defendants is responsible for the representations made in or
omitted from the Offering Materials. Specific false and misleading statements in the Registration Statements for the Certificates purchased by the GSEs are detailed in Parts (I)(C) and (I)(D), supra and Appendix A, which is incorporated by reference. 161. Because payment on the Certificates ultimately was funded by payments from the
mortgagors, Fannie Mae and Freddie Mac faced a risk of non-payment if too many borrowers defaulted on their loans and the value of the mortgaged properties was insufficient to cover the unpaid principal balance. By misrepresenting the true risk profile of the underlying loan pools, the Fraud Defendants defrauded Fannie Mae and Freddie Mac. 162. As the FCIC found:
The Commission concludes that firms securitizing mortgages failed to perform adequate due diligence on the mortgages they purchased and at times knowingly waived compliance with underwriting standards. Potential investors were not fully informed or were misled about the poor quality of the mortgages contained in some mortgage-related securities. These problems appear to have been significant. (FCIC Report at 187 (emphasis added).)
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C.
The Fraud Defendants Knew or Were Reckless in Not Knowing That Their Representations Were False and Misleading The Fraud Defendants knew or were reckless in not knowing that their
163.
representations in the Offering Materials were false, and that the information they omitted from those documents rendered them materially misleading. The consistency of the misrepresentations and omissions across all of the 33 Securitizations is strong evidence that the Fraud Defendants did not innocently make materially false statements and omissions, but actually knew or were reckless in not knowing that (1) the loan originators systemically disregarded their own underwriting guidelines, (2) the LTV ratios presented in the Offering Materials were materially inaccurate, (3) the owner-occupancy rates presented in the Offering Materials were materially inaccurate, and (4) the credit ratings for the Certificates were based on incomplete and inaccurate information and were not believed by the ratings agencies when provided. In the case of the Morgan Stanley Defendants -- which structured, implemented, or underwrote all of the Securitizations -- the securities underwriting due diligence process was so compromised that Morgan Stanley cannot have believed in the truth of, or had a sound basis for believing, the representations in the Offering Materials, and had to have known that the information omitted therefrom was material and rendered the information provided misleading. Thus, for example, the FCIC, in its report on the financial crisis, expressly found that Morgan Stanleys due diligence apparatus was inadequate both in its size and geographic location, stating: At Morgan Stanley, the head of due diligence was based not in New York but rather in Boca Raton, Florida. He had, at any one time, two to five individuals reporting to him directly -- but they were actually employees of a personnel consultant. . . (FCIC Report at 168) (footnote omitted).)
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164.
Thus, Morgan Stanley had two to five people in Boca Raton, Florida performing
due diligence on tens of billions of dollars worth of securitizations being originated and run from New York. This alone renders it more likely than not that Morgan Stanley lacked capacity and controls to determine that the representations in the Registration Statements concerning the securitizations were true. As described below, Morgan Stanley hired a third-party due-diligence firm to supplement their inadequately staffed due-diligence team, then ignored that firms warnings about loans that became part of RMBS, including the Certificates. 165. Morgan Stanleys lax due diligence standards, and its failure to present accurate
and complete information concerning the loan origination practices of the originators whose loans underlie the Certificates, were likely attributable at least in part to the warehouse lending relationships it had with several of those originators, and to the fact that Morgan Stanley was dependent on those originators to feed it the high volume of loans it needed to keep churning out securitizations. The FCIC found that underwriter/originator warehouse lending relationships led to an environment in which financial institutions ineffectively sampled loans they were purchasing to package and sell to investors, and knew a significant percentage of the sampled loans did not meet their own underwriting standards or those of the originators. Nonetheless, they sold those securities to investors. The Commissions review of many prospectuses provided to investors found that this critical information was not disclosed. (FCIC Report at xii.) 166. Given Morgan Stanleys close relationships with the originators for the
Certificates at issue here, it had a unique window into the true credit quality of the loans backing the Certificates and undue influence over the loan origination process. As one industry publication explained, warehouse loan providers had detailed knowledge of the [mortgage]
69
lenders operations. (Kevin Connor, Wall Street and the Making of the Subprime Disaster, November 2007 at 11.) 167. Morgan Stanleys warehouse lending and other relationships with New Century
were particularly close (and were the subject of the Massachusetts AG investigation and Morgan Stanley settlement already alleged). New Centurys former president testified before the Bankruptcy Examiner appointed by the Bankruptcy Court overseeing New Centurys Chapter 11 proceeding that New Century often reached deals with loan purchasers to limit the percentage of loans the purchaser would kickout of the loan pool due to the poor quality of the loan. (See, Final Report of Michael J. Missal Bankruptcy Court Examiner, Case No. 07-10416(KJC) (D.Del. Feb. 29, 2008) at 135.) That admission, the warehouse lending relationship between New Century and Morgan Stanley and the fact that Morgan Stanley did more business with this worst of the worst originator than any other bank, strongly suggest that Morgan Stanley and New Century had such a deal. 168. Morgan Stanley was not the only Defendant with a particularly close relationship
with New Century. According to the FCIC, Morgan Stanley and Credit Suisse together accounted for three-quarters of all deals securitized using New Century mortgage loans as early as 2003. (FCIC Report, at 89.) New Centurys systematic departure from its stated loan origination guidelines has come to light in recent years. That departure has been extensively investigated and reported on by, among others, the Bankruptcy Examiner in the New Century Chapter 11 proceeding, the Massachusetts AG and the FCIC, as well as in the financial press. Upon information and belief Morgan Stanley, Credit Suisse and other Defendants knew the falsity of the representations in the Registration Statements that New Century loans underlying various of the Certificates were originated in accordance with its underwriting guidelines, or at a
70
minimum these Defendants knew that neither they nor New Century had any basis to represent otherwise. These Defendants also intentionally or recklessly omitted the truth about New Centurys origination practices. 169. Morgan Stanleys knowledge concerning New Centurys origination practices
went far beyond a general awareness that New Century was systematically disregarding its own guidelines. During the 2005 to 2006 period, Morgan Stanley had determined, in reviewing and rejecting loans for purchase, that the stated income on a number of New Century loans was unreasonable and that stated income credit had not been adequately evaluated by New Century. This raised red flags because approximately 36 percent of the loans originated by New Century were stated income loans. A Morgan Stanley employee described the stated income method of verifying borrower income as overused to the point of abuse. (Assurance of Discontinuance 38.) On average, the stated income of the borrowers for these New Century loans was approximately 42 percent higher than the income of borrowers who did not merely state their income but rather submitted full documentation reflecting it; this discrepancy strongly indicated that the stated income borrowers were materially overstating their income. (Assurance of Discontinuance 39.) 170. The other Fraud Defendants, Credit Suisse and RBS, joined the Morgan Stanley
Defendants in consciously disregarding and departing from sound securities underwriting standards, and in failing to disclose that they had done so and the fact that doing so rendered information provided in the Registration Statements false, misleading and unreliable. These Defendants intent or recklessness is further evidenced by their conduct in relation to third-party due diligence providers.
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171.
Among the third-party due diligence experts engaged by the Fraud Defendants
was Clayton Holdings, Inc. (Clayton).15 Clayton was hired to identify, among other things, whether the loans met the originators stated underwriting guidelines and, in some measure, to enable clients to negotiate better prices on pools of loans. (FCIC Report at 166 (footnote omitted).) Yet, upon information and belief, the Fraud Defendants routinely disregarded and manipulated Claytons findings. 172. In January 2008, Clayton disclosed that it had entered into an agreement with the
New York Attorney General (NYAG) to provide documents and testimony regarding its due diligence reports, including copies of the actual reports provided to its clients. According to The New York Times, as reported on January 27, 2008, Clayton told the NYAG that starting in 2005, it saw a significant deterioration of lending standards and a parallel jump in lending expectations and some investment banks directed Clayton to halve the sample of loans it evaluated in each portfolio. Upon information and belief, Morgan Stanley, Credit Suisse and RBS were included in that group of investment banks. Thus, these Defendants made a conscious decision not to avail themselves of comprehensive due diligence regarding the loans they were securitizing, which alone renders their misrepresentations concerning those loans knowing or reckless. 173. For the 18 month period ending on June 31, 2007, a significant percentage of the
loans sampled by Clayton at the direction of the selling underwriters failed to meet the various
15
Clayton was the leading provider of third-party due diligence during the relevant time period. In 2006, Clayton analyzed over $418 billion in loans underlying mortgage-backed securities, which represented 22.8% of the total outstanding U.S. non-agency mortgage-backed securities for that year. (Clayton, Form 10-K.) During 2004, 2005, and 2006, Clayton worked with each of the ten largest non-agency mortgage-backed securities underwriters, as ranked by Inside MBS & ABS, which accounted for 73% to 78% of the total underwriting volume during those years.
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loan originators underwriting guidelines. This information was provided to Morgan Stanley, RBS, and Credit Suisse, but they overruled Claytons findings and waived in substantial percentages of those loans (approximately 56 percent for Morgan Stanley, 53 percent for RBS, and 33 percent for Credit Suisse). 174. Upon information and belief, these Defendants waived in these loans, found by
Clayton to be non-compliant with the relevant originators origination guidelines, without taking any adequate steps of their own to verify Claytons findings. These loans then found their way into RMBS that were sold to investors like the GSEs. (See Clayton Trending Reports, available at http://fcic.law.stanford.edu/hearings/testimony/the-impact-of-the-financial-crisissacramento#documents; FCIC Report, 167.) 175. The revelations concerning the Defendants routine disregard of Claytons due
diligence findings and recommendations further supports an inference of intent or recklessness on the part of these Defendants with respect to the misrepresentations in and omissions from the Offering Materials concerning adherence to loan origination standards, LTV ratios, owneroccupancy rates, and credit ratings (among others). 176. Morgan Stanley personnel have admitted to Congressional investigators that
Morgan Stanleys loan review process was defective. In an interview with the FCIC, Tony Peterson, a Vice President in Morgan Stanleys due diligence group, stated that Morgan Stanley routinely rejected Claytons findings with respect to sampled loans. Mr. Peterson further admitted that Morgan Stanley traders who created Morgan Stanleys RMBS deals had information concerning the inferior quality of the loans they were securitizing and that significant aspects of the due diligence process, including which loans were to be sampled, were dictated by Morgan Stanley traders in New York.
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177.
Like the NYAG, the Massachusetts Attorney General also undertook an
investigation into the financing, purchase, and securitization of allegedly unfair residential mortgage loans during the period late 2005 through the first half of 2007 by Morgan Stanley. Although Morgan Stanley did not admit the allegations in the Assurance of Discontinuance filed by the Massachusetts AG in resolution of that investigation, Morgan Stanley settled the charges against it in exchange for a payment of $102 million. The core of the Massachusetts AGs findings was that New Century systematically disregarded its own underwriting standards, that Morgan Stanley had a partner-like relationship with New Century by virtue of the warehouse lending relationship alleged above and otherwise, that Morgan Stanley routinely disregarded Claytons findings with respect to New Centurys loan practices and New Centuryoriginated loans, and that New Centurys origination practices violated Massachusettss law. The Massachusetts AGs investigation and allegations, and Morgan Stanleys willingness to settle the matter for a sum in excess of one hundred million dollars, further support the allegations herein of knowledge or recklessness on the part of Morgan Stanley. 178. The Fraud Defendants also knew or recklessly disregarded that the owner-
occupancy statistics and LTV ratios reported in the Offering Materials were false and misleading. Given their role as underwriters of the Certificates, the relationships they had with loan originators and their expertise in underwriting and securitizing RMBS, the Fraud Defendants had the practical ability to gain access to loan files and the ability and resources to test the reported data points, such as owner-occupancy rates and LTV ratios. They intentionally elected not to do so, rendering their representations concerning those data knowingly or recklessly false.
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179.
Moreover, upon information and belief, underwriters, including certain of the
Fraud Defendants, influenced the appraisals used to determine LTV ratios. Government investigations have uncovered widespread evidence of appraisers being pressured to overvalue properties so more loans could be originated. For instance, several witnesses, ranging from the President of the Appraisal Institute to appraisers and lenders on the ground, confirmed that appraisers felt compelled to come in at value -- i.e., at least the amount needed for the loan to be approved -- or face losing future business or their livelihoods. Given the systemic pressure applied to appraisers, upon information and belief, the appraisers themselves, the originators, and the underwriters did not believe that the appraised values of the properties -- and therefore LTV ratios -- were true and accurate at the time they communicated the information to potential investors, including the GSEs. 180. Further, the Fraud Defendants knew or were reckless in not knowing that the
credit ratings reported for the Certificates failed to reflect the actual risk of the Certificates, and that the ratings agencies had no basis to believe in the accuracy of those ratings. Not only did these Defendants provide the ratings agencies with false loan-level information, but they also routinely engaged in ratings shopping -- i.e., pressuring the ratings agencies for favorable ratings and playing the rating agencies off one another with the threat of withholding future business if the sponsoring bank was not given favorable treatment. As detailed in the SPSI Report: At the same time Moodys and S&P were pressuring their RMBS and CDO analysis to increase market share and revenues, the investment banks responsible for bringing RMBS and CDO business to the firms were pressuring those same analysts to ease rating standards. Former Moodys and S&P analysts and managers interviewed by the Subcommittee described, for example, how investment bankers pressured them to get their deals done quickly, increase the size of the tranches that received AAA ratings, and reduce the credit enhancements protecting the AAA tranches from loss. They also pressed the CRA analysts and managers to ignore a host of factors that could be seen as
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increasing credit risk. Sometimes described as ratings shopping, the analysts described how some investment bankers threatened to take their business to another credit rating agency if they did not get the favorable treatment they wanted. The evidence collected by the Subcommittee indicates that the pressure exerted by investment banks frequently impacted the ratings process, enabling the banks to obtain more favorable treatment than they otherwise would have received. (See Sen. Levin, Carl and Sen. Coburn, Tom, U.S. Senate Permanent Subcommittee on Investigations, Wall Street and the Financial Crisis: Anatomy of a Financial Collapse (Committee on Homeland Security and Governmental Affairs, April 13, 2011) (the SPSI Report), at 278.) 181. As one S&P director put it in an August 8, 2006 email: [Our RMBS friends
have] become so beholden to their top issuers for revenue [that] they have all developed a kind of Stockholm syndrome which they mistakenly tag as Customer Value creation. Ratings analysts who complained about the pressure, or did not do as they were told, were quickly replaced on deals or terminated. 182. Summarizing the intense pressure investment banks put on ratings analysts to
provide favorable ratings, a former Moodys VP and Senior Credit Officer testified before the FCIC that [t]he willingness to decline to rate, or to just say no to proposed transactions, steadily diminished over time. That unwillingness to say no grew in parallel with the companys share price and the proportion of total firm revenues represented by structured finance transactions . . . coincident with the steady drive toward commoditization of the instruments we were rating . . . . The threat of losing business . . . even if not realized, absolutely tilted the balance away from independent arbiter of risk towards a captive facilitator of risk transfer . . . . The message from management was . . . Must say yes. (See Written Testimony of Richard Michalek (FCIC Hearing, June 2, 2010), available at http://fcic-static.law.stanford.edu/cdn_media/fcictestimony/2008-0602-Michalek-corrected-oral.pdf; see also Written Statement of Eric
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Kolchinsky, Managing Director, Moodys Derivatives Group (SPSI Hearing, Apr. 23, 2011) (Managers of rating groups were expected by their supervisors and ultimately the Board of Directors . . . to build, or at least maintain, market shares. It was an unspoken understanding that loss of market share would cause a manager to lose his or her job; [L]owering credit standards . . . was one easy way for a managing director to regain market share.), available at http://hsgac.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=bd65f802-961c4727-b176-72ece145baef.) D. Fannie Mae and Freddie Mac Justifiably Relied on the Misrepresentations and Omissions in the Offering Materials and Were Damaged by Defendants Fraudulent Conduct Fannie Mae and Freddie Mac are government-sponsored enterprises chartered by
183.
Congress to provide liquidity, stability, and affordability to the U.S. housing and mortgage markets. In furtherance of this mission, the GSEs purchase mortgages and invest in RMBS. 184. Generally, when purchasing RMBS, the GSEs require compliance with their
investment requirements, as well as various representations and warranties concerning, among other things, the credit quality of the underlying loans, evaluation of the borrowers ability to pay, the accuracy of loan data provided, and adherence to applicable local, state, and federal law. Such representations and warranties were material to the GSEs decisions to purchase RMBS, including the Certificates. 185. The Fraud Defendants intended for investors, including Fannie Mae and Freddie
Mac, to rely on their representations of material facts about the assets backing the Certificates. These Defendants regularly provided prospective RMBS investors with information concerning the volume of their annual securitization business to assure investors that, by virtue of their expertise in and share of the RMBS market, Fannie Mae and Freddie Mac should rely upon the
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representations and warranties in their Offering Materials. (See, e.g. Prospectus Supplement to the MSAC 2006-HE8 Securitization, filed November 22, 2006.) 186. The Fraud Defendants knew that Fannie Mae and Freddie Mac had specific
requirements for investing in non-agency mortgage-backed securities and intended for the GSEs to rely on their fraudulent misstatements as shown by their provision of representations, warranties and anticipated credit ratings in connection with the Certificates, and their repetition of false loan statistics in the term sheets, free writing prospectuses, and Prospectus Supplements, among other materials. 187. In fact, Fannie Mae and Freddie Mac did rely to their detriment on the Fraud
Defendants misrepresentations and material omissions in the Offering Materials. 188. The GSEs reliance was justifiable because the GSEs necessarily were required to
rely upon the Fraud Defendants to provide accurate information regarding the loans. The GSEs lacked access to the actual loan files and the loan-level data essential to perform statistical tests with respect to, among other things, owner-occupancy and LTV ratios. 189. The GSEs reliance also was justifiable because industry practice was for an
investor to rely upon the representations and warranties of the sponsors and underwriters regarding the quality of the mortgage loans and the standards under which they were originated. Information regarding the originators compliance with underwriting guidelines, owneroccupancy rates, LTV ratios, and the information provided to credit ratings agencies, was peculiarly within the knowledge of the Fraud Defendants. 190. The GSEs were induced into buying the Certificates based on the false and
misleading Offering Materials. They would not have purchased the Certificates had they known
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the truth concerning the matters alleged herein. Alternatively, the GSEs suffered damages because the price they paid for the Certificates was higher than their actual value. 191. From the day the GSEs purchased the Certificates, they suffered injury. As a
result of Defendants misrepresentations, the true value of the Certificates on the date of purchase was far lower than the price paid for them by the GSEs. FIRST CAUSE OF ACTION Violation of Section 11 of the Securities Act of 1933 (Against MS&Co., MSAC, MSC, SASC, Credit Suisse, RBS and the Individual Defendants) 192. Plaintiff realleges paragraphs 1 through 133 as if fully set forth herein. For
purposes of this cause of action, Plaintiff hereby expressly excludes any allegation that could be construed as sounding in fraud. 193. This claim is brought by FHFA pursuant to Section 11 of the Securities Act of
1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the Certificates issued pursuant to the Registration Statements for the Securitizations listed in paragraph 40. 194. This claim is for strict liability based on the material misstatements and omissions
in the Registration Statements for the 33 Securitizations (as specified in Table 1, supra at paragraph 41), and is asserted against MS&Co., MSAC, MSC, and SASC, Credit Suisse, RBS and the Individual Defendants (together, the Section 11 Defendants). 195. MS&Co., Credit Suisse, and/or RBS acted as underwriter in connection with the
sale of the Certificates for each of the 33 Securitizations (as specified in Table 1, supra at paragraph 41), directly and indirectly participated in distributing the Certificates, and directly and indirectly participated in drafting and disseminating the Registration Statements. MS&Co., Credit Suisse, and/or RBS were underwriters for the Certificates, and are strictly liable for the
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misstatements and omissions in the Registration Statements under Section 11 of the Securities Act. 196. Depositors MSAC, MSC and SASC filed Shelf Registration Statements (as
specified in Table 2, supra at paragraph 47) pursuant to which the Securitizations were carried out, and are the issuers of the Certificates issued pursuant to the Registration Statements within the meaning of Section 2(a)(4) of the Securities Act, 15 U.S.C. 77b(a)(4), and in accordance with Section 11(a), 15 U.S.C. 77k(a). 197. At the time Depositors MSAC, MSC and SASC filed the relevant Shelf
Registration Statements, the Individual Defendants were officers and/or directors of MSAC, MSC and SASC (as specified in Table 2, supra at paragraph 47). The Individual Defendants signed the Shelf Registration Statements, and either signed (or authorized another to sign on their behalf) the amendments to the Shelf Registration Statements. As such, the Individual Defendants are strictly liable for the misstatements and omissions in the Shelf Registration Statements under Section 11 of the Securities Act. 198. At the time that they became effective, each of the Registration Statements, as set
forth above, contained material misstatements of fact and omitted information necessary to make the facts stated therein not misleading. The facts misstated or omitted were material to a reasonable investor in the Certificates sold pursuant to the Registration Statements. 199. The untrue statements of material facts and omissions of material fact in the
Registration Statements are principally those set forth herein in Parts (I)(C) and (D) and Appendix A, and pertain to purported compliance with underwriting guidelines, occupancy status, loan-to-value ratios and credit ratings.
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200.
Fannie Mae and Freddie Mac purchased or otherwise acquired the Certificates
pursuant to the false and misleading Registration Statements and in the primary market. At the time they purchased the Certificates, Fannie Mae and Freddie Mac were unaware of the false and misleading statements and omissions alleged herein, and if they had known those facts, they would not have purchased the Certificates. 201. MS&Co., Credit Suisse, and RBS were obligated to make a reasonable
investigation of the statements contained in the Registration Statements at the time they became effective to ensure that such statements were true and correct, and that there were no omissions of material facts required to be stated in order to make the statements contained therein not misleading. The Individual Defendants owed the same duty with respect to the Shelf Registration Statements that they signed, which are applicable to all 33 of the Securitizations. 202. MS&Co., Credit Suisse, RBS and the Individual Defendants did not exercise such
due diligence and failed to conduct a reasonable investigation, as alleged in paragraphs 38 through 128. In the exercise of reasonable care, these Defendants should have known of the false statements and omissions contained in or omitted from the Registration Statements filed in connection with the Securitizations, as set forth herein. In addition, although the performance of due diligence is not an affirmative defense available to the Depositors on this strict liability claim, they nonetheless also failed to take reasonable steps to ensure the accuracy of the representations made in the Registration Statements. 203. By virtue of the foregoing, Fannie Mae and Freddie Mac sustained substantial
damages, including depreciation in the value of the Certificates, as a result of the misstatements and omissions in the Registration Statements. Plaintiff is entitled to damages, jointly and severally, from each of the Section 11 Defendants.
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204.
Based on the foregoing, MS&Co., MSAC, MSC SASC, Credit Suisse, RBS, and
the Individual Defendants are jointly and severally liable for their wrongdoing. SECOND CAUSE OF ACTION Violation of Section 12(a)(2) of the Securities Act of 1933 (Against Defendants MS&Co., MSAC, MSC SASC, Credit Suisse, and RBS) 205. Plaintiff realleges paragraphs 1 through 133 above as if fully set forth herein. For
purposes of this cause of action, Plaintiff hereby expressly excludes any allegation that could be construed as sounding in fraud. 206. This claim is brought by Plaintiff pursuant to Section 12(a)(2) of the Securities
Act of 1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the Certificates issued pursuant to the Registration Statements in the Securitizations listed in paragraph 40. 207. MS&Co., Credit Suisse, and RBS are prominently identified as underwriters in
the Prospectuses used to sell the Certificates. MS&Co., Credit Suisse, and RBS offered, promoted, and/or sold the Certificates publicly, including selling to Fannie Mae and Freddie Mac their Certificates, as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. MS&Co., Credit Suisse, and RBS offered, promoted, and/or sold the Certificates to Fannie Mae and Freddie Mac as specified in Table 2, supra at paragraph 47. 208. MS&Co., Credit Suisse, and RBS offered, promoted, and/or sold the Certificates
to Fannie Mae and Freddie Mac by means of the Prospectuses that contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. MS&Co., Credit Suisse, and RBS successfully solicited Fannie Mae and Freddie Macs purchases of the Certificates, and generated millions of dollars in commissions in connection with the sale of the Certificates.
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209.
MS&Co., Credit Suisse, and RBS offered the Certificates for sale, sold them, and
distributed them by the use of means or instruments of transportation and communication in interstate commerce. 210. The Depositors are prominently identified in the Prospectuses for the
Securitizations carried out under the Registration Statements that they filed. These Prospectuses were the primary documents each used to sell the Certificates for the 30 Securitizations under those Registration Statements. MSAC, MSC and SASC offered the Certificates publicly and actively solicited their sale, including to Fannie Mae and Freddie Mac. 211. With respect to the Securitizations for which they filed Registration Statements,
the Depositors offered the Certificates to Fannie Mae and Freddie Mac by means of Prospectuses that contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. Upon information and belief, the Depositors reviewed and participated in drafting the Prospectuses. 212. The Depositors offered the Certificates for sale by the use of means or
instruments of transportation and communication in interstate commerce. 213. MS&Co., Credit Suisse, and RBS actively participated in the solicitation of
Fannie Mae and Freddie Macs purchase of the Certificates, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and/or assisting in marketing and selling the Certificates. 214. Each of the Prospectuses contained material misstatements of fact and omitted
information necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectuses.
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215.
The untrue statements of material facts and omissions of material fact in the
Registration Statements, which include the Prospectuses, are set forth above in Parts (I)(C) and (D) and Appendix A and pertain to compliance with underwriting guidelines, occupancy status, and loan-to-value ratios. 216. MS&Co., Credit Suisse, RBS and the Depositors offered and sold the Certificates
offered pursuant to the Registration Statements directly to Fannie Mae and Freddie Mac, pursuant to the false and misleading Prospectuses. 217. MS&Co., Credit Suisse, and RBS owed Freddie Mac and Fannie Mae a duty to
make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. MS&Co., Credit Suisse, and RBS failed to exercise such reasonable care, and in the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above. 218. Fannie Mae and Freddie Mac did not know of the misstatements and omissions
contained in the Prospectuses at the time they purchased the Certificates. If Fannie Mae and Freddie Mac had known of those misstatements and omissions, they would not have purchased the Certificates. 219. Fannie Mae and Freddie Mac acquired the Certificates in the primary market
their investments in the Certificates and have the right to rescind and recover the consideration paid for the Certificates, with interest thereon. Plaintiff hereby seeks rescission and makes any
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necessary tender of its Certificates. In the alternative, Plaintiff seeks damages according to proof. THIRD CAUSE OF ACTION Violation of Section 15 of the Securities Act of 1933 (Against MS, MSMC, SCI, SFM, and the Individual Defendants) 221. Plaintiff realleges paragraphs 1 through 133 above as if fully set forth herein. For
purposes of this cause of action, Plaintiff hereby expressly excludes any allegation that could be construed as sounding in fraud. 222. This claim is brought under Section 15 of the Securities Act of 1933, 15 U.S.C.
77o (Section 15), against Defendants MS, MSMC, SCI, SFM, and the Individual Defendants for controlling-person liability with regard to the Section 11 and Section 12(a)(2) causes of actions set forth above. 223. The Individual Defendants at all relevant times participated in the operation and
management of the Depositors, and conducted and participated, directly and indirectly, in the conduct of the Depositors business affairs. Specifically: Steven Shapiro was Vice President at MSAC; Gail P. McDonald was a Director at MSAC; Howard Hubler was a Director at MSAC; Craig S. Phillips was President and Director at MSAC; Alexander Frank was Treasurer at MSAC.; David Warren was President and Director at MSC; John E. Westerfield was a Director at MSC; Steven S. Stern was a Director at MSC; Michael L. Sawyer was President and Director at SASC; Ernest G. Bretana was Vice President or a Director at SASC; Dean A. Christiansen was a Director and Board Member at SASC; Orlando Figueroa was a Director at SASC; Robert B. Eastep was Executive Vice President and CFO at SASC; and Jennifer Sebastian was Vice President and Treasurer at SASC.
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224.
SFM and MSMC (on its own behalf and as the successor in interest to MCI) were
sponsors for the Securitizations carried out pursuant to Registration Statements filed by MSAC, MSC and SASC (as specified in Table 2, supra at paragraph 47), and culpably participated in their violations of Sections 11 and 12(a)(2) by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting the Depositors as special-purpose vehicles, and selecting MS&Co. or the Non-MS Underwriters as underwriters. As sponsors, SFM and MSMC/MCI knew and intended that the mortgage loans they purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the mortgages would be issued by the relevant trusts. 225. SFM and MSMC/MCI sold the mortgage loans to the Depositors (as specified in
Table 1, supra at paragraph 40), and conveyed the mortgage loans to the Depositors pursuant to an Assignment and Recognition Agreement or a Mortgage Loan Purchase Agreement. SFM and MSMC/MCI controlled all aspects of the business of the Depositors, who were special-purpose entities created for the purpose of acting as a pass-through for the issuance of the Certificates. Upon information and belief, the officers and directors of MSMC and SFM overlapped with the officers and directors of the Depositors. SFM and MSMC/MCI were able to, and did in fact, control the contents of the Registration Statements filed by the Depositors, including the Prospectuses and Prospectus Supplements that contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 226. Defendant MS wholly owns MS&Co., MSAC, MSC and MSMC and is the
ultimate parent of SCI, SFM, and SASC. MS, as the sole corporate parent of MS&Co., MSAC, MSC, and MSMC, had the practical ability, in connection with the Securitizations and the
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issuance and sale of the Certificates, to direct and control the actions of MS&Co., MSAC, MSC, and MSMC, and in fact exercised such discretion and control over these activities. 227. MS culpably participated in the violations of Section 11 and 12(a)(2) set forth
above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as the Depositors and the issuing trusts to serve as conduits for the mortgage loans. 228. Further, the officers and directors of MS significantly overlapped with the officers
and directors of the Depositors. For example, Defendant Phillips was, at all relevant times, the Global Head of Securitized Products at MS while also serving as the President and CEO at MSAC. Similarly, Defendant Warren was, at all relevant times, the Global Head of Structured Credit Trading at MS while also serving as the President and Director at MSC. 229. MS, MSMC, SCI, and SFM, and the Individual Defendants are controlling
persons within the meaning of Section 15 by virtue of their actual power over, control of, ownership of, and/or directorship of the Depositors at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 230. Fannie Mae and Freddie Mac purchased the Certificates in the primary market,
which were issued pursuant to the Registration Statements, including the Prospectuses and Prospectus Supplements, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements.
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231.
Fannie Mae and Freddie Mac did not know of the misstatements and omissions in
the Registration Statements; had they known of those misstatements and omissions, they would not have purchased the Certificates. 232. Fannie Mae and Freddie Mac have sustained damages as a result of the
misstatements and omissions in the Registration Statements, for which they are entitled to compensation. 233. rescission. FOURTH CAUSE OF ACTION Primary Violations of the Virginia Securities Act (Against MS&Co., Credit Suisse, RBS, MSAC, MSC, and SASC) 234. Plaintiff re-alleges paragraphs 1 through 133 above as if fully set forth herein. Plaintiff hereby tenders the Certificates in connection with its request for
For purposes of this cause of action, Plaintiff hereby expressly excludes any allegation that could be construed as sounding in fraud. 235. This claim is brought by Plaintiff pursuant to Section 13.1-522(A)(ii) of the
Virginia Code and is asserted on behalf of Freddie Mac with respect to the Certificates identified above that were purchased by Freddie Mac and issued pursuant to the Registration Statements. 236. Defendants MSAC, MSC, and SASC made false and materially misleading
statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as Prospectuses) for each Securitization (as specified in Table 2, supra). Defendants MS&Co., Credit Suisse, and RBS made false and materially misleading statements in the Prospectuses for the Securitizations effected under the Shelf Registration Statements.
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237.
MS&Co., Credit Suisse, and RBS are prominently identified in the Prospectuses,
the primary documents it used to sell the Certificates. MS&Co., Credit Suisse, and RBS offered the Certificates publicly, including selling to Freddie Mac the Certificates, as set forth in the Method of Distribution or equivalent underwriting section of each Prospectus. 238. MS&Co., Credit Suisse, and RBS offered and sold the Certificates to Freddie Mac
by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. MS&Co., Credit Suisse, and RBS reviewed and participated in drafting the Prospectuses. 239. MS&Co., Credit Suisse, and RBS successfully solicited Freddie Macs purchases
of the Certificates. As underwriters, MS&Co., Credit Suisse, and RBS were paid a substantial commission based on the amount it received from the sale of the Certificates to the public. 240. MS&Co., Credit Suisse, and RBS offered the Certificates for sale, sold them, and
distributed them to Freddie Mac in the State of Virginia. 241. MSAC, MSC, and SASC are prominently identified in the Prospectuses for the
Securitizations carried out under the Registration Statements. These Prospectuses were the primary documents used to sell Certificates for the Securitizations under the Registration Statements. MSAC, MSC, and SASC offered the Certificates publicly and actively solicited their sale, including to Freddie Mac. MSAC, MSC, and SASC were paid a percentage of the total dollar amount of the offering upon completion of the Securitizations effected pursuant to the Shelf Registration Statements. 242. With respect to the Securitizations for which it filed the Shelf Registration
Statements, including the related Prospectus Supplements, MSAC, MSC, and SASC offered the
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Certificates to Freddie Mac by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. MSAC, MSC, and SASC reviewed and participated in drafting the Prospectuses. 243. Each of MS&Co., Credit Suisse, and RBS, and MSAC, MSC, and SASC, actively
participated in the solicitation of Freddie Macs purchase of the Certificates, and did so in order to benefit itself. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the Certificates. 244. Each of the Prospectuses contained material misstatements of fact and omitted
Registration Statements, which include the Prospectuses, are set forth above, and include compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 246. MS&Co., Credit Suisse, and RBS, and MSAC, MSC, and SASC offered and sold
the Certificates directly to Freddie Mac pursuant to the materially false, misleading, and incomplete Prospectuses. 247. MS&Co., Credit Suisse, and RBS owed to Freddie Mac, as well as to other
investors in these trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements
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contained therein not misleading. MSAC, MSC, and SASC owed the same duty with respect to the Prospectuses for the Securitizations effected under the Shelf Registration Statements. 248. MS&Co., Credit Suisse, RBS, MSAC, MSC, and SASC failed to exercise such
could not have known, of the untruths and omissions contained in the Prospectuses at the time it purchased the Certificates. If Freddie Mac had known of those untruths and omissions, it would not have purchased the Certificates. 250. Freddie Mac sustained substantial damages in connection with its investments in
the Certificates and has the right to rescind and recover the consideration paid for the Certificates, with interest thereon. Plaintiff hereby seeks rescission and makes any necessary tender of its Certificates. In the alternative, Plaintiff seeks damages according to proof. FIFTH CAUSE OF ACTION Controlling Person Liability Under the Virginia Securities Act (Against MS, MSMC, SCI, SFM, and the Individual Defendants) 251. Plaintiff realleges paragraphs 1 through 133 above as if fully set forth herein. For
purposes of this cause of action, Plaintiff hereby expressly excludes any allegation that could be construed as sounding in fraud. 252. This claim is brought under Section 13.1-522(C) of the Virginia Code and is
asserted on behalf of Freddie Mac, which purchased the Certificates (identified in Table 10 above) that were issued pursuant to the Registration Statements. This claim is brought against Defendants MS, MSMC, SCI, SFM, and the Individual Defendants (the Control Persons) for
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controlling-person liability with regard to the claim brought by Plaintiff pursuant to Section 13.1522(A)(ii). 253. The Individual Defendants at all relevant times participated in the operation and
management of the Depositors, and conducted and participated, directly and indirectly, in the conduct of the Depositors business affairs. Specifically: Mr. Shapiro was Vice President at MSAC; Ms. P. McDonald was a Director at MSAC; Mr. Hubler was a Director at MSAC; Mr. Phillips was President and Director at MSAC; Mr. Frank was Treasurer at MSAC; Mr. Warren was President and Director at MSC; Mr. E. Westerfield was a Director at MSC; Mr. Stern was a Director at MSC. 254. SFM and MSMC (on its own behalf and as the successor in interest to MCI) were
sponsors for the Securitizations carried out pursuant to Registration Statements filed by MSAC, MSC and SASE (as specified supra), and culpably participated in their violations of Section 13.1-522(A)(ii) by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting the Depositors as specialpurpose vehicles, and selecting MS&Co. or the Non-MS Underwriters as underwriters. As sponsors, SFM and MSMC/MCI knew and intended that the mortgage loans they purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the mortgages would be issued by the relevant trusts. 255. SFM and MSMC/MCI sold the mortgage loans to the Depositors (as specified
supra), and conveyed the mortgage loans to the Depositors pursuant to an Assignment and Recognition Agreement or a Mortgage Loan Purchase Agreement. SFM and MSMC/MCI controlled all aspects of the business of the Depositors, who were special-purpose entities created for the purpose of acting as a pass-through for the issuance of the Certificates. Upon information
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and belief, the officers and directors of MSMC and SFM overlapped with the officers and directors of the Depositors. SFM and MSMC/MCI were able to, and did in fact, control the contents of the Registration Statements filed by the Depositors, including the Prospectuses and Prospectus Supplements that contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 256. Defendant MS wholly owns MS&Co., MSAC, MSC and MSMC and is the
ultimate parent of SCI, SFM, and SASC. MS, as the sole corporate parent of MS&Co., MSAC, MSC, and MSMC, had the practical ability, in connection with the Securitizations and the issuance and sale of the Certificates, to direct and control the actions of MS&Co., MSAC, MSC, and MSMC, and in fact exercised such discretion and control over these activities. 257. MS culpably participated in the violations of Section 13.1-522(A)(ii) set forth
above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as the Depositors and the issuing trusts to serve as conduits for the mortgage loans. 258. Further, the officers and directors of MS significantly overlapped with the officers
and directors of the Depositors. For example, Defendant Mr. Phillips was, at all relevant times, the Global Head of Securitized Products at MS while also serving as the President and CEO at MSAC. Similarly, Defendant Mr. Warren was, at all relevant times, the Global Head of Structured Credit Trading at MS while also serving as the President and Director at MSC. 259. MS, MSMC, SCI, and SFM, and the Individual Defendants are controlling
persons within the meaning of Section 13.1-522(C) by virtue of their actual power over, control of, ownership of, and/or directorship of the Depositors at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements.
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260.
Freddie Mac purchased the Certificates, which were issued pursuant to the
Registration Statements, including the Prospectuses and Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements, and specifically to Freddie Mac. 261. Freddie Mac did not know, and in the exercise of reasonable diligence could not
have known, of the misstatements and omissions in the Registration Statements; had Freddie Mac known of those misstatements and omissions, it would not have purchased the Certificates. 262. Freddie Mac has sustained substantial damages as a result of the misstatements
and omissions in the Registration Statements, for which it is entitled to compensation, and for which the Control Persons are jointly and severally liable. SIXTH CAUSE OF ACTION Primary Violations of the District of Columbia Securities Act (Against Defendants MS&Co., MSAC, MSC, SASC, Credit Suisse and RBS) 263. Plaintiff realleges paragraphs 1 through 133 above as if fully set forth herein. For
purposes of this cause of action, Plaintiff hereby expressly excludes any allegation that could be construed as sounding in fraud. 264. This claim is brought by Plaintiff pursuant to Section 31-5606.05(a)(1)(B) of the
District of Columbia Code and is asserted on behalf of Fannie Mae, which purchased the Certificates issued pursuant to the Registration Statements in the Securitizations listed in paragraph 40. 265. MS&Co., Credit Suisse, and RBS are prominently identified as underwriters in
the Prospectuses that were used to sell the Certificates. MS&Co., Credit Suisse, and RBS offered, promoted, and/or sold the Certificates publicly, including selling to Fannie Mae its
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Certificates, as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. MS&Co., Credit Suisse, and RBS offered, promoted, and/or sold the Certificates to Fannie Mae as specified in Tables 10 and 11, supra at paragraph 129. 266. MS&Co., Credit Suisse, and RBS offered, promoted, and/or sold the Certificates
to Fannie Mae by means of the Prospectuses that contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. MS&Co., Credit Suisse, and RBS successfully solicited Fannie Maes purchases of the Certificates, and generated millions of dollars in commissions in connection with the sale of the Certificates. 267. MS&Co., Credit Suisse, and RBS offered the Certificates for sale, sold them, and
distributed them to Fannie Mae in the District of Columbia. 268. The Depositors are prominently identified in the Prospectuses for the
Securitizations carried out under the Registration Statements that they filed. These Prospectuses were the primary documents each used to sell the Certificates for the 30 Securitizations under those Registration Statements. MSAC, MSC and SASC offered the Certificates publicly and actively solicited their sale, including to Fannie Mae. MSAC, MSC and SASC were paid a percentage of the total dollar amount of the offering upon completion of the Securitizations effected pursuant to the Registration Statements that they filed. 269. With respect to the Securitizations for which they filed Registration Statements,
the Depositors offered the Certificates to Fannie Mae by means of Prospectuses that contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. Upon information and belief, the Depositors reviewed and participated in drafting the Prospectuses.
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270.
MS&Co., Credit Suisse, and RBS actively participated in the solicitation of
Fannie Maes purchase of the Certificates, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and/or assisting in marketing and selling the Certificates. 271. Each of the Prospectuses contained material misstatements of fact and omitted
facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectuses. 272. The untrue statements of material facts and omissions of material facts in the
Registration Statements, which include the Prospectuses, are set forth above in Parts (I)(C) and (D) and Appendix A and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 273. MS&Co., Credit Suisse, RBS and the Depositors offered and sold the Certificates
offered pursuant to the Registration Statements directly to Fannie Mae, pursuant to the false and misleading Prospectuses. 274. MS&Co., Credit Suisse, and RBS owed Fannie Mae a duty to make a reasonable
and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. MS&Co., Credit Suisse, and RBS failed to exercise such reasonable care, and in the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above.
96
275.
Fannie Mae did not know of the misstatements and omissions contained in the
Prospectuses at the time they purchased the Certificates. If Fannie Mae had known of those misstatements and omissions, they would not have purchased the Certificates. 276. Fannie Mae sustained substantial damages in connection with their investments in
the Certificates and have the right to rescind and recover the consideration paid for the Certificates, with interest thereon. Plaintiff hereby seeks rescission and makes any necessary tender of its Certificates. In the alternative, Plaintiff seeks damages according to proof. SEVENTH CAUSE OF ACTION Controlling Person Liability Under the District of Columbia Securities Act (Against MS, MSMC, SCI, SFM, and the Individual Defendants) 277. Plaintiff realleges paragraphs 1 through 133 above as if fully set forth herein. For
purposes of this cause of action, Plaintiff hereby expressly excludes any allegation that could be construed as sounding in fraud. 278. This claim is brought under Section 31-5606.05(c) of the District of Columbia
Code against Defendants MS, MSMC, SCI, SFM, and the Individual Defendants for controllingperson liability with regard to the Section 31-5606.05(a)(1)(B) causes of action set forth above. 279. The Individual Defendants at all relevant times participated in the operation and
management of the Depositors, and conducted and participated, directly and indirectly, in the conduct of the Depositors business affairs. Specifically: Steven Shapiro was Vice President at MSAC; Gail P. McDonald was a Director at MSAC; Howard Hubler was a Director at MSAC; Craig S. Phillips was President and Director at MSAC; Alexander Frank was Treasurer at MSAC.; David Warren was President and Director at MSC; John E. Westerfield was a Director at MSC; Steven S. Stern was a Director at MSC; Michael L. Sawyer was President and Director at SASC; Ernest G. Bretana was Vice President or a Director at SASC; Dean A. Christiansen
97
was a Director and Board Member at SASC; Orlando Figueroa was a Director at SASC; Robert B. Eastep was Executive Vice President and CFO at SASC; and Jennifer Sebastian was Vice President and Treasurer at SASC. 280. SFM and MSMC (on its own behalf and as the successor in interest to MCI) were
sponsors for the Securitizations carried out pursuant to Registration Statements filed by MSAC, MSC and SASE (as specified in Table 2, supra at paragraph 47), and culpably participated in their violations of Section 31-5606.05(a)(1)(B) by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting the Depositors as special purpose vehicles, and selecting MS&Co. or the Non-MS Underwriters as underwriters. As sponsors, SFM and MSMC (on its own behalf and as successor-in-interest to MCI) knew and intended that the mortgage loans they purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the mortgages would be issued by the relevant trusts. 281. SFM and MSMC (on its own behalf and as successor-in-interest to MCI) sold the
mortgage loans to the Depositors (as specified in Table 1, supra at paragraph 41), and conveyed the mortgage loans to the Depositors pursuant to an Assignment and Recognition Agreement or a Mortgage Loan Purchase Agreement. SFM and MSMC (on its own behalf and as successor-ininterest to MCI) controlled all aspects of the business of the Depositors, who were special purpose entities created for the purpose of acting as a pass-through for the issuance of the Certificates. Upon information and belief, the officers and directors of MSMC and SFM overlapped with the officers and directors of the Depositors. SFM and MSMC (on its own behalf and as successor-in-interest to MCI) were able to, and did in fact, control the contents of the Registration Statements filed by the Depositors, including the Prospectuses and Prospectus
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Supplements that contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 282. Defendant MS wholly owns MS&Co., MSAC, MSC and MSMC and is the
ultimate parent of SCI, SFM, and SASC. As the sole corporate parent of MS&Co., MSAC, MSC, and MSMC, MS had the practical ability to direct and control the actions of MS&Co., MSAC, MSC, and MSMC in issuing and selling the Certificates, and in fact, exercised such discretion and control over the activities of MS&Co., MSMC, MSAC, and MSC. 283. MS culpably participated in the violations of Section 31-5606.05(a)(1)(B) set
forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as the Depositors and the issuing trusts to serve as conduits for the mortgage loans. 284. Further, the officers and directors of MS significantly overlapped with the officers
and directors of the Depositors. For example, Defendant Phillips was, at all relevant times, the Global Head of Securitized Products at MS while also serving as the President and CEO at MSAC. Similarly, Defendant Warren was, at all relevant times, the Global Head of Structured Credit Trading at MS while also serving as the President and Director at MSC. 285. MS, MSMC, SCI, and SFM, and the Individual Defendants are controlling
persons within the meaning of Section 31-5606.05(c) of the District of Columbia Code by virtue of their actual power over, control of, ownership of, and/or directorship of the Depositors at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements.
99
286.
Fannie Mae purchased the Certificates in the primary market, which were issued
pursuant to the Registration Statements, including the Prospectuses and Prospectus Supplements, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements. 287. Fannie Mae did not know of the misstatements and omissions in the Registration
Statements; had they known of those misstatements and omissions, they would not have purchased the Certificates. 288. Fannie Mae has sustained damages as a result of the misstatements and omissions
in the Registration Statements, for which they are entitled to compensation. 289. rescission. EIGHTH CAUSE OF ACTION (Common Law Fraud Against MS&Co, MSAC, MSC, MSMC, SASC, SFM, Credit Suisse, and RBS) 290. 291. Plaintiff realleges paragraphs 1 through 191 as if fully set forth herein. The material representations set forth in Parts (I)(C) and (D) and in Appendix A Plaintiff hereby tenders the Certificates in connection with its request for
were fraudulent, and the Fraud Defendants representations falsely and misleadingly misrepresented and omitted material statements of fact. The representations at issue are identified in Parts (I)(C) and (D) above and further identified in Appendix A. 292. The Fraud Defendants knew their representations and omissions were false and/or
misleading at the time they were made, or made such representations and omissions recklessly without knowledge of their truth or falsity.
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293.
Each of the Fraud Defendants made the misleading statements with the intent and
for the purpose of inducing Fannie Mae or Freddie Mac to purchase the Certificates. 294. Fannie Mae and Freddie Mac justifiably relied on the Fraud Defendants false
representations and misleading omissions. 295. But for the Fraud Defendants fraudulent misrepresentations and omissions
regarding the Fraud Defendants underwriting practice and quality of the loans making up the securitizations, Fannie Mae and Freddie Mac would not have purchased the Certificates. 296. As a result of the foregoing, Fannie Mae and Freddie Mac have suffered damages
in an amount to be proven at trial. Plaintiff hereby demands rescission and makes any necessary tender of the Certificates. 297. Because the Fraud Defendants defrauded Fannie Mae and Freddie Mac willfully
and wantonly, and because, by their acts, the Fraud Defendants knowingly affected the general public, including but not limited to all persons with interest in the Certificates, Plaintiff is entitled to recover punitive damages. NINTH CAUSE OF ACTION (Aiding and Abetting Against MSMC, SFM, MSAC, MSC, and SASC) 298. 299. Plaintiff realleges paragraphs 1 through 191 as if fully set forth herein. This is a claim for aiding and abetting fraud, in the alternative, should it be found
that the Underwriting Defendants alone are liable for fraud. This claim is brought against MSMC, SFM, MSAC, MSC, and SASC arising from the intentional and substantial assistance each rendered to MS&Co., Credit Suisse, and RBS (the Selling Underwriters) to advance the fraud on Fannie Mae and Freddie Mac.
101
300.
Through overlapping personnel, strategies, and intertwined business operations,
and the fluid transfer of information among the Defendants, each of MSMC, SFM, MSAC, MSC, and SASC knew of the Selling Underwriters fraudulent scheme to offload the credit risks of non-agency loans to investors, including Fannie Mae and Freddie Mac. Each of these Defendants acted in concert to defraud Fannie Mae and Freddie Mac. 301. MSMC, SFM, MSAC, MSC, and SASC through their employees and
representatives, substantially assisted in, among other things: (a) the extension of warehouse loans to originators; (b) acquiring the underlying mortgage loans from the originators; (c) packaging up those loans into pools which were deposited into the Trust; (d) waiving into the collateral pools of the Trusts loans previously rejected by Clayton or otherwise non-compliant loans, despite the lack of compensating factors; (e) creating and structuring the Trusts whose Certificates would be sold to investors including Fannie Mae and Freddie Mac and (f) preparing the Registration Statements which would be used to market the Certificates. 302. The Selling Underwriters would not have been able to implement their fraud
against Fannie Mae and Freddie Mac without such substantial assistance. 303. Through overlapping personnel, strategies, and intertwined business operations,
and the fluid transfer of information among the Defendants, each of the Morgan Stanley Defendants knew of the fraud perpetrated on Fannie Mae and Freddie Mac. 304. Defendants could not have perpetrated their fraud without the substantial
assistance of each other defendant, and they all provided financial, strategic, and marketing assistance for their scheme. Defendants are highly intertwined and interdependent businesses and each benefitted from the success of the scheme. Through the fraudulent sale of the Certificates to the GSEs, the Selling Underwriters were able to materially improve their financial
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condition by reducing their exposure to declining subprime-related assets and garnering millions of dollars in fees from the structuring and sale of the Certificates. 305. As a direct, proximate, and foreseeable result of the conduct of MSMC, SFM,
MSAC, MSC, and SASC Fannie Mae and Freddie Mac have suffered and will continue to suffer damages in an amount to be proven at trial. Plaintiff hereby demands rescission and makes any necessary tender of the Certificates. 306. Because the Fraud Defendants defrauded Fannie Mae and Freddie Mac willfully
and wantonly, and because, by their acts, the Fraud Defendants knowingly affected the general public, including but not limited to all persons with interest in the Certificates, Plaintiff is entitled to recover punitive damages. TENTH CAUSE OF ACTION (Negligent Misrepresentation Against the Selling Underwriters, MSAC, MSC, and SASC) 307. 308. Plaintiff realleges paragraphs 1 through 191 as if fully set forth herein. Between September 12, 2005 and September 28, 2007, the Selling Underwriters
and MSAC, MSC, and SASC (the Depositor Defendants) sold the Certificates to the GSEs as described above. Because the Depositor Defendants owned and then conveyed the underlying mortgage loans to the issuing trusts, the Depositor Defendants had unique, exclusive, and special knowledge about the mortgage loans in the Securitizations through their possession of the loan files and other documentation. 309. Likewise, as underwriters of the Securitizations, the Selling Underwriters had the
access to and ability to review loan file information and were obligated to perform adequate due diligence to ensure the accuracy of the Offering Materials. Accordingly, the Selling Underwriters had unique, exclusive, and special knowledge about the underlying mortgage loans in the Securitizations.
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310.
The Selling Underwriters and the Depositor Defendants also had unique,
exclusive, and special knowledge of the work of third-party due diligence providers, such as Clayton, who identified significant failures of originators to adhere to the underwriting standards represented in the Registration Statements. The GSEs lacked access to borrower loan files prior to the closing of the Securitizations and their purchase of the Certificates. Accordingly, when determining whether to purchase the Certificates, the GSEs could not evaluate the underwriting quality or the servicing practices of the mortgage loans in the Securitizations on a loan-by-loan basis. The GSEs reasonably relied on the knowledge and representations of the Selling Underwriters and Depositor Defendants regarding the underlying mortgage loans. 311. The Selling Underwriters and Depositor Defendants were aware that the GSEs
reasonably relied on these Defendants for complete, accurate, and timely information. The standards under which the underlying mortgage loans were actually originated were known to these Defendants and were not known, and could not be determined, by the GSEs prior to the closing of the Securitizations. The GSEs therefore reasonably relied upon these Defendants misrepresentations and omissions in the Offering Materials. 312. The Selling Underwriters and Depositor Defendants breached their duty of
disclosure by making false or misleading statements of material facts to the GSEs when they knew or should have known of the falsity of their statements. The misrepresentations are set forth in Parts (I)(C) and (D) above and Appendix A. 313. In addition, having false or misleading representations about the underlying
collateral in the Securitizations and the facts bearing on the riskiness of the Certificates, the Selling Underwriters and Depositor Defendants had a duty to correct the misimpressions left by their statements, including with respect to any half truths. The Selling Underwriters and
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Depositor Defendants failed to correct in a timely manner any of their misstatements or half truths. 314. The GSEs reasonably relied on the information provided by the Selling
Underwriters and Depositor Defendants, and as a result, the GSEs suffered damages in an amount to be determined at trial. PRAYER FOR RELIEF WHEREFORE, Plaintiff prays for relief as follows: An award in favor of Plaintiff against all Defendants, jointly and severally, for:: a. Rescission and recovery of the consideration paid for the Certificates, with
interest thereon (in connection with this request for rescission, the Certificates are hereby tendered to the Defendants); b. Each GSEs monetary losses, included any diminution in value of the Certificates,
as well as lost principal and lost interest payments thereon; c. d. e. f. Punitive damages; Attorneys fees and costs; Prejudgment interest at the maximum legal rate; and Such other and further relief as the Court may deem just and proper.
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DATED:
New York, New York September 2, 2011
KASOWITZ, BENSON, TORRES & FRIEDMAN LLP
By: __/s/ Marc E. Kasowitz______________________ Marc E. Kasowitz (mkasowitz@kasowitz.com) Hector Torres (htorres@kasowitz.com) Michael S. Shuster (mshuster@kasowitz.com) Christopher P. Johnson (cjohnson@kasowitz.com) Michael Hanin (mhanin@kasowitz.com) Kanchana Wangkeo Leung (kleung@kasowitz.com) 1633 Broadway New York, New York 10019 (212) 506-1700 Attorneys for the Plaintiff Federal Housing Finance Agency
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UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK FEDERAL HOUSING FINANCE AGENCY, AS CONSERVATOR FOR THE FEDERAL NATIONAL MORTGAGE ASSOCIATION AND THE FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff, -againstBARCLAYS BANK PLC; BARCLAYS CAPITAL INC.; SECURITIZED ASSET BACKED RECEIVABLES LLC; MICHAEL WADE; JOHN CARROLL; and PAUL MENEFEE, Defendants.
___ CIV. ___ (___)
TABLE OF CONTENTS NATURE OF ACTION ...................................................................................................................1 PARTIES .........................................................................................................................................5 The Plaintiff and the GSEs ..................................................................................................5 The Defendants ....................................................................................................................6 JURISDICTION AND VENUE ......................................................................................................7 FACTUAL ALLEGATIONS ..........................................................................................................8 I. THE SECURITIZATIONS..................................................................................................8 A. B. C. Residential Mortgage-Backed Securitizations In General .......................................8 The Securitizations At Issue In This Case .............................................................10 The Securitization Process .....................................................................................11 1. 2. II. Mortgage Loans Are Grouped in Special Purpose Trusts .........................11 The Trusts Issue Securities Backed by the Loans ......................................12
THE DEFENDANTS PARTICIPATION IN THE SECURITIZATION PROCESS ..........................................................................................................................14 A. The Role of Each of the Defendants ......................................................................14 1. 2. 3. 4. B. SABR .........................................................................................................15 Barclays Capital .........................................................................................16 Barclays Bank ............................................................................................16 The Individual Defendants .........................................................................17
Defendants Failure To Conduct Proper Due Diligence ........................................17
III.
THE REGISTRATION STATEMENTS AND THE PROSPECTUS SUPPLEMENTS................................................................................................................18 A. B. C. Compliance With Underwriting Guidelines ..........................................................18 Statements Regarding Occupancy Status of Borrower ..........................................21 Statements Regarding Loan-to-Value Ratios.........................................................23
D. IV.
Statements Regarding Credit Ratings ....................................................................25
FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS......................................................................................27 A. The Statistical Data Provided in the Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False ....................................27 1. 2. B. Owner Occupancy Data Was Materially False ..........................................28 Loan-to-Value Data Was Materially False ................................................30
The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines .........................................................32 1. Government Investigations Have Confirmed That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines ..............................................................33 The Collapse of the Certificates Credit Ratings Further Indicates that the Mortgage Loans were not Originated in Adherence to the Stated Underwriting Guidelines. ................................................................37 The Surge in Mortgage Delinquency and Default Further Indicates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines .................................................................38
2.
3.
V.
FIRST CAUSE OF ACTION ........................................................................................................41 SECOND CAUSE OF ACTION ...................................................................................................45 THIRD CAUSE OF ACTION .......................................................................................................48 FOURTH CAUSE OF ACTION ...................................................................................................51 FIFTH CAUSE OF ACTION ........................................................................................................54 SIXTH CAUSE OF ACTION .......................................................................................................57 SEVENTH CAUSE OF ACTION .................................................................................................60 EIGHTH CAUSE OF ACTION ....................................................................................................62 PRAYER FOR RELIEF ................................................................................................................66 JURY TRIAL DEMANDED .........................................................................................................67
ii
Plaintiff Federal Housing Finance Agency (FHFA), as conservator of The Federal National Mortgage Association (Fannie Mae) and The Federal Home Loan Mortgage Corporation (Freddie Mac), by its attorneys, Quinn Emanuel Urquhart & Sullivan, LLP, for its Complaint herein against Barclays Bank PLC (Barclays Bank), Barclays Capital Inc. (Barclays Capital), and Securitized Asset Backed Receivables LLC (SABR) (collectively, Barclays), Michael Wade, John Carroll, and Paul Menefee (collectively, the Individual Defendants, and together with Barclays, the Defendants) alleges as follows: NATURE OF ACTION 1. This action arises out of Defendants actionable conduct in connection with the
offer and sale of certain residential mortgage-backed securities (RMBS) to Fannie Mae and Freddie Mac (collectively, the Government Sponsored Enterprises or the GSEs). These
securities were sold pursuant to registration statements, including prospectuses and prospectus supplements that formed part of those registration statements, which contained materially false or misleading statements and omissions. Defendants falsely stated that the underlying
mortgage loans and properties complied with certain underwriting guidelines and standards, including representations that significantly overstated the ability of the borrowers to repay their mortgage loans. These representations were material to the GSEs, as reasonable investors, and
their falsity violates Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77a et seq., Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, Sections 315606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, and constitutes negligent misrepresentation. 2. Between October 28, 2005 and February 28, 2007, Fannie Mae and Freddie Mac
purchased approximately $4.9 billion in residential mortgage-backed securities (the GSE
Certificates) issued in connection with eight Barclays-underwritten securitizations.1
The GSE
Certificates purchased by Freddie Mac, along with date and amount of the purchases, are listed infra in Table 10. The GSE Certificates purchased by Fannie Mae, along with date and amount The following eight securitizations are at issue in
of the purchases, are listed infra in Table 11. this action: i.
Argent Securities Inc., Asset-Backed Pass-Through Certificates, Series 2005-W3 (ARSI 2005-W3); Fremont Home Loan Trust, Mortgage-Backed Certificates, Series 2005-D (FHLT 2005-D); Ameriquest Mortgages Securities Inc., Asset-Backed Pass-Through Certificates, Series 2005-R10 (AMSI 2005-R10); Argent Securities Inc., Asset-Backed Pass-Through Certificates, Series 2006-W5 (ARSI 2006-W5); Securitized Asset Backed Receivables LLC Trust, C-Bass Mortgage Loan AssetBacked Certificates, Series 2006-CB1 (CBASS 2006-CB1); Argent Securities Inc., Asset-Backed Pass-Through Certificates, Series 2006-W2 (ARSI 2006-W2) Fremont Home Loan Trust, Mortgage-Backed Certificates, Series 2006-C (FHLT 2006-C); Securitized Asset Backed Receivables LLC Trust, C-Bass Mortgage Loan AssetBacked Certificates, Series 2007-CB2 (CBASS 2007-CB2);
ii.
iii.
iv.
v.
vi.
vii.
viii.
(collectively, the Securitizations). 3. Each Certificate was offered for sale pursuant to one of seven shelf registration
statements (the Shelf Registration Statements) filed with the Securities and Exchange Commission (the SEC).
1
Defendant SABR filed two of the Shelf Registration Statements (the
For purposes of this Complaint, the securities issued under the Registration Statements (as defined in paragraph 4 below) are referred to as Certificates, while the particular Certificates that Fannie Mae and Freddie Mac purchased are referred to as the GSE Certificates. Holders of Certificates are referred to as Certificateholders.
SABR Shelf Registration Statements) that pertained to two of the Securitizations CBASS 2006-CB1 and CBASS 2007-CB2 (the SABR Securitizations). The Individual Defendants
signed one or more of the SABR Shelf Registration Statements and the amendments thereto. Argent Securities Inc., Fremont Mortgage Securities, and Ameriquest Mortgage Securities Inc. filed the remaining five Shelf Registration Statements. Barclays Capital was the lead or co-lead
underwriter and the underwriter who sold the GSE Certificates to Fannie Mae and Freddie Mac with respect to all the Securitizations. 4. For each Securitization, a prospectus (Prospectus) and prospectus supplement
(Prospectus Supplement) were filed with the SEC as part of the Registration Statement2 for that Securitization. The GSE Certificates were marketed and sold to Fannie Mae and Freddie Mac pursuant to the Registration Statements, including the Shelf Registration Statements and the corresponding Prospectuses and Prospectus Supplements. 5. The Registration Statements contained statements about the characteristics and
credit quality of the mortgage loans underlying the Securitizations, the creditworthiness of the borrowers of those underlying mortgage loans, and the origination and underwriting practices used to make and approve the loans. Such statements were material to a reasonable investors Unbeknownst
decision to invest in mortgage-backed securities by purchasing the Certificates.
to Fannie Mae and Freddie Mac, these statements were materially false, as significant percentages of the underlying mortgage loans were not originated in accordance with the represented underwriting standards and origination practices and had materially poorer credit quality than what was represented in the Registration Statements.
The term Registration Statement as used herein incorporates the Shelf Registration Statement, the Prospectus, and the Prospectus Supplement for each referenced Securitization, except where otherwise indicated.
6.
The Registration Statements also contained statistical summaries of the groups of
mortgage loans in each Securitization, such as the percentage of loans secured by owneroccupied properties and the percentage of the loan groups aggregate principal balance with loan-to-value ratios within specified ranges. This information was also material to reasonable
investors. However, a loan-level analysis of a sample of loans for each Securitizationa review that encompassed thousands of mortgages across all of the Securitizationshas revealed that these statistics were false and omitted material facts due to inflated property values and misstatements of other key characteristics of the mortgage loans. 7. For example, the percentage of owner-occupied properties is a material risk factor
to the purchasers of Certificates, such as Fannie Mae and Freddie Mac, since a borrower who lives in a mortgaged property is generally less likely to stop paying his or her mortgage and more likely to take better care of the property. Likewise, the Prospectus Supplements misrepresented
other material factors, including the true value of the mortgaged properties relative to the amount of the underlying loans. 8. Defendants Barclays Capital (which lead underwrote and then sold the GSE
Certificates to the GSEs), SABR (which acted as depositor in the SABR Securitizations), and the Individual Defendants (who signed the SABR Shelf Registration Statements) are directly responsible for the misstatements and omissions of material fact contained in the Registration Statements because they prepared, signed, filed and/or used these documents to market and sell the Certificates to Fannie Mae and Freddie Mac. 9. Defendant Barclays Bank is likewise responsible for the misstatements and
omissions of material fact contained in the Registration Statements by virtue of its direction and control over the business operations of Defendants Barclays Capital and SABR. Barclays Bank
directly participated in and exercised dominion and control over the business operations of Defendants Barclays Capital and SABR. 10. Fannie Mae and Freddie Mac purchased approximately $4.9 billion of the These documents
Certificates pursuant to the Registration Statements filed with the SEC.
contained misstatements and omissions of material facts concerning the quality of the underlying mortgage loans, the creditworthiness of the borrowers, and the practices used to originate such loans. As a result of Defendants misstatements and omissions of material fact, Fannie Mae
and Freddie Mac have suffered substantial losses as the value of their holdings has significantly deteriorated. 11. FHFA, as Conservator of Fannie Mae and Freddie Mac, brings this action against
the Defendants for violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77k, 77(a)(2), 77o, Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, Sections 31-5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, and for negligent misrepresentation. PARTIES The Plaintiff and the GSEs 12. The Federal Housing Finance Agency is a federal agency located at 1700 G FHFA was created on July 30, 2008 pursuant to the Housing
Street, N.W. in Washington, D.C.
and Economic Recovery Act of 2008 (HERA), Pub. L. No. 110-289, 122 Stat. 2654 (2008) (codified at 12 U.S.C. 4617) to oversee Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. On September 6, 2008, under HERA, the Director of FHFA placed Fannie Mae and
Freddie Mac into conservatorship and appointed FHFA as conservator. In that capacity, FHFA has the authority to exercise all rights and remedies of the GSEs, including but not limited to, the
authority to bring suits on behalf of and/or for the benefit of Fannie Mae and Freddie Mac. U.S.C. 4617(b)(2). 13.
12
Fannie Mae and Freddie Mac are government-sponsored enterprises chartered by
Congress with a mission to provide liquidity, stability and affordability to the United States housing and mortgage markets. As part of this mission, Fannie Mae and Freddie Mac invested
in residential mortgage-backed securities. Fannie Mae is located at 3900 Wisconsin Avenue, NW in Washington, D.C. McLean, Virginia. The Defendants 14. Defendant Barclays Bank is a public limited company registered in England and Freddie Mac is located at 8200 Jones Branch Drive in
Wales, with its registered head office at Churchill Place, London E14 5HP. Barclays Bank maintains a New York Branch that is located at 200 Park Avenue, New York, New York 10166. Together with its subsidiary companies, it is an international financial services group engaged primarily in banking, investment banking, and asset management. 15. Defendant Barclays Capital is an SEC-registered broker-dealer. Barclays
Capital is a Connecticut corporation that is principally located at 200 Park Avenue, New York, New York 10166. Barclays Capital is a wholly-owned subsidiary of Barclays Bank.
Defendant Barclays Capital was the lead or co-lead underwriter for each Securitization, and was intimately involved in the offerings. Fannie Mae and Freddie Mac purchased all of the GSE
Certificates from Barclays Capital in its capacity as underwriter of the Securitizations. 16. Defendant SABR is a Delaware corporation, and is principally located at 200 Park
Avenue, New York, New York 10166. SABR is a wholly owned subsidiary of Barclays Bank. SABR was the depositor for the SABR Securitizations. SABR, as depositor, was also responsible for preparing and filing reports required under the Securities Exchange Act of 1934.
17.
Defendant Michael Wade was President and Chief Executive Officer at SABR.
Mr. Wade signed the SABR Shelf Registration Statements and the amendments thereto, and did so in New York. 18. Defendant John Carroll was Vice President and Chief Financial Officer at SABR.
Mr. Carroll signed the SABR Shelf Registration Statements and the amendments thereto, and did so in New York. 19. SABR. Defendant Paul Menefee was Vice President and Chief Accounting Officer at
Mr. Menefee signed the SABR Shelf Registration Statements and the amendments
thereto, and did so in New York. The Non-Party Originators 20. The loans underlying the Certificates were acquired by the sponsor for each The originators principally responsible
Securitization from non-party mortgage originators.3
for the loans underlying the Certificates were Argent Mortgage Company, L.L.C. (Argent), Fremont Investment & Loan (Fremont), Ameriquest Mortgage Company (Ameriquest), HSBC Consumer Lending (USA) Inc. (HSBC), and Lime Financial Inc. (Lime). JURISDICTION AND VENUE 21. Jurisdiction of this Court is founded upon 28 U.S.C. 1345, which gives federal
courts original jurisdiction over claims brought by FHFA in its capacity as conservator of Fannie Mae and Freddie Mac. 22. Jurisdiction of this Court is also founded upon 28 U.S.C. 1331 because the
Securities Act claims asserted herein arise under Sections 11, 12(a)(2), and 15 of the Securities
The Securitizations were all sponsored by non-parties. In particular, Ameriquest, Fremont, and Credit-Based Asset Servicing and Securitization (C-BASS) each sponsored one or more of the eight Securitizations.
Act of 1933, 15 U.S.C. 77k, 77l(a)(2), 77o. This Court further has jurisdiction over the Securities Act claims pursuant to Section 22 of the Securities Act of 1933, 15 U.S.C. 77v. 23. This Court has jurisdiction over the statutory claims of violations of Sections
13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code and Sections 31-5606.05(a)(1)(B) and 315606.05(c) of the District of Columbia Code, pursuant to this Courts supplemental jurisdiction under 28 U.S.C. 1367(a). This Court also has jurisdiction over the common law claim of
negligent misrepresentation pursuant to this Courts supplemental jurisdiction under 28 U.S.C. 1367(a). 24. Venue is proper in this district pursuant to Section 22 of the Securities Act of
1933, 15 U.S.C. 77v, and 28 U.S.C. 1391(b). Barclays Capital and SABR are principally located in this district. Barclays Bank maintains a branch in this district. Many of the acts and transactions alleged herein, including the preparation and dissemination of the Registration Statements, occurred in substantial part within this district. The Individual Defendants signed the Registration Statements in this district. in this District. FACTUAL ALLEGATIONS I. THE SECURITIZATIONS A. 25. Residential Mortgage-Backed Securitizations In General Asset-backed securitization distributes risk by pooling cash-producing financial Defendants are also subject to personal jurisdiction
the entity that acquires or originates the mortgage loans and initiates the securitization and the creation of a trust, to which the sponsor directly or indirectly transfers a portfolio of mortgage
loans.
The trust is established pursuant to a Pooling and Servicing Agreement entered into by,
among others, the depositor for that securitization. In many instances, the transfer of assets to a trust is a two-step process: the financial assets are transferred by the sponsor first to an intermediate entity, often a limited purpose entity created by the sponsor . . . and commonly called a depositor, and then the depositor will transfer the assets to the [trust] for the particular asset-backed transactions. Asset-Backed Securities, Securities Act Release No. 33-8518, Exchange Act Release No. 34-50905, 84 SEC Docket 1624 (Dec. 22, 2004). 27. loans. Residential mortgage-backed securities are backed by the underlying mortgage
Some residential mortgage-backed securitizations are created from more than one cohort
of loans called collateral groups, in which case the trust issues securities backed by different groups. For example, a securitization may involve two groups of mortgages, with some
securities backed primarily by the first group, and others primarily by the second group. Purchasers of the securities acquire an ownership interest in the assets of the trust, which in turn owns the loans. Within this framework, the purchasers of the securities acquire rights to the
cash-flows from the designated mortgage group, such as homeowners payments of principal and interest on the mortgage loans held by the related trust. 28. Residential mortgage-backed securities are issued pursuant to registration These registration statements include prospectuses, which
statements filed with the SEC.
explain the general structure of the investment, and prospectus supplements, which contain detailed descriptions of the mortgage groups underlying the certificates. Certificates are issued by the trust pursuant to the registration statement, the prospectus, and the prospectus supplement. Underwriters sell the certificates to investors.
29.
A mortgage servicer is necessary to manage the collection of proceeds from the The servicer is responsible for collecting homeowners mortgage loan The
mortgage loans.
payments, which the servicer remits to the trustee after deducting a monthly servicing fee. servicers duties include making collection efforts on delinquent loans, initiating foreclosure proceedings, and determining when to charge off a loan by writing down its balance. The
servicer is required to report key information about the loans to the trustee. The trustee (or trust administrator) administers the trusts funds and delivers payments due each month on the certificates to the investors. B. 30. The Securitizations At Issue In This Case This case involves the eight Securitizations listed in Table 1 below. Barclays
Capital served as the lead or co-lead underwriter and sold the GSE Certificates to the GSEs for all eight of the Securitizations. For each of the eight Securitizations, Table 1 identifies: (1)
the sponsor; (2) the depositor; (3) the lead underwriter; (4) the principal amount issued for the tranches4 purchased by the GSEs; (5) the date of issuance; and (6) the loan group backing the GSE Certificates for that Securitization (referred to as the Supporting Loan Groups). Table 1
Transaction Tranche Sponsor Ameriquest Mortgage Company Depositor Argent Securities Inc. Fremont Mortgage Securities Corporation Ameriquest Mortgage Securities, Inc. Argent Securities Inc. Lead Underwriter(s) Barclays Capital Inc. and Morgan Stanley & Co. Incorporated Barclays Capital Inc. Barclays Capital Inc. and J.P. Morgan Securities Inc. Barclays Capital Inc. Principal Amount Issued $736,186,000 Date of Issuance 10/28/2005 Supporting Loan Group Group I
ARSI 2005-W3
A1
FHLT 2005-D
1A1
Fremont Investment & Loan
$343,936,000
11/18/2005
Group I
AMSI 2005-R10
A1
Ameriquest Mortgage Company Ameriquest Mortgage Company
$1,230,491,000
11/23/2005
Group I
ARSI 2005-W5
A1
$881,201,000
12/28/2005
Group I
10
Transaction
Tranche
Sponsor Credit-Based Asset Servicing and Securitization LLC Ameriquest Mortgage Company Fremont Investment & Loan Credit-Based Asset Servicing and Securitization LLC
Depositor Securitized Asset Backed Receivables LLC Argent Securities Inc. Fremont Mortgage Securities Corporation Securitized Asset Backed Receivables LLC
Lead Underwriter(s) Barclays Capital Inc. Barclays Capital Inc. and Deutsche Bank Securities Inc. Barclays Capital Inc.
Principal Amount Issued $287,298,000
Supporting Loan Group Group I
CBASS 2006-CB1
AV1
ARSI 2006-W2
A1
$725,306,000
2/27/2006
Group I
FHLT 2006-C
1A1
$459,746,000
8/30/2006
Group 1
CBASS 2007-CB2
A1
Barclays Capital Inc.
$220,801,000
2/28/2007
Group I
C.
The Securitization Process 1. Mortgage Loans Are Grouped in Special Purpose Trusts
31.
Non-party sponsors Ameriquest, Fremont, and C-BASS purchased the mortgage
loans underlying the Certificates for one or more of the Securitizations after the loans were originated, either directly from the originators or through affiliates of the originators. 32. The sponsors then sold the mortgage loans for the Securitizations that they
sponsored to depositors. C-BASS sold the mortgage loans for two of the Securitizations to Defendant SABR, as depositor. With respect to the remaining six Securitizations, non-party
sponsors Ameriquest and Fremont sold the mortgage loans to non-party depositors, as reflected in Table 1, supra at paragraph 30. Defendant Barclays Capital was the lead or co-lead and the selling underwriter for all eight Securitizations. 33. Capital. SABR was a wholly-owned, limited-purpose financial subsidiary of Barclays
The sole purpose of SABR as depositor was to act as a conduit through which loans
acquired by the sponsor could be securitized and sold to investors. 34. As depositor for the SABR Securitizations, SABR transferred the relevant
mortgage loans to the trusts.
11
35.
As part of each of the Securitizations, the trustee, on behalf of the
Certificateholders, executed a Pooling and Servicing Agreement (PSA) with the relevant depositor and the parties responsible for monitoring and servicing the mortgage loans in that Securitization. The trust, administered by the trustee, held the mortgage loans pursuant to the The
related PSA and issued Certificates, including the GSE Certificates, backed by such loans.
GSEs purchased the GSE Certificates, through which they obtained an ownership interest in the assets of the trust, including the mortgage loans. 2. 36. The Trusts Issue Securities Backed by the Loans
Once the mortgage loans were transferred to the trusts in accordance with the The Certificates
PSAs, each trust issued Certificates backed by the underlying mortgage loans.
were then sold to investors like Fannie Mae and Freddie Mac, which thereby acquired an ownership interest in the assets of the corresponding trust. Each Certificate entitles its holder to a specified portion of the cash-flows from the underlying mortgages in the Supporting Loan Group. The level of risk inherent in the Certificates was a function of the capital structure of
the related transaction and the credit quality of the underlying mortgages. 37. The Certificates were issued pursuant to one of seven Shelf Registration The Shelf Registration Statements were Each Individual Defendant signed
Statements filed with the SEC on a Form S-3.
amended by one or more Forms S-3/A filed with the SEC.
one or more of the SABR Shelf Registration Statements, including any amendments thereto. The SEC filing number, registrants, signatories and filing dates for the seven Shelf Registration Statements and amendments thereto, as well as the Certificates covered by each Shelf Registration Statement, are reflected in Table 2 below.
12
Table 2
SEC File No.
333 112237

1/27/2004
Date(s) Amended Registration Statement Filed

Notapplicable
Registrants
Signatories of Registration Statement

AdamJ.Bass; JohnP.Grazer; AndrewL.Stidd MurrayL.Zoota; LouisJ.Rampino; WayneR.Bailey; ThomasW.Hayes; PatrickLamb AdamJ.Bass; JohnP.Grazer; AndrewL.Stidd AdamJ.Bass; JohnP.Grazer; AndrewL.Stidd MichaelWade; JohnCarroll; PaulMenefee
ArgentSecurities Inc. Fremont Mortgage Securities Corporation Ameriquest Mortgage SecuritiesInc. ArgentSecurities Inc. SecuritizedAsset Backed ReceivablesLLC
ARSI2005W3
Notapplicable
333 125587
6/7/2005
Notapplicable
FHLT2005D
Notapplicable
333 121781 333 121782 333 123990
12/30/2004
Notapplicable
AMSI2005R10 ARSI2005W5; ARSI2006W2 CBASS2006CB1
Notapplicable AdamJ.Bass; JohnP.Grazer; AndrewL.Stidd MichaelWade JohnCarroll; PaulMenefee 5/16Am. MurrayL.Zoota; LouisJ.Rampino; WayneR.Bailey; ThomasW.Hayes; DonaldPuglisi; PatrickE.Lamb; AlanFaigin; 6/23Am. KyleW.Walker; LouisJ.Rampino; MurrayL.Zoota; WayneR.Bailey; ThomasW.Hayes; DonaldPuglisi; RonaldS.Nicolas; AlanFaigin JohnCarroll; MichaelWade; PaulMenefee
12/30/2004
1/12/2006
4/11/2005
12/7/2005
333 132540
3/17/2006
5/16/2006, 6/23/2006
Fremont Mortgage Securities Corporation
FHLT2006C
MurrayL.Zoota; LouisJ.Rampino; WayneR.Bailey; ThomasW.Hayes; DonaldPuglisi; KyleR.Walker; RonaldNicolas,Jr.
333 130543
12/20/2005
2/9/2006
SecuritizedAsset Backed ReceivablesLLC
CBASS2007CB2
MichaelWade; JohnCarroll; PaulMenefee
38.
guidelines that purportedly were used in connection with the origination of the underlying mortgage loans. In addition, the Prospectus Supplements purport to provide accurate statistics
regarding the mortgage loans in each group, including the ranges of and weighted average FICO credit scores of the borrowers, the ranges of and weighted average loan-to-value ratios of the loans, the ranges of and weighted average outstanding principal balances of the loans, the debt-
13
to-income ratios, the geographic distribution of the loans, the extent to which the loans were for purchase or refinance purposes; information concerning whether the loans were secured by a property to be used as a primary residence, second home, or investment property; and information concerning whether the loans were delinquent. 39. The Prospectus Supplements associated with each Securitization were filed with
the SEC as part of the Registration Statements. The Form 8-Ks attaching the PSAs for each Securitization were also filed with the SEC. The date on which the Prospectus Supplement and Form 8-K were filed for each Securitization, as well as the filing number of the Shelf Registration Statement related to each, are set forth in Table 3 below. Table 3
Transaction
ARSI 2005-W3 FHLT 2005-D AMSI 2005-R10 ARSI 2005-W5 CBASS 2006-CB1 ARSI 2006-W2 FHLT 2006-C CBASS 2007-CB2
Date Prospectus Supplement Filed

10/28/2005 11/16/2005 11/23/2005 12/27/2005 1/26/2006 2/27/2006 8/31/2006 3/2/2007
Filing Date of Form 8-K Attaching PSA

11/11/2005 12/5/2005 12/08/2005 1/12/2006 2/10/2006 3/14/2006 9/20/2006 3/15/2007
Filing No. of Related Registration Statement

333-112237 333-125587 333-121781 333-121782 333-123990 333-121782 333-132540 333-130543
40.
The Certificates were issued pursuant to the PSAs, and Defendant Barclays
Capital offered and sold the GSE Certificates to Fannie Mae and Freddie Mac pursuant to the Registration Statements, which, as noted previously, included the Prospectuses and Prospectus Supplements. II. THE DEFENDANTS PARTICIPATION IN THE SECURITIZATION PROCESS A. 41. The Role of Each of the Defendants Each of the Defendants, including the Individual Defendants, had a role in the
securitization process and the marketing for most or all of the Certificates, which included purchasing the mortgage loans from the originators, arranging the Securitizations, selling the
14
mortgage loans to the depositor, transferring the mortgage loans to the trustee on behalf of the Certificateholders, underwriting the public offering of the Certificates, structuring and issuing the Certificates, and marketing and selling the Certificates to investors such as Fannie Mae and Freddie Mac. 42. With respect to each Securitization, the depositor, underwriters, and Individual
Defendants who signed the Registration Statement, as well as the Defendants who exercised control over the activities, are liable, jointly and severally, as participants in the registration, issuance and offering of the Certificates, including issuing, causing, or making materially misleading statements in the Registration Statements, and omitting material facts required to be stated therein or necessary to make the statements contained therein not misleading. 1. 43. SABR It is a special
Defendant SABR is a wholly owned subsidiary of Barclays Bank.
purpose entity formed solely for the purpose of purchasing mortgage loans, filing registration statements with the SEC, forming issuing trusts, assigning mortgage loans and all of its rights and interests in such mortgage loans to the trustee for the benefit of the Certificateholders, and depositing the underlying mortgage loans into the issuing trusts. 44. SABR was the depositor for two of the eight Securitizations. In its capacity as
depositor, SABR purchased the mortgage loans from the sponsor (which was C-BASS in the SABR Securitizations) pursuant to a mortgage loan purchase and warranties agreement. SABR then sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trusts. SABR, together with the other Defendants, was also responsible for preparing and filing the Registration Statements pursuant to which the Certificates were offered for sale. The trusts in
turn held the mortgage loans for the sole benefit of the Certificateholders, and issued the Certificates in public offerings for sale to investors such as Fannie Mae and Freddie Mac.
15
2. 45.
Barclays Capital
Defendant Barclays Capital was formed in 1997 and is the investment banking Defendant Barclays Capital was, at all relevant times, a registered
division of Barclays Bank.
broker/dealer and one of the leading underwriters of mortgage and other asset-backed securities in the United States. 46. Barclays Capital was the lead or co-lead underwriter in each of the In that role, it was responsible for underwriting and managing the offer and Barclays Capital
Securitizations.
sale of the Certificates to Fannie Mae and Freddie Mac and other investors.
was also obligated to conduct meaningful due diligence to ensure that the Registration Statements did not contain any material misstatements or omissions, including as to the manner in which the underlying mortgage loans were originated, underwritten, and transferred. 3. 47. Barclays Bank
Barclays Bank employed its wholly-owned subsidiaries, Barclays Capital and With respect to the SABR Securitizations,
SABR, in the key steps of the securitization process. the depositor was SABR.
SABR does not have any significant assets and was created for the
sole purpose of acquiring and pooling residential loans, offering securities or other mortgage- or asset-related securities, and related activities. Barclays Capital, the investment banking division of Barclays Bank, was the lead and selling underwriter with respect to all of the Securitizations. 48. As the sole corporate parent of Barclays Capital and SABR, Barclays Bank had
the practical ability to direct and control the actions of Barclays Capital and SABR related to the Securitizations, and in fact exercised such direction and control over the activities of these entities related to the issuance and sale of the Certificates. Furthermore, Barclays Bank, upon information and belief, shared overlapping management with the other Defendant entities. instance, Defendant John Carroll was Vice President and Chief Financial Officer at SABR. For Mr.
16
Carroll was also Managing Director at Barclays Bank. Mr. Carroll signed the SABR Shelf Registration Statements as an employee of both Barclays Bank and SABR. 4. 49. The Individual Defendants
Defendant Michael Wade was President and Chief Executive Officer at SABR.
Mr. Wade signed the SABR Shelf Registration Statements and the amendments thereto. 50. Defendant John Carroll was Vice President and Chief Financial Officer at SABR. Mr. Carroll signed the SABR Shelf
Mr. Carroll was also Managing Director at Barclays Bank. Registration Statements and the amendments thereto. 51. SABR. thereto. B. 52.
Defendant Paul Menefee was Vice President and Chief Accounting Officer at
Mr. Menefee signed the SABR Shelf Registration Statements and the amendments
Defendants Failure To Conduct Proper Due Diligence The Defendants failed to conduct adequate and sufficient due diligence to ensure
that the mortgage loans underlying the Securitizations complied with the representations in the Registration Statements. 53. During the time period in which the Certificates were issuedapproximately
2005 through 2007Barclays was extensively involved in the subprime mortgage market. In 2005, Barclays Capital securitized $27.1 billion in mortgage-backed securities, putting it in the top ten banks in this category. In June 2006, Barclays Bank acquired mortgage servicer In April 2007, Barclays Bank
HomeEq Servicing Corporation from Wachovia Corporation.
acquired EquiFirst Corporation (EquiFirst), the non-prime mortgage origination business of Regions Financial Corporation for $76 million. EquiFirst made $24.4 billion of high interest loans between 2005 and 2007. Barclays Bank stated that EquiFirst was to be combined with
Barclays Capitals active U.S. wholesale mortgage business, mortgage servicing, and capital
17
markets capabilities to create a vertically integrated franchise for the purchase and securitization of non-prime mortgages. 54. Defendants had enormous financial incentives to complete as many offerings as
quickly as possible without regard to ensuring the accuracy or completeness of the Registration Statements, or conducting adequate and reasonable due diligence. For example, Barclays
Capital, as the underwriter, was paid a commission based on the amount it received from the sale of the Certificates to the public. 55. The push to securitize large volumes of mortgage loans contributed to the absence
of controls needed to prevent the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. In particular, Defendants failed to conduct adequate diligence or otherwise to ensure the accuracy of the statements in the Registrations Statements pertaining to the Securitizations. III. THE REGISTRATION STATEMENTS AND THE PROSPECTUS SUPPLEMENTS A. 56. Compliance With Underwriting Guidelines The Prospectus Supplements for each Securitization describe the mortgage loan
underwriting guidelines pursuant to which the mortgage loans underlying the related Securitizations were to have been originated. These guidelines were intended to assess the
creditworthiness of the borrower, the ability of the borrower to repay the loan, and the adequacy of the mortgaged property as security for the loan. 57. The statements made in the Prospectus Supplements, which, as discussed, formed
part of the Registration Statement for each Securitization, were material to a reasonable investors decision to purchase and invest in the Certificates because the failure to originate a mortgage loan in accordance with the applicable guidelines creates a higher risk of delinquency
18
and default by the borrower, as well as a risk that losses upon liquidation will be higher, thus resulting in a greater economic risk to an investor. 58. The Prospectus Supplements for the Securitizations contained several key
statements with respect to the underwriting standards of the entities that originated the loans in the Securitizations. For example, the Prospectus Supplement for the AMSI 2005-R10
Securitization, for which Ameriquest was the originator, Barclays Capital was the underwriter and Ameriquest Mortgage Securities, Inc. was the depositor, stated that: All mortgage loans to
be included in a trust fund will have been subject to underwriting standards acceptable to the depositor and applied as described in the following paragraph. Each mortgage loan seller, or
another party on its behalf, will represent and warrant that mortgage loans purchased by or on behalf of the depositor from it have been originated by the related originators in accordance with these guidelines. It also stated that the Underwriting Guidelines are primarily intended to
evaluate: (1) the applicants credit standing and repayment ability and (2) the value and adequacy of the mortgaged property as collateral. 59. The AMSI 2005-R10 Prospectus Supplement stated that the originator may
determine that a loan applicant, not strictly qualifying under an enumerated risk factor warrants an exception to the requirements set forth in the Underwriting Guidelines, but emphasized that the exceptions were made on a case-by-case basis. 60. With respect to the information evaluated by the originator, the Prospectus
Supplement stated that: Each loan application package has an application completed by the applicant that includes information with respect to the applicants liabilities, income, credit history and employment history, as well as certain other personal information. The Originator
also obtains (or the broker submits) a credit report on each applicant from a credit reporting
19
company.
If applicable, the loan application package must also generally include a letter from
the applicant explaining all late payments on mortgage debt and, generally, consumer (i.e. nonmortgage) debt. 61. The Prospectus and Prospectus Supplement for each of the Securitizations had The relevant representations in the Prospectus
similar representations to those quoted above.
and Prospectus Supplement pertaining to originating entity underwriting standards for each Securitization are reflected in Appendix A to this Complaint. As discussed infra at paragraphs 91 through 109, in fact, the originators of the mortgage loans in the Supporting Loan Group for the Securitizations did not adhere to their stated underwriting guidelines, thus rendering the description of those guidelines in the Prospectuses and Prospectus Supplements false and misleading. 62. Further, for the vast majority of the Securitizations, the Prospectuses and
Prospectus Supplements described or referenced additional representations and warranties in the PSA or the Mortgage Loan Purchase Agreement by the originator/sponsor concerning the mortgage loans underlying the Securitizations. These representations and warranties, which are described more fully for each Securitization in Appendix A, included (i) each mortgage loan was made in material compliance with all applicable local, state and federal laws and regulations; (ii) no mortgage loan is delinquent; (iii) origination and collection practices used by the originator with respect to each mortgage note and mortgage have been in all respects legal, proper, prudent and customary in the mortgage origination and servicing business; and (iv) the mortgage note and the mortgage were not subject to any right of rescission, set-off, counterclaim or defense (including the defense of usury) as to render such mortgage note or mortgage unenforceable.
20
63.
The inclusion of these representations in the Prospectuses and Prospectus
Supplements had the purpose and effect of providing additional assurances to investors regarding the quality of the mortgage collateral underlying the Securitizations and the compliance of that collateral with the underwriting guidelines described in the Prospectuses and Prospectus Supplements. These representations were material to a reasonable investors decision to
purchase the Certificates. B. 64. Statements Regarding Occupancy Status of Borrower The Prospectus Supplements contained collateral group-level information about
the occupancy status of the borrowers of the loans in the Securitizations. Occupancy status refers to whether the property securing a mortgage is to be the primary residence of the borrower, a second home, or an investment property. The Prospectus Supplements for each of
the Securitizations presented this information in tabular form, usually in a table entitled Occupancy Status of the Mortgage Loans. This table divided all the loans in the collateral
group by occupancy status, e.g., into the following categories: (i) Primary, or OwnerOccupied; (ii) Secondary or Second Home; and (iii) Investor or Non-Owner. each category, the table stated the number of loans in that category. For
Occupancy statistics for
the Supporting Loan Groups for each Securitization were reported in the Prospectus Supplements as follows:5 Table 4
Transaction
ARSI 2005-W3 FHLT 2005-D

Group I Group I
Primary/ OwnerOccupied (%)

85.64 89.98
Secondary/Second Home (%)

1.01 1.29
Investor/Non-Owner (%)
13.35 8.73
Each Prospectus Supplement provides the total number of loans and the number of loans in the following categories: primary or owner-occupied, secondary or second home, and investor or non-owner. These numbers have been converted to percentages.
21
Transaction
AMSI 2005-R10 ARSI 2005-W5 CBASS 2006-CB1 ARSI 2006-W2 FHLT 2006-C CBASS 2007-CB2

Group I Group I Group I Group I Group 1 Group I
Primary/ OwnerOccupied (%)

95.93 84.32 91.81 83.66 94.29 89.82
Secondary/Second Home (%)

0.92 1.01 1.41 0.98 0.66 2.12
Investor/Non-Owner (%)
3.15 14.67 6.78 15.36 5.05 8.06
65.
reported that an overwhelming majority of the mortgage loans in the Supporting Loan Groups were owner-occupied, while a small percentage were reported to be non-owner-occupied (i.e. a second home or investor/non-owner property). 66. The statements about occupancy status were material to a reasonable investors Information about occupancy status is an important factor
decision to invest in the Certificates.
in determining the credit risk associated with a mortgage loan and, therefore, the securitization that it collateralizes. Because borrowers who reside in mortgaged properties are less likely to
default than borrowers who purchase homes as second homes or investments and live elsewhere, and are more likely to care for their primary residence, the percentage of loans in the collateral group of a securitization that are secured by mortgage loans on owner-occupied residences is an important measure of the risk of the certificates sold in that securitization. 67. Other things being equal, the higher the percentage of loans not secured by Even small
owner-occupied residences, the greater the risk of loss to the certificateholders.
differences in the percentages of primary/owner-occupied, second home/secondary, and investor/non-owner properties in the collateral group of a securitization can have a significant effect on the risk of each certificate sold in that securitization, and thus, are important to the decision of a reasonable investor whether to purchase any such certificate. As discussed at paragraphs 80 through 84 below, the Registration Statement for each Securitization materially
22
overstated the percentage of loans in the Supporting Loan Groups that were owner-occupied, thereby misrepresenting the degree of risk of the GSE Certificates. C. 68. Statements Regarding Loan-to-Value Ratios The loan-to-value ratio of a mortgage loan, or LTV ratio, is the ratio of the
balance of the mortgage loan to the value of the mortgaged property when the loan is made. 69. The denominator in the LTV ratio is the value of the mortgaged property, and is In a
generally the lower of the purchase price or the appraised value of the property.
refinancing or home-equity loan, there is no purchase price to use as the denominator, so the denominator is often equal to the appraised value at the time of the origination of the refinanced loan. Accordingly, an accurate appraisal is essential to an accurate LTV ratio. In particular,
an inflated appraisal will understate, sometimes greatly, the credit risk associated with a given loan. 70. The Prospectus Supplements for each Securitization also contained group-level The percentage
information about the LTV ratio for the underlying group of loans as a whole.
of loans with an LTV ratio at or less than 80 percent and the percentage of loans with an LTV ratio greater than 100 percent as reported in the Prospectus Supplements for the Supporting Loan Groups are reflected in Table 5 below.6
23
Table 5
Group I Group I Group I Group I Group I Group I Group 1 Group I
Transaction
Percentage of loans, by aggregate principal balance, with LTV less than or equal to 80%
53.18 69.19 54.09 56.08 69.72 48.87 60.13 56.66
Percentage of loans, by aggregate principal balance, with LTV greater than 100%
0.00 0.00 0.00 0.00 0.01 0.00 0.00 0.00
71.
reported that many or most of the mortgage loans in the Supporting Loan Groups had an LTV ratio of 80% or less, and that virtually no mortgage loans in the Supporting Loan Group had an LTV ratio over 100 percent. 72. The LTV ratio is among the most important measures of the risk of a mortgage
loan, and thus, it is one of the most important indicators of the default risk of the mortgage loans underlying the Certificates. The lower the ratio, the less likely that a decline in the value of the
property will wipe out an owners equity, and thereby give an owner an incentive to stop making mortgage payments and abandon the property. This ratio also predicts the severity of loss in the event of default. The lower the LTV, the greater the equity cushion, so the greater the
likelihood that the proceeds of foreclosure will cover the unpaid balance of the mortgage loan. 73. Thus, LTV ratio is a material consideration to a reasonable investor in deciding
whether to purchase a certificate in a securitization of mortgage loans. Even small differences in the LTV ratios of the mortgage loans in the collateral group of a securitization have a significant effect on the likelihood that the collateral groups will generate sufficient funds to pay
24
Certificateholders in that securitization, and thus are material to the decision of a reasonable investor whether to purchase any such certificate. As discussed infra at paragraphs 85 through 90, the Registration Statements for the Securitizations materially overstated the percentage of loans in the Supporting Loan Groups with an LTV ratio at or less than 80 percent, and materially understated the percentage of loans in the Supporting Loan Groups with an LTV ratio over 100 percent, thereby misrepresenting the degree of risk of the GSE Certificates. D. 74. Statements Regarding Credit Ratings Credit ratings are assigned to the tranches of mortgage-backed securitizations by
the credit rating agencies, including Moodys Investors Service, Standard & Poors, Fitch Ratings, and DBRS. Each credit rating agency uses its own scale with letter designations to In general, AAA or its equivalent ratings are at the top of the C and D ratings are at
describe various levels of risk.
credit rating scale and are intended to designate the safest investments.
the bottom of the scale and refer to investments that are currently in default and exhibit little or no prospect for recovery. At the time the GSEs purchased the GSE Certificates, investments
with AAA or its equivalent ratings historically experienced a loss rate of less than .05 percent. Investments with a BBB rating, or its equivalent, historically experienced a loss rate of less than one percent. As a result, securities with credit ratings between AAA or its equivalent through
BBB- or its equivalent were generally referred to as investment grade. 75. Rating agencies determine the credit rating for each tranche of a mortgage-backed
securitization by comparing the likelihood of contractual principal and interest repayment to the credit enhancements available to protect investors. Rating agencies determine the likelihood
of repayment by estimating cash-flows based on the quality of the underlying mortgages by using sponsor-provided loan-level data. Credit enhancements, such as subordination, represent
25
the amount of cushion or protection from loss incorporated into a given securitization.7
This
cushion is intended to improve the likelihood that holders of highly rated certificates receive the interest and principal to which they are contractually entitled. The level of credit enhancement offered is based on the make-up of the loans in the underlying collateral group and entire securitization. Riskier loans underlying the securitization necessitate higher levels of credit
enhancement to insure payment to senior certificate holders. If the collateral within the deal is of a higher quality, then rating agencies require less credit enhancement for AAA or its equivalent rating. 76. Credit ratings have been an important tool to gauge risk when making investment
decisions. In testimony before the Senate Permanent Subcommittee on Investigations, Susan Barnes, the North American Practice Leader for RMBS at S&P from 2005 to 2008, confirmed that the rating agencies relied upon investment banks to provide accurate information about the loan pools: The securitization process relies on the quality of the data generated about the loans going into the securitizations. S&P relies on the data produced by others and reported to both S&P and investors about those loans . . . . S&P does not receive the original loan files for the loans in the pool. Those files are reviewed by the arranger or sponsor of the transaction, who is also responsible for reporting accurate information about the loans in the deal documents and offering documents to potential investors. (SPSI hearing testimony, April 23, 2010). 77. For almost a hundred years, investors like pension funds, municipalities,
insurance companies, and university endowments have relied heavily on credit ratings to assist them in distinguishing between safe and risky investments. Fannie Mae and Freddie Macs
Subordination refers to the fact that the certificates for a mortgage-backed securitization are issued in a hierarchical structure, from senior to junior. The junior certificates are subordinate to the senior notes in that, should the underlying mortgage loans become delinquent or default, the junior certificates suffer losses first. These subordinate certificates thus provide a degree of protection to the senior certificates from losses on the underlying loans.
26
respective internal policies limited their purchases of private label residential mortgage-backed securities to those rated AAA (or its equivalent), and in very limited instances, AA or A bonds (or their equivalent). 78. Each tranche of the Securitizations received a credit rating upon issuance, which
purported to describe the riskiness of that tranche. The Defendants reported the credit ratings for each tranche in the Prospectus Supplements. The credit rating provided for each of the GSE Certificates was investment grade, AAA or its equivalent. The accuracy of these ratings was
material to a reasonable investors decision to purchase the Certificates. As set forth in Table 8, infra at paragraph 105, the ratings for the Securitizations were inflated as a result of Defendants provision of incorrect data concerning the attributes of the underlying mortgage collateral to the ratings agencies, and, as a result, Defendants sold and marketed the GSE Certificates as AAA (or its equivalent) in fact, they were not. IV. FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS A. 79. The Statistical Data Provided in the Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False A review of loan-level data was conducted in order to assess whether the
statistical information provided in the Prospectus Supplements was true and accurate. For each Securitization, the sample consisted of 1,000 randomly selected loans per Supporting Loan Group, or all of the loans in the group if there were fewer than 1,000 loans in the Supporting Loan Group. The sample data confirms, on a statistically-significant basis, material
misrepresentations of underwriting standards and of certain key characteristics of the mortgage loans across the Securitizations. The data review demonstrates that the data concerning owner
occupancy and LTV ratios was materially false and misleading.
27
1. 80.
Owner Occupancy Data Was Materially False
The data review has revealed that the owner occupancy statistics reported in the
claimed, a number of tests were conducted, including, inter alia, whether months after the loan closed, the borrowers tax bill was being mailed to the property or to a different address; whether the borrower had claimed a tax exemption on the property; and whether the mailing address of the property was reflected in the borrowers credit reports, tax records, or lien records. Failing two or more of these tests is a strong indication that the borrower did not live at the mortgaged property and instead used it as a second home or an investment property, both of which make it much more likely that a borrower will not repay the loan. 82. A significant number of the loans failed two or more of these tests, indicating that
the owner occupancy statistics provided to Fannie Mae and Freddie Mac were materially false and misleading. 83. For example, for the AMSI 2005-R10 Securitization, the Prospectus Supplement
stated that 4.07 percent of the underlying properties by loan count in the Supporting Loan Group were not owner-occupied. But the data review revealed that, for 9.65 percent of the properties
represented as owner-occupied, the owners lived elsewhere, indicating that the true percentage of
28
non-owner-occupied properties was 13.33 percent, more than double the percentage reported in the Prospectus Supplement.8 84. The data review revealed that for each Securitization, the Prospectus Supplement
misrepresented the percentage of non-owner-occupied properties. The true percentage of nonowner-occupied properties, as determined by the data review, versus the percentage stated in the Prospectus Supplement for each Securitization, is reflected in Table 6 below. Table 6 demonstrates that the Prospectus Supplements for each Securitization understated the percentage of non-owner-occupied properties by at least 7.49 percent, and for all but one of the Securitizations by nine percent or more. Table 6
Percentage of Properties Reported as OwnerOccupied With Strong Indication of Non-Owner Occupancy9
11.60 13.36 9.65 11.44 8.16 11.34 12.87 12.40
Transaction
Reported Percentage of Non-OwnerOccupied Properties
Prospectus Understatement of Non-OwnerOccupied Properties

9.94 12.02 9.26 9.65 7.49 9.49 12.14 11.14
14.36 10.02 4.07 15.68 8.19 16.34 5.71 10.18
24.30 22.05 13.33 25.33 15.68 25.83 17.85 21.32
This conclusion is arrived at by summing (a) the stated non-owned-occupied percentage in the Prospectus Supplement (here, 4.07 percent), and (b) the product of (i) the stated owner-occupied percentage (here, 95.93 percent) and (ii) the percentage of the properties represented as owner-occupied in the sample that showed strong indications that their owners in fact lived elsewhere (here, 9.65 percent). As described more fully in paragraph 81, failing two or more tests of owneroccupancy is a strong indication that the borrower did not live at the mortgaged property and instead used it as a second home or an investment property.
9
29
2. 85.
Prospectus Supplements were materially false and understated, as more specifically set out below. For each of the sampled loans, an industry standard automated valuation model
(AVM) was used to calculate the value of the underlying property at the time the mortgage loan was originated. AVMs are routinely used in the industry as a way of valuing properties AVMs rely upon similar
during prequalification, origination, portfolio review and servicing.
data as appraisersprimarily county assessor records, tax rolls, and data on comparable properties. AVMs produce independent, statistically-derived valuation estimates by applying modeling techniques to this data. 86. Applying the AVM to the available data for the properties securing the sampled
loans shows that the appraised value given to such properties was significantly higher than the actual value of such properties. understatement of LTV. The result of this overstatement of property values is a material
That is, if a propertys true value is significantly less than the value
used in the loan underwriting, then the loan represents a significantly higher percentage of the propertys value. This, of course, increases the risk a borrower will not repay the loan and the
risk of greater losses in the event of a default. 87. For example, for the CBASS 2007-CB2 Securitization, which was sponsored by
C-BASS and underwritten by Barclays Capital, the Prospectus Supplement stated that no LTV ratio for the Supporting Loan Group was above 100 percent. In fact, 29.27 percent of the sample of loans included in the data review had LTV ratios above 100 percent. In addition, the Prospectus Supplement stated that 60.68 percent of the loans had LTV ratios at or below 80 percent. The data review indicated that only 31.87 percent of the loans had LTV ratios at or
below 80 percent.
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88.
The data review revealed that for each Securitization, the Prospectus Supplement
misrepresented the percentage of loans with an LTV ratio above 100 percent, as well the percentage of loans that had an LTV ratio at or below 80 percent. Table 7 reflects (i) the true
percentage of mortgages in the Supporting Loan Group with LTV ratios above 100 percent, versus the percentage reported in the Prospectus Supplement; and (ii) the true percentage of mortgages in the Supporting Loan Group with LTV ratios at or below 80 percent, versus the percentage reported in the Prospectus Supplement. calculated by aggregated principal balance. Table 7
PROSPECTUS Percentage of Loans Reported to Have LTV Ratio At Or Less Than 80%
53.18 69.19 54.09 56.08 69.72 48.87 60.13 56.66
The percentages listed in Table 7 were
Transaction

DATA REVIEW True Percentage of Loans With LTV Ratio At Or Less Than 80%
36.47 46.05 41.14 37.59 45.34 32.95 37.06 31.87
PROSPECTUS Percentage of Loans Reported to Have LTV Ratio Over 100%

0.00 0.00 0.00 0.00 0.01 0.00 0.00 0.00
DATA REVIEW True Percentage of Loans With LTV Ratio Over 100%
17.07 13.33 12.93 14.26 12.82 20.93 22.07 29.27
89.
Securitizations reported that virtually none of the mortgage loans in the Supporting Loan Groups had an LTV ratio over 100 percent. In contrast, the data review revealed that at least 12.25 percent of the mortgage loans for each Securitization had an LTV ratio over 100 percent, and for almost half of the Securitizations this figure was much larger. Indeed, for three of the Securitizations, the data review revealed that more than 20 percent of the mortgages in the Supporting Loan Group had a true LTV ratio over 100 percent.
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90.
These inaccuracies with respect to reported LTV ratios also indicate that the
representations in the Registration Statements relating to appraisal practices were false, and that the appraisers themselves, in many instances, furnished appraisals that they understood were inaccurate and that they knew bore no reasonable relationship to the actual value of the underlying properties. Indeed, independent appraisers following proper practices, and providing genuine estimates as to valuation, would not systematically generate appraisals that deviate so significantly (and so consistently upward) from the true values of the appraised properties. This conclusion is further confirmed by the findings of the Financial Crisis Inquiry Commission (the FCIC), which identified inflated appraisals as a pervasive problem during the period of the Securitizations, and determined through its investigation that appraisers were often pressured by mortgage originators, among others, to produce inflated results. See FCIC, Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (January 2011). B. 91. The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines The Registration Statements contained material misstatements and omissions Indeed, the originators for the loans
regarding compliance with underwriting guidelines.
underlying the Securitizations systematically disregarded their respective underwriting guidelines in order to increase production and profits derived from their mortgage lending businesses. This is confirmed by the systematically misreported owner occupancy and LTV statistics, discussed above, and by (1) government investigations into originators underwriting practices, which have revealed widespread abandonment of originators reported underwriting guidelines during the relevant period; (2) the collapse of the Certificates credit ratings; and (3) the surge in delinquency and default in the mortgages in the Securitizations.
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1.
Government Investigations Have Confirmed That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines
92.
The abandonment of underwriting guidelines is confirmed by several government
reports and investigations that have described rampant underwriting failures throughout the period of the Securitizations, and, more specifically, have described underwriting failures by the very originators whose loans were included by the Defendants in the Securitizations. 93. For instance, in November 2008, the Office of the Comptroller of the Currency,
an office within the United States Department of the Treasury, issued a report identifying the Worst Ten mortgage originators in the Worst Ten metropolitan areas. The worst
originators were defined as those with the largest number of non-prime mortgage foreclosures for 2005-2007 originations. Argent, Ameriquest, and Fremont, which originated many of the
loans for the Securitizations at issue here, were all on that list. See Worst Ten in the Worst Ten, Office of the Comptroller of the Currency Press Release, November 13, 2008. 94. The originators of the mortgage loans underlying the Securitizations went beyond
the systemic disregard of their own underwriting guidelines. Indeed, as the FCIC has confirmed, mortgage loan originators throughout the industry pressured appraisers, during the period of the Securitizations, to issue inflated appraisals that met or exceeded the amount needed for the subject loans to be approved, regardless of the accuracy of such appraisals, and especially when the originators aimed at putting the mortgages into a package of mortgages that would be sold for securitization. This resulted in lower LTV ratios, discussed supra, which in turn made the loans appear to the investors less risky that they were. 95. As described by Patricia Lindsay, a former wholesale lender who testified before
the FCIC in April 2010, appraisers fear[ed] for their livelihoods, and therefore cherry-picked data that would help support the needed value rather than finding the best comparables to come
33
up with the most accurate value. See Written Testimony of Patricia Lindsay to the FCIC, April 7, 2010, at 5. Likewise, Jim Amorin, President of the Appraisal Institute, confirmed in
his testimony that [i]in many cases, appraisers are ordered or severely pressured to doctor their reports and to convey a particular, higher value for a property, or else never see work from those parties again [T]oo often state licensed and certified appraisers are forced into making a Hobsons Choice. See Testimony of Jim Amorin to the FCIC, available at www.appraisalinstitute.org/newsadvocacy/downloads/ltrs_tstmny/2009/AI-ASA-ASFMRANAIFATestimonyonMortgageReform042309final.pdf. Faced with this choice, appraisers
systematically abandoned applicable guidelines and over-valued properties in order to facilitate the issuance of mortgages that could then be collateralized into mortgage-backed securitizations. 96. On October 4, 2007, the Commonwealth of Massachusetts, through its Attorney
General, brought an enforcement action against Fremont, which originated loans for two of the Securitizations, for an array of unfair and deceptive business conduct, on a broad scale. See Complaint, Commonwealth v. Fremont Investment & Loan and Fremont General Corp., No. 07-4373 (Mass. Super. Ct.) (Fremont Complaint). According to the complaint, Fremont (i)
approve[ed] borrowers without considering or verifying the relevant documentation related to the borrowers credit qualifications, including the borrowers income; (ii) approv[ed] borrowers for loans with inadequate debt-to-income analyses that do not properly consider the borrowers ability to meet their overall level of indebtedness and common housing expenses; (iii) failed to meaningfully account for [ARM] payment adjustments in approving and selling loans; (iv) approved borrowers for these ARM loans based only on the initial fixed teaser rate, without regard for borrowers ability to pay after the initial two year period; (v) consistently failed to monitor or supervise brokers practices or to independently verify the
34
information provided to Fremont by brokers; and (vi) ma[de] loans based on information that Fremont knew or should have known was inaccurate or false, including, but not limited to, borrowers income, property appraisals, and credit scores. See Fremont Complaint. 97. On December 9, 2008, the Supreme Judicial Court of Massachusetts affirmed a
preliminary injunction that prevented Fremont from foreclosing on thousands of its loans issued to Massachusetts residents. As a basis for its unanimous ruling, the Supreme Judicial Court
found that the record supported the lower courts conclusions that Fremont made no effort to determine whether borrowers could make the scheduled payments under the terms of the loan, and that Fremont knew or should have known that [its lending practices and loan terms] would operate in concert essentially to guarantee that the borrower would be unable to pay and default would follow. Commonwealth v. Fremont Inv. & Loan, 897 N.E.2d 548, 556 (Mass. 2008). The terms of the preliminary injunction were made permanent by a settlement reached on June 9, 2009. 98. Argent originated loans for three of the Securitizations. According to a
December 7, 2008 article in the Miami Herald, employees of Argent Mortgage had a practice of actively assisting brokers to falsify information on loan applications. tutor[]mortgage brokers in the art of fraud. They would
Employees taught [brokers] how to doctor
credit reports, coached them to inflate [borrower] income on loan applications, and helped them invent phantom jobs for borrowers so that loans could be approved. Borrowers Betrayed, Part 4, Miami Herald, Dec. 7, 2008. 99. Orson Benn, a former Argent Vice President who went to prison for his role in
facilitating mortgage fraud, has stated that at Argent the accuracy of loan applications was not a priority. Borrowers Betrayed, Part 4, Miami Herald, Dec. 7, 2008. Mr. Benn was the head
35
of a crime ring that fabricated loan applications in order to pocket the loan fees; Mr. Benn himself pocketed a $3,000 kickback for each loan he helped secure. FCIC Report at 164. Of
the 18 defendants charged in the Argent ring, 16 have been convicted or pled guilty, FCIC Report at 164, including Mr. Benn, who was sentenced to 18 years in prison, Ex-Argent Mortgage VP Sentenced For Fraud, North Country Gazette, Sept. 5, 2008. 100. Other jurisdictions have also investigated Argent for its mortgage origination
practices. On June 22, 2011, a grand jury in Cuyahoga County, Cleveland, indicted nine employees of Argent for their suspected roles in approving fraudulent home loans. The case,
investigated by the Cuyahoga County Mortgage Fraud Task Force, alleges that the employees helped coach mortgage brokers about how to falsify loan documents to misstate the source or existence of down payments, as well as a borrowers income and assets. Argent was Clevelands number one lender in 2004, and originated over 10,000 loans during the time span 2002 through 2005. This was the first time in Ohio, and one of few instances nationwide, that a
mortgage fraud investigation has led to criminal charges against employees of a subprime lender. Mark Gillespie, Former employees of subprime mortgage lender indicted by Cuyahoga County grand jury, The Plain Dealer, June 23, 2011. 101. Indeed, Jacquelyn Fishwick, who worked for more than two years at an Argent
loan processing center near Chicago as an underwriter and account manager, noted that some Argent employees played fast and loose with the rules. She personally saw some stuff [she]
didnt agree with, such as [Argent] account managers remove documents from files and create documents by cutting and pasting them. The Subprime House of Cards, Cleveland Plain Dealer, May 11, 2008.
36
102.
Similarly, Argent was also not diligent about confirming accurate appraisals for Steve Jernigan, a fraud investigator at The
the properties for which it was issuing mortgages.
Argent, said that he once went to check on a subdivision for which Argent had made loans. address on the loans turned out to be in the middle of a cornfield; the appraisals had all been fabricated. The same fake picture had been included in each file. Michael W. Hudson,
Silencing the Whistle-blowers, The Investigative Fund, May 10, 2010. 2. The Collapse of the Certificates Credit Ratings Further Indicates that the Mortgage Loans were not Originated in Adherence to the Stated Underwriting Guidelines.
103.
AAA or its equivalent to non-investment speculative grade, is further evidence of the originators systematic disregard of underwriting guidelines, amplifying that the GSE Certificates were impaired from the start. 104. The GSE Certificates that Fannie Mae and Freddie Mac purchased were originally
assigned credit ratings of AAA or its equivalent, which purportedly reflected the description of the mortgage loan collateral and underwriting practices set forth in the Registration Statements. These ratings were artificially inflated, however, as a result of the very same misrepresentations that the Defendants made to investors in the Prospectus Supplements 105. Barclays provided or caused to be provided loan-level information to the rating
agencies that they relied upon in order to calculate the Certificates assigned ratings, including the borrowers LTV ratio, debt-to-income ratio, owner-occupancy status, and other loan-level information described in aggregation reports in the Prospectus Supplements. Because the
information that Barclays provided or caused to be provided was false, the ratings were inflated and the level of subordination that the rating agencies required for the sale of AAA (or its equivalent) certificates was inadequate to provide investors with the level of protection that those
37
ratings signified.
As a result, the GSEs paid Defendants inflated prices for purported AAA (or
its equivalent) Certificates, unaware that those Certificates actually carried a severe risk of loss and carried inadequate credit enhancement. 106. Since the issuance of the Certificates, the ratings agencies have dramatically
downgraded their ratings to reflect the revelations regarding the true underwriting practices used to originate the mortgage loans, and the true value and credit quality of the mortgage loans. Table 8 details the extent of the downgrades.10 Table 8
Transaction
Tranche
A1 1A1 A1 A1 AV1 A1 1A1 A1
Rating at Issuance (Moodys/S&P/Fitch/DBRS)

Aaa/AAA/AAA/Aaa/AAA/-/AAA Aaa/AAA/AAA/Aaa/AAA/AAA/Aaa/AAA/AAA/AAA Aaa/AAA/AAA/Aaa/AAA/AAA/AAA Aaa/AAA/AAA/AAA
Rating at July 31, 2011 (Moodys/S&P/Fitch/DBRS)

Ba2/BBB/B/Baa3/AAA/A1/AAA/A/B2/B+/CC/B1/BB/CC/C Caa1/CCC/C/Ca/CCC/CC/C Ca/B-/C/C
3.
The Surge in Mortgage Delinquency and Default Further Indicates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines
107.
Applicable ratings are shown in sequential order separated by forward slashes: Moodys/S&P/Fitch/DBRS. A hyphen between forward slashes indicates that the relevant agency did not provide a rating at issuance.
10
38
mortgage loans is a direct consequence of the fact that they were not underwritten in accordance with applicable underwriting guidelines as represented in the Registration Statements. 108. Loan groups that were properly underwritten and contained loans with the
characteristics represented in the Registration Statements would have experienced substantially fewer payment problems and substantially lower percentages of defaults, foreclosures, and delinquencies than occurred here. Table 9 reflects the percentage of loans in the Supporting
Loan Groups that are in default, have been foreclosed upon, or are delinquent as of July 2011. Table 9
Transaction

Group I Group I Group I Group I Group I Group I Group I Group I
Percentage of Delinquent/Defaulted/Foreclosed Loans

40.00 55.40 33.70 36.10 44.50 42.10 53.20 44.50
109.
confirmed systematic underwriting failures by the originators responsible for the mortgage loans across the Securitizations, and the extraordinary drop in credit rating and rise in delinquencies across those Securitizations, all confirm that the mortgage loans in the Supporting Loan Groups, contrary to the representations in the Registration Statements, were not originated in accordance with the stated underwriting guidelines.
39
V.
FANNIE MAES AND FREDDIE MACS PURCHASES OF THE GSE CERTIFICATES AND THE RESULTING DAMAGES 110. In total, between October 28, 2005 and February 28, 2007, Fannie Mae and
Freddie Mac purchased approximately $4.9 billion in residential mortgage-backed securities issued in connection with the Securitizations. purchases of the Certificates.11 Table 10
Settlement Date of Purchase by Freddie Mac
10/28/2005 11/18/2005 11/23/2005 12/28/2005 1/26/2006 2/27/2006 2/28/2007
Table 10 reflects each of Freddie Macs
Transaction
ARSI 2005-W3 FHLT 2005-D AMSI 2005R10 ARSI 2005-W5 CBASS 2006CB1 ARSI 2006-W2 CBASS 2007CB2
Tranche
A1 1A1 A1 A1 AV1 A1 A1
CUSIP
040104NX5 35729PMA5 03072SS22 040104QK0 81375WHF6 040104SG7 1248MBAF2
Initial Unpaid Principal Balance

736,186,000 343,936,000 1,230,491,000 881,201,000 287,298,000 725,306,000 220,801,000
Purchase Price (% of Par)

100 100 100 100 100 100 100
Seller to Freddie Mac

Barclays Capital Barclays Capital Barclays Capital Barclays Capital Barclays Capital Barclays Capital Barclays Capital
111.
Table 11 reflects Fannie Maes purchase of the Certificates: Table 11

Settlement Date of Purchase by Fannie Mae
9/7/2006
Transaction
FHLT 2006-C
Tranche
1A1
CUSIP
35729TAA0

459,746,000

100
Seller to Fannie Mae

Barclays Capital
112.
quality and characteristics of the mortgage loans underlying the GSE Certificates, and the origination and underwriting practices pursuant to which the mortgage loans were originated, which were summarized in such documents, were material to a reasonable investors decision to purchase the GSE Certificates. Purchased securities in Tables 10 and 11 are stated in terms of unpaid principal balance of the relevant Certificates. Purchase prices are stated in terms of percentage of par.
11
40
113.
Registration Statements, including the Prospectuses and Prospectus Supplements, directly caused Fannie Mae and Freddie Mac to suffer hundreds of millions of dollars in damages, including without limitation depreciation in the value of the securities. The mortgage loans underlying
the GSE Certificates experienced defaults and delinquencies at a much higher rate than they would have had the loan originators adhered to the underwriting guidelines set forth in the Registration Statements, and the payments to the trusts were therefore much lower than they would have been had the loans been underwritten as described in the Registration Statements. 114. Fannie Maes and Freddie Macs losses have been much greater than they would
have been if the mortgage loans had the credit quality represented in the Registration Statements. 115. Barclays misstatements and omissions in the Registration Statements regarding
the true characteristics of the loans were the proximate cause of Fannie Maes and Freddie Macs losses relating to their purchase of the GSE Certificates. 116. Barclays misstatements and omissions in the Registration Statements regarding
the true characteristics of the loans were the proximate cause of Fannie Maes and Freddie Macs losses relating to their purchases of the GSE Certificates. Based upon sales of the Certificates
or similar certificates in the secondary market, Barclays proximately caused hundreds of millions of dollars in damages to Fannie Mae and Freddie Mac in an amount to be determined at trial. FIRST CAUSE OF ACTION Violation of Section 11 of the Securities Act of 1933 (Against Defendants Barclays Capital, SABR, and the Individual Defendants) 117. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud.
41
118.
This claim is brought by Plaintiff pursuant to Section 11 of the Securities Act of
1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements. This claim is brought against This claim is
Defendant Barclays Capital with respect to each of the Registration Statements.
also brought against (i) Defendant SABR and (ii) the Individual Defendants, each with respect to the SABR Shelf Registration Statements filed by SABR in connection with the SABR Securitizations. 119. This claim is predicated upon Defendants Barclays Capitals strict liability for
making false and materially misleading statements in each of the Registration Statements for the Securitizations and for omitting facts necessary to make the facts stated therein not misleading. Defendant SABR and the Individual Defendants are strictly liable for making false and materially misleading statements in the SABR Shelf Registration Statements which are applicable to the SABR Securitizations (as specified in Table 1, supra at paragraph 30), and for omitting facts necessary to make the facts stated therein not misleading. 120. Securitization. Defendant Barclays Capital served as the lead or co-lead underwriter in each As the underwriter in each Securitization, Barclays Capital is strictly liable
under Section 11 of the Securities Act for the misstatements and omissions in each Registration Statement. 121. Defendant SABR filed the SABR Shelf Registration Statements under which two
of the eight Securitizations were carried out. As depositor, Defendant SABR is an issuer of the GSE Certificates issued pursuant to the Registration Statements it filed within the meaning of Section 2(a)(4) of the Securities Act, 15 U.S.C. 77(b)(4), and in accordance with Section 11(a), 15 U.S.C. 77k(a). As such, it is liable under Section 11 of the Securities Act for the
42
misstatements and omissions in the SABR Shelf Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005 in connection with the SABR Securitizations. 122. At the time SABR filed the SABR Shelf Registration Statements applicable to the
SABR Securitizations, the Individual Defendants were officers and/or directors of SABR. In addition, the Individual Defendants signed the SABR Shelf Registration Statements and either signed or authorized another to sign on their behalf the amendments to those Registration Statements. As such, the Individual Defendants are liable under Section 11 of the Securities
Act for the misstatements and omissions in the SABR Shelf Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005 in connection with the SABR Securitizations. 123. At the time that they became effective, each Registration Statement contained
material misstatements of fact and omitted information necessary to make the facts stated therein not misleading, as set forth above. The facts misstated or omitted were material to a reasonable investor reviewing the Registration Statements, including to Fannie Mae and Freddie Mac. 124. The untrue statements of material facts and omissions of material fact in the
Registration Statements are set forth above in Section IV and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 125. Fannie Mae and Freddie Mac purchased or otherwise acquired the GSE Fannie Mae and
Certificates pursuant to the false and misleading Registration Statements. Freddie Mac made these purchases in the primary market.
At the time they purchased the GSE
Certificates, Fannie Mae and Freddie Mac did not know of the facts concerning the false and
43
misleading statements and omissions alleged herein, and if the GSEs had known those facts, they would not have purchased the GSE Certificates. 126. Barclays Capital owed to Fannie Mae, Freddie Mac, and other investors a duty to
make a reasonable and diligent investigation of the statements contained in the Registration Statements at the time they became effective to ensure that such statements were true and correct and that there were no omissions of material facts required to be stated in order to make the statements contained therein not misleading. The Individual Defendants owed the same duty with respect to the SABR Shelf Registration Statements they signed, which are applicable to the SABR Securitizations. 127. Barclays Capital and the Individual Defendants did not exercise such due
diligence and failed to conduct a reasonable investigation. In the exercise of reasonable care, these Defendants should have known of the false statements and omissions contained in or omitted from the Registration Statements filed in connection with the Securitizations, as set forth herein. In addition, SABR, though subject to strict liability without regard to whether it performed diligence, also failed to take reasonable steps to ensure the accuracy of the representations in the SABR Shelf Registration Statements. 128. Fannie Mae and Freddie Mac sustained substantial damages as a result of the
misstatements and omissions in the Registration Statements, for which they are entitled to compensation. 129. The time period since July 29, 2011 is tolled for statute of limitations purposes by
virtue of a tolling agreement entered into among the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, Barclays Bank, Barclays Capital, and SABR. This action is brought within
44
three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). 130. By reason of the conduct herein alleged, Barclays Capital, SABR, and the
Individual Defendants are jointly and severally liable for their wrongdoing. SECOND CAUSE OF ACTION Violation of Section 12(a)(2) of the Securities Act of 1933 (Against Barclays Capital and SABR) 131. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 132. This claim is brought by Plaintiff pursuant to Section 12(a)(2) of the Securities
Act of 1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements. 133. Defendant Barclays Capital negligently made false and materially misleading
statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as Prospectuses) for each Securitization. Defendant SABR negligently made false and materially misleading statements in the Prospectuses for the SABR Securitizations effected under the SABR Shelf Registration Statements it filed in connection with the SABR Securitizations. 134. Barclays Capital is prominently identified in the Prospectuses, the primary Barclays Capital offered the Certificates
documents that it used to sell the GSE Certificates.
publicly, including selling to Fannie Mae and Freddie Mac the GSE Certificates, as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. 135. Barclays Capital offered and sold the GSE Certificates to Fannie Mae and Freddie
Mac by means of the Prospectuses, which contained untrue statements of material facts and
45
omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. Barclays Capital reviewed and participated in drafting the Prospectuses. 136. Barclays Capital successfully solicited Fannie Maes and Freddie Macs
purchases of the GSE Certificates. As underwriter, Barclays Capital obtained substantial commissions based upon the amount received from the sale of the Certificates to the public. 137. Barclays Capital offered the GSE Certificates for sale, sold them, and distributed
them by the use of means or instruments of transportation and communication in interstate commerce, including communications between its representatives in New York and representatives of Fannie Mae in the District of Columbia and Freddie Mac in McLean, Virginia. 138. SABR is prominently identified in the Prospectuses for the SABR Securitizations These Prospectuses were the
carried out under the SABR Shelf Registration Statements it filed.
primary documents SABR used to sell Certificates for the SABR Securitizations under the SABR Shelf Registration Statements. SABR offered the Certificates publicly, and actively
solicited their sale, including selling to Fannie Mae and Freddie Mac. SABR was paid a percentage of the total dollar amount of the offering upon completion of the SABR Securitizations effected pursuant to the SABR Shelf Registration Statements. 139. With respect to the SABR Securitizations for which it filed the SABR Shelf
Registration Statements, SABR offered and sold the GSE Certificates to Fannie Mae and Freddie Mac by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. Prospectuses. SABR reviewed and participated in drafting the
46
140.
SABR offered the GSE Certificates for sale by the use of means or instruments of
transportation and communication in interstate commerce. 141. Barclays and SABR actively participated in the solicitation of the GSEs purchase
of the GSE Certificates, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates. 142. Each of the Prospectuses contained material misstatements of fact and omitted
information necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectuses, and were specifically material to Fannie Mae and Freddie Mac. 143. The untrue statements of material facts and omissions of material fact in the
Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 144. SABR and Barclays Capital offered and sold the GSE Certificates offered
pursuant to the Registration Statements directly to Fannie Mae and Freddie Mac, pursuant to the false and misleading Prospectuses. 145. Barclays Capital owed to Fannie Mae and Freddie Mac, as well as to other
investors in these trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. SABR owed the same duty with respect to the Prospectuses for the SABR Securitizations carried out under the SABR Shelf Registration Statements it filed.
47
146.
Barclays Capital and SABR failed to exercise such reasonable care.
These
defendants in the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above. 147. In contrast, Fannie Mae and Freddie Mac did not know, and in the exercise of
reasonable diligence could not have known, of the untruths and omissions contained in the Prospectuses at the time they purchased the GSE Certificates. If the GSEs had known of those
untruths and omissions, they would not have purchased the GSE Certificates. 148. Fannie Mae and Freddie Mac acquired the GSE Certificates in the primary market
their investments in the GSE Certificates and have the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 150. The time period since July 29, 2011 is tolled for statute of limitations purposes by
three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). THIRD CAUSE OF ACTION Violation of Section 15 of the Securities Act of 1933 (Against Barclays Bank and the Individual Defendants) 151. Plaintiff realleges each allegation above as if fully set forth herein, except to the
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152.
This claim is brought under Section 15 of the Securities Act of 1933, 15 U.S.C.
77o, against Barclays Bank and the Individual Defendants for controlling-person liability with regard to the Section 11 and Section 12(a)(2) causes of actions set forth above. 153. The Individual Defendants at all relevant times participated in the operation and
management of SABR, and conducted and participated, directly and indirectly, in the conduct of SABRs business affairs. Defendant Michael Wade was President and Chief Executive Officer of SABR. Defendant John Carroll was Vice President and Chief Financial Officer of SABR.
Defendant Paul Menefee was Vice President and Chief Accounting Officer at SABR. 154. Because of their positions of authority and control as senior officers and directors
of SABR, the Individual Defendants were able to, and in fact did, control the contents of the SABR Shelf Registration Statements, including the related Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 155. Defendant Barclays Bank controlled all aspects of the business of SABR, as
SABR was merely a special purpose entity created for the purpose of acting as a pass-through for the issuance of the Certificates. Upon information and belief, the officers and directors of For example, Defendant
Barclays Bank overlapped with the officers and directors of SABR.
John Carroll was both Vice President and Chief Executive Officer at SABR, and Managing Director at Barclays Bank. 156. Capital. Defendant Barclays Bank also controlled the business operations of Barclays As the sole
Barclays Bank is the corporate parent of Barclays Capital and SABR.
corporate parent of Barclays Capital and SABR, Barclays Bank, upon information and belief, held the voting power and therefore the practical ability to direct and control the actions of
49
Barclays Capital and SABR in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of Barclays Capital and SABR in connection with the issuance and sale of the Certificates. Barclays Bank expanded its share of the residential mortgage-backed securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 157. Defendant Barclays Bank wholly owns Barclays Capital and SABR. Barclays
Bank culpably participated in the violations of Section 11 and 12(a)(2) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as SABR and the issuing trusts to serve as conduits for the mortgage loans. 158. Barclays Bank and the Individual Defendants are controlling persons within the
meaning of Section 15 by virtue of their actual power over, control of, ownership of, and/or directorship of Barclays Capital and SABR at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 159. Fannie Mae and Freddie Mac purchased in the primary market the GSE
Certificates issued pursuant to the Registration Statements, including the Prospectuses and Prospectus Supplements, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements, and were specifically material to Fannie Mae and Freddie Mac.
50
160.
Fannie Mae and Freddie Mac did not know of the misstatements and omissions in Had the GSEs known of those misstatements and omissions, they
the Registration Statements.
would not have purchased the GSE Certificates. 161. Fannie Mae and Freddie Mac have sustained substantial damages as a result of the
misstatements and omissions in the Registration Statements, for which they are entitled to compensation. 162. The time period since July 29, 2011 is tolled for statute of limitations purposes by
three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). FOURTH CAUSE OF ACTION Violation of Section 13.1-522(A)(ii) of the Virginia Code (Against Barclays Capital and SABR) 163. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 164. This claim is brought by Plaintiff pursuant to Section 13.1-522(A)(ii) of the The allegations set forth below in this
Virginia Code and is asserted on behalf of Freddie Mac.
cause of action pertain only to the GSE Certificates issued in connection with the CBASS 2007CB2 Securitization (the CBASS 2007-CB2 Certificates). 165. This claim is predicated upon Barclays Capitals and SABRs negligence in
making materially false and misleading statements in the Prospectus (as supplemented by the Prospectus Supplement, hereinafter referred to in this Section as Prospectus) for the CBASS
51
2007-CB2 Securitization, effected under the Registration Statement filed December 20, 2005 by SABR. 166. Barclays Capital and SABR are prominently identified in the Prospectus for the
CBASS 2007-CB2 Securitization, the primary document used to sell the CBASS 2007-CB2 Certificates. Barclays Capital and SABR offered the Certificates issued in connection with the
CBASS 2007-CB2 Securitization publicly, including selling the CBASS 2007-CB2 Certificates to Freddie Mac, as set forth in the Underwriting section of the Prospectus. 167. Barclays Capital and SABR offered and sold the CBASS 2007-CB2 Certificates
to Freddie Mac by means of a Prospectus, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. Barclays Capital and SABR reviewed and participated in drafting the Prospectus. 168. Barclays Capital and SABR successfully solicited Freddie Macs purchase of the
CBASS 2007-CB2 Certificates. As underwriter, Barclays Capital obtained a substantial commission based upon the amount received from the sale of the Certificates issued in connection with the CBASS 2007-CB2 Securitization to the public. SABR was paid a
percentage of the total dollar amount of the offering upon completion of the CBASS 2007-CB2 Securitization. 169. Barclays Capital and SABR offered the GSE Certificates for sale, sold them, and
distributed them to Freddie Mac in the State of Virginia. 170. Barclays Capital and SABR actively participated in the solicitation of Freddie
Macs purchase of the CBASS 2007-CB2 Certificates, and did so in order to benefit themselves.
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Such solicitation included assisting in preparing a Registration Statement, filing the Registration Statement, and assisting in marketing the CBASS 2007-CB2 Certificates. 171. The Prospectus contained material misstatements of fact and omitted information
necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectus, and were specifically material to Freddie Mac. 172. The untrue statements of material facts and omissions of material fact in the
Registration Statement, which include the Prospectus, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 173. Barclays Capital and SABR offered and sold the CBASS 2007-CB2 Certificates
offered pursuant to the Registration Statement directly to Freddie Mac, pursuant to the false and misleading Prospectus. 174. Barclays Capital owed to Freddie Mac, as well as to other investors, a duty to
make a reasonable and diligent investigation of the statements contained in the Prospectus, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. SABR owed the same duty with respect to the Prospectus for the CBASS 2007-CB2 Securitization, effected under the Registration Statement filed December 20, 2005. 175. Barclays Capital and SABR failed to exercise such reasonable care. These
defendants in the exercise of reasonable care should have known that the Prospectus contained untrue statements of material facts and omissions of material facts at the time of the CBASS 2007-CB2 Securitization as set forth above.
53
176.
In contrast, Freddie Mac did not know, and in the exercise of reasonable diligence
could not have known, of the untruths and omissions contained in the Prospectus at the time it purchased the CBASS 2007-CB2 Certificates. If Freddie Mac had known of those untruths and omissions, it would not have purchased the CBASS 2007-CB2 Certificates. 177. Freddie Mac sustained substantial damages in connection with its investment in
the CBASS 2007-CB2 Certificates and has the right to rescind and recover the consideration paid for the CBASS 2007-CB2 Certificates, with interest thereon. 178. The time period since July 29, 2011 is tolled for statute of limitations purposes by
three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). FIFTH CAUSE OF ACTION Violation of Section 13.1-522(C) of the Virginia Code (Against Barclays Bank and the Individual Defendants) 179. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 180. This claim is brought by Plaintiff under Section 13.1-522(C) of the Virginia Code The allegations set forth below in this cause of action
and is asserted on behalf of Freddie Mac.
pertain only to the CBASS 2007-CB2 Certificates. This claim is brought against Barclays Bank and the Individual Defendants for controlling-person liability with regard to the Fourth Cause of Action set forth above. 181. The Individual Defendants at all relevant times participated in the operation and
management of SABR, and conducted and participated, directly and indirectly, in the conduct of
54
SABRs business affairs. Defendant Michael Wade was President and Chief Executive Officer of SABR. Defendant John Carroll was Vice President and Chief Financial Officer of SABR.
Defendant Paul Menefee was Vice President and Chief Accounting Officer at SABR. 182. Because of their positions of authority and control as senior officers and directors
of SABR, the Individual Defendants were able to, and in fact did, control the contents of the Registration Statement filed in connection with the CBASS 2007-CB2 Securitization, including the related Prospectus Supplement, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 183. Defendant Barclays Bank controlled all aspects of the business of SABR, as
SABR was merely a special purpose entity created for the purpose of acting as a pass-through for the issuance of the Certificates. Upon information and belief, the officers and directors of For example, Defendant
Barclays Bank overlapped with the officers and directors of SABR.
John Carroll was both Vice President and Chief Executive Officer at SABR, and Managing Director at Barclays Bank. 184. Capital. Defendant Barclays Bank also controlled the business operations of Barclays As the sole
Barclays Bank is the corporate parent of Barclays Capital and SABR.
corporate parent of Barclays Capital and SABR, Barclays Bank, upon information and belief, held the voting power and therefore the practical ability to direct and control the actions of Barclays Capital and SABR in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of Barclays Capital and SABR in connection with the issuance and sale of the CBASS 2007-BC2 Certificates. Barclays Bank expanded its share of
the residential mortgage-backed securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue
55
statements of material facts and omissions of material facts in the Registration Statement filed in connection with the CBASS 2007-CB2 Securitization. 185. Defendant Barclays Bank wholly owns Barclays Capital and SABR. Barclays
Bank culpably participated in the violation of Section 13.1-522(A)(ii) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statement filed in connection with the CBASS 2007-CB2 Securitization and established special-purpose financial entities such as SABR and the issuing trust to serve as conduits for the mortgage loans. 186. Barclays Bank and the Individual Defendants are controlling persons within the
meaning of Section 13.1-522(C) by virtue of their actual power over, control of, ownership of, and/or directorship of Barclays Capital and SABR at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statement filed in connection with the CBASS 2007-CB2 Securitization. 187. Freddie Mac purchased the CBASS 2007-CB2 Certificates issued pursuant to the
Registration Statement filed December 20, 2005 by SABR, including the corresponding Prospectus and Prospectus Supplement, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing
the Registration Statements, and were specifically material to Freddie Mac. 188. Freddie Mac did not know of the misstatements and omissions in the Registration
Statement filed in connection with the CBASS 2007-CB2 Securitization. Had Freddie Mac known of those misstatements and omissions, it would not have purchased the CBASS 2007CB2 Certificates.
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189.
Freddie Mac has sustained substantial damages as a result of the misstatements
and omissions in the Registration Statement filed in connection with the CBASS 2007-CB2 Securitization, for which it is entitled to compensation. 190. The time period since July 29, 2011 is tolled for statute of limitations purposes by
three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). SIXTH CAUSE OF ACTION Violation of Section 31-5606.05(a)(1)(B) of the District of Columbia Code (Against Barclays Capital) 191. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 192. This claim is brought by Plaintiff pursuant to Section 31-5606.05(a)(1)(B) of the The allegations set forth
District of Columbia Code and is asserted on behalf of Fannie Mae.
below in this cause of action pertain only to the GSE Certificates issued in connection with the FHLT 2006-C Securitization (the FHLT 2006-C Certificates). 193. This claim is predicated upon Barclays Capitals negligence in making materially
false and misleading statements in the Prospectus (as supplemented by the Prospectus Supplement, hereinafter referred to in this Section as Prospectus) for the FHLT 2006-C Securitization that Barclays Capital sold. 194. Barclays Capital is prominently identified in the Prospectus for the FHLT 2006-C
Securitization, the primary document used to sell the FHLT 2006-C Certificates. Barclays Capital offered the Certificates issued in connection with the FHLT 2006-C Securitization
57
publicly, including selling the FHLT 2006-C Certificates to Fannie Mae, as set forth in the Method of Distribution section of the Prospectus. 195. Barclays Capital offered and sold the FHLT 2006-C Certificates to Fannie Mae by
means of a Prospectus, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. Prospectus. 196. C Certificates. Barclays Capital successfully solicited Fannie Maes purchase of the FHLT 2006As underwriter, Barclays Capital obtained a substantial commission based upon Barclays Capital reviewed and participated in drafting the
the amount received from the sale of the Certificates issued in connection with the FHLT 2006-C Securitization to the public. 197. Barclays Capital offered the FHLT 2006-C Securitization Certificates for sale,
sold them, and distributed them to Fannie Mae in the District of Columbia. 198. Barclays Capital actively participated in the solicitation of Fannie Maes purchase Such solicitation
of the FHLT 2006-C Certificates, and did so in order to benefit itself.
included assisting in preparing a Registration Statement, filing the Registration Statement, and assisting in marketing the FHLT 2006-C Certificates. 199. The Prospectus contained material misstatements of fact and omitted information
necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectus, and were specifically material to Fannie Mae. 200. The untrue statements of material facts and omissions of material fact in the
Registration Statement, which include the Prospectus, are set forth above in Section IV, and
58
pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 201. Barclays Capital offered and sold the FHLT 2006-C Certificates pursuant to the
Registration Statement dated March 17, 2006 directly to Fannie Mae, pursuant to the materially false, misleading, and incomplete Prospectus. 202. Barclays Capital owed to Fannie Mae, as well as to other investors, a duty to
make a reasonable and diligent investigation of the statements contained in the Prospectus, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. 203. Barclays Capital failed to exercise such reasonable care. Barclays Capital in the
exercise of reasonable care should have known that the Prospectus contained untrue statements of material facts and omissions of material facts at the time of the Securitization as set forth above. 204. In contrast, Fannie Mae did not know, and in the exercise of reasonable diligence
could not have known, of the untruths and omissions contained in the Prospectus at the time it purchased the FHLT 2006-C Certificates. If Fannie Mae had known of those untruths and omissions, it would not have purchased the FHLT 2006-C Certificates. 205. Fannie Mae sustained substantial damages in connection with its investment in
the FHLT 2006-C Certificates and has the right to rescind and recover the consideration paid for the FHLT 2006-C Certificates, with interest thereon. 206. The time period since July 29, 2011 is tolled for statute of limitations purposes by
59
three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). SEVENTH CAUSE OF ACTION Violation of Section 31-5606.05(c) of the District of Columbia Code (Against Barclays Bank) 207. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 208. This claim is brought under Section 31-5606.05(c) of the District of Columbia
Code and is asserted on behalf of Fannie Mae. The allegations set forth below in this cause of action pertain only to the FHLT 2006-C Certificates. This claim is brought against Barclays
Bank for controlling-person liability with regard to the Sixth Cause of Action set forth above. 209. Defendant Barclays Bank controlled the business operations of Barclays Capital. As the sole corporate parent of
Barclays Bank is the corporate parent of Barclays Capital.
Barclays Capital, Barclays Bank, upon information and belief, held the voting power and therefore the practical ability to direct and control the actions of Barclays Capital in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of Barclays Capital in connection with the issuance and sale of the FHLT 2006-C Certificates. Barclays Bank expanded its share of the residential mortgage-backed securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans
contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statement filed in connection with the FHLT 2006-C Securitization. 210. Defendant Barclays Bank wholly owns Barclays Capital and SABR. Barclays It
Bank culpably participated in the violation of Section 31-5606.05(a)(1)(B) set forth above. oversaw the actions of its subsidiary Barclays Capital and allowed it to misrepresent the
60
mortgage loans characteristics in the Registration Statement filed in connection with the FHLT 2006-C Securitization. 211. Barclays Bank is a controlling person within the meaning of Section 31-
5606.05(c) by virtue of its actual power over, control of, ownership of, and/or directorship of Barclays Capital at the time of the wrongs alleged herein and as set forth herein, including its control over the content of the Registration Statement filed in connection with the FHLT 2006-C Securitization. 212. Fannie Mae purchased the FHLT 2006-C Certificates issued pursuant to the
Registration Statement, including the Prospectus and Prospectus Supplement, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a
reasonable investor reviewing the Registration Statements, and were specifically material to Fannie Mae. 213. Fannie Mae did not know of the misstatements and omissions in the Registration Had Fannie Mae known
Statement filed in connection with the FHLT 2006-C Securitization.
of those misstatements and omissions, it would not have purchased the FHLT 2006-C Certificates. 214. Fannie Mae has sustained substantial damages as a result of the misstatements and
omissions in the Registration Statement filed in connection with the FHLT 2006-C Securitization, for which it is entitled to compensation. 215. The time period since July 29, 2011 is tolled for statute of limitations purposes by
61
three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). EIGHTH CAUSE OF ACTION Common Law Negligent Misrepresentation (Against SABR and Barclays Capital) 216. 217. Plaintiff realleges each allegation above as if fully set forth herein. This is a claim for common law negligent misrepresentation against Defendants
SABR and Barclays Capital. 218. Between October 28, 2005 and February 28, 2007, Barclays Capital and SABR Because SABR owned and then
sold the GSE Certificates to the GSEs as described above.
conveyed the underlying mortgage loans that collateralized the Securitizations for which it served as depositor, SABR had unique, exclusive, and special knowledge about the mortgage loans in the Securitizations through its possession of the loan files and other documentation. 219. Likewise, as underwriter for the Securitizations, Barclays Capital was obligated
toand had the opportunity toperform sufficient due diligence to ensure that the Registration Statements for those Securitizations, including without limitation the corresponding Prospectus Supplements, did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. As a result of this privileged position as underwriterwhich gave it access to loan file information and obligated it to perform adequate due diligence to ensure the accuracy of the Registration StatementsBarclays Capital had unique, exclusive, and special knowledge about the underlying mortgage loans in the Securitizations. 220. The GSEs, like other investors, had no access to borrower loan files prior to the Accordingly, when
closing of the Securitizations and their purchase of the Certificates.
62
determining whether to purchase the GSE Certificates, the GSEs could not evaluate the underwriting quality or the servicing practices of the mortgage loans in the Securitizations on a loan-by-loan basis. The GSEs therefore reasonably relied on SABRs and Barclays Capitals
knowledge and their express representations made prior to the closing of the Securitizations regarding the underlying mortgage loans. 221. SABR and Barclays Capital were aware that the GSEs reasonably relied on
SABRs and Barclays Capitals reputations and unique, exclusive, and special expertise and experience, as well as their express representations made prior to the closing of the Securitizations, and that the GSEs depended upon these Defendants for complete, accurate, and timely information. The standards under which the underlying mortgage loans were actually
originated were known to these Defendants and were not known, and could not be determined, by the GSEs prior to the closing of the Securitizations. In purchasing the GSE Certificates from SABR and Barclays Capital, the GSEs relied on their special relationship with those Defendants, and the purchases were made, in part, in reliance on that relationship. 222. Based upon their unique, exclusive, and special knowledge and expertise about
the loans held by the trusts in the Securitizations, SABR and Barclays Capital had a duty to provide the GSEs complete, accurate, and timely information regarding the mortgage loans and the Securitizations. SABR and Barclays Capital breached their duty to provide such
information to the GSEs by instead making to the GSEs untrue statements of material facts in the Securitizations, or otherwise misrepresenting to the GSEs material facts about the Securitizations. The misrepresentations are set forth in Section IV above, and include
misrepresentations as to the accuracy of the represented credit ratings, compliance with underwriting guidelines for the mortgage loans, and the accuracy of the owner-occupancy
63
statistics and the loan-to-value ratios applicable to the Securitizations, as disclosed in the term sheets and Prospectus Supplements. 223. In addition, having made actual representations about the underlying collateral in
the Securitizations and the facts bearing on the riskiness of the Certificates, SABR and Barclays Capital had a duty to correct misimpressions left by their statements, including with respect to any half truths. The GSEs were entitled to rely upon SABRs and Barclays Capitals
representations about the Securitizations, and these defendants failed to correct in a timely manner any of their misstatements or half truths, including misrepresentations as to compliance with underwriting guidelines for the mortgage loans. 224. Fannie Mae and Freddie Mac purchased the GSE Certificates based upon the
representations by SABR as the depositor in the SABR Securitizations and Barclays Capital as lead and selling underwriter in all of the Securitizations. The GSEs received term sheets
containing critical data as to the Securitizations, including with respect to anticipated credit ratings by the credit rating agencies, loan-to-value and combined loan-to-value ratios for the underlying collateral, and owner occupancy statistics, which term sheets were delivered, upon information and belief, by Barclays Capital. This data was subsequently incorporated into
Prospectus Supplements that were received by the GSEs upon the close of each Securitization. 225. The GSEs relied upon the accuracy of the data transmitted to them and In particular, the GSEs relied upon the
subsequently reflected in the Prospectus Supplements.
credit ratings that the credit rating agencies indicated they would bestow on the Certificates based on the information provided by Barclays Capital relating to the collateral quality of the underlying loans and the structure of the Securitization. These credit ratings represented a determination by the credit rating agencies that the GSE Certificates were AAA quality (or its
64
equivalent)meaning the Certificates had an extremely strong capacity to meet the payment obligations described in the respective PSAs. 226. Detailed information about the underlying collateral and structure of each
Securitization was provided or caused to be provided to the credit rating agencies by Barclays Capital and/or the sponsor. The credit rating agencies based their ratings on the information provided to them, and the agencies anticipated ratings of the Certificates were dependent on the accuracy of that information. The GSEs relied on the accuracy of the anticipated credit ratings
and the actual credit ratings assigned to the Certificates by the credit rating agencies, and upon the accuracy of the representations in the term sheets and Prospectus Supplements. 227. In addition, the GSEs relied on the fact that the originators of the mortgage loans
in the Securitizations had acted in conformity with their underwriting guidelines, which were described in the Prospectus Supplements. Compliance with underwriting guidelines was a
precondition to the GSEs purchase of the GSE Certificates in that the GSEs decision to purchase the Certificates was directly premised on their reasonable belief that the originators complied with applicable underwriting guidelines and standards. 228. In purchasing the GSE Certificates, the GSEs justifiably relied on SABRs and
Barclays Capitals false representations and omissions of material fact detailed above, including the misstatements and omissions in the term sheets about the underlying collateral, which were reflected in the Prospectus Supplements. 229. But for the above misrepresentations and omissions, the GSEs would not have
purchased or acquired the Certificates as they ultimately did, because those representations and omissions were material to their decision to acquire the GSE Certificates, as described above.
65
230.
The GSEs were damaged in an amount to be determined at trial as a direct,
proximate, and foreseeable result of SABRs and Barclays Capitals misrepresentations, including any half truths. 231. The time period since July 29, 2011 is tolled for statute of limitations purposes by
three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). PRAYER FOR RELIEF WHEREFORE Plaintiff prays for relief as follows: 232. An award in favor of Plaintiff against all Defendants, jointly and severally, for all
damages sustained as a result of Defendants wrongdoing, in an amount to be proven at trial, but including: a. Rescission and recovery of the consideration paid for the GSE
Certificates, with interest thereon; b. Each GSEs monetary losses, including any diminution in value of the
GSE Certificates, as well as lost principal and lost interest payments thereon; c. d. e. Attorneys fees and costs; Prejudgment interest at the maximum legal rate; and Such other and further relief as the Court may deem just and proper.
66
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK FEDERAL HOUSING FINANCE AGENCY, AS CONSERVATOR FOR THE FEDERAL NATIONAL MORTGAGE ASSOCIATION AND THE FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff, -againstBANK OF AMERICA CORPORATION; BANK OF AMERICA, NATIONAL ASSOCIATION; MERRILL LYNCH, PIERCE, FENNER & SMITH, INC. (f/k/a BANC OF AMERICA SECURITIES LLC); ASSET BACKED FUNDING CORPORATION; BANC OF AMERICA MORTGAGE SECURITIES, INC.; BANC OF AMERICA FUNDING CORPORATION; GEORGE C. CARP; ROBERT CARUSO; GEORGE E. ELLISON; ADAM D. GLASSNER; DANIEL B. GOODWIN; JULIANA JOHNSON; AASHISH KAMAT; MICHAEL J. KULA; JAMES H. LUTHER; WILLIAM L. MAXWELL; MARK I. RYAN; AND ANTOINE SCHETRITT, Defendants.
___ CIV. ___ (___)
TABLE OF CONTENTS Page NATURE OF ACTION ...................................................................................................................1 PARTIES .........................................................................................................................................6 The Plaintiff and the GSEs...................................................................................................6 The Defendants ....................................................................................................................7 The Non-Party Originators ................................................................................................10 JURISDICTION AND VENUE ....................................................................................................11 FACTUAL ALLEGATIONS ........................................................................................................12 I. THE SECURITIZATIONS................................................................................................12 A. B. C. Residential Mortgage-Backed Securitizations In General .....................................12 The Securitizations At Issue In This Case .............................................................13 The Securitization Process .....................................................................................15 1. 2. II. BOA National Groups Mortgage Loans in Special Purpose Trusts ..........15 The Trusts Issue Securities Backed by the Loans ......................................16
THE DEFENDANTS PARTICIPATION IN THE SECURITIZATION PROCESS ..........................................................................................................................20 A. The Role of Each of the Defendants ......................................................................20 1. 2. 3. 4. 5. 6. 7. BOA National ............................................................................................20 ABF Corp. ..................................................................................................22 BOA Mortgage...........................................................................................22 BOA Funding .............................................................................................23 MLPF&S, As Successor-in-Interest to BOA Securities ............................24 BOA Corporation .......................................................................................24 The Individual Defendants .........................................................................25
B. III.
The Defendants Failure To Conduct Proper Due Diligence.................................27
THE REGISTRATION STATEMENTS AND THE PROSPECTUS SUPPLEMENTS................................................................................................................29 A. B. C. D. Compliance With Underwriting Guidelines ..........................................................29 Statements Regarding Occupancy Status of Borrower ..........................................31 Statements Regarding Loan-to-Value Ratios.........................................................33 Statements Regarding Credit Ratings ....................................................................36
IV.
THE FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS ............................................................................38 A. The Statistical Data Provided in the Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False ....................................38 1. 2. B. Owner Occupancy Data Was Materially False ..........................................39 Loan-to-Value Data Was Materially False ................................................41
The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines .........................................................45 1. Government Investigations and Private Litigants Have Confirmed That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines .........45 The Collapse of the Certificates Credit Ratings Further Indicates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines .................................................................51 The Surge in Mortgage Delinquency and Default Further Demonstrates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines ....................................53
2.
3.
V.
FIRST CAUSE OF ACTION ........................................................................................................57 SECOND CAUSE OF ACTION ...................................................................................................61 THIRD CAUSE OF ACTION .......................................................................................................65 FOURTH CAUSE OF ACTION ...................................................................................................68
ii
FIFTH CAUSE OF ACTION ........................................................................................................72 SIXTH CAUSE OF ACTION .......................................................................................................75 SEVENTH CAUSE OF ACTION .................................................................................................79 EIGHTH CAUSE OF ACTION ....................................................................................................83 PRAYER FOR RELIEF ................................................................................................................87 JURY TRIAL DEMANDED .........................................................................................................88
iii
Plaintiff Federal Housing Finance Agency (FHFA), as conservator of The Federal National Mortgage Association (Fannie Mae) and The Federal Home Loan Mortgage Corporation (Freddie Mac), by its attorneys, Quinn Emanuel Urquhart & Sullivan, LLP, for its Complaint herein against Bank of America Corporation (BOA Corp.); Bank of America, National Association (BOA National); Merrill Lynch, Pierce, Fenner & Smith, Inc. (MLPF&S), as successor-in-interest to Banc of America Securities, LLP (BOA Securities); Asset Backed Funding Corporation (ABF Corp.); Banc of America Mortgage Securities, Inc. (BOA Mortgage); Banc of America Funding Corporation (BOA Funding) (collectively, BOA); George C. Carp; Robert Caruso; George E. Ellison; Adam D. Glassner; Daniel B. Goodwin; Juliana Johnson; Aashish Kamat; Michael J. Kula; William L. Maxwell; Mark I. Ryan; James H. Luther; and Antoine Schetritt (the Individual Defendants) (together with BOA, the Defendants) alleges as follows: NATURE OF ACTION 1. This action arises out of Defendants actionable conduct in connection with the
offer and sale of certain residential mortgage-backed securities to Fannie Mae and Freddie Mac (collectively, the Government Sponsored Enterprises or GSEs). These securities were sold pursuant to registration statements, including prospectuses and prospectus supplements that formed part of those registration statements, which contained materially false or misleading statements and omissions. Defendants falsely represented that the underlying mortgage loans complied with certain underwriting guidelines and standards, including representations that significantly overstated the ability of the borrowers to repay their mortgage loans. These representations were material to the GSEs, as reasonable investors, and their falsity violates Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77a et seq., Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, Sections 31-5606.05(a)(1)(B) and 311
5606.05(c) of the District of Columbia Code, and constitutes common law negligent misrepresentation. 2. Between September 30, 2005 and November 5, 2007, Fannie Mae and Freddie
Mac purchased over $6 billion in residential mortgage-backed securities (the GSE Certificates) issued in connection with 23 BOA-sponsored and/or BOA-underwritten securitizations.1 The GSE Certificates purchased by Freddie Mac, along with date and amount of the purchases, are listed below in Table 10. The GSE Certificates purchased by Fannie Mae, along with the date and amount of the purchases, are listed below in Table 11. The 23 securitizations at issue are: i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. xii. xiii.
1
ABFC Trust, Series 2005-WMC1 (ABFC 2005-WMC1); ABFC Trust, Series 2006-HE1 (ABFC 2006-HE1); ABFC Trust, Series 2006-OPT1 (ABFC 2006-OPT1); ABFC Trust, Series 2006-OPT2 (ABFC 2006-OPT2); ABFC Trust, Series 2006-OPT3 (ABFC 2006-OPT3); ABFC Trust, Series 2007-WMC1 (ABFC 2007-WMC1); Banc of America Funding Trust, Series 2006-G (BAFC 2006-G); Banc of America Funding Trust, Series 2006-H (BAFC 2006-H); Banc of America Funding Trust, Series 2007-A (BAFC 2007-A); Banc of America Funding Trust, Series 2007-C (BAFC 2007-C); Banc of America Alternative Loan Trust, Series 2005-10 (BOAA 2005-10); Banc of America Alternative Loan Trust, Series 2005-11 (BOAA 2005-11); Banc of America Alternative Loan Trust, Series 2005-12 (BOAA 2005-12);
For purposes of this Complaint, the securities issued under the Registration Statements (as defined in note 2 below) are referred to as Certificates, while the particular Certificates that Fannie Mae and Freddie Mac purchased are referred to as the GSE Certificates. Holders of Certificates are referred to as Certificateholders. 2
xiv. xv. xvi. xvii.
Banc of America Alternative Loan Trust, Series 2006-1 (BOAA 2006-1); Banc of America Alternative Loan Trust, Series 2006-2 (BOAA 2006-2); Banc of America Alternative Loan Trust, Series 2006-3 (BOAA 2006-3); NationStar Home Equity Loan Asset-Backed Certificates, Series 2007-C (NSTR 2007-C); Option One Mortgage Loan Trust Asset-Backed Certificates, Series 2005-5 (OOMLT 2005-5); Option One Mortgage Loan Asset-Backed Certificates, Series 2007-2 (OOMLT 2007-2); Option One Mortgage Loan Trust Asset-Backed Certificates, Series 2007-6 (OOMLT 2007-6); Option One Mortgage Loan Trust Asset-Backed Certificates, Series 2007-FXD1 (OOMLT 2007-FXD1); Option One Mortgage Loan Trust Asset-Backed Certificates, Series 2007-HL1 (OOMLT 2007-HL1); SunTrust Alternative Loan Trust, Series 2005-1F (STALT 2005-1F);
xviii.
xix.
xx.
xxi.
xxii.
xxiii.
(collectively, the Securitizations). 3. The Certificates were offered for sale pursuant to one of nine shelf registration
statements (the Shelf Registration Statements) filed with the Securities and Exchange Commission (the SEC). Defendants ABF Corp., BOA Mortgage, and BOA Funding filed six Shelf Registration Statements that pertained to seventeen of the Securitizations in this action. These six Shelf Registration Statements, and the amendments thereto, were signed by or on behalf of the Individual Defendants. With respect to all of the Securitizations, BOA Securities was the lead underwriter and the underwriter who sold the Certificates to the GSEs.
4.
For each Securitization, a prospectus (Prospectus) and prospectus supplement
credit quality of the mortgage loans underlying the Securitizations, the creditworthiness of the borrowers of those underlying mortgage loans, and the origination and underwriting practices used to make and approve the loans. Such statements were material to a reasonable investors decision to invest in mortgage-backed securities by purchasing the Certificates. Unbeknownst to Fannie Mae and Freddie Mac, these statements were materially false, as significant percentages of the underlying mortgage loans were not originated in accordance with the represented underwriting standards and origination practices and had materially poorer credit quality than what was represented in the Registration Statements. 6. The Registration Statements also contained statistical summaries of the groups of
mortgage loans in each Securitization, such as the percentage of loans secured by owneroccupied properties and the percentage of the loan groups aggregate principal balance with loan-to-value ratios within specified ranges. This information was also material to reasonable investors. However, a loan level analysis of a sample of loans for each Securitization a review that encompassed thousands of mortgages across all of the Securitizations has revealed that these statistics were also false and omitted material facts.
7.
For example, the percentage of owner-occupied properties is a material risk factor
to the purchasers of Certificates, such as Fannie Mae and Freddie Mac, since a borrower who lives in mortgaged property is generally less likely to stop paying his or her mortgage and more likely to take better care of the property. The loan level review reveals that the true percentage of owner-occupied properties for the loans supporting the GSE Certificates was materially lower than what was stated in the Prospectus Supplements. Likewise, the Prospectus Supplements misrepresented other material factors, including the true value of the mortgaged properties relative to the amount of the underlying loans. 8. Defendant BOA Securities (an underwriter) is directly responsible for the
misstatements and omissions of material fact contained in the Registration Statements because it prepared these documents to market and sell the Certificates to Fannie Mae and Freddie Mac. Defendants ABF Corp. (a depositor), BOA Mortgage (a depositor), BOA Funding (a depositor), and the Individual Defendants are also directly responsible for the misstatements and omissions of material fact contained in the Registration Statements filed by ABF Corp., BOA Mortgage, and BOA Funding because they prepared, signed, filed and/or used these documents to market and sell the Certificates to Fannie Mae and Freddie Mac. 9. Defendants BOA National, BOA Corp., and the Individual Defendants are also
responsible for the misstatements and omissions of material fact contained in the Registration Statements by virtue of their direction and control over BOA Securities and Defendants ABF Corp., BOA Mortgage, and BOA Funding. BOA Corp. directly participated in and exercised dominion and control over the business operations of BOA Securities and Defendants ABF Corp., BOA Mortgage, and BOA Funding. BOA National (the sponsor) and the Individual
Defendants directly participated in and exercised dominion and control over the business operations of Defendants ABF Corp., BOA Mortgage, and BOA Funding. 10. Fannie Mae and Freddie Mac purchased over $6 billion of the Certificates
pursuant to the Registration Statements filed with the SEC. These documents contained misstatements and omissions of material facts concerning the quality of the underlying mortgage loans, the creditworthiness of the borrowers, and the practices used to originate such loans. As a result of Defendants misstatements and omissions of material fact, Fannie Mae and Freddie Mac have suffered substantial losses as the value of their holdings has significantly deteriorated. 11. FHFA, as Conservator of Fannie Mae and Freddie Mac, brings this action against
the Defendants for violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77k, 77l(a)(2), 77o, Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, Sections 31-5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, and for common law negligent misrepresentation. PARTIES The Plaintiff and the GSEs 12. The Federal Housing Finance Agency is a federal agency located at 1700 G
Street, NW in Washington, D.C. FHFA was created on July 30, 2008 pursuant to the Housing and Economic Recovery Act of 2008 (HERA), Pub. L. No. 110-289, 122 Stat. 2654 (2008) (codified at 12 U.S.C. 4617), to oversee Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. On September 6, 2008, under HERA, the Director of FHFA placed Fannie Mae and Freddie Mac into conservatorship and appointed FHFA as conservator. In that capacity, FHFA has the authority to exercise all rights and remedies of the GSEs, including but not limited to, the authority to bring suits on behalf of and/or for the benefit of Fannie Mae and Freddie Mac. 12 U.S.C. 4617(b)(2). 6
13.
Fannie Mae and Freddie Mac are government-sponsored enterprises chartered by
Congress with a mission to provide liquidity, stability, and affordability to the United States housing and mortgage markets. As part of this mission, Fannie Mae and Freddie Mac invested in residential mortgage-backed securities. Fannie Mae is located at 3900 Wisconsin Avenue, NW in Washington, D.C. Freddie Mac is located at 8200 Jones Branch Drive in McLean, Virginia. The Defendants 14. Defendant BOA Corp. purports to be one of the worlds largest financial
institutions and delivers banking and financial services throughout the world. BOA Corp. is a Delaware corporation principally located in Charlotte, North Carolina. It maintains offices and conducts substantial business operations at the Bank of America Tower at One Bryant Park, New York, New York. BOA Corp. is the sole parent corporation of each of the other BOA Defendants: BOA National, BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding. 15. Defendant BOA National is one of the nations largest banks and a wholly-owned
subsidiary of BOA Corp. BOA National is a Delaware corporation principally located in Charlotte, North Carolina, with offices and substantial business operations at the Bank of America Tower at One Bryant Park, New York, New York. BOA National was the sponsor of sixteen of the Securitizations. 16. Defendant MLPF&S is a Delaware corporation and an SEC-registered broker-
dealer. It principally located at 4 World Financial Center, 250 Vesey Street, New York, New York and is a wholly-owned subsidiary of BOA Corp. MLPF&S is liable as successor-ininterest to BOA Securities, which was the lead underwriter for each of the Securitizations and intimately involved in the offerings. Fannie Mae and Freddie Mac also purchased all of the GSE Certificates from BOA Securities in its capacity as underwriter of the Securitizations. On November 1, 2010, BOA Securities at the time a Delaware Corporation and wholly-owned 7
subsidiary of BOA Corp. was merged with and into MLPF&S. This merger followed BOA Corp.s acquisition in January 2009 of MLPF&S as part of its acquisition of Merrill Lynch & Co. Defendant MLPF&S is liable as a matter of law as successor to BOA Securities by virtue of its status as the surviving entity in its merger with BOA Securities. 17. Defendant ABF Corp. is a Delaware corporation with its principal place of
business in Charlotte, North Carolina. ABF Corp. is a direct subsidiary of BOA National and an indirect wholly-owned subsidiary of BOA Corp. BOA Funding was the depositor for six of the Securitizations. BOA Funding, as depositor, was also responsible for preparing and filing reports required under the Securities Exchange Act of 1934. 18. Defendant BOA Mortgage is a Delaware corporation with its principal place of
business in Charlotte, North Carolina and offices at the Bank of America Tower at One Bryant Park, New York, New York. BOA Mortgage is a direct subsidiary of BOA National and an indirect wholly-owned subsidiary of BOA Corp. BOA Mortgage was the depositor for six of the Securitizations. BOA Mortgage, as depositor, was also responsible for preparing and filing reports required under the Securities Exchange Act of 1934. 19. Defendant BOA Funding is a Delaware corporation with its principal place of
business in Charlotte, North Carolina and offices at the Bank of America Tower at One Bryant Park, New York, New York. BOA Funding is a direct subsidiary of BOA National and an indirect wholly-owned subsidiary of BOA Corp. BOA Funding was the depositor for five of the Securitizations. BOA Funding, as depositor, was also responsible for preparing and filing reports required under the Securities Exchange Act of 1934. 20. Defendant George C. Carp is an individual residing in Charlotte, North Carolina.
Mr. Carp was Treasurer, Chief Accounting Officer, and Chief Financial Officer of ABF Corp.
and BOA Funding. Mr. Carp was also a Managing Director and Capital Markets Finance Executive of BOA Corp. Mr. Carp signed four of the Shelf Registration Statements and any amendment thereto. 21. Defendant Robert Caruso is an individual residing in New York, New York. Mr.
Caruso was a Director of BOA Mortgage. Mr. Caruso was also a Senior Vice President at BOA National. Mr. Caruso signed two of the Shelf Registration Statements and any amendment thereto. 22. Defendant George E. Ellison is an individual residing in Charlotte, North
Carolina. Mr. Ellison was a Director of ABF Corp. and BOA Funding. Mr. Ellison was also Managing Director of the Global Structured Finance Division at BOA Securities. Mr. Ellison signed four of the Shelf Registration Statements and any amendment thereto. 23. Defendant Adam D. Glassner is an individual residing in Charlotte, North
Carolina. Mr. Glassner was President, Chief Executive Officer, and Chairman of the Board of BOA Mortgage. Mr. Glassner was also a Managing Director at BOA Securities. Mr. Glassner signed the amendment to one of the Shelf Registration Statements. 24. Defendant Daniel B. Goodwin is an individual residing in New Jersey. Defendant
Daniel B. Goodwin was President and Chief Executive Officer of ABF Corp. Mr. Goodwin was also a Managing Director at BOA Securities. Mr. Goodwin signed two of the Shelf Registration Statements and any amendment thereto. 25. Defendant Juliana Johnson is an individual residing in Charlotte, North Carolina.
Ms. Johnson was a Director of BOA Mortgage. Ms. Johnson signed two of the Shelf Registration Statements and any amendment thereto.
26.
Defendant Aashish R. Kamat is an individual residing in New York, New York.
Mr. Kamat was a Director of BOA Mortgage. Mr. Kamat signed one of the Shelf Registration Statements and any amendment thereto. 27. Defendant Michael J. Kula was a Director of BOA Mortgage. Mr. Kula was also
a Senior Vice President at BOA National. Mr. Kula signed one of the Shelf Registration Statements and any amendment thereto. 28. Defendant James H. Luther was a Director of ABF Corp. and BOA Funding.
Mr. Luther signed three of the Shelf Registration Statements and any amendment thereto. 29. Defendant William L. Maxwell was a Director of ABF Corp. Mr. Maxwell
signed two Shelf Registration Statements that were not subsequently amended. 30. Defendant Mark I. Ryan is an individual residing in Charlotte, North Carolina.
Mr. Ryan was President and Chief Executive Officer of BOA Funding. Mr. Ryan signed two of the Shelf Registration Statements and any amendment thereto. 31. Defendant Antoine Schetritt is an individual residing in New York, New York.
Mr. Schetritt was President, Chief Executive Officer, and Chairman of the Board of BOA Mortgage. Mr. Schetritt was also a Managing Director and the Head of Residential Finance at BOA Securities. Mr. Schetritt signed one Shelf Registration Statement. The Non-Party Originators 32. In eight Securitizations sponsored either by BOA National or non-party Option
One Mortgage Corporation (Option One), 100 percent of the mortgage loans were originated
10
by Option One. As to six Securitizations in which it acted as sponsor, BOA National itself originated or acquired 100 percent of the mortgage loans underlying the Securitizations.3 JURISDICTION AND VENUE 33. Jurisdiction of this Court is founded upon 28 U.S.C. 1345, which gives federal
13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code and Sections 31-5606.05(a)(1)(B) and 315606.05(c) of the District of Columbia Code pursuant to this Courts supplemental jurisdiction under 28 U.S.C. 1367(a). This Court also has jurisdiction over the common law claim of negligent misrepresentation pursuant to this Courts supplemental jurisdiction under 28 U.S.C. 1367(a). 36. Venue is proper in this district pursuant to Section 22 of the Securities Act of
1933, 15 U.S.C. 77v and 28 U.S.C. 1391(b). The BOA Defendants conduct business in this district, BOA Securities is principally located in this district, at least two of the Individual Defendants reside in this district, and many of the acts and transactions alleged herein, including
The remaining nine Securitizations were sponsored by BOA National (seven), NationStar Mortgage LLC (one) and SunTrust Asset Funding LLC (one). In those Securitizations, the underlying mortgage loans were originated or acquired by a mix of originators including but not limited to BOA National, non-party Option One, and other nonparty originators. 11
the preparation and dissemination of the Registration Statements, and offer and sale of the Certificates, occurred in substantial part within this district. Defendants are also subject to personal jurisdiction in this district. FACTUAL ALLEGATIONS I. THE SECURITIZATIONS A. 37. Residential Mortgage-Backed Securitizations In General Asset-backed securitization distributes risk by pooling cash-producing financial
the entity that acquires or originates the mortgage loans and initiates the securitization and the creation of a trust, to which the sponsor directly or indirectly transfers a portfolio of mortgage loans. The trust is established pursuant to a Pooling and Servicing Agreement entered into by, among others, the depositor for that securitization. In many instances, the transfer of assets to a trust is a two-step process: the financial assets are transferred by the sponsor first to an intermediate entity, often a limited purpose entity created by the sponsor . . . and commonly called a depositor, and then the depositor will transfer the assets to the [trust] for the particular asset-backed transactions. Asset-Backed Securities, Securities Act Release No. 33-8518, Exchange Act Release No. 34-50905, 84 SEC Docket 1624 (Dec. 22, 2004). 39. Residential mortgage-backed securities are backed by the underlying mortgage
loans. Some residential mortgage-backed securitizations are created from more than one cohort of loans called collateral groups, in which case the trust issues securities backed by different groups. For example, a securitization may involve two groups of mortgages, with some securities backed primarily by the first group, and others primarily by the second group.
12
Purchasers of the securities acquire an ownership interest in the assets of the trust, which in turn owns the loans. Within this framework, the purchasers of the securities acquire rights to the cash-flows from the designated mortgage group, such as homeowners payments of principal and interest on the mortgage loans held by the related trust. 40. Residential mortgage-backed securities are issued pursuant to registration
statements filed with the SEC. These registration statements include prospectuses, which explain the general structure of the investment, and prospectus supplements, which contain detailed descriptions of the mortgage groups underlying the certificates. Certificates are issued by the trust pursuant to the registration statement, the prospectus, and the prospectus supplement. Underwriters sell the certificates to investors. 41. A mortgage servicer is necessary to manage the collection of proceeds from the
mortgage loans. The servicer is responsible for collecting homeowners mortgage loan payments, which the servicer remits to the trustee after deducting a monthly servicing fee. The servicers duties include making collection efforts on delinquent loans, initiating foreclosure proceedings, and determining when to charge off a loan by writing down its balance. The servicer is required to report key information about the loans to the trustee. The trustee (or trust administrator) administers the trusts funds and delivers payments due each month on the certificates to the investors. B. 42. The Securitizations At Issue In This Case This case involves the 23 Securitizations listed in paragraph 2 above, sixteen of
which were sponsored by BOA National, and all of which were underwritten by BOA Securities. For each of the 23 Securitizations, Table 1 identifies: (1) the sponsor; (2) the depositor; (3) the
13
lead underwriter; (4) the principal amount issued for the tranches4 purchased by the GSEs; (5) the date of issuance; and (6) the loan group or groups backing the GSE Certificate for that Securitization (referred to as the Supporting Loan Groups). Table 1
Transaction Tranche Sponsor Depositor Lead Underwriter
BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities (colead) BOA Securities (colead)
Principal Amount Issued ($)

235,900,000 305,011,000 166,946,000 167,027,000 232,465,000 232,459,000 114,343,000 114,273,000 631,248,000 396,306,000 431,225,000 94,441,000 68,349,000 92,219,000 86,674,000 128,037,000 71,582,000 94,235,000 51,314,000 75,638,000 49,085,000 224,590,000 227,921,000
Date of Issuance
9/30/2005 12/14/2006 8/10/2006 8/10/2006 10/12/2006 10/12/2006 11/14/2006 11/14/2006 11/5/2007 7/31/2006 10/2/2006 1/31/2007 4/30/2007 10/27/2005 11/29/2005 12/29/2005 1/30/2006 1/30/2006 3/1/2006 3/1/2006 3/30/2006 6/7/2007 11/10/2005
Supporting Loan Group(s)

Group 1 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 1 Group 1 Group 5 Group 1 Group 6 Group 2 Group 2 Group 2 Group 1 Group 3 Group 1 Group 3 Group 5 Group 1 Group I
ABFC 2005WMC1 ABFC 2006-HE1 ABFC 2006OPT1 ABFC 2006OPT2 ABFC 2006OPT3 ABFC 2007WMC1 BAFC 2006-G BAFC 2006-H BAFC 2007-A BAFC 2007-C BOAA 2005-10 BOAA 2005-11 BOAA 2005-12 BOAA 2006-1
A1 A1 A2 A1 A2 A1 A2 A1 A1A 1A1 5A1 1A1 6A1 2CB1 2CB1 2CB1 1CB1 3CB1 1CB1
BOA National BOA National BOA National BOA National BOA National BOA National BOA National BOA National BOA National BOA National BOA National BOA National BOA National BOA National BOA National BOA National BOA National BOA National BOA National BOA National BOA National NationStar Mortgage LLC Option One
ABF Corp. ABF Corp. ABF Corp. ABF Corp. ABF Corp. ABF Corp. ABF Corp. ABF Corp. ABF Corp. BOA Funding BOA Funding BOA Funding BOA Funding BOA Mortgage BOA Mortgage BOA Mortgage BOA Mortgage BOA Mortgage BOA Mortgage BOA Mortgage BOA Mortgage NationStar Funding LLC Option One Mortgage Acceptance Corporation
BOAA 2006-2 3CB1 BOAA 2006-3 NSTR 2007-C 5CB1 1AV1 A1 OOMLT 2005-5
Transaction
Tranche
Sponsor
Depositor
Lead Underwriter
BOA Securities (colead)

190,306,000
Date of Issuance
3/9/2007

Group I
IA1
Option One
OOMLT 2007-2
IIA1
Option One
IA1 OOMLT 2007-6 IIA1 OOMLT 2007FXD1
Option One
Option One
IA1
Option One
IA1 OOMLT 2007HL1 STALT 2005-1F 4A1
Option One
SunTrust Asset Funding, LLC
Option One Mortgage Acceptance Corporation Option One Mortgage Acceptance Corporation Option One Mortgage Acceptance Corporation Option One Mortgage Acceptance Corporation Option One Mortgage Acceptance Corporation Option One Mortgage Acceptance Corporation BOA Funding
190,288,000
3/12/2007
Group II
435,470,000
5/30/2007
Group I
272,242,000
1/30/2007
Group II
273,043,000
1/30/2007
Group I
304,935,000
4/26/2007
Group I
BOA Securities
117,447,000
1/5/2006
Group 4
C.
The Securitization Process 1. BOA National Groups Mortgage Loans in Special Purpose Trusts
43.
With respect to the sixteen of the 23 Securitizations for which it was the sponsor,
BOA National either originated the mortgage loans underlying the Certificates or purchased the loans after they were originated, either directly from the originators or through affiliates of the originators.5 44. BOA National then sold the mortgage loans for the sixteen Securitizations that it
sponsored to one of three depositors, all of which are BOA-affiliated entities: ABF Corp., BOA Mortgage, and BOA Funding (collectively, the Depositor Defendants). With respect to one of the remaining seven Securitizations, non-party SunTrust Asset Funding, LLC, as sponsor, sold
Non-party sponsors SunTrust Asset Funding LLC, Option One, and NationStar Mortgage LLC each sponsored one or more of the remaining six Securitizations. The sponsor for each Securitization is specified in Table 1, at paragraph 42 above. 15
the mortgage loans to Defendant BOA Funding, as depositor. With respect to six of the remaining Securitizations, non-party sponsors Option One and NationStar Mortgage LLC sold the mortgage loans to non-party depositors Option One Mortgage Acceptance Corporation and NationStar Funding LLC (formerly known as CHEC Funding LLC), respectively, as reflected in Table 1, above at paragraph 42. Defendant BOA Securities was the lead or co-lead underwriter, as well as the selling underwriter, for all 23 Securitizations. 45. ABF Corp., BOA Mortgage, and BOA Funding were wholly-owned, limited-
purpose financial subsidiaries of BOA National. The sole purpose of ABF Corp., BOA Funding, and BOA Mortgage as depositors was to act as a conduit through which loans acquired by the sponsor could be securitized and sold to investors. 46. As depositors for seventeen of the Securitizations, ABF Corp., BOA Mortgage,
and BOA Funding transferred the relevant mortgage loans to the trusts. As part of each of the Securitizations, the trustee, on behalf of the Certificateholders, executed a Pooling and Servicing Agreement (PSA) with the relevant depositor and the parties responsible for monitoring and servicing the mortgage loans in that Securitization. The trust, administered by the trustee, held the mortgage loans pursuant to the related PSA and issued Certificates, including the GSE Certificates, backed by such loans. The GSEs purchased the GSE Certificates, through which they obtained an ownership interest in the assets of the trust, including the mortgage loans. 2. 47. The Trusts Issue Securities Backed by the Loans
PSAs, each trust issued Certificates backed by the underlying mortgage loans. The Certificates were then sold to investors like Fannie Mae and Freddie Mac, which thereby acquired an ownership interest in the assets of the corresponding trust. Each Certificate entitles its holder to a specified portion of the cashflows from the underlying mortgages in the Supporting Loan 16
Group. The level of risk inherent in the Certificates was a function of the capital structure of the related transaction and the credit quality of the underlying mortgages. 48. The Certificates were issued pursuant to one of nine Shelf Registration Statements
filed with the SEC on a Form S-3. The Shelf Registration Statements were amended by one or more Forms S-3/A filed with the SEC (the Amendments). Six of the Shelf Registration Statements and the Amendments were filed by ABF Corp., BOA Mortgage, and BOA Funding. Each Individual Defendant signed one or more of the six Shelf Registration Statements, including any amendments thereto, that were filed by ABF Corp., BOA Mortgage, and BOA Funding. The SEC filing number, registrants, signatories and filing dates for the nine Shelf Registration Statements with Amendments, as well as the Certificates covered by each Shelf Registration Statement, are reflected in Table 2 below. Table 2
SEC File No. Date Registration Statement Filed
9/7/2004

9/29/2004
Registrants

Sal Mirran, Aashish Kamat, Juliana Johnson, Robert Caruso Mark I. Ryan, George C. Carp, George E. Ellison, William L. Maxwell, James H. Luther Robert E. Dubrish, Steven L. Nadon, William L. ONeill Daniel B. Goodwin, George C. Carp, George E. Ellison, William L. Maxwell
333118843
BOA Mortgage
333121559
12/22/2004
Not applicable
BOA Funding
BOAA 2005-11; BOAA 2005-12; BOAA 2006-1; BOAA 2006-2; BOAA 2005-10; STALT 2005-1F
Sal Mirran, Aashish Kamat, Juliana Johnson, Robert Caruso Not applicable
333126920
7/27/2005
Not applicable
Option One Mortgage Acceptance Corporation ABF Corp.
OOMLT 2005-5
Not applicable
333127970
8/30/2005
Not applicable
ABFC 2005-WMC1
Not applicable
17
SEC File No.

12/20/2005

3/15/2006 3/31/2006
Registrants

Daniel B. Goodwin, George C. Carp, George E. Ellison, James H. Luther Mark I. Ryan, George C. Carp, George E. Ellison, James H. Luther Anthony H. Barone, Jesse K. Bray, Gerard A. Berrens, Leldon E. Echols Antoine Schetritt, Michael J. Kula, Juliana C. Johnson, Robert Caruso Robert E. Dubrish, Steven L. Nadon, William L. ONeill
333130524
ABF Corp.
ABFC 2006-OPT1; ABFC 2006-OPT2; ABFC 2006-OPT3; ABFC 2007-WMC1; ABFC 2006-HE1 BAFC 2006-H; BAFC 2007-A; BAFC 2007-C; BAFC 2006-G NSTR 2007-C
Daniel B. Goodwin, George C. Carp, George E. Ellison, James H. Luther Mark I. Ryan, George C. Carp, George E. Ellison, James H. Luther Anthony H. Barone, Jesse K. Bray, Gerard A. Berrens, Leldon E. Echols, Adam J. DeYoung Adam D. Glassner, Michael J. Kula, Juliana C. Johnson, Robert Caruso Robert E. Dubrish, Steven L. Nadon, William L. ONeill
333130536
12/20/2005
3/15/2006 3/21/2006
BOA Funding
333130642
12/22/2005
3/3/2006 4/3/2006 4/19/2006 4/28/2006
Chec Funding, LLC
333132249
3/7/2006
5/12/2006
BOA Mortgage
BOAA 2006-3
333130870
1/5/2006
3/31/2006 3/30/2006 3/17/2006 3/02/2006 2/10/2006
Option One Mortgage Acceptance Corporation
OOMLT 2007-2; OOMLT 2007-6; OOMLT 2007FXD1; OOMLT 2007-HL1
49.
guidelines that purportedly were used in connection with the origination of the underlying mortgage loans. In addition, the Prospectus Supplements purport to provide accurate statistics regarding the mortgage loans in each group, including the ranges of and weighted average FICO credit scores of the borrowers, the ranges of and weighted average loan-to-value ratios of the loans, the ranges of and weighted average outstanding principal balances of the loans, the debtto-income ratios, the geographic distribution of the loans, the extent to which the loans were for purchase or refinance purposes; information concerning whether the loans were secured by a property to be used as a primary residence, second home, or investment property; and information concerning whether the loans were delinquent.
18
50.
The Prospectus Supplements associated with each Securitization were filed with
Transaction Date Prospectus Supplement Filed
9/30/2005 12/15/2006 8/10/2006 10/16/2006 11/15/2006 11/7/2007 7/31/2006 10/2/2006 1/31/2007 5/1/2007 10/27/2005 11/29/2005 12/29/2005 1/30/2006 3/1/2006 3/30/2006 6/11/2007 11/8/2005 3/9/2007 5/25/2007 1/30/2007 4/26/2007 1/5/2006
Date Form 8-K Attaching PSA

333-127970 333-130524 333-130524 333-130524 333-130524 333-130524 333-130536 333-130536 333-130536 333-130536 333-118843 333-118843 333-118843 333-118843 333-118843 333-132249 333-130642 333-126920 333-130870 333-130870 333-130870 333-130870 333-121559
ABFC 2005-WMC1 ABFC 2006-HE1 ABFC 2006-OPT1 ABFC 2006-OPT2 ABFC 2006-OPT3 ABFC 2007-WMC1 BAFC 2006-G BAFC 2006-H BAFC 2007-A BAFC 2007-C BOAA 2005-10 BOAA 2005-11 BOAA 2005-12 BOAA 2006-1 BOAA 2006-2 BOAA 2006-3 NSTR 2007-C OOMLT 2005-5 OOMLT 2007-2 OOMLT 2007-6 OOMLT 2007FXD1 OOMLT 2007-HL1 STALT 2005-1F
10/17/2005 12/29/2006 8/25/2006 10/27/2006 11/29/2006 11/20/2007 8/15/2006 10/16/2006 2/15/2007 5/15/2007 11/10/2005 12/14/2005 1/6/2006 2/14/2006 3/14/2006 4/13/2006 6/22/2007 11/23/2005 3/27/2007 6/18/2007 3/15/2007 6/1/2007 1/12/2006
51.
The Certificates were issued pursuant to the PSAs, and Defendant BOA Securities
offered and sold the GSE Certificates to Fannie Mae and Freddie Mac pursuant to the Registration Statements, which, as noted previously, included the Prospectuses and Prospectus Supplements.
19
II.
THE DEFENDANTS PARTICIPATION IN THE SECURITIZATION PROCESS A. 52. The Role of Each of the Defendants Each of the Defendants, including the Individual Defendants, had a role in the
securitization process and the marketing for most or all of the Certificates, which included purchasing the mortgage loans from the originators, arranging the Securitizations, selling the mortgage loans to the depositor, transferring the mortgage loans to the trustee on behalf of the Certificateholders, underwriting the public offering of the Certificates, structuring and issuing the Certificates, and marketing and selling the Certificates to investors such as Fannie Mae and Freddie Mac. 53. With respect to each Securitization, the Depositor Defendants, MLPF&S (as
successor-in-interest to BOA Securities), and the Individual Defendants who signed the Registration Statement, as well as the BOA Defendants who exercised control over their activities, are liable, jointly and severally, as participants in the registration, issuance and offering of the Certificates, including issuing, causing, or making materially misleading statements in the Registration Statement, and omitting material facts required to be stated therein or necessary to make the statements contained therein not misleading. 1. 54. BOA National
BOA National is one of the nations largest banks and a leading sponsor of
mortgage-backed securities. BOA National is also the direct parent corporation of ABF Corp., BOA Mortgage, and BOA Funding. As stated in the Prospectus Supplement for the ABFC 2006-OPT3 Securitization, [BOA National] and its affiliates have been active in the securitization market since inception. The volume of loans originated and aggregated by BOA National made it possible for BOA Corp. to consistently securitize tens of billions of dollars worth of mortgage loans during the time period relevant here. In 2005, BOA Corp. securitized a
20
total of $95.1 billion of mortgages. See Bank of America Corp., 2006 Annual Report, at 119. In 2006, BOA Corp. securitized a total of $65.5 billion of mortgages. Id. In 2007, BOA Corp. securitized a total of $84.5 billion of mortgages. See Bank of America Corp., 2007 Annual Report, at 135. In 2007, BOA was ranked the 14th largest sponsor of non-agency mortgagebacked securities.6 See Financial Crisis Inquiry Commission, Preliminary Staff Report: Securitization and the Mortgage Crisis, April 7, 2010, at 13. 55. Defendant BOA National was the sponsor of sixteen of the 23 Securitizations. In
that capacity, BOA National determined the structure of the Securitizations, initiated the Securitizations, purchased the mortgage loans to be securitized, determined distribution of principal and interest, and provided data to the credit rating agencies to secure investment grade ratings for the Certificates. BOA National also selected the Depositor Defendants ABF Corp., BOA Mortgage, or BOA Funding as the special purpose vehicles that would be used to transfer the mortgage loans from BOA National to the trusts, and selected BOA Securities as the underwriter for the Securitizations. In its role as sponsor, BOA National knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing such loans would be issued by the relevant trusts. 56. For the sixteen Securitizations that it sponsored, BOA National also conveyed the
mortgage loans to ABF Corp., BOA Mortgage, or BOA Funding as depositor, pursuant to an Assignment and Recognition Agreement or a Mortgage Loan Purchase Agreement. In these agreements, BOA National made certain representations and warranties to ABF Corp., BOA Mortgage, and BOA Funding regarding the groups of loans collateralizing the Certificates. Agency mortgage-backed securities are guaranteed by a government agency or government-sponsored enterprise such as Fannie Mae or Freddie Mac, while non-agency mortgage-backed securities are issued by banks and financial companies not associated with a government agency or government sponsored enterprise. 21
6
These representations and warranties were assigned by ABF Corp., BOA Mortgage, and BOA Funding to the trustees for the benefit of the Certificateholders. 2. 57. ABF Corp.
Defendant ABF Corp. is a wholly-owned direct subsidiary of BOA National and a
wholly-owned indirect subsidiary of BOA Corp. ABF Corp. is a special purpose entity formed solely for the purpose of purchasing mortgage loans, filing registration statements with the SEC, forming issuing trusts, assigning mortgage loans and all of its rights and interests in such mortgage loans to the trustee for the benefit of the certificateholders, and depositing the underlying mortgage loans into the issuing trusts. 58. ABF Corp. was the depositor for six of the 23 Securitizations. In its capacity as
depositor, ABF Corp. purchased the mortgage loans from the sponsor (which was BOA National for all six Securitizations) pursuant to the Assignment and Recognition Agreements or Mortgage Loan Purchase Agreements, as applicable. ABF Corp. then sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trusts. ABF Corp., together with the other Defendants, was also responsible for preparing and filing the Registration Statements pursuant to which the Certificates were offered for sale. The trusts in turn held the mortgage loans for the sole benefit of the Certificateholders, and issued the Certificates in public offerings for sale to investors such as Fannie Mae and Freddie Mac. 3. 59. BOA Mortgage
Defendant BOA Mortgage is a wholly-owned direct subsidiary of BOA National
and a wholly-owned indirect subsidiary of BOA Corp. BOA Mortgage is a special purpose entity formed solely for the purpose of purchasing mortgage loans, filing registration statements with the SEC, forming issuing trusts, assigning mortgage loans and all of its rights and interests
22
in such mortgage loans to the trustee for the benefit of the certificateholders, and depositing the underlying mortgage loans into the issuing trusts. 60. BOA Mortgage was the depositor for six of the 23 Securitizations. In its capacity
as depositor, BOA Mortgage purchased the mortgage loans from the sponsor (which was BOA National for all six Securitizations) pursuant to the Assignment and Recognition Agreements or Mortgage Loan Purchase Agreements, as applicable. BOA Mortgage then sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trusts. BOA Mortgage, together with the other Defendants, was also responsible for preparing and filing the Registration Statements pursuant to which the Certificates were offered for sale. The trusts in turn held the mortgage loans for the benefit of the Certificateholders, and issued the Certificates in public offerings for sale to investors such as Fannie Mae and Freddie Mac. 4. 61. BOA Funding
Defendant BOA Funding is a wholly-owned direct subsidiary of BOA National
and a wholly-owned indirect subsidiary of BOA Corp. BOA Funding is a special purpose entity formed solely for the purpose of purchasing mortgage loans, filing registration statements with the SEC, forming issuing trusts, assigning mortgage loans and all of its rights and interests in such mortgage loans to the trustee for the benefit of the certificateholders, and depositing the underlying mortgage loans into the issuing trusts 62. BOA Funding was the depositor for five of the 23 Securitizations. In its capacity
as depositor, BOA Funding purchased the mortgage loans from the sponsor (which, for all but one of the five Securitizations, was BOA National) pursuant to the Assignment and Recognition Agreements or Mortgage Loan Purchase Agreements, as applicable. BOA Funding then sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trusts. BOA Funding, together with the other Defendants, was also responsible for preparing and filing the 23
Registration Statements pursuant to which the Certificates were offered for sale. The trusts in turn held the mortgage loans for the sole benefit of the Certificateholders, and issued the Certificates in public offerings for sale to investors such as Fannie Mae and Freddie Mac. 5. 63. MLPF&S, As Successor-in-Interest to BOA Securities
BOA Securities was an investment bank, and was, at all relevant times, a
registered broker/dealer and one of the leading underwriters of mortgage and other asset-backed securities in the United States. 64. BOA Securities was one of the nations largest underwriters of asset-backed
securities. For the period 2005 through 2007, BOA Securities was the tenth largest underwriter of subprime mortgage-backed securities and had a 4.5 percent market share. During the same period, BOA Securities underwrote over $24 billion of subprime mortgage-backed securities: approximately $10 billion, $3.9 billion and $10.1 billion in 2005, 2006, and 2007, respectively. See Compass Point Research & Trading LLC, Mortgage Finance, August 17, 2010. 65. BOA Securities was the lead underwriter for the Securitizations. In that role, it
was responsible for underwriting and managing the offer and sale of the Certificates to Fannie Mae and Freddie Mac and other investors. BOA Securities was also obligated to conduct meaningful due diligence to ensure that the Registration Statements did not contain any material misstatements or omissions, including as to the manner in which the underlying mortgage loans were originated, transferred, and underwritten. 66. As discussed above at paragraph 16, MLPF&S is liable as successor-in-interest to
BOA Securities by virtue of its status as the surviving entity in its merger with BOA Securities. 6. 67. BOA Corporation
BOA Corp. employed its wholly-owned subsidiaries, BOA National, BOA
Securities, ABF Corp., BOA Mortgage, and BOA Funding, in the key steps of the securitization 24
process. Unlike typical arms length securitizations, sixteen of the 23 Securitizations here involved various BOA subsidiaries and affiliates at virtually each step in the chain. With respect to all but seven of the Securitizations, the sponsor was BOA National, the depositor was ABF Funding, BOA Mortgage, or BOA Funding, and the lead underwriter was BOA Securities. As to the remaining Securitizations, non-parties served as sponsor and depositor (except in one instance in which BOA Funding acted as depositor), and BOA Securities was the lead and selling underwriter. 68. As the sole corporate parent of BOA Securities, ABF Funding, BOA Mortgage,
BOA Funding, and BOA National, BOA Corp. had the practical ability to direct and control the actions of BOA Securities, ABF Funding, BOA Mortgage, and BOA Funding related to the Securitizations, and in fact exercised such direction and control over the activities of these entities related to the issuance and sale of the Certificates. 69. As detailed above, the Securitizations here involved BOA entities, including the
aforementioned subsidiaries of the BOA Corp., at virtually each step in the process. BOA Corp. profited substantially from this vertically integrated approach to mortgage-backed securitization. 7. 70. The Individual Defendants
Defendant George C. Carp was Treasurer, Chief Accounting Officer, and Chief
Financial Officer of ABF Corp. and BOA Funding. Mr. Carp signed four of the Shelf Registration Statements and any amendment thereto. 71. Defendant Robert Caruso was a Director of BOA Mortgage. Mr. Caruso signed
two of the Shelf Registration Statements and any amendment thereto. 72. Defendant George E. Ellison was a Director of BOA Funding and ABF Corp.
Mr. Ellison signed four of the Shelf Registration Statements and any amendment thereto.
25
73.
Defendant Adam D. Glassner was President, Chief Executive Officer, and
Chairman of the Board of BOA Mortgage. Mr. Glassner signed the amendment to one of the Shelf Registration Statements. 74. Defendant Daniel B. Goodwin was President and Chief Executive Officer of ABF
Corp. Mr. Goodwin was also a Managing Director at BOA Securities. Mr. Goodwin signed two of the Shelf Registration Statements and any amendment thereto. 75. Defendant Juliana Johnson was a Director of BOA Mortgage. Ms. Johnson
signed two of the Shelf Registration Statements and any amendment thereto. 76. Defendant Aashish Kamat was a Director of BOA Mortgage. Mr. Kamat signed
one of the Shelf Registration Statements and any amendment thereto. 77. Defendant Michael J. Kula was a Director of BOA Mortgage. Mr. Kula signed
one of the Shelf Registration Statements and any amendment thereto. 78. Defendant James H. Luther was a Director of BOA Funding and ABF Corp.
Mr. Luther signed three of the Shelf Registration Statements and any amendment thereto. 79. Defendant William L. Maxwell was a director of ABF Corp. Mr. Maxwell signed
two of the Shelf Registration Statements that were not subsequently amended. 80. Defendant Mark I. Ryan was President and Chief Executive Officer of BOA
Funding. Mr. Ryan signed two of the Shelf Registration Statements and any amendment thereto. 81. Defendant Antoine Schetritt was President, Chief Executive Officer, and
Chairman of the Board of BOA Mortgage. Mr. Schetritt signed one Shelf Registration Statement.
26
B. 82.
The Defendants Failure To Conduct Proper Due Diligence Defendants failed to conduct adequate and sufficient due diligence to ensure that
the mortgage loans underlying the Securitizations complied with the representations in the Registration Statements. 83. As discussed above at paragraphs 54 and 64, from approximately 2005 through
2007, BOAs involvement in the mortgage-backed securitization industry was substantial. Defendants indeed had enormous financial incentives to complete as many offerings as quickly as possible without regard to ensuring the accuracy or completeness of the Registration Statements, or conducting adequate and reasonable due diligence. For example, ABF Corp., BOA Mortgage, and BOA Funding, as the depositors, were paid a percentage of the total dollar amount of the offerings upon completion of the Securitizations, and BOA Securities, as the underwriter, was paid a commission based on the amount it received from the sale of the Certificates to the public. 84. The push to securitize large volumes of mortgage loans contributed to the absence
of controls needed to prevent the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. In particular, Defendants failed to conduct adequate diligence or to otherwise ensure the accuracy of the statements in the Registration Statements pertaining to the Securitizations. 85. For instance, BOA retained third-parties, including Clayton Holdings, Inc.
(Clayton), to analyze the loans it was considering placing in its securitizations, but waived a significant number of loans into the Securitizations that these firms had recommended for exclusion, and did so without taking adequate steps to ensure that these loans had in fact been underwritten in accordance with applicable guidelines or had compensating factors that excused the loans non-compliance with those guidelines. On January 27, 2008, Clayton revealed that it 27
had entered into an agreement with the New York Attorney General (the NYAG) to provide documents and testimony regarding its due diligence reports, including copies of the actual reports provided to its clients. According to The New York Times, as reported on January 27, 2008, Clayton told the NYAG that starting in 2005, it saw a significant deterioration of lending standards and a parallel jump in lending expectations and some investment banks directed Clayton to halve the sample of loans it evaluated in each portfolio. 86. BOA was negligent in allowing into the Securitizations a substantial number of
mortgage loans that, as reported to BOA by third-party due diligence firms, did not conform to the underwriting standards stated in the Registration Statements, including the Prospectuses and Prospectus Supplements. Even upon learning from the third-party due diligence firms that there were high percentages of defective or at least questionable loans in the sample of loans reviewed by the third-party due diligence firms, BOA failed to take any additional steps to verify that the population of loans in the Securitizations did not include a similar percentage of defective and/or questionable loans. 87. Claytons trending reports revealed that in the period from the first quarter of
2006 to the second quarter of 2007, 30 percent of the mortgage loans BOA submitted to Clayton to review in residential mortgage-backed securities groups were rejected by Clayton as falling outside the applicable underwriting guidelines. Of the mortgage loans that Clayton found defective, 27 percent of the loans were subsequently waived in by BOA without proper consideration and analysis of compensating factors and included in securitizations such as the ones in which Fannie Mae and Freddie Mac invested here. See Clayton Trending Reports, available at http://fcic.law.stanford.edu/hearings/testimony/the-impact-of-the-financial-crisissacramento#documents.
28
88.
In May 2011, the NYAG opened an investigation into the mortgage securitization
practices of Bank of America. The New York Times reported on May 16, 2011, that the Attorney General had subpoenaed information covering many aspects of BOAs pooling operations in connection with the bundling of home loans into securities. Upon information and belief, that investigation is ongoing. III. THE REGISTRATION STATEMENTS AND THE PROSPECTUS SUPPLEMENTS A. 89. Compliance With Underwriting Guidelines The Prospectus Supplements for each Securitization describe the mortgage loan
underwriting guidelines pursuant to which the mortgage loans underlying the related Securitizations were to have been originated. These guidelines were intended to assess the creditworthiness of the borrower, the ability of the borrower to repay the loan, and the adequacy of the mortgaged property as security for the loan. 90. The statements made in the Prospectus Supplements, which, as discussed, formed
statements with respect to the underwriting standards of the entities that originated the loans in the Securitizations. For example, the Prospectus Supplement for the ABFC 2006-OPT3 Securitization, for which Option One was the originator, BOA National was the sponsor, BOA Securities was the underwriter, and ABF Corp. was the depositor, stated that: All of the
29
mortgage loans were originally originated or acquired by Option One Mortgage Corporation in accordance with the underwriting guidelines described under Underwriting Standards in this prospectus supplement and that the Option One Underwriting Guidelines are primarily intended to assess the value of the mortgaged property, to evaluate the adequacy of such property as collateral for the mortgage loan and to assess the applicants ability to repay the mortgage loan. 92. The ABFC 2006-OPT3 Prospectus Supplement further stated that exceptions to
the Option One Underwriting Guidelines (including a debt-to-income ratio exception, a pricing exception, a loan-to-value exception, a credit score exception or an exception from certain requirements of a particular risk category) are made on a case-by-case basis, but only where compensating factors exist. 93. With respect to the information evaluated by the originator, the Prospectus
Supplement stated that: Each mortgage loan applicant completes an application that includes information with respect to the applicants liabilities, income, credit history, employment history and personal information. The Option One Underwriting Guidelines require a credit report and, if available, a credit score on each applicant from a credit-reporting agency. The credit report typically contains information relating to such matters as credit history with local and national merchants and lenders, installment debt payments and any record of defaults, bankruptcies, repossessions or judgments. 94. The ABFC 2006-OPT3 Prospectus Supplement further stated that: The Option
One Underwriting Guidelines require that mortgage loans be underwritten in a standardized procedure which complies with applicable federal and state laws and regulations and require
30
Option Ones underwriters to be satisfied that the value of the property being financed, as indicated by an appraisal supports the loan balance. 95. The Prospectus and Prospectus Supplements for each of the Securitizations had
similar representations to those quoted above. The relevant representations in the Prospectus and Prospectus Supplement pertaining to originating entity underwriting standards for each Securitization are reflected in Appendix A to this Complaint. As discussed below in Section IV, in fact, the originators of the mortgage loans in the Supporting Loan Group for the Securitizations did not adhere to their stated underwriting guidelines, thus rendering the description of those guidelines in the Prospectus and Prospectus Supplements false and misleading. B. 96. Statements Regarding Occupancy Status of Borrower The Prospectus Supplements contained collateral group-level information about
the occupancy status of the borrowers of the loans in the Securitizations. Occupancy status refers to whether the property securing a mortgage is to be the primary residence of the borrower, a second home, or an investment property. The Prospectus Supplements for each of the Securitizations presented this information in tabular form, usually in a table entitled Occupancy Status of the Mortgage Loans. This table divided all the loans in the collateral group by occupancy status, e.g., into the following categories: (i) Primary, or Owner Occupied; (ii) Second Home, or Secondary; and (iii) Investment or Non-Owner. For each category, the table stated the number of loans in that category.
31
97.
In the case of six of the 23 Securitizations,7 the Prospectus Supplement stated that
all or nearly all of the mortgage loans in the Supporting Loan Group were Investment or NonOwner properties. The Prospectus Supplements for the remaining seventeen Securitizations, however, reported that an overwhelming majority of the mortgage loans in the Supporting Loan Groups were owner-occupied, while a small percentage were reported to be non-owner occupied (i.e. a second home or investor home). The occupancy statistics for the Supporting Loan Groups for the seventeen Securitizations were reported in the Prospectus Supplements as follows:8 Table 4
Primary or Owner Occupied (%) 90.50 95.55 91.41 88.19 92.97 91.41 91.44 91.41 90.87 79.90 83.95 58.38 82.89 88.47 97.19 86.47 91.56 84.95 82.50 95.07 92.17 Second Home/Secondary (%) 5.08 0.60 0.90 1.26 0.95 0.42 2.02 0.94 3.96 9.00 4.69 13.35 8.72 11.53 0.87 1.70 0.74 1.79 1.69 0.70 0.91
Transaction ABFC 2005WMC1 ABFC 2006-HE1 ABFC 2006-OPT1 ABFC 2006-OPT2 ABFC 2006-OPT3 ABFC 2007WMC1 BAFC 2006-G BAFC 2006-H BAFC 2007-A BAFC 2007-C BOAA 2006-3 NSTR 2007-C OOMLT 2005-5 OOMLT 2007-2 OOMLT 2007-6 OOMLT 2007FXD1
7
Supporting Loan Group Group 1 Group 1 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 1 Group 5 Group 1 Group 6 Group 5 Group 1 Group I Group I Group II Group I Group I Group II
Investor (%) 4.42 3.85 7.70 10.55 6.08 8.17 6.54 7.66 5.17 11.09 11.36 28.27 8.39 0.00 1.94 11.82 7.70 13.26 15.81 4.22 6.92
These six Securitizations are BOAA 2005-10, BOAA 2005-11, BOAA 2005-12, BOAA 2006-1, BOAA 2006-2, and STALT 2005-1F. Each Prospectus Supplement provides the total number of loans and the number of loans in the following categories: owner occupied, investor, and second home. These numbers have been converted to percentages. 32
8
Transaction OOMLT 2007-HL1
Supporting Loan Group Group I
Primary or Owner Occupied (%) 92.84
Second Home/Secondary (%) 0.92
Investor (%) 6.25
98.
The statements about occupancy status were material to a reasonable investors
decision to invest in the Certificates. Information about occupancy status is an important factor in determining the credit risk associated with a mortgage loan and, therefore, the securitization that it collateralizes. Because borrowers who reside in mortgaged properties are less likely to default than borrowers who purchase homes as second homes or investments and live elsewhere, and are more likely to care for their primary residence, the percentage of loans in the collateral group of a securitization that are secured by mortgage loans on owner-occupied residences is an important measure of the risk of the certificates sold in that securitization. 99. Other things being equal, the higher the percentage of loans not secured by
owner-occupied residences, the greater the risk of loss to the certificateholders. Even small differences in the percentages of primary/owner-occupied, second home/secondary, and investment properties in the collateral group of a securitization can have a significant effect on the risk of each certificate sold in that securitization, and thus, are important to the decision of a reasonable investor whether to purchase any such certificate. As discussed below at paragraphs 111 through 115, the Registration Statement for each Securitization materially overstated the percentage of loans in the Supporting Loan Groups that were owner-occupied, thereby misrepresenting the degree of risk of the GSE Certificates. C. 100. Statements Regarding Loan-to-Value Ratios The loan-to-value ratio of a mortgage loan, or LTV ratio, is the ratio of the
balance of the mortgage loan to the value of the mortgaged property when the loan is made.
33
101.
The denominator in the LTV ratio is the value of the mortgaged property, and is
generally the lower of the purchase price or the appraised value of the property. In a refinancing or home-equity loan, there is no purchase price to use as the denominator, so the denominator is often equal to the appraised value at the time of the origination of the refinanced loan. Accordingly, an accurate appraisal is essential to an accurate LTV ratio. In particular, an inflated appraisal will understate, sometimes greatly, the credit risk associated with a given loan. 102. The Prospectus Supplements for each Securitization also contained group-level
information about the LTV ratio for the underlying group of loans as a whole. The percentage of loans with an LTV ratio at or less than 80 percent and the percentage of loans with an LTV ratio greater than 100 percent as reported in the Prospectus Supplements for the Supporting Loan Groups are reflected in Table 5 below.9 Table 5
Transaction Supporting Loan Group Percentage of loans, by aggregate principal balance, with LTV less than or equal to 80% 60.68 56.39 49.60 52.53 70.79 67.04 0.00 0.00 52.49 84.93 Percentage of loans, by aggregate principal balance, with LTV greater than 100% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
ABFC 2005-WMC1 ABFC 2006-HE1 ABFC 2006-OPT1 ABFC 2006-OPT2 ABFC 2006-OPT3 ABFC 2007-WMC1 BAFC 2006-G
9
Group 1 Group 1 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 1
As used in this Complaint, LTV refers to the original loan-to-value ratio for first lien mortgages and for properties with second liens that are subordinate to the lien that was included in the securitization (i.e., only the securitized lien is included in the numerator of the LTV calculation). However, for second lien mortgages, where the securitized lien is junior to another loan, the more senior lien has been added to the securitized one to determine the numerator in the LTV calculation (this latter calculation is sometimes referred to as the combined-loan-to-value ratio, or CLTV). 34
Transaction
BAFC 2006-H BAFC 2007-A BAFC 2007-C BOAA 2005-10 BOAA 2005-11 BOAA 2005-12 BOAA 2006-1 BOAA 2006-2 BOAA 2006-3 NSTR 2007-C OOMLT 2005-5 OOMLT 2007-2 OOMLT 2007-6 OOMLT 2007FXD1 OOMLT 2007-HL1 STALT 2005-1F
Group 5 Group 1 Group 6 Group 2 Group 2 Group 2 Group 1 Group 3 Group 1 Group 3 Group 5 Group 1 Group I Group I Group II Group I Group I Group II Group I Group 4
Percentage of loans, by aggregate principal balance, with LTV less than or equal to 80% 93.53 84.18 97.31 87.60 90.29 91.35 95.76 89.40 94.87 90.92 84.94 25.94 39.86 64.26 63.15 51.49 65.81 62.64 0.00 94.73
Percentage of loans, by aggregate principal balance, with LTV greater than 100% 0.08 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.14 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
103.
As Table 5 makes clear, the Prospectus Supplement for nearly all of the
Securitizations reported that many or most of the mortgage loans in the Supporting Loan Groups had an LTV ratio of 80 percent or less,10 and the Prospectus Supplement for nearly all of the Securitizations reported that zero mortgage loans in the Supporting Loan Group had an LTV ratio over 100 percent. 104. The LTV ratio is among the most important measures of the risk of a mortgage
loan, and thus, it is one of the most important indicators of the default risk of the mortgage loans underlying the Certificates. The lower the ratio, the less likely that a decline in the value of the
The lone exceptions are the ABFC 2006-OPT3 and OOMLT 2007-HL1 Securitizations, for which the majority of mortgages were reported as having an LTV ratio greater than 80 percent and below 100 percent. 35
10
property will wipe out an owners equity, and thereby give an owner an incentive to stop making mortgage payments and abandon the property. This ratio also predicts the severity of loss in the event of default. The lower the LTV ratio, the greater the equity cushion, so the greater the likelihood that the proceeds of foreclosure will cover the unpaid balance of the mortgage loan. 105. Thus, LTV ratio is a material consideration to a reasonable investor in deciding
whether to purchase a certificate in a securitization of mortgage loans. Even small differences in the LTV ratios of the mortgage loans in the collateral group of a securitization have a significant effect on the likelihood that the collateral groups will generate sufficient funds to pay certificateholders in that securitization, and thus are material to the decision of a reasonable investor whether to purchase any such certificate. As discussed below at paragraphs 116 through 121, the Registration Statements for the Securitizations materially overstated the percentage of loans in the Supporting Loan Groups with an LTV ratio at or less than 80 percent, and materially understated the percentage of loans in the Supporting Loan Groups with an LTV ratio over 100 percent, thereby misrepresenting the degree of risk of the GSE Certificates.11 D. 106. Statements Regarding Credit Ratings Credit ratings are assigned to the tranches of mortgage-backed securitizations by
the credit rating agencies, including Moodys Investors Service, Standard & Poors, and Fitch Ratings. Each credit rating agency uses its own scale with letter designations to describe various levels of risk. In general, AAA or its equivalent ratings are at the top of the credit rating scale and are intended to designate the safest investments. C and D ratings are at the bottom of the scale and refer to investments that are currently in default and exhibit little or no prospect for
The lone exceptions are the ABFC 2006-OPT3 and OOMLT 2007-HL1 Securitizations, for which the Registration Statements solely understated the percentage of loans with an LTV ratio above 100 percent by more than 40 percent. 36
11
recovery. At the time the GSEs purchased the GSE Certificates, investments with AAA or its equivalent ratings historically experienced a loss rate of less than .05 percent. Investments with a BBB rating, or its equivalent, historically experienced a loss rate of less than one percent. As a result, securities with credit ratings between AAA or its equivalent through BBB- or its equivalent were generally referred to as investment grade. 107. Rating agencies determine the credit rating for each tranche of a mortgage-backed
securitization by comparing the likelihood of contractual principal and interest repayment to the credit enhancements available to protect investors. Rating agencies determine the likelihood of repayment by estimating cashflows based on the quality of the underlying mortgages by using sponsor-provided loan level data. Credit enhancements, such as subordination, represent the amount of cushion or protection from loss incorporated into a given securitization.12 This cushion is intended to improve the likelihood that holders of highly rated certificates receive the interest and principal to which they are contractually entitled. The level of credit enhancement offered is based on the make-up of the loans in the underlying collateral group and entire securitization. Riskier loans underlying the securitization necessitate higher levels of credit enhancement to insure payment to senior certificate holders. If the collateral within the deal is of a higher quality, then rating agencies require less credit enhancement for an AAA or its equivalent rating. 108. Credit ratings have been an important tool to gauge risk when making investment
decisions. For almost a hundred years, investors like pension funds, municipalities, insurance
12
companies, and university endowments have relied heavily on credit ratings to assist them in distinguishing between safe and risky investments. Fannie Maes and Freddie Macs respective internal policies limited their purchases of private label residential mortgage-backed securities to those rated AAA (or its equivalent), and in very limited instances, AA or A bonds (or their equivalent). 109. Each tranche of the Securitizations received a credit rating upon issuance, which
purported to describe the riskiness of that tranche. The Defendants reported the credit ratings for each tranche in the Prospectus Supplements. The credit rating provided for each of the GSE Certificates was investment grade, almost always AAA or its equivalent. The accuracy of these ratings was material to a reasonable investors decision to purchase the GSE Certificates. As set forth in Table 8, below at paragraph 142, the ratings for the Securitizations were inflated as a result of Defendants provision of incorrect data concerning the attributes of the underlying mortgage collateral to the ratings agencies, and, as a result, Defendants sold and marketed the GSE Certificates as AAA (or its equivalent) when, in fact, they were not. IV. THE FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS A. 110. The Statistical Data Provided in the Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False A review of loan-level data was conducted in order to assess whether the
statistical information provided in the Prospectus Supplements was true and accurate. For each Securitization, the sample consisted of 1,000 randomly selected loans per Supporting Loan Group, or all of the loans in the group if there were fewer than 1,000 loans in the Supporting Loan Group. The sample data confirms, on a statistically-significant basis, material misrepresentations of underwriting standards and of certain key characteristics of the mortgage
38
loans across the Securitizations. The data review demonstrates that the data concerning owner occupancy and LTV ratios was materially false and misleading. 1. 111. Owner Occupancy Data Was Materially False
Prospectus Supplements were materially false and inflated. In fact, for the seventeen Securitizations whose Prospectus Supplement represented the Supporting Loan Groups to be overwhelmingly owner-occupied, far fewer underlying properties were occupied by their owners than disclosed in the Prospectus Supplement and more correspondingly were held as second homes or investment properties. 112. To determine whether a given borrower actually occupied the property as
claimed, a number of tests were conducted, including, inter alia, whether, months after the loan closed, the borrowers tax bill was being mailed to the property or to a different address; whether the borrower had claimed a tax exemption on the property; and whether the mailing address of the property was reflected in the borrowers credit reports, tax records, or lien records. Failing two or more of these tests is a strong indication that the borrower did not live at the mortgaged property and instead used it as a second home or an investment property, both of which make it much more likely that a borrower will not repay the loan. 113. A significant number of the loans in the Supporting Loan Groups backing the
seventeen Securitizations for which the majority of mortgage loans were purportedly for owneroccupied properties failed two or more of these tests, indicating that the owner occupancy statistics provided to Fannie Mae and Freddie Mac were materially false and misleading. For example, for the ABFC 2006-HE1 Securitization, for which BOA National was the sponsor, BOA Securities was the underwriter, and ABF Corp. was the depositor, the Prospectus Supplement stated that 4.45 percent of the underlying properties by loan count in the Supporting 39
Loan Group were not owner-occupied. But the data review revealed that, for 11.32 percent of the properties represented as owner-occupied, the owners lived elsewhere, indicating that the true percentage of non-owner occupied properties was 15.27 percent, more than triple the percentage reported in the Prospectus Supplement.13 114. The data review revealed that for each of the seventeen Securitizations, the
Prospectus Supplement misrepresented the percentage of non-owner occupied properties. The true percentage of non-owner occupied properties, as determined by the data review, versus the percentage stated in the Prospectus Supplement for each Securitization, is reflected in Table 6 below. Table 6 demonstrates that the Prospectus Supplements for the majority of the Securitizations understated the percentage of non-owner occupied properties by at least 6.53 percent, and for several Securitizations by 10 percent or more. 115. In the case of six of the 23 Securitizations,14 the Prospectus Supplement stated
that all or nearly all of the mortgage loans in the Supporting Loan Group were Investment or Non-Owner properties. The Prospectus Supplements for the remaining seventeen Securitizations, however, reported that an overwhelming majority of the mortgage loans in the Supporting Loan Groups were owner-occupied, while a small percentage were reported to be non-owner occupied (i.e. a second home or investor home). The occupancy statistics for the Supporting Loan Groups for the seventeen Securitizations were reported in the Prospectus Supplements as follows.
This conclusion is arrived at by summing (a) the stated non-owner-occupied percentage in the Prospectus Supplement (here, 4.45 percent), and (b) the product of (i) the stated owner-occupied percentage (here, 96.13 percent) and (ii) the percentage of the properties represented as owner-occupied in the sample that showed strong indications that their owners in fact lived elsewhere (here, 11.32 percent). These six Securitizations are BOAA 2005-10, BOAA 2005-11, BOAA 2005-12, BOAA 2006-1, BOAA 2006-2, and STALT 2005-1F. 40
14
13
Table 6
Transaction Supporting Loan Group Reported Percentage of Non-Owner Occupied Properties Percentage of Properties Reported as OwnerOccupied With Strong Indication of Non-Owner Occupancy15 9.89 11.32 10.06 10.77 8.20 11.56 8.24 11.57 11.80 16.19 11.01 22.39 16.97 13.85 11.27 10.52 10.36 10.78 8.76 9.40 11.05 10.08 Actual Percentage of Non-Owner Occupied Properties Prospectus Percentage Understatement of Non-Owner Occupied Properties
ABFC 2005-WMC1 ABFC 2006-HE1 ABFC 2006-OPT1 ABFC 2006-OPT2 ABFC 2006-OPT3 ABFC 2007-WMC1 BAFC 2006-G BAFC 2006-H BAFC 2007-A BAFC 2007-C BOAA 2006-3 NSTR 2007-C OOMLT 2005-5 OOMLT 2007-2 OOMLT 2007-6 OOMLT 2007-FXD1 OOMLT 2007-HL1
Group 1 Group 1 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 1 Group 5 Group 1 Group 6 Group 5 Group 1 Group I Group II Group I Group I Group II Group I Group I
9.50 4.45 8.59 11.81 7.03 8.59 8.56 8.59 9.13 20.10 16.05 41.62 17.11 11.53 2.81 13.53 15.05 8.44 17.50 7.83 4.93 7.16
18.45 15.27 17.79 21.31 14.65 19.16 16.10 19.17 19.85 33.03 25.30 54.69 31.18 23.78 13.76 22.62 23.85 18.32 24.72 16.49 15.43 16.52
8.95 10.82 9.19 9.50 7.63 10.57 7.54 10.57 10.72 12.93 9.25 13.07 14.07 12.26 10.95 9.10 8.80 9.87 7.22 8.67 10.50 9.36
2. 116.
Prospectus Supplements were materially false and understated, as more specifically set out below. For each of the sampled loans, an industry standard automated valuation model (AVM) was used to calculate the value of the underlying property at the time the mortgage loan was originated. AVMs are routinely used in the industry as a way of valuing properties
As described more fully in paragraph 112, failing two or more tests of owneroccupancy is a strong indication that the borrower did not live at the mortgaged property and instead used it as a second home or an investment property. 41
15
during prequalification, origination, portfolio review and servicing. AVMs rely upon similar data as appraisersprimarily county assessor records, tax rolls, and data on comparable properties. AVMs produce independent, statistically-derived valuation estimates by applying modeling techniques to this data. 117. Applying the AVM to the available data for the properties securing the sampled
loans shows that the appraised value given to such properties was significantly higher than the actual value of such properties. The result of this overstatement of property values is a material understatement of the LTV ratio. That is, if a propertys true value is significantly less than the value used in the loan underwriting, then the loan represents a significantly higher percentage of the propertys value. This, of course, increases the risk a borrower will not repay the loan as well as the risk of greater losses in the event of a default. 118. For example, for the BAFC 2006-G Securitization, which was sponsored by BOA
National and underwritten by BOA Securities, and for which BOA Funding was the depositor, the Prospectus Supplement stated that zero LTV ratios for the Supporting Loan Group were above 100 percent. In fact, 11.13 percent of the sample of loans included in the data review had LTV ratios above 100 percent. In addition, the Prospectus Supplement stated that 84.93 percent of the loans had LTV ratios at or below 80 percent. The data review indicated that only 48.08 percent of the loans had LTV ratios at or below 80 percent. 119. The data review revealed that for all but two of the 23 Securitizations (ABFC
2006-OPT3 and OOMLT 2007-HL1),16 the Prospectus Supplement misrepresented the percentage of loans with an LTV ratio that were above 100 percent, as well the percentage of loans that had an LTV ratio at or below 80 percent. Table 7 reflects (i) the true percentage of Even in the case of those two exceptions, the percentage of mortgage loans with an LTV ratio at or under 80 percent was understated and thus misrepresented. 42
16
mortgages in the Supporting Loan Group with LTV ratios above 100 percent, versus the percentage reported in the Prospectus Supplement; and (ii) the true percentage of mortgages in the Supporting Loan Group with LTV ratios at or below 80 percent, versus the percentage reported in the Prospectus Supplement. The percentages listed in Table 7 were calculated by aggregated principal balance. Table 7
PROSPECTUS Transaction Supporting Loan Group Percentage of Loans Reported to Have LTV Ratio At Or Under 80% 60.68 56.39 49.60 52.53 70.79 67.04 0.00 0.00 52.49 84.93 93.53 84.18 97.31 87.60 90.29 91.35 95.76 89.40 94.87 90.92 84.94 25.94 39.86 64.26 63.15 51.49 65.81 62.64 0 94.73 DATA REVIEW True Percentage of Loans With LTV Ratio At Or Under 80% 38.88 38.67 35.42 37.82 48.98 49.05 3.38 2.17 29.48 48.08 51.32 58.30 62.94 74.27 75.33 78.31 81.22 68.65 84.87 75.31 65.77 22.32 30.73 42.77 40.37 31.85 49.53 48.04 2.64 65.06 PROSPECTUS Percentage of Loans Reported to Have LTV Ratio Over 100% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.08 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.14 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 DATA REVIEW True Percentage of Loans With LTV Ratio Over 100% 15.56 18.78 20.48 17.62 14.56 12.81 40.68 43.89 23.38 11.13 8.23 8.85 6.17 4.21 4.47 3.65 2.54 5.69 2.59 6.34 6.46 27.02 17.38 16.94 16.03 22.48 14.45 12.98 46.52 8.62
ABFC 2005-WMC1 ABFC 2006-HE1 ABFC 2006-OPT1 ABFC 2006-OPT2 ABFC 2006-OPT3 ABFC 2007-WMC1 BAFC 2006-G BAFC 2006-H BAFC 2007-A BAFC 2007-C BOAA 2005-10 BOAA 2005-11 BOAA 2005-12 BOAA 2006-1 BOAA 2006-2 BOAA 2006-3 NSTR 2007-C OOMLT 2005-5 OOMLT 2007-2 OOMLT 2007-6 OOMLT 2007FXD1 OOMLT 2007-HL1 STALT 2005-1F
Group 1 Group 1 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 1 Group 5 Group 1 Group 6 Group 2 Group 2 Group 2 Group 1 Group 3 Group 1 Group 3 Group 5 Group 1 Group I Group I Group II Group I Group I Group II Group I Group 4
43
120.
Securitizations reported that virtually none of the mortgage loans in the Supporting Loan Groups had an LTV ratio over 100 percent.17 In contrast, the data review revealed that at least 2.54 percent of the mortgage loans for each Securitization had an LTV ratio over 100 percent, and for most Securitizations this figure was much larger. Indeed, for thirteen of the Securitizations, the data review revealed that more than ten percent of the mortgages in the Supporting Loan Group had a true LTV ratio over 100 percent. For six Securitizations, the data review revealed that more than 20 percent of the mortgages in the Supporting Loan Group had a true LTV ratio over 100 percent. 121. These inaccuracies with respect to reported LTV ratios also indicate that the
representations in the Registration Statements relating to appraisal practices were false, and that the appraisers themselves, in many instances, furnished appraisals that they understood were inaccurate and that they knew bore no reasonable relationship to the actual value of the underlying properties. Indeed, independent appraisers following proper practices, and providing genuine estimates as to valuation, would not systematically generate appraisals that deviate so significantly (and so consistently upward) from the true values of the appraised properties. This conclusion is further confirmed by the findings of the Financial Crisis Inquiry Commission (the FCIC), which identified inflated appraisals as a pervasive problem during the period of the Securitizations, and determined through its investigation that appraisers were often pressured by mortgage originators, among others, to produce inflated results. See FCIC, Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (January 2011). In the BAFC 2006-H and BOAA 2006-3 Securitizations, the percentage of mortgage loans with a reported LTV ratio over 100 percent was .08 and .14 percent, respectively. 44
17
B. 122.
The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines The Registration Statements contained material misstatements and omissions
regarding compliance with underwriting guidelines. Indeed, the originators for the loans underlying the Securitizations systematically disregarded their respective underwriting guidelines in order to increase production and profits derived from their mortgage lending businesses. This is confirmed by the systematically misreported owner occupancy and LTV statistics, discussed above, and by (1) investigations into originators underwriting practices by government officials and private litigants, which have revealed widespread abandonment of originators reported underwriting guidelines during the relevant period; (2) the collapse of the Certificates credit ratings; and (3) the surge in delinquency and default in the mortgages in the Securitizations. 1. Government Investigations and Private Litigants Have Confirmed That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines
123.
The abandonment of underwriting guidelines is further demonstrated by
government reports and investigations that have described rampant underwriting failures throughout the period of the Securitizations, and, more specifically, have described underwriting failures by the very originator whose loans were included by the Defendants in the majority of the Securitizations. 124. As described above at paragraph 32, Option One Originated 100 percent of the
mortgage loans underlying eight Securitizations, and BOA National originated 100 percent of the mortgage loans underlying six Securitizations. Each additionally originated smaller portions of the loans underlying one or more additional Securitizations. These fourteen Securitizations
45
comprise approximately 59 percent of Fannie Maes and Freddie Macs $6 billion worth of purchases of the 23 Securitizations. 125. In November 2008, the Office of the Comptroller of the Currency (the OCC),
an office within the United States Department of the Treasury, issued a report identifying the Worst Ten mortgage originators in the Worst Ten metropolitan areas. The worst originators were defined as those with the largest number of non-prime mortgage foreclosures for 20052007 originations. Option One, which originated many of the loans for the Securitizations at issue here, was on that list. See Worst Ten in the Worst Ten, Office of the Comptroller of the Currency Press Release, November 13, 2008. 126. Option One has been identified through multiple reports and investigations for its
faulty underwriting. On June 3, 2008, for instance, the Attorney General for the Commonwealth of Massachusetts filed an action against Option One (the Option One Complaint), and its past and present parent companies, for their unfair and deceptive origination and servicing of mortgage loans. See Complaint, Commonwealth v. H&R Block, Inc., CV NO. 08-2474-BLS (Mass. Super. Ct. June. 3, 2008). According to the Massachusetts Attorney General, since 2004, Option One had increasingly disregarded underwriting standards . . . and originated thousands of loans that [Option One] knew or should have known the borrowers would be unable to pay, all in an effort to increase loan origination volume so as to profit from the practice of packaging and selling the vast majority of [Option Ones] residential subprime loans to the secondary market. See Option One Complaint. 127. The Massachusetts Attorney General alleged that Option Ones agents and
brokers frequently overstated an applicants income and/or ability to pay, and inflated the appraised value of the applicants home, and that Option One avoided implementing
46
reasonable measures that would have prevented or limited these fraudulent practices. Option Ones origination policies employed from 2004 through 2007 have resulted in an explosion of foreclosures. Id. at 1. 128. On November 24, 2008, the Superior Court of Massachusetts granted a
preliminary injunction that prevented Option One from foreclosing on thousands of its loans issued to Massachusetts residents. Commonwealth v. H&R Block, Inc., No. 08-2474-BLS1, 2008 WL 5970550 (Mass. Super. Ct. Nov. 24, 2008). On October 29, 2009, the Appeals Court of Massachusetts affirmed the preliminary injunction. See Commonwealth v. Option One Mortgage Co., No. 09-P-134, 2009 WL 3460373 (Mass. App. Ct. Oct. 29, 2009). 129. On August 9, 2011, the Massachusetts Attorney General announced that H&R
Block, Inc., Option Ones parent company, had agreed to settle the suit for approximately $125 million. See Massachusetts Attorney General Press Release, H&R Block Mortgage Company Will Provide $125 Million in Loan Modifications and Restitutions, Aug. 9, 2011. Media reports noted that the suit was being settled amidst ongoing discussions among multiple states attorneys general, federal authorities, and five major mortgage servicers, aimed at resolving investigations of the lenders foreclosure and mortgage-servicing practices. The Massachusetts Attorney General released a statement saying that no settlement should include a release for conduct relating to the lenders packaging of mortgages into securitizations. See, e.g., Bloomberg.com, H&R Block, Massachusetts Reach $125 Million Accord in State Mortgage Suit, Aug. 9, 2011. 130. BOA also departed from its own underwriting standards as a consequence of
striving to increase the volume of subprime mortgage loans it originated between 2004 and 2007. In 2004, Bank of America announced its commitment to invest $750 billion over 10 years in
47
low- and moderate-income (LMI) communities through consumer loans and other programs. FCIC Report at 97; see also BOA Press Release, Bank of America Community Development Lending Exceeds $85 Billion, May 22, 2006. Pursuant to this initiative, in 2005 alone, BOA provided more than $33.2 billion in mortgage loans to LMI borrowers and made more than $40 million in loans and investments every business hour. Id. As disclosed to the FCIC in June 2010, almost 17 percent of the LMI loans originated by Bank of America between 2004 and 2007 were delinquent at some point for 90 days or more. See 6/16/10 BOA letter to FCIC, Schedule 2.5. Bank of America retained only about 50 percent of those LMI loans on its balance sheet and either sold or securitized the rest. Id. 131. The FCIC reports that, in 2005, examiners from the Federal Reserve and other
agencies conducted a confidential peer group study of mortgage practices at six companies, including BOA. According to Sabeth Siddique, then head of credit risk at the Federal Reserve Boards Division of Banking Supervision and Regulation, the study showed a very rapid increase in the volume of these irresponsible loans, very risky loans. The study also showed that [a] large percentage of their loans issued were subprime and Alt-A mortgages, and the underwriting standards for these products had deteriorated. FCIC Report at 172. 132. BOA was one of the most aggressive competitors in the mortgage origination
market. Even the top executives of Countrywide Financial Corp., the notorious mortgage lender singled out by the FCIC for having originated high-risk loans destined to bring financial and reputational catastrophe, FCIC Report at xxii, complained to each other at the time that BOAs appetite for risky products was greater than that of Countywide. In a June 13, 2005 e-mail Countrywide CEO Angelo Mozilo wrote to President and COO David Sambol: This is the third deal in the last 10 days that BoA has offered that is impossible to beat. In fact the other two
48
were substantially worse than this one. It appears to me that BofA is making an aggressive move into mortgages once again. (Emphasis added). 133. BOA also participated in warehouse lending extending a line of credit to a
third-party loan originator to fund mortgage loans to ensure that it had access to a steady stream of mortgage loans to securitize and sell to investors. In 2001, BOA sold EquiCredit, the division of BOA that, at the time, was primarily responsible for making subprime loans. In order to guarantee that it could obtain sufficient mortgages to pool into its residential mortgage-backed securities securitizations, BOA began to directly fund originating banks, including Countrywide and New Century Mortgage Corporation. According to Inside Mortgage Funding, BOA was the leading participant in the warehouse lending channel, with nearly 26 percent market share by 2009. See BOA press release, Bank of America Exits First Mortgage Wholesale Channel, October 5, 2010. 134. In addition, BOA sought to expand its share of the mortgage securities market by
aggressively pursuing subprime mortgage originators, including Option One, offering to pay more for their mortgages than competing Wall Street banks and offering to perform less due diligence than its competitors. 135. Plaintiffs with access to files compiled by BOA in originating loans have
confirmed that Bank of America routinely originated loans that failed to comply with its guidelines. In its recently filed action alleging that BOA National and BOA Securities, among others, engaged in common law fraud and violated the Securities Act of 1933, the insurer American International Group, Inc. (AIG), has described that after managing to obtain the loan files relating to a 2007 securitization of mortgage-backed securities (OOMLT 2007-FXD2), AIG arranged for a third-party consultant to review a sample of the files to assess whether the loans
49
met stated underwriting guidelines. See Complaint, Am. Intl Group, Inc. v. Bank of Am. Corp., et al., CV No. 652199/2011 (NY Sup. August 8, 2011) at 128-29. 136. The results of that review confirmed what the publicly available data already
showed: that BOAs mortgage pools contain loans rife with violations of BOAs representations and its underwriting guidelines. AIGs review of 100 loan files from OOMLT 2007-FXD2 revealed violations of underwriting guidelines in 82 percent of the loans, including violations of guidelines relating to income, employment, and owner-occupancy. Id. 137. The originators of the mortgage loans underlying the Securitizations went beyond
the systematic disregard of their own underwriting guidelines. Indeed, as the FCIC has confirmed, mortgage loan originators throughout the industry pressured appraisers, during the period of the Securitizations, to issue inflated appraisals that met or exceeded the amount needed for the subject loans to be approved, regardless of the accuracy of such appraisals, and especially when the originators aimed at putting the mortgages into a package of mortgages that would be sold for securitization. This resulted in lower LTV ratios, discussed above, which in turn made the loans appear to the investors less risky than they were. 138. As described by Patricia Lindsay, a former wholesale lender who testified before
the FCIC in April 2010, appraisers fear[ed] for their livelihoods, and therefore cherry-picked data that would help support the needed value rather than finding the best comparables to come up with the most accurate value. See Written Testimony of Patricia Lindsay to the FCIC, April 7, 2010, at 5. Likewise, Jim Amorin, President of the Appraisal Institute, confirmed in his testimony that [i]n many cases, appraisers are ordered or severely pressured to doctor their reports and to convey a particular, higher value for a property, or else never see work from those parties again . [T]oo often state licensed and certified appraisers are forced into making a
50
Hobsons Choice. See Testimony of Jim Amorin to the FCIC, available at www.appraisalinstitute.org/newsadvocacy/downloads/ltrs_tstmny/2009/AI-ASA-ASFMRANAIFATestimonyonMortgageReform042309final.pdf. Faced with this choice, appraisers systematically abandoned applicable guidelines and over-valued properties in order to facilitate the issuance of mortgages that could then be collateralized into mortgage-backed securitizations. 2. The Collapse of the Certificates Credit Ratings Further Indicates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines
139.
assigned credit ratings of AAA or its equivalent, which purportedly reflected the description of the mortgage loan collateral and underwriting practices set forth in the Registration Statements. These ratings were artificially inflated, however, as a result of the very same misrepresentations that the Defendants made to investors in the Prospectus Supplements 141. BOA provided or caused to be provided loan-level information to the rating
agencies that they relied upon in order to calculate the Certificates assigned ratings, including the borrowers LTV ratio, debt-to-income ratio, owner occupancy status, and other loan-level information described in aggregation reports in the Prospectus Supplements. Because the information that BOA provided or caused to be provided was false, the ratings were inflated and the level of subordination that the rating agencies required for the sale of AAA (or its equivalent) certificates was inadequate to provide investors with the level of protection that those ratings signified. As a result, the GSEs paid Defendants inflated prices for purported AAA (or its 51
equivalent) Certificates, unaware that those Certificates actually carried a severe risk of loss and carried inadequate credit enhancement. 142. Since the issuance of the Certificates, the ratings agencies have dramatically
Transaction ABFC 2005-WMC1 ABFC 2006-HE1 ABFC 2006-OPT1 ABFC 2006-OPT2 ABFC 2006-OPT3 ABFC 2007-WMC1 BAFC 2006-G BAFC 2006-H BAFC 2007-A BAFC 2007-C BOAA 2005-10 BOAA 2005-11 BOAA 2005-12 BOAA 2006-1 BOAA 2006-2 BOAA 2006-3 NSTR 2007-C OOMLT 2005-5 OOMLT 2007-2 Tranche A1 A1 A2 A1 A2 A1 A2 A1 A1A 1A1 5A1 1A1 6A1 2CB1 2CB1 2CB1 1CB1 3CB1 1CB1 3CB1 5CB1 1AV1 A1 IIA1 Rating at Issuance (Moodys/S&P/Fitch) Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/--/AAA Aaa/--/AAA --/AAA/AAA Aaa/AAA/-Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/AAA Aaa/--/AAA Aaa/--/AAA Aaa/--/AAA Aaa/--/AAA Aaa/--/AAA Aaa/--/AAA Aaa/--/AAA Aaa/--/AAA Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/-Rating at July 31, 2011 (Moodys/S&P/Fitch) Aaa/AAA/AAA Caa3/CCC/C Caa1/A/CCC Caa1/A/CCC Caa2/BB-/CC Caa3/B+/CC Caa2/-/C Caa2/--/C --/CCC/C Caa2/BB/-Caa3/CCC/-Caa3/CCC/C Caa1/BB/CCC Caa2/--/C Caa2/--/C Caa2/--/C Caa1/--/CC Caa2/--/C Caa1/--/CC Caa3/--/C Caa3/--/C Caa3/CCC/-Aa3/AAA/BBB Caa3/CCC/--
Applicable ratings are shown in sequential order separated by forward slashes: Moodys/S&P/Fitch. The hyphens between forward slashes indicate that the relevant agency did not provide a rating at issuance. 52
18
Transaction
Tranche IA1 IA1 IIA1 IA1 IA1 4A1
OOMLT 2007-6 OOMLT 2007FXD1 OOMLT 2007-HL1 STALT 2005-1F
Rating at Issuance (Moodys/S&P/Fitch) Aaa/AAA/-Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/-Aaa/AAA/--
Rating at July 31, 2011 (Moodys/S&P/Fitch) Caa3/CCC/-Caa3/CCC/-Ca/CC/WD Ca/CC/WD Ca/CCC/-Ca/D/--
3.
143.
supposed to represent long-term, stable investments, a significant percentage of the mortgage loans backing the Certificates have defaulted, have been foreclosed upon, or are delinquent, resulting in massive losses to the Certificateholders. The overall poor performance of the mortgage loans is a direct consequence of the fact that they were not underwritten in accordance with applicable underwriting guidelines as represented in the Registration Statements. 144. Loan groups that were properly underwritten and contained loans with the
characteristics represented in the Registration Statements would have experienced substantially fewer payment problems and substantially lower percentages of defaults, foreclosures, and delinquencies than occurred here. Table 9 reflects the percentage of loans in the Supporting Loan Groups that are in default, have been foreclosed upon, or are delinquent as of July 2011. Table 9
Transaction Tranche Percentage of Delinquent/Defaulted/Foreclosed Loans 32.7 50.9 61.5 61.6 48.6 53.6
ABFC 2005-WMC1 ABFC 2006-HE1 ABFC 2006-OPT1 ABFC 2006-OPT2
A1 A1 A2 A1 A2 A1
53
ABFC 2006-OPT3 ABFC 2007-WMC1 BAFC 2006-G BAFC 2006-H BAFC 2007-A BAFC 2007-C BOAA 2005-10 BOAA 2005-11 BOAA 2005-12 BOAA 2006-1 BOAA 2006-2 BOAA 2006-3 NSTR 2007-C OOMLT 2005-5 OOMLT 2007-2 OOMLT 2007-6 OOMLT 2007-FXD1 OOMLT 2007-HL1 STALT 2005-1F
A2 A1 A1A 1A1 5A1 1A1 6A1 2CB1 2CB1 2CB1 1CB1 3CB1 1CB1 3CB1 5CB1 1AV1 A1 IIA1 IA1 IA1 IIA1 IA1 IA1 4A1
43.8 44.7 50.8 22.2 34.1 45.1 26.2 17.2 19.7 13.0 10.7 21.9 7.6 18.1 28.9 31.4 41.3 42.1 42.7 38.5 32.8 34.2 48.0 29.3
145.
confirmed systematic underwriting failures by the originators responsible for the mortgage loans across the Securitizations, and the extraordinary drop in credit rating and rise in delinquencies across those Securitizations, all confirm that the mortgage loans in the Supporting Loan Groups, contrary to the representations in the Registration Statements, were not originated in accordance with the stated underwriting guidelines. V. FANNIE MAES AND FREDDIE MACS PURCHASES OF THE GSE CERTIFICATES AND THE RESULTING DAMAGES 146. In total, between September 30, 2005 and November 5, 2007, Fannie Mae and
Freddie Mac purchased over $6 billion in residential mortgage-backed securities issued in
54
connection with the Securitizations. Table 10 reflects each of Freddie Macs purchases of the Certificates.19 Table 10
9/30/2005 8/10/2006 10/12/2006 11/14/2006 11/5/2007 6/7/2007 11/10/2005 3/12/2007 5/30/2007 1/30/2007 4/26/2007
Transaction
Tranche
CUSIP

235,900,000 166,946,000 232,465,000 114,343,000 631,248,000 224,590,000 227,921,000 190,288,000 435,470,000 272,242,000 304,935,000

100 100 100 100 100 100 100 100 100 99.99 100
ABFC 2005-WMC1 ABFC 2006-OPT1 ABFC 2006-OPT2 ABFC 2006-OPT3 ABFC 2007-WMC1 NSTR 2007-C OOMLT 2005-5 OOMLT 2007-2 OOMLT 2007-6 OOMLT 2007-FXD1 OOMLT 2007-HL1
A1 A2 A2 A2 A1A 1AV1 A1 IIA1 IA1 IIA1 IA1
04542BNX6 00075QAR3 00075XAB3 00075VAB7 04545EAA1 63860KAA0 68389FKK9 68401TAB4 68403KAQ8 68402VAB8 68402SAA7
BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities
147.
Table 11
12/14/2006 8/10/2006 10/12/2006 11/14/2006 7/31/2006 9/29/2006 1/31/2007 4/30/2007 10/31/2005 11/30/2005 12/30/2005 2/28/2006 2/28/2006 3/31/2006 3/31/2006
Transaction
Tranche
CUSIP

304,800,000 167,027,000 232,459,000 114,273,000 396,306,000 431,225,000 94,441,000 68,349,000 92,219,000 86,674,000 128,037,000 71,491,241 93,494,428 50,937,925 75,289,333

100 100 100 100 100 100 100 99.99 101.11 99.78 99.91 100.67 102.16 100.16 101.70
ABFC 2006-HE1 ABFC 2006-OPT1 ABFC 2006-OPT2 ABFC 2006-OPT3 BAFC 2006-G BAFC 2006-H BAFC 2007-A BAFC 2007-C BOAA 2005-10 BOAA 2005-11 BOAA 2005-12 BOAA 2006-1 BOAA 2006-2
A1 A1 A1 A1 1A1 5A1 1A1 6A1 2CB1 2CB1 2CB1 1CB1 3CB1 1CB1 3CB1
00075WAA7 00075QAQ5 00075XAA5 00075VAA9 05950MAA8 05950PAS2 05952DAA6 059522AA0 05948KR84 05948KV55 05948KY52 05948K2G3 05948K2K4 05948K2V0 05948K3A5
BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities
Purchases of securities in Tables 10 and 11 are stated in terms of unpaid principal balance of the relevant Certificates. Purchase prices are stated in terms of percentage of par. 55
19
Transaction
Tranche
CUSIP

8/24/2007 3/12/2007 1/30/2007 12/30/2005

37,470,787 190,306,000 273,043,000 87,447,000

99.03 100 99.99 101.75
BOAA 2006-3 OOMLT 2007-2 OOMLT 2007-FXD1 STALT 2005-1F
5CB1 IA1 IA1 4A1
05948K4Q9 68401TAA6 68402VAA0 86789MAV9
BOA Securities BOA Securities BOA Securities BOA Securities
148.
Registration Statements, including the Prospectuses and Prospectus Supplements, directly caused Fannie Mae and Freddie Mac to suffer hundreds of millions of dollars in damages, including without limitation depreciation in the value of the Certificates. The mortgage loans underlying the GSE Certificates experienced defaults and delinquencies at a much higher rate than they would have had the loan originators adhered to the underwriting guidelines set forth in the Registration Statements, and the payments to the trusts were therefore much lower than they would have been had the loans been underwritten as described in the Registration Statements. 150. Fannie Maes and Freddie Macs losses have been much greater than they would
have been if the mortgage loans had the credit quality represented in the Registration Statements. 151. BOAs misstatements and omissions in the Registration Statements regarding the
true characteristics of the loans were the proximate cause of Fannie Maes and Freddie Macs losses relating to their purchases of the GSE Certificates. Based upon sales of the Certificates or
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similar certificates in the secondary market, BOA proximately caused hundreds of millions of dollars in damages to Fannie Mae and Freddie Mac in an amount to be determined at trial. FIRST CAUSE OF ACTION Violation of Section 11 of the Securities Act of 1933 (Against Defendants MLPF&S, ABF Corp., BOA Mortgage, BOA Funding, George C. Carp, Robert Caruso, George E. Ellison, Adam D. Glassner, Daniel B. Goodwin, Juliana Johnson, Aashish Kamat, Michael J. Kula, Mark I. Ryan, James H. Luther, and Antoine Schetritt) 152. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 153. This claim is brought by Plaintiff pursuant to Section 11 of the Securities Act of
1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements. This claim is brought against Defendant MLPF&S (as successor-in-interest to BOA Securities) with respect to each of the Registration Statements. This claim is also brought against (i) Defendants ABF Corp., BOA Mortgage, and BOA Funding, and (ii) Defendants George C. Carp, Robert Caruso, George E. Ellison, Adam D. Glassner, Daniel B. Goodwin, Juliana Johnson, Aashish Kamat, Michael J. Kula, Mark I. Ryan, James H. Luther, and Antoine Schetritt (collectively, the Section 11 Individual Defendants), each with respect to the Registration Statements filed by ABF Corp., BOA Mortgage, or BOA Funding that registered securities that were bona fide offered to the public on or after September 6, 2005. 154. This claim is predicated upon the strict liability of Defendant MLPF&S (as
successor-in-interest to BOA Securities) for making false and materially misleading statements in each of the Registration Statements for the Securitizations, and for omitting facts necessary to make the facts stated therein not misleading. As discussed above at paragraph 16, MLPF&S is liable as successor-in-interest to BOA Securities, which was merged into it in November 2010. 57
Depositor Defendants ABF Corp., BOA Mortgage, BOA Funding, and the Section 11 Individual Defendants are strictly liable for making false and materially misleading statements in the Registration Statements filed by the Depositor Defendants that registered securities that were bona fide offered to the public on or after September 6, 2005, which are applicable to ten of the 23 securitizations (as specified in Table 2, above at paragraph 48), and for omitting facts necessary to make the facts stated therein not misleading. 155. BOA Securities served as underwriter of each of the Securitizations, and as such,
is liable for the misstatements and omissions in the Registration Statements under Section 11 of the Securities Act. As discussed above at paragraph 16, MLPF&S is liable as successor-ininterest to BOA Securities, which was merged into it in November 2010. 156. Depositor Defendants ABF Corp., BOA Mortgage, and BOA Funding filed six of
the Registration Statements, under which seventeen of the 23 securitizations were carried out. As depositors, ABF Corp., BOA Mortgage, and BOA Funding are issuers of the GSE Certificates issued pursuant to the Registration Statements they filed within the meaning of Section 2(a)(4) of the Securities Act, 15 U.S.C. 77b(a)(4), and in accordance with Section 11(a), 15 U.S.C. 77k(a). As such, they are liable under Section 11 of the Securities Act for the misstatements and omissions in those three Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005. 157. At the time Depositor Defendants ABF Corp., BOA Mortgage, and BOA Funding
filed six Registration Statements applicable to seventeen of the Securitizations, the Section 11 Individual Defendants were officers and/or directors of ABF Corp., BOA Mortgage, and/or BOA Funding. In addition, the Section 11 Individual Defendants signed those Registration Statements and either signed or authorized another to sign on their behalf the amendments to those
58
Registration Statements. As such, the Section 11 Individual Defendants are liable under Section 11 of the Securities Act for the misstatements and omissions in those three Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005. 158. At the time that they became effective, each of the Registration Statements
contained material misstatements of fact and omitted information necessary to make the facts stated therein not misleading, as set forth above. The facts misstated or omitted were material to a reasonable investor reviewing the Registration Statements. 159. The untrue statements of material facts and omissions of material fact in the
Registration Statements are set forth above in Section IV and pertain to compliance with underwriting guidelines, occupancy status and loan-to-value ratios. 160. Fannie Mae and Freddie Mac purchased or otherwise acquired the GSE
Certificates pursuant to the false and misleading Registration Statements. Fannie Mae and Freddie Mac made these purchases in the primary market. At the time they purchased the GSE Certificates, Fannie Mae and Freddie Mac did not know of the facts concerning the false and misleading statements and omissions alleged herein, and if the GSEs would have known those facts, they would not have purchased the GSE Certificates. 161. BOA Securities owed to Fannie Mae, Freddie Mac, and other investors a duty to
make a reasonable and diligent investigation of the statements contained in the Registration Statements at the time they became effective to ensure that such statements were true and correct and that there were no omissions of material facts required to be stated in order to make the statements contained therein not misleading. The Section 11 Individual Defendants owed the same duty with respect to the three Registration Statements that they signed that registered
59
securities that were bona fide offered to the public on or after September 6, 2005, which are applicable to ten of the Securitizations. 162. BOA Securities and the Section 11 Individual Defendants did not exercise such
due diligence and failed to conduct a reasonable investigation. In the exercise of reasonable care, these Defendants should have known of the false statements and omissions contained in or omitted from the Registration Statements filed in connection with the Securitizations, as set forth herein. As discussed above at paragraph 16, MLPF&S is liable as successor-in-interest to BOA Securities, which was merged into it in November 2010. Depositor Defendants ABF Corp., BOA Mortgage, and BOA Funding, though subject to strict liability without regard to whether they performed diligence, also failed to take reasonable steps to ensure the accuracy of the representations. 163. Fannie Mae and Freddie Mac sustained substantial damages as a result of the
misstatements and omissions in the Registration Statements. 164. The time period from July 13, 2009 through August 30, 2011 is tolled for statute
of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae, BOA Corp., BOA Securities, BOA Mortgage, BOA National, and BOA Funding. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12). 165. By reason of the conduct herein alleged, BOA Securities, ABF Corp., BOA
Mortgage, BOA Funding, and the Section 11 Individual Defendants are jointly and severally liable for their wrongdoing.
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SECOND CAUSE OF ACTION Violation of Section 12(a)(2) of the Securities Act of 1933 (Against MLPF&S, ABF Corp., BOA Mortgage, and BOA Funding) 166. Plaintiff realleges each allegation above as if fully set forth herein, except to the
Act of 1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements in the Securitizations listed in paragraph 2. 168. This claim is predicated upon BOA Securities negligence for making false and
materially misleading statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as Prospectuses) for the Securitizations listed in paragraph 2. As discussed above at paragraph 16, MLPF&S is liable as successor-ininterest to BOA Securities, which was merged into it in November 2010. Depositor Defendants ABF Corp., BOA Mortgage, and BOA Funding acted negligently in making false and materially misleading statements in the Prospectuses for the Securitizations carried out under the six Registration Statements they filed, which are applicable to seventeen of the Securitizations. 169. BOA Securities is prominently identified in the Prospectuses, the primary
documents that it used to sell the GSE Certificates. BOA Securities offered the Certificates publicly, including selling to Fannie Mae and Freddie Mac their GSE Certificates, as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. 170. BOA Securities offered and sold the GSE Certificates to Fannie Mae and Freddie
Mac by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances
61
under which they were made, not misleading. BOA Securities reviewed and participated in drafting the Prospectuses. 171. BOA Securities successfully solicited Fannie Maes and Freddie Macs purchases
of the GSE Certificates. As underwriter, BOA Securities obtained substantial commissions based upon the amount received from the sale of the Certificates to the public. 172. BOA Securities offered the GSE Certificates for sale, sold them, and distributed
them by the use of means or instruments of transportation and communication in interstate commerce. 173. Depositor Defendants ABF Corp., BOA Mortgage, and BOA Funding are
prominently identified in the Prospectuses for the Securitizations carried out under the Registration Statements that they filed. These Prospectuses were the primary documents each used to sell Certificates for the seventeen Securitizations under those Registration Statements. ABF Corp., BOA Mortgage, and BOA Funding offered the Certificates publicly and actively solicited their sale, including to Fannie Mae and Freddie Mac. 174. With respect to the seventeen Securitizations for which they filed Registration
Statements, ABF Corp., BOA Mortgage, and BOA Funding offered the GSE Certificates to Fannie Mae and Freddie Mac by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. Upon information and belief, ABF Corp., BOA Mortgage, and BOA Funding reviewed and participated in drafting the Prospectuses.
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175.
Depositor Defendants ABF Corp., BOA Mortgage, and BOA Funding offered the
GSE Certificates for sale by the use of means or instruments of transportation and communication in interstate commerce. 176. Each of BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding actively
participated in the solicitation of the GSEs purchase of the GSE Certificates, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates. 177. Each of the Prospectuses contained material misstatements of fact and omitted
information necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectuses. 178. The untrue statements of material facts and omissions of material fact in the
Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, and loan-to-value ratios. 179. BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding offered and sold
the GSE Certificates directly to Fannie Mae and Freddie Mac, pursuant to the false and misleading Prospectuses. 180. BOA Securities owed to Fannie Mae and Freddie Mac, as well as to other
investors in these trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. As discussed above at paragraph 16, MLPF&S is liable as successor-in-interest to BOA Securities, which was merged into it in November 2010. Depositor Defendants ABF Corp., BOA Mortgage, and BOA Funding owed the same duty with respect to
63
the Prospectuses for the Securitizations carried out under the six Registration Statements filed by them. 181. BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding failed to exercise
such reasonable care. These Defendants in the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above. As discussed above at paragraph 16, MLPF&S is liable as successor-in-interest to BOA Securities, which was merged into it in November 2010. 182. In contrast, Fannie Mae and Freddie Mac did not know of the untruths and
omissions contained in the Prospectuses at the time they purchased the GSE Certificates. If the GSEs would have known of those untruths and omissions, they would not have purchased the GSE Certificates. 183. Fannie Mae and Freddie Mac acquired the GSE Certificates in the primary market
their investments in the GSE Certificates and have the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 185. The time period from July 13, 2009 through August 30, 2011 is tolled for statute
of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae, BOA Corp., BOA Securities, BOA Mortgage, BOA National, and BOA Funding. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12).
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THIRD CAUSE OF ACTION Violation of Section 15 of the Securities Act of 1933 (Against BOA Corp., BOA National, and the Individual Defendants) 186. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 187. This claim is brought under Section 15 of the Securities Act of 1933, 15 U.S.C.
77o (Section 15), against BOA Corp., BOA National, and the Individual Defendants for controlling-person liability with regard to the Section 11 and Section 12(a)(2) causes of actions set forth above. 188. The Individual Defendants at all relevant times participated in the operation and
management of ABF Corp., BOA Mortgage, and/or BOA Funding and their related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of ABF Corp.s, BOA Mortgages, and/or BOA Fundings business affairs. Defendant George C. Carp was Treasurer, Chief Accounting Officer, and Chief Financial Officer of ABF Corp. and BOA Funding. Defendant Robert Caruso was a Director of BOA Mortgage. Defendant George E. Ellison was a Director of ABF Corp. and BOA Funding. Defendant Daniel B. Goodwin was President and Chief Executive Officer of ABF Corp. Defendant Juliana Johnson was a Director of BOA Mortgage. Defendant Adam D. Glassner was President, Chief Executive Officer, and Chairman of the Board of BOA Mortgage. Defendant Aashish Kamat was a Director of BOA Mortgage. Defendant Michael J. Kula was a Director of BOA Mortgage. Defendant James H. Luther was a Director of ABF Corp. and BOA Funding. Defendant William L. Maxwell was a director of ABF Corp. Defendant Mark I. Ryan was President and Chief Executive Officer of BOA Funding. Defendant Antoine Schetritt was President, Chief Executive Officer, and Chairman of the Board of BOA Mortgage.
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189.
Defendant BOA National was the sponsor for sixteen of the Securitizations
carried out under five of the Registration Statements filed by ABF Corp., BOA Mortgage, and BOA Funding, and culpably participated in the violations of Sections 11 and 12(a)(2) set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting ABF Corp., BOA Mortgage, and BOA Funding as the special purpose vehicles, and selecting BOA Securities as underwriter for the Securitizations. In its role as sponsor, BOA National knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 190. Defendant BOA National also acted as the seller of the mortgage loans for the
sixteen Securitizations carried out under five of the Registration Statements filed by Defendants ABF Corp., BOA Mortgage, and BOA Funding, in that it conveyed such mortgage loans to ABF Corp., BOA Mortgage, and BOA Funding pursuant to an Assignment and Recognition Agreement or a Mortgage Loan Purchase Agreement. 191. Defendant BOA National also controlled all aspects of the business of Depositor
Defendants ABF Corp., BOA Mortgage, and BOA Funding, as those Defendants were merely special purpose entities created for the purpose of acting as a pass-through for the issuance of the Certificates. ABF Corp., BOA Mortgage, and BOA Funding were direct, wholly-owned subsidiaries of BOA National, and the officers and directors of BOA National overlapped with the officers and directors of ABF Corp., BOA Mortgage, and BOA Funding. In addition, because of its position as sponsor, BOA National was able to, and did in fact, control the contents of the five Registration Statements filed by ABF Corp., BOA Mortgage, and BOA
66
Funding, including the Prospectuses and Prospectus Supplements, which pertained to the sixteen Securitizations sponsored by BOA National and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 192. Defendant BOA Corp. controlled the business operations of BOA Securities
Depositor Defendants ABF Corp., BOA Mortgage, and BOA Funding. As the sole corporate parent of BOA Securities and ABF Corp., BOA Mortgage, and BOA Funding, BOA Corp. had the practical ability to direct and control the actions of ABF Corp., BOA Mortgage, BOA Funding, and BOA Securities in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding in connection with the issuance and sale of the Certificates. 193. BOA Corp.s push to securitize large volumes of mortgage loans contributed to
the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 194. BOA Corp. culpably participated in the violations of Section 11 and 12(a)(2) set
forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and establish special-purpose financial entities such as ABF Corp., BOA Mortgage, BOA Funding, and the issuing trusts to serve as conduits for the mortgage loans. 195. BOA Corp., BOA National, and the Individual Defendants are controlling persons
within the meaning of Section 15 by virtue of their actual power over, control of, ownership of, and/or directorship of BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements.
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196.
Fannie Mae and Freddie Mac purchased in the primary market Certificates issued
pursuant to the Registration Statements, including the Prospectuses and Prospectus Supplements, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements. 197. Fannie Mae and Freddie Mac did not know of the misstatements and omissions in
the Registration Statements; had the GSEs known of those misstatements and omissions, they would not have purchased the GSE Certificates. 198. Fannie Mae and Freddie Mac have sustained damages as a result of the
misstatements and omissions in the Registration Statements, for which they are entitled to compensation. 199. The time period from July 13, 2009 through August 30, 2011 is tolled for statute
of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae, BOA Corp., BOA Securities, BOA Mortgage, BOA National, and BOA Funding. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12). FOURTH CAUSE OF ACTION Violation of Section 13.1-522(A)(ii) of the Virginia Code (Against MLPF&S, ABF Corp., BOA Mortgage, and BOA Funding) 200. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 201. This claim is brought by Plaintiff pursuant to Section 13.1-522(A)(ii) of the
Virginia Code and is asserted on behalf of Freddie Mac. The allegations set forth below in this
68
cause of action pertain to only those GSE Certificates identified in Table 10 above that were purchased by Freddie Mac on or after September 6, 2006. 202. This claim is predicated upon BOA Securities negligence for making false and
materially misleading statements in the Prospectuses for the Securitizations listed in paragraph 2. As discussed above at paragraph 16, MLPF&S is liable as successor-in-interest to BOA Securities, which was merged into it in November 2010. Depositor Defendants ABF Corp., BOA Mortgage, and BOA Funding acted negligently in making false and materially misleading statements in the Prospectuses for the Securitizations carried out under the six Registration Statements they filed. 203. BOA Securities is prominently identified in the Prospectuses, the primary
documents that it used to sell the GSE Certificates. BOA Securities offered the Certificates publicly, including selling to Freddie Mac its GSE Certificates, as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. 204. BOA Securities offered and sold the GSE Certificates to Freddie Mac by means
of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. BOA Securities reviewed and participated in drafting the Prospectuses. 205. BOA Securities successfully solicited Freddie Macs purchases of the GSE
Certificates. As underwriter, BOA Securities obtained substantial commissions based upon the amount received from the sale of the Certificates to the public. 206. BOA Securities offered the GSE Certificates for sale, sold them, and distributed
them to Freddie Mac in the State of Virginia.
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207.
Depositor Defendants ABF Corp., BOA Mortgage, and BOA Funding are
prominently identified in the Prospectuses for the Securitizations carried out under the Registration Statements that they filed. These Prospectuses were the primary documents each used to sell Certificates for those Securitizations. ABF Corp., BOA Mortgage, and BOA Funding offered the Certificates publicly and actively solicited their sale, including to Freddie Mac. 208. With respect to the Securitizations for which they filed Registration Statements,
ABF Corp., BOA Mortgage, and BOA Funding offered the GSE Certificates to Freddie Mac by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. Upon information and belief, ABF Corp., BOA Mortgage, and BOA Funding reviewed and participated in drafting the Prospectuses. 209. Each of BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding actively
participated in the solicitation of Freddie Macs purchase of the GSE Certificates, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates. 210. Each of the Prospectuses contained material misstatements of fact and omitted
Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, and loan-to-value ratios.
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212.
BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding offered and sold
the GSE Certificates directly to Freddie Mac, pursuant to the false and misleading Prospectuses. 213. BOA Securities owed to Freddie Mac, as well as to other investors in these trusts,
a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. As discussed above at paragraph 16, MLPF&S is liable as successor-in-interest to BOA Securities, which was merged into it in November 2010. Depositor Defendants ABF Corp., BOA Mortgage, and BOA Funding owed the same duty with respect to the Prospectuses for the Securitizations carried out under the six Registration Statements filed by them. 214. BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding failed to exercise
such reasonable care. These Defendants in the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above. As discussed above at paragraph 16, MLPF&S is liable as successor-in-interest to BOA Securities, which was merged into it in November 2010. 215. In contrast, Freddie Mac did not know of the untruths and omissions contained in
the Prospectuses at the time they purchased the GSE Certificates. If Freddie Mac would have known of those untruths and omissions, they would not have purchased the GSE Certificates. 216. Freddie Mac sustained substantial damages in connection with its investments in
the GSE Certificates and has the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon.
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217.
This action is brought within three years of the date that the FHFA was appointed
as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). FIFTH CAUSE OF ACTION Violation of Section 13.1-522(C) of the Virginia Code (Against BOA Corp., BOA National, and the Individual Defendants) 218. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 219. This claim is brought by Plaintiff under Section 13.1-522(C) of the Virginia Code
and is asserted on behalf of Freddie Mac. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 10 above that were purchased by Freddie Mac on or after September 6, 2006. This claim is brought against BOA Corp., BOA National, and the Individual Defendants for controlling-person liability with regard to the Fourth Cause of Action set forth above. 220. The Individual Defendants at all relevant times participated in the operation and
management of ABF Corp., BOA Mortgage, and/or BOA Funding and their related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of ABF Corp.s, BOA Mortgages, and/or BOA Fundings business affairs. Defendant George C. Carp was Treasurer, Chief Accounting Officer, and Chief Financial Officer of ABF Corp. and BOA Funding. Defendant Robert Caruso was a Director of BOA Mortgage. Defendant George E. Ellison was a Director of ABF Corp. and BOA Funding. Defendant Daniel B. Goodwin was President and Chief Executive Officer of ABF Corp. Defendant Juliana Johnson was a Director of BOA Mortgage. Defendant Adam D. Glassner was President, Chief Executive Officer, and Chairman of the Board of BOA Mortgage. Defendant Aashish Kamat was a Director of BOA Mortgage.
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Defendant Michael J. Kula was a Director of BOA Mortgage. Defendant James H. Luther was a Director of ABF Corp. and BOA Funding. Defendant William L. Maxwell was a director of ABF Corp. Defendant Mark I. Ryan was President and Chief Executive Officer of BOA Funding. Defendant Antoine Schetritt was President, Chief Executive Officer, and Chairman of the Board of BOA Mortgage. 221. Defendant BOA National was the sponsor for Securitizations carried out under
five of the Registration Statements filed by ABF Corp., BOA Mortgage, and BOA Funding, and culpably participated in the violations of Section 13.1-522(A)(ii) set forth above with respect to the offering of the GSE Certificates to Freddie Mac by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting ABF Corp., BOA Mortgage, and BOA Funding as the special purpose vehicles, and selecting BOA Securities as underwriter for the Securitizations. In its role as sponsor, BOA National knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 222. Defendant BOA National also acted as the seller of the mortgage loans for
Securitizations carried out under five of the Registration Statements filed by Defendants ABF Corp., BOA Mortgage, and BOA Funding, in that it conveyed such mortgage loans to ABF Corp., BOA Mortgage, and BOA Funding pursuant to an Assignment and Recognition Agreement or a Mortgage Loan Purchase Agreement. 223. Defendant BOA National also controlled all aspects of the business of Depositor
Defendants ABF Corp., BOA Mortgage, and BOA Funding, as those Defendants were merely special purpose entities created for the purpose of acting as a pass-through for the issuance of the
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Certificates. ABF Corp., BOA Mortgage, and BOA Funding were direct, wholly-owned subsidiaries of BOA National, and the officers and directors of BOA National overlapped with the officers and directors of ABF Corp., BOA Mortgage, and BOA Funding. In addition, because of its position as sponsor, BOA National was able to, and did in fact, control the contents of five of the Registration Statements filed by ABF Corp., BOA Mortgage, and BOA Funding, including the Prospectuses and Prospectus Supplements, which pertained to Securitizations sponsored by BOA National and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 224. Defendant BOA Corp. controlled the business operations of BOA Securities
the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 226. BOA Corp. culpably participated in the violations of Section 13.1-522(A)(ii) set
forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and establish special-purpose financial entities such as ABF Corp., BOA Mortgage, BOA Funding, and the issuing trusts to serve as conduits for the mortgage loans.
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227.
BOA Corp., BOA National, and the Individual Defendants are controlling persons
within the meaning of Section 13.1-522(C) by virtue of their actual power over, control of, ownership of, and/or directorship of BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 228. Freddie Mac purchased Certificates issued pursuant to the Registration
Statements, including the Prospectuses and Prospectus Supplements, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements. 229. Freddie Mac did not know of the misstatements and omissions in the Registration
Statements; had Freddie Mac known of those misstatements and omissions, it would not have purchased the GSE Certificates. 230. Freddie Mac has sustained damages as a result of the misstatements and
omissions in the Registration Statements, for which they are entitled to compensation. 231. This action is brought within three years of the date that the FHFA was appointed
as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12). SIXTH CAUSE OF ACTION Violation of Section 31-5606.05(a)(1)(B) of the District of Columbia Code (Against MLPF&S, ABF Corp., BOA Mortgage, and BOA Funding) 232. Plaintiff realleges each allegation above as if fully set forth herein, except to the
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233.
This claim is brought by Plaintiff pursuant to 31-5606.05(a)(1)(B) of the District
of Columbia Code and is asserted on behalf of Fannie Mae. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 11 above, which were purchased by Fannie Mae. 234. This claim is predicated upon BOA Securities negligence for making false and
materially misleading statements in the Prospectuses for the Securitizations listed in paragraph 2. As discussed above at paragraph 16, MLPF&S is liable as successor-in-interest to BOA Securities, which was merged into it in November 2010. Depositor Defendants ABF Corp., BOA Mortgage, and BOA Funding acted negligently in making false and materially misleading statements in the Prospectuses for the Securitizations carried out under the six Registration Statements they filed. 235. BOA Securities is prominently identified in the Prospectuses, the primary
documents that it used to sell the GSE Certificates. BOA Securities offered the Certificates publicly, including selling to Fannie Mae its GSE Certificates, as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. 236. BOA Securities offered and sold the GSE Certificates to Fannie Mae by means of
the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. BOA Securities reviewed and participated in drafting the Prospectuses. 237. BOA Securities successfully solicited Fannie Maes purchases of the GSE
Certificates. As underwriter, BOA Securities obtained substantial commissions based upon the amount received from the sale of the Certificates to the public.
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238.
BOA Securities offered the GSE Certificates for sale, sold them, and distributed
them to Fannie Mae in the District of Columbia. 239. Depositor Defendants ABF Corp., BOA Mortgage, and BOA Funding are
prominently identified in the Prospectuses for the Securitizations carried out under the Registration Statements that they filed. These Prospectuses were the primary documents each used to sell Certificates for those Securitizations. ABF Corp., BOA Mortgage, and BOA Funding offered the Certificates publicly and actively solicited their sale, including to Fannie Mae. 240. With respect to the Securitizations for which they filed Registration Statements,
ABF Corp., BOA Mortgage, and BOA Funding offered the GSE Certificates to Fannie Mae by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. Upon information and belief, ABF Corp., BOA Mortgage, and BOA Funding reviewed and participated in drafting the Prospectuses. 241. Each of BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding actively
participated in the solicitation of Fannie Maes purchase of the GSE Certificates, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates. 242. Each of the Prospectuses contained material misstatements of fact and omitted
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243.
Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, and loan-to-value ratios. 244. BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding offered and sold
the GSE Certificates directly to Fannie Mae, pursuant to the false and misleading Prospectuses. 245. BOA Securities owed to Fannie Mae, as well as to other investors in these trusts,
a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. As discussed above at paragraph 16, MLPF&S is liable as successor-in-interest to BOA Securities, which was merged into it in November 2010. Depositor Defendants ABF Corp., BOA Mortgage, and BOA Funding owed the same duty with respect to the Prospectuses for the Securitizations carried out under the six Registration Statements filed by them. 246. BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding failed to exercise
such reasonable care. These Defendants in the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above. As discussed above at paragraph 16, MLPF&S is liable as successor-in-interest to BOA Securities, which was merged into it in November 2010. 247. In contrast, Fannie Mae did not know of the untruths and omissions contained in
the Prospectuses at the time they purchased the GSE Certificates. If Fannie Mae would have known of those untruths and omissions, they would not have purchased the GSE Certificates.
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248.
the GSE Certificates and has the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 249. The time period from July 13, 2009 through August 30, 2011 is tolled for statute
of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae, BOA Corp., BOA Securities, BOA Mortgage, BOA National, and BOA Funding. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12). SEVENTH CAUSE OF ACTION Violation of Section 31-5606.05(c) of the District of Columbia Code (Against BOA Corp., BOA National, and the Individual Defendants) 250. Plaintiff realleges each allegation above as if fully set forth herein, except to the
Code and is asserted on behalf of Fannie Mae. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 11 above, which were purchased by Fannie Mae. This claim is brought against BOA Corp., BOA National, and the Individual Defendants for controlling-person liability with regard to the Sixth Cause of Action set forth above. 252. The Individual Defendants at all relevant times participated in the operation and
management of ABF Corp., BOA Mortgage, and/or BOA Funding and their related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of ABF Corp.s, BOA Mortgages, and/or BOA Fundings business affairs. Defendant George C. Carp was Treasurer, Chief Accounting Officer, and Chief Financial Officer of ABF Corp. and BOA Funding.
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Defendant Robert Caruso was a Director of BOA Mortgage. Defendant George E. Ellison was a Director of ABF Corp. and BOA Funding. Defendant Daniel B. Goodwin was President and Chief Executive Officer of ABF Corp. Defendant Juliana Johnson was a Director of BOA Mortgage. Defendant Adam D. Glassner was President, Chief Executive Officer, and Chairman of the Board of BOA Mortgage. Defendant Aashish Kamat was a Director of BOA Mortgage. Defendant Michael J. Kula was a Director of BOA Mortgage. Defendant James H. Luther was a Director of ABF Corp. and BOA Funding. Defendant William L. Maxwell was a director of ABF Corp. Defendant Mark I. Ryan was President and Chief Executive Officer of BOA Funding. Defendant Antoine Schetritt was President, Chief Executive Officer, and Chairman of the Board of BOA Mortgage. 253. Defendant BOA National was the sponsor for Securitizations carried out under
five of the Registration Statements filed by ABF Corp., BOA Mortgage, and BOA Funding, and culpably participated in the violations of Section 31-5606.05(a)(1)(B) set forth above with respect to the offering of the GSE Certificates to Fannie Mae by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting ABF Corp., BOA Mortgage, and BOA Funding as the special purpose vehicles, and selecting BOA Securities as underwriter for the Securitizations. In its role as sponsor, BOA National knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 254. Defendant BOA National also acted as the seller of the mortgage loans
Securitizations carried out under five of the Registration Statements filed by Defendants ABF Corp., BOA Mortgage, and BOA Funding, in that it conveyed such mortgage loans to ABF
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Corp., BOA Mortgage, and BOA Funding pursuant to an Assignment and Recognition Agreement or a Mortgage Loan Purchase Agreement. 255. Defendant BOA National also controlled all aspects of the business of Depositor
Defendants ABF Corp., BOA Mortgage, and BOA Funding, as those Defendants were merely special purpose entities created for the purpose of acting as a pass-through for the issuance of the Certificates. ABF Corp., BOA Mortgage, and BOA Funding were direct, wholly-owned subsidiaries of BOA National, and the officers and directors of BOA National overlapped with the officers and directors of ABF Corp., BOA Mortgage, and BOA Funding. In addition, because of its position as sponsor, BOA National was able to, and did in fact, control the contents of five Registration Statements filed by ABF Corp., BOA Mortgage, and BOA Funding, including the Prospectuses and Prospectus Supplements, which pertained to the Securitizations sponsored by BOA National and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 256. Defendant BOA Corp. controlled the business operations of BOA Securities
the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements.
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258.
BOA Corp. culpably participated in the violations of Section 31-5606.05(a)(1)(B)
set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and establish special-purpose financial entities such as ABF Corp., BOA Mortgage, BOA Funding, and the issuing trusts to serve as conduits for the mortgage loans. 259. BOA Corp., BOA National, and the Individual Defendants are controlling persons
within the meaning of Section 31-5606.05(c) by virtue of their actual power over, control of, ownership of, and/or directorship of BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 260. Fannie Mae purchased Certificates issued pursuant to the Registration Statements,
including the Prospectuses and Prospectus Supplements, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements. 261. Fannie Mae did not know of the misstatements and omissions in the Registration
Statements; had Fannie Mae known of those misstatements and omissions, it would not have purchased the GSE Certificates. 262. Fannie Mae has sustained damages as a result of the misstatements and omissions
in the Registration Statements, for which they are entitled to compensation. 263. The time period from July 13, 2009 through August 30, 2011 is tolled for statute
of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae, BOA Corp., BOA Securities, BOA Mortgage, BOA National, and BOA Funding. In addition, this
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action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12). EIGHTH CAUSE OF ACTION Common Law Negligent Misrepresentation (Against MLPF&S, ABF Corp., BOA Mortgage, and BOA Funding) 264. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 265. This is a claim for common law negligent misrepresentation against Defendants
MLPF&S (as successor-in-interest to BOA Securities), ABF Corp., BOA Mortgage, and BOA Funding. 266. Between September 30, 2005 and November 5, 2007, BOA Securities, ABF
Corp., BOA Mortgage, and BOA Funding sold the GSE Certificates to the GSEs as described above. Because ABF Corp., BOA Mortgage, and BOA Funding owned and then conveyed the underlying mortgage loans that collateralized the Securitizations for which they served as depositors, ABF Corp., BOA Mortgage, and BOA Funding had unique, exclusive, and special knowledge about the mortgage loans in the Securitizations through its possession of the loan files and other documentation. 267. Likewise, as underwriter for the Securitizations, BOA Securities was obligated
and had the opportunity to perform sufficient due diligence to ensure that the Registration Statements for those Securitizations, including without limitation the corresponding Prospectus Supplements, did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. As a result of this privileged position as underwriter which gave it access to loan file information and obligated it to perform adequate due diligence to ensure the accuracy of the Registration
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Statements BOA Securities had unique, exclusive, and special knowledge about the underlying mortgage loans in the Securitizations. As discussed above at paragraph 16, MLPF&S is liable as successor-in-interest to BOA Securities, which was merged into it in November 2010. 268. BOA Securities also had unique, exclusive, and special knowledge of the work of
third-party due diligence providers, such as Clayton, which identified significant failures by originators to adhere to the underwriting standards represented in the Registration Statements. The GSEs, like other investors, had no access to borrower loan files prior to the closing of the Securitizations and their purchase of the Certificates. Accordingly, when determining whether to purchase the GSE Certificates, the GSEs could not evaluate the underwriting quality or the servicing practices of the mortgage loans in the Securitizations on a loan-by-loan basis. The GSEs therefore reasonably relied on BOA Securities knowledge and their express representations made prior to the closing of the Securitizations regarding the underlying mortgage loans. 269. BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding were aware that
the GSEs reasonably relied on BOA Securities, ABF Corp.s, BOA Mortgages, and BOA Fundings reputations and unique, exclusive, and special expertise and experience, as well as their express representations made prior to the closing of the Securitizations, and that the GSEs depended upon these Defendants for complete, accurate, and timely information. The degree to which the underlying mortgage loans were actually originated in compliance with the underwriting guidelines was known to these Defendants and was not known, and could not be determined, by the GSEs prior to the closing of the Securitizations. 270. Based upon their unique, exclusive, and special knowledge and expertise about
the loans held by the trusts in the Securitizations, BOA Securities, ABF Corp., BOA Mortgage,
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and BOA Funding had a duty to provide the GSEs complete, accurate, and timely information regarding the mortgage loans and the Securitizations. BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding negligently breached their duty to provide such information to the GSEs by instead making to the GSEs untrue statements of material facts in the Securitizations, or otherwise misrepresenting to the GSEs material facts about the Securitizations. The misrepresentations are set forth in Section IV above, and include misrepresentations as to the accuracy of the represented credit ratings, compliance with underwriting guidelines for the mortgage loans, and the accuracy of the owner-occupancy statistics and the loan-to-value ratios applicable to the Securitizations, as disclosed in the term sheets and Prospectus Supplements. 271. In addition, having made actual representations about the underlying collateral in
the Securitizations and the facts bearing on the riskiness of the Certificates, BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding had a duty to correct misimpressions left by their statements, including with respect to any half truths. The GSEs were entitled to rely upon BOA Securities, ABF Corp.s, BOA Mortgages, and BOA Fundings representations about the Securitizations, and these Defendants failed to correct in a timely manner any of their misstatements or half truths, including misrepresentations as to compliance with underwriting guidelines for the mortgage loans. 272. Fannie Mae and Freddie Mac purchased the GSE Certificates based upon the
representations by BOA as the sponsor, depositor, and lead and selling underwriter in all sixteen of the BOA-sponsored Securitizations. The GSEs received term sheets containing critical data as to the Securitizations, including with respect to anticipated credit ratings by the credit rating agencies, loan-to-value and combined loan-to-value ratios for the underlying collateral, and owner occupancy statistics, which term sheets were delivered, upon information and belief, by
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BOA Securities. This data was subsequently incorporated into Prospectus Supplements that were received by the GSEs upon the close of each Securitization. 273. The GSEs relied upon the accuracy of the data transmitted to them and
subsequently reflected in the Prospectus Supplements. In particular, the GSEs relied upon the credit ratings that the credit rating agencies indicated they would bestow on the Certificates based on the information provided by ABF Corp., BOA Mortgage, BOA Funding, and BOA Securities relating to the collateral quality of the underlying loans and the structure of the Securitization. These credit ratings represented a determination by the credit rating agencies that the GSE Certificates were AAA quality (or its equivalent) meaning the Certificates had an extremely strong capacity to meet the payment obligations described in the respective PSAs. 274. Detailed information about the underlying collateral and structure of each
Securitization was provided to the credit rating agencies by, upon information and belief, BOA National. The credit rating agencies based their ratings on the information provided to them by BOA, and the agencies anticipated ratings of the Certificates were dependent on the accuracy of that information. The GSEs relied on the accuracy of the anticipated credit ratings and the actual credit ratings assigned to the Certificates by the credit rating agencies, and upon the accuracy of BOAs representations in the term sheets and Prospectus Supplements. 275. In addition, the GSEs relied on the fact that the originators of the mortgage loans
in the Securitizations had acted in conformity with their underwriting guidelines, which were described in the Prospectus Supplements. Compliance with underwriting guidelines was a precondition to the GSEs purchase of the GSE Certificates in that the GSEs decision to purchase the Certificates was directly premised on their reasonable belief that the originators complied with applicable underwriting guidelines and standards.
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276.
In purchasing the GSE Certificates, the GSEs justifiably relied on BOAs false
representations and omissions of material fact detailed above, including the misstatements and omissions in the term sheets about the underlying collateral, which were reflected in the Prospectus Supplements. 277. But for the above misrepresentations and omissions, the GSEs would not have
proximate, and foreseeable result of the Depositor Defendants and BOA Securities misrepresentations, including any half truths. 279. The time period from July 13, 2009 through August 30, 2011 is tolled for statute
of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae, BOA Corp., BOA Securities, BOA Mortgage, BOA National, and BOA Funding. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12). PRAYER FOR RELIEF WHEREFORE Plaintiff prays for relief as follows: 280. An award in favor of Plaintiff against all Defendants, jointly and severally, for all
GSE Certificates, as well as lost principal and lost interest payments thereon; 87
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK FEDERAL HOUSING FINANCE AGENCY, AS CONSERVATOR FOR THE FEDERAL NATIONAL MORTGAGE ASSOCIATION AND THE FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff, JURY TRIAL DEMANDED -againstCITIGROUP, INC.; CITIGROUP MORTGAGE LOAN TRUST, INC.; CITIGROUP GLOBAL MARKETS, INC.; CITIGROUP GLOBAL MARKETS REALTY CORP.; SUSAN MILLS; RANDALL COSTA; SCOTT FREIDENRICH; RICHARD A. ISENBERG; MARK I. TSESARSKY; PETER PATRICOLA; JEFFREY PERLOWITZ; and EVELYN ECHEVARRIA, Defendants.
___ CIV. ___ (___)
COMPLAINT
TABLE OF CONTENTS Page
NATURE OF ACTION ...................................................................................................................1 PARTIES .........................................................................................................................................6 JURISDICTION AND VENUE ......................................................................................................9 FACTUAL ALLEGATIONS ........................................................................................................10 I. THE SECURITIZATIONS................................................................................................10 A. B. C. Residential Mortgage-Backed Securitizations In General .....................................10 The Securitizations At Issue In This Case .............................................................12 The Securitization Process .....................................................................................12 1. 2. II. CGMR Pools Mortgage Loans In Special Purpose Trusts.........................12 The Trusts Issue Securities Backed By The Loans ....................................13
THE DEFENDANTS PARTICIPATION IN THE SECURITIZATION PROCESS ..........................................................................................................................16 A. The Role Of Each Of The Defendants ...................................................................16 1. 2. 3. 4. 5. B. CGMR ........................................................................................................17 CGMLT......................................................................................................18 CGMI .........................................................................................................18 Citi..............................................................................................................19 The Individual Defendants .........................................................................20
III.
THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS ..........30
A. B. C. D. IV.
Compliance With Underwriting Guidelines ..........................................................30 Statements Regarding Occupancy Status Of Borrower .........................................33 Statements Regarding Loan-To-Value Ratios .......................................................35 Statements Regarding Credit Ratings ....................................................................37
FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS......................................................................................39 A. The Statistical Data Provided In The Prospectus Supplements Concerning Owner Occupancy And LTV Ratios Was Materially False...................................39 1. 2. B. Owner Occupancy Data Was Materially False ..........................................40 Loan-To-Value Data Was Materially False ...............................................42
The Originators Of The Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines .........................................................45 1. Government Investigations Have Confirmed That The Originators Of The Loans In The Securitizations Systematically Failed To Adhere To Their Underwriting Guidelines ................................................45 i. ii. iii. iv. v. vi. 2. Wells Fargo ....................................................................................46 Countrywide...................................................................................49 American Home .............................................................................50 Argent ............................................................................................52 WMC..............................................................................................54 Inflated Appraisals .........................................................................55
The Collapse Of The Certificates Credit Ratings Further Indicates That The Mortgage Loans Were Not Originated In Adherence To The Stated Underwriting Guidelines .........................................................56
ii
3.
The Surge In Mortgage Delinquencies And Defaults Further Indicates That The Mortgage Loans Were Not Originated In Adherence To The Stated Underwriting Guidelines ..................................58
V.
FIRST CAUSE OF ACTION ........................................................................................................61 SECOND CAUSE OF ACTION ...................................................................................................64 THIRD CAUSE OF ACTION .......................................................................................................68 FOURTH CAUSE OF ACTION ...................................................................................................72 FIFTH CAUSE OF ACTION ........................................................................................................75 SIXTH CAUSE OF ACTION .......................................................................................................78 SEVENTH CAUSE OF ACTION .................................................................................................82 EIGHTH CAUSE OF ACTION ....................................................................................................85 PRAYER FOR RELIEF ................................................................................................................89 JURY TRIAL DEMANDED .........................................................................................................90
iii
Plaintiff Federal Housing Finance Agency (FHFA), as conservator of The Federal National Mortgage Association (Fannie Mae) and The Federal Home Loan Mortgage Corporation (Freddie Mac), by its attorneys, Quinn Emanuel Urquhart & Sullivan, LLP, for its Complaint herein against Citigroup, Inc. (Citi), Citigroup Mortgage Loan Trust, Inc. (CGMLT), Citigroup Global Markets, Inc. (CGMI), Citigroup Global Markets Realty Corp. (CGMR) (collectively, the Citi Defendants), Susan Mills, Randall Costa, Richard A. Isenberg, Scott Freidenrich, Mark I. Tsesarsky, Peter Patricola, Jeffrey Perlowitz, and Evelyn Echevarria (the Individual Defendants) (together with the Citi Defendants, the Defendants) alleges as follows: NATURE OF ACTION 1. This action arises out of Defendants actionable conduct in connection with the
offer and sale of certain residential mortgage-backed securities to Fannie Mae and Freddie Mac (collectively, the Government Sponsored Enterprises or GSEs). These securities were sold pursuant to registration statements, including prospectuses and prospectus supplements that formed part of those registration statements, which contained materially false or misleading statements and omissions. Defendants falsely represented that the underlying mortgage loans complied with certain underwriting guidelines and standards, including representations that significantly overstated the ability of the borrowers to repay their mortgage loans. These representations were material to the GSEs, as reasonable investors, and their falsity violates Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77a et seq., Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, Sections 31-5606.05(a)(1)(B) and 315606.05(c) of the District of Columbia Code, and constitutes common law negligent misrepresentation.
2.
Between September 13, 2005 and May 31, 2007, Fannie Mae and Freddie Mac
purchased over $3.5 billion in residential mortgage-backed securities (the GSE Certificates) issued in connection with ten securitizations sponsored or underwritten by the Citi Defendants.1 The GSE Certificates purchased by Freddie Mac, along with date and amount of the purchases, are listed infra in Table 10. The GSE Certificates purchased by Fannie Mae, along with date and amount of the purchases, are listed infra in Table 11. The following ten securitizations are at issue in this case: i. Argent Securities Inc., Asset-Backed Pass-Through Certificates, Series 2005-W2 (ARSI 2005-W2); ii. CitiGroup Mortgage Loan Trust Mortgage Pass-Through Certificates, Series 2005-7 (CMLTI 2005-7); iii. CitiGroup Mortgage Loan Trust Mortgage Pass-Through Certificates, Series 200510 (CMLTI 2005-10); iv. CitiGroup Mortgage Loan Trust Mortgage Pass-Through Certificates, Series 2005HE3 (CMLTI 2005-HE3); v. CitiGroup Mortgage Loan Trust Mortgage Pass-Through Certificates, Series 2005HE4 (CMLTI 2005-HE4); vi. CitiGroup Mortgage Loan Trust Mortgage Pass-Through Certificates, Series 2006AR2 (CMLTI 2006-AR2); vii. CitiGroup Mortgage Loan Trust Mortgage Pass-Through Certificates, Series 2006-
For purposes of this Complaint, the securities issued under the Registration Statements (as defined in note 2 below) are referred to as Certificates, while the particular Certificates that Fannie Mae and Freddie Mac purchased are referred to as the GSE Certificates. Holders of Certificates are referred to as Certificateholders.
AR5 (CMLTI 2006-AR5); viii. CitiGroup Mortgage Loan Trust Mortgage Pass-Through Certificates, Series 2006WF1 (CMLTI 2006-WF1); ix. CitiGroup Mortgage Loan Trust Mortgage Pass-Through Certificates, Series 2006WF2 (CMLTI 2006-WF2); x. CitiGroup Mortgage Loan Trust Mortgage Pass-Through Certificates, Series 2007AR7 (CMLTI 2007-AR7); and (collectively, the Securitizations). 3. The Certificates were offered for sale pursuant to one of five shelf registration
statements (the Shelf Registration Statements) filed with the Securities and Exchange Commission (the SEC). Defendant CGMLT filed four Shelf Registration Statements that pertained to nine of the Securitizations at issue in this action. The Individual Defendants signed one or more of the Shelf Registration Statements and the amendments thereto. With respect to all of the Securitizations, CGMI was the lead underwriter, and with respect to all but one of the Securitizations, CGMI was also the underwriter who sold the Certificates to the GSEs. 4. For each Securitization, a prospectus (Prospectus) and prospectus supplement
(Prospectus Supplement) were filed with the SEC as part of the Shelf Registration Statement for that Securitization.2 The GSE Certificates were marketed and sold to Fannie Mae and Freddie Mac pursuant to the Registration Statements, including the Shelf Registration Statements and the corresponding Prospectuses and Prospectus Supplements. 5.
2
The Registration Statements contained statements about the characteristics and
The term Registration Statement, as used herein, incorporates the Shelf Registration statement, the Prospectus and the Prospectus Supplement for each referenced Securitization, except where otherwise indicated.
credit quality of the mortgage loans underlying the Securitizations, the creditworthiness of the borrowers of those underlying mortgage loans, and the origination and underwriting practices used to make and approve the loans. Such statements were material to a reasonable investors decision to purchase the Certificates. Unbeknownst to Fannie Mae and Freddie Mac, these statements were materially false, as significant percentages of the underlying mortgage loans were not originated in accordance with the stated underwriting standards and origination practices and had materially poorer credit quality than what was represented in the Registration Statements. 6. The Registration Statements contained statistical summaries of the groups of
mortgage loans in each Securitization, such as the percentage of loans secured by owneroccupied properties and the percentage of the loan groups aggregate principal balance with loan-to-value ratios within specified ranges. This information was also material to reasonable investors. However, a loan level analysis for each Securitizationan analysis that encompassed a statistically significant sample of thousands of mortgages across all of the Securitizationshas revealed that these statistics were also false and omitted material facts due to inflated property values and misstatements of other key characteristics of the mortgage loans. 7. For example, the percentage of owner-occupied properties is a material risk factor
to the purchasers of Certificates, such as Fannie Mae and Freddie Mac, since a borrower who lives in a mortgaged property is generally less likely to stop paying his or her mortgage and more likely to take better care of the property. The loan level review reveals that the true percentage of owner-occupied properties for the loans supporting the GSE Certificates was materially lower than what was stated in the Prospectus Supplements. Likewise, the Prospectus Supplements misrepresented other material factors, including the true value of the mortgaged properties
relative to the amount of the underlying loans. 8. Defendants CGMLT (the depositor for nine of the Securitizations), CGMI (the
lead underwriter for all of the Securitizations and selling underwriter for nine of the Securitizations), and the Individual Defendants (the signatories to the Registration Statements with respect to nine of the Securitizations) are directly responsible for the misstatements and omissions of material fact contained in the Registration Statements because they prepared, signed, filed and/or used these documents to market and sell the GSE Certificates to Fannie Mae and Freddie Mac, and/or directed and controlled such activities. 9. Defendants CGMR (the sponsor of nine of the Securitizations) and Citi are also
responsible for the misstatements and omissions of material fact contained in the Registration Statements by virtue of their direction and control over Defendants CGMLT and CGMI. Citi also directly participated in and exercised dominion and control over the business operations of Defendants CGMLT, CGMR, and CGMI. 10. Fannie Mae and Freddie Mac purchased over $3.5 billion of the Certificates
the Defendants for violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77k, 77l(a)(2), 77o, Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, Sections 31-5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, and for
common law negligent misrepresentation. PARTIES The Plaintiff and the GSEs 12. The Federal Housing Finance Agency is a federal agency located at 1700 G
Street, NW in Washington, D.C. FHFA was created on July 30, 2008 pursuant to the Housing and Economic Recovery Act of 2008 (HERA), Pub. L. No. 110-289, 122 Stat. 2654 (2008) (codified at 12 U.S.C. 4617), to oversee Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. On September 6, 2008, under HERA, the Director of FHFA placed Fannie Mae and Freddie Mac into conservatorship and appointed FHFA as conservator. In that capacity, FHFA has the authority to exercise all rights and remedies of the GSEs, including but not limited to, the authority to bring suits on behalf of and/or for the benefit of Fannie Mae and Freddie Mac. 12 U.S.C. 4617(b)(2). 13. Fannie Mae and Freddie Mac are government-sponsored enterprises chartered by
Congress with a mission to provide liquidity, stability and affordability to the United States housing and mortgage markets. As part of this mission, Fannie Mae and Freddie Mac invested in residential mortgage-backed securities. Fannie Mae is located at 3900 Wisconsin Avenue, NW in Washington, D.C. Freddie Mac is located at 8200 Jones Branch Drive in McLean, Virginia. The Defendants 14. Defendant CitiGroup, Inc. is a diversified global financial services holding
company, incorporated under the laws of the State of Delaware, and headquartered at 399 Park Avenue, New York, New York. Citi offers a broad range of financial services to consumer and corporate customers, with more than 200 million customer accounts and operations in more than 100 countries. All of the Citi Defendants are direct or indirect subsidiaries of Citi.
15.
Defendant CitiGroup Global Markets, Inc., formerly known as Salomon Smith
Barney or Smith Barney, is a New York corporation with its principal place of business at 388 Greenwich St. in New York, New York. CGMI is a registered broker-dealer with the SEC, and is a wholly owned subsidiary of Citi. CGMI was the lead underwriter for each Securitization and was intimately involved in the offerings of the Certificates. With one exception, Fannie Mae and Freddie Mac purchased all of the GSE Certificates from CGMI in its capacity as underwriter of the Securitizations. 16. Defendant CitiGroup Mortgage Loan Trust, Inc. is a Delaware corporation with
its principal place of business located at 390 Greenwich Street, 6th Floor, New York, New York 10013. It is a wholly owned subsidiary of Citi. It was the depositor for nine of the ten Securitizations, the registrant for certain Registration Statements filed with the SEC, and an issuer of certain Certificates purchased by the GSEs. 17. Defendant Citigroup Global Markets Realty Corp. is a New York corporation
with its principal place of business at 390 Greenwich St. in New York, New York. It is an affiliate of CGMI, a wholly owned subsidiary of Citi. CGMR was the sponsor of nine of the ten Securitizations.3 18. Defendant Susan Mills is an individual residing in Rockville Centre, New York.
Ms. Mills was Vice President and Managing Director of Defendant CGMLT. Ms. Mills was also the head of CGMIs Mortgage Finance Group since 1999. Ms. Mills signed the Shelf Registration Statements and the amendments thereto, and did so in New York. 19. Defendant Richard A. Isenberg is an individual residing in New York, New York.
The remaining securitization was sponsored by non-party Ameriquest Mortgage Company.
Mr. Isenberg was a Director and President (Principal Executive Officer) of Defendant CGMLT. Mr. Isenberg signed certain Shelf Registration Statements and the amendments thereto, and did so in New York. 20. Defendant Randall Costa is an individual residing in Evanston, Illinois. Mr.
Costa was a Director and President (Principal Executive Director) of Defendant CGMLT. Mr. Costa signed certain Shelf Registration Statements and the amendments thereto, and did so in New York. 21. Defendant Scott Freidenrich is an individual residing in Westfield, New Jersey.
Mr. Freidenrich was a Treasurer (Principal Financial Officer) of Defendant CGMLT. Mr. Freidenrich signed certain Shelf Registration Statements and the amendments thereto, and did so in New York. 22. Defendant Mark I. Tsesarsky is an individual residing in New York, New York.
Mr. Tsesarsky was a Director of Defendant CGMLT. Mr. Tsesarsky signed certain Shelf Registration Statements and the amendments thereto, and did so in New York. 23. Defendant Peter Patricola is an individual residing in Holmdel, New Jersey. Mr.
Patricola was a Controller of Defendant CGMLT. Mr. Patricola signed certain Shelf Registration Statements and the amendments thereto, and did so in New York. 24. Defendant Jeffrey Perlowitz is an individual residing in Short Hills, New Jersey.
Mr. Perlowitz was a Director of Defendant CGMLT. Mr. Perlowitz signed certain Shelf Registration Statements and the amendments thereto, and did so in New York. 25. Defendant Evelyn Echevarria is an individual residing in Charlotte, North
Carolina. Ms. Echevarria was a Director of Defendant CGMLT. Ms. Echevarria signed certain Registration Statements and the amendments thereto, and did so in New York.
The Non-Party Originators: 26. CitiMortgage, Inc. (CitiMortgage) is a Florida corporation with its principal
place of business at 1000 Technology Drive, Mailstop 730, OFallon, Missouri. It was engaged in the business of, among other things, originating and acquiring residential mortgage loans and selling those loans through securitizations. It originated and serviced many of the residential mortgage loans at issue here. 27. In addition, many of the loans underlying the Certificates were acquired by the
sponsor for each Securitization from other non-party mortgage originators. The originators responsible for the loans underlying the Certificates include Countrywide Home Loans, Inc. (Countrywide), Greenpoint Mortgage Funding, Inc., Quicken Loans, Inc., MortgageIT, Inc., Wells Fargo Bank, N.A. (Wells Fargo), WMC Mortgage Corp. (WMC), American Home Mortgage Corp. (American Home), and Argent Mortgage Company (Argent), among others. JURISDICTION AND VENUE 28. Jurisdiction of this Court is founded upon 28 U.S.C. 1345, which gives federal
Securities Act claims asserted herein arise under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77k, 77l(a)(2), 77o. This Court further has jurisdiction over the Securities Act claims pursuant to Section 22 of the Securities Act of 1933, 15 U.S.C. 77v. 30. This Court has jurisdiction over the statutory claims of violations of Sections
13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code and Sections 31-5606.05(a)(1)(B) and 315606.05(c) of the District of Columbia Code pursuant to this Courts supplemental jurisdiction
under 28 U.S.C. 1367(a). This Court also has jurisdiction over the common law claim of negligent misrepresentation pursuant to this Courts supplemental jurisdiction under 28 U.S.C. 1367(a). 31. Venue is proper in this district pursuant to Section 22 of the Securities Act of
1933, 15 U.S.C. 77v, and 28 U.S.C. 1391(b). Several of the Citi Defendants are principally located in this district, several of the Individual Defendants reside in this district, and many of the acts and transactions alleged herein, including the preparation and dissemination of the Registration Statements occurred in substantial part in the State of New York. Additionally, the GSE Certificates were actively marketed and sold from this State and several of the Defendants can be found and transact business in this District. Defendants are also subject to personal jurisdiction in this District. FACTUAL ALLEGATIONS I. THE SECURITIZATIONS A. 32. Residential Mortgage-Backed Securitizations In General Asset-backed securitization distributes risk by pooling cash-producing financial
assets and issuing securities backed by those pools of assets. In residential mortgage-backed securitizations, the cash-producing financial assets are residential mortgage loans. 33. The most common form of securitization of mortgage loans involves a sponsor or
sellerthe entity that acquires or originates the mortgage loans and initiates the securitization and the creation of a trust, to which the sponsor directly or indirectly transfers a portfolio of mortgage loans. The trust is established pursuant to a Pooling and Servicing Agreement entered into by, among others, the depositor for that securitization. In many instances, the transfer of assets to a trust is a two-step process: the financial assets are transferred by the sponsor first to
10
an intermediate entity, often a limited purpose entity created by the sponsor . . . and commonly called a depositor, and then the depositor will transfer the assets to the [trust] for the particular asset-backed transactions. Asset-Backed Securities, Securities Act Release No. 33-8518, Exchange Act Release No. 34-50905, 84 SEC Docket 1624 (Dec. 22, 2004). 34. Residential mortgage-backed securities (RMBS) are backed by the underlying
mortgage loans. Some RMBS are created from more than one cohort of loans called collateral groups, in which case the trust issues securities backed by different loan groups. For example, a securitization may involve two groups of mortgages, with some securities backed primarily by the first group, and others primarily by the second group. Purchasers of the securities acquire an ownership interest in the assets of the trust, which in turn owns the loans. The purchasers of the securities receive the cash-flows from the designated mortgage groups, such as homeowners payments of principal and interest on the mortgage loans held by the related trust. 35. RMBS are issued pursuant to registration statements filed with the SEC. These
registration statements include prospectuses, which explain the general structure of the investment, and prospectus supplements, which contain detailed descriptions of the mortgage group underlying the certificates. Certificates are issued by the trust pursuant to the registration statement and the prospectus and prospectus supplement. Underwriters sell the certificates to investors. 36. A mortgage servicer is necessary to manage the collection of proceeds from the
mortgage loans. The servicer is responsible for collecting homeowners mortgage loan payments, which the servicer remits to the trustee after deducting a monthly servicing fee. The servicers duties include making collection efforts on delinquent loans, initiating foreclosure proceedings, and determining when to charge off a loan by writing down its balance. The
11
servicer is required to report key information about the loans to the trustee. The trustee (or trust administrator) administers the trusts funds and delivers payments due each month on the certificates to the investors. B. 37. The Securitizations At Issue In This Case This case involves the ten Securitizations listed in Table 1 below, nine of which
were sponsored and structured by CGMR, and all of which were underwritten by CGMI. For each of the ten Securitizations, Table 1 identifies the (1) sponsor; (2) depositor; (3) lead underwriter; (4) principal amount issued for the tranches purchased by the GSEs; (5) date of issuance; and (6) the loan group or groups backing the GSE Certificate for that Securitization (referred to as the Supporting Loan Groups). Table 1
Securitization Tranche
4
Sponsor
Depositor
Lead Underwriter
Principal Amount Issued per Tranche ($)

1,351,319,000 151,768,000 132,099,000 380,972,000 344,773,000 161,220,000 36,920,000 425,206,000 484,445,000 117,893,000
Date of Issuance
Supporting Loan Groups

Group I Group I-3 Group 1-2 Group I Group I Group I-1 Group 1-2 Group I Group I Group 2
ARSI 2005-W2 CMLTI 2005-10 CMLTI 2005-7 CMLTI 2005-HE3 CMLTI 2005-HE4 CMLTI 2006-AR2 CMLTI 2006-AR5 CMLTI 2006-WF1 CMLTI 2006-WF2 CMLTI 2007-AR7
A1 IA3A IA2 A1 A1 IA1 1A2A A1 A1 A2A
Ameriquest Mortgage Company CGMR CGMR CGMR CGMR CGMR CGMR CGMR CGMR CGMR
Argent Securities Inc. CGMLT CGMLT CGMLT CGMLT CGMLT CGMLT CGMLT CGMLT CGMLT
CGMI CGMI CGMI CGMI CGMI CGMI CGMI CGMI CGMI CGMI
9/27/2005 12/ 30/2005 9/30/2005 9/13/2005 11/30/2005 3/30/2006 6/30/2006 3/30/2006 5/31/2006 5/31/2007
C.
The Securitization Process 1. CGMR Pools Mortgage Loans In Special Purpose Trusts
38.
As the sponsor for nine of the ten Securitizations, Defendant CGMR purchased
the mortgage loans underlying the Certificates for those nine Securitizations after the loans were
12
originated, either directly from the originators or through affiliates of the originators, including CitiMortgage.5 39. CGMR then sold the mortgage loans for the nine Securitizations that it sponsored
to the depositor, Defendant CGMLT, a Citi-affiliated entity. With respect to the remaining securitization, a non-party sponsor sold the mortgage loans to a non-party depositor, as reflected in Table 1, supra at paragraph 37. Defendant CGMI was the lead or co-lead underwriter, and the selling underwriter, for that securitization. 40. CGMLT was a wholly-owned, limited-purpose financial subsidiary of Defendant
Citi. The sole purpose of CGMLT as depositor was to act as a conduit through which loans acquired by the sponsor could be securitized and sold to investors. 41. As depositor for nine of the Securitizations, Defendant CGMLT transferred the
relevant mortgage loans to the trusts. As part of each of the Securitizations, the trustee, on behalf of the Certificateholders, executed a Pooling and Servicing Agreement (PSA) with the relevant depositor and the parties responsible for monitoring and servicing the mortgage loans in that Securitization. The securitization trust, administered by the trustee, held the mortgage loans pursuant to the related PSA and issued Certificates, including the GSE Certificates, backed by such loans. 2. 42. The Trusts Issue Securities Backed By The Loans
PSAs, each trust issued Certificates backed by the underlying mortgage loans. The Certificates were then sold to investors like Fannie Mae and Freddie Mac, which thereby acquired an Non-party sponsor Ameriquest Mortgage Company was a sponsor of the one non-Citi sponsored Securitizations. The sponsor for each Securitization is included in Table 1, supra at paragraph 37.
5
13
ownership interest in the assets of the corresponding trust. Each Certificate entitles its holder to a specified portion of the cash-flows from the underlying mortgages in the Supporting Loan Group. The level of risk inherent in the Certificates was a function of the capital structure of the related transaction and the credit quality of the underlying mortgages. 43. The Certificates were issued pursuant to one of the five Shelf Registration
Statements, filed with the SEC on Form S-3. Certain Shelf Registration Statements were amended by one or more Forms S-3/A filed with the SEC. Each Individual Defendant signed one or more of the four Shelf Registration Statements, including any amendments thereto, which were filed by CGMLT. The SEC filing number, registrants, signatories, and filing dates for each Shelf Registration Statement and amendments thereto, as well as the Certificates covered by each Shelf Registration Statement, are reflected in Table 2 below. Table 2
SEC File No.
333124036

4/13/2005

N/A
Registrant
Signatories of Registration Statements

Susan Mills Richard A. Isenberg Scott Freidenrich Peter Patricola Mark I. Tsesarsky Jeffrey Perlowitz Evelyn Echevarria Susan Mills Richard A. Isenberg Scott Freidenrich Peter Patricola Mark I. Tsesarsky Jeffrey Perlowitz Evelyn Echevarria
CGMLT
CMLTI 2005HE3
N/A
333127834
8/25/2005
9/7/2005
CGMLT
333131136
1/19/2006
2/28/2006; 3/30/2006; 4/5/2006
CGMLT
CMLTI 2005-7; CMLTI 200510; CMLTI 2005HE4; CMLTI 2006WF1; CMLTI 2006AR2 CMLTI 2006AR5; CMLTI 2006WF2
Susan Mills Richard A. Isenberg Scott Freidenrich Peter Patricola Mark I. Tsesarsky Jeffrey Perlowitz Evelyn Echevarria
333-
10/25/2006
11/17/2006;
CGMLT
CMLTI 2007-
Susan Mills Randall Costa Scott Freidenrich Peter Patricola Mark I. Tsesarsky Jeffrey Perlowitz Evelyn Echevarria Susan Mills
Susan Mills Randall Costa Scott Freidenrich Peter Patricola Mark I. Tsesarsky Jeffrey Perlowitz Evelyn Echevarria Susan Mills
14
SEC File No.

138237

12/4/2006; 12/12/2006
Registrant
Signatories of Registration Statements

Randall Costa Scott Freidenrich Peter Patricola Mark I. Tsesarsky Jeffrey Perlowitz Evelyn Echevarria Adam J. Bass John P. Grazer Andrew L. Stidd
AR7
Randall Costa Scott Freidenrich6 Peter Patricola Mark I. Tsesarsky Jeffrey Perlowitz Evelyn Echevarria N/A
333112237
1/27/2004
N/A
Argent Securities Inc.
ARSI 2005-W2
44.
guidelines that purportedly were used in connection with the origination of the underlying mortgage loans. In addition, the Prospectus Supplements purport to provide detailed and accurate information regarding the mortgage loans in each group, including the ranges of and weighted average FICO credit scores of the borrowers, the ranges of and weighted average loanto-value ratios of the loans, the ranges of and weighted average outstanding principal balances of the loans, the debt-to-income ratios, the geographic distribution of the loans, the extent to which the loans were for purchase or refinance purposes; information concerning whether the loans were secured by a property to be used as a primary residence, second home, or investment property; and information concerning whether the loans were delinquent. 45. The Prospectus Supplements associated with each Securitization were filed with
the SEC as part of the Registration Statements. The Forms 8-K attaching the PSAs for each Securitization were also filed with the SEC. The date on which the Prospectus Supplement and Form 8-K was filed for each Securitization, as well as the filing number of the Shelf Registration Statement related to each, are set forth in Table 3 below.
6
Scott Freidenrich did not sign the 11/17/2006 amendment to the Shelf Registration Statement.
15
Table 3
Transaction

9/28/05 12/30/2005 10/3/2005 9/13/2005 11/29/2005 3/30/2006 6/30/2006 3/27/2006 5/25/2006 6/1/2007
Date of Filing Form 8-K Attaching PSA Filed

10/12/2005 3/22/2006 10/19/2005 9/28/2005 12/15/2005 5/1/2006 7/31/2006 4/18/2006 6/20/2006 10/2/2007

333-112237 333-127834 333-127834 333-124036 333-127834 333-127834 333-131136 333-127834 333-131136 333-138237
46.
The Certificates were issued pursuant to the PSAs, and Defendant CGMI offered
and sold the Certificates to Fannie Mae and Freddie Mac pursuant to the Registration Statements, which, as noted previously, included the Prospectuses and Prospectus Supplements. II. THE DEFENDANTS PARTICIPATION IN THE SECURITIZATION PROCESS A. 47. The Role Of Each Of The Defendants Each of the Defendants, including the Individual Defendants, had a role in the
securitization process and the marketing for most or all of the Certificates, which included purchasing the mortgage loans from the originators, structuring and arranging the Securitizations, selling the mortgage loans to the depositor, transferring the mortgage loans to the trustee on behalf of the Certificateholders, underwriting the public offering of the Certificates, issuing the Certificates, and marketing and selling the Certificates to investors such as Fannie Mae and Freddie Mac. 48. With respect to each Securitization, the depositor, underwriters, and the
Individual Defendants who signed the Registration Statements, as well as the Defendants who exercised control over their activities, are liable, jointly and severally, as participants in the registration, issuance and offering of the Certificates, including issuing, causing, or making materially misleading statements in the Registration Statements, and omitting material facts
16
required to be stated therein or necessary to make the statements contained therein not misleading. 1. 49. CGMR
Defendant CGMR was organized in 1979 and has been securitizing residential
mortgage loans since 1987. CGMR is an affiliate of CGMI, and acted as the sponsor of nine of the Securitizations. CGMR is a leading sponsor of mortgage-backed securities. As stated in the Prospectus Supplement for the CMLTI 2007-AR7 Securitization, during the 2003, 2004, 2005, and 2006 fiscal years, CGMR securitized approximately $2.9 billion, $7.1 billion, $18.4 billion, and $21 billion of mortgage loans, respectively. 50. CGMR was the sponsor of nine of the ten Securitizations. In that capacity,
CGMR determined the structure of the Securitizations, initiated the Securitizations, purchased the mortgage loans to be securitized, determined the distribution of principal and interest, and provided data to the credit rating agencies to secure investment grade ratings for the GSE Certificates. For nine of the Securitizations, Defendant CGMR also selected CGMLT as the special purpose vehicle that would be used to transfer the mortgage loans from CGMR to the trusts, and selected CGMI as the underwriter for the Securitizations. In its role as sponsor, CGMR knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing such loans would be issued by the relevant trusts. 51. For the nine Securitizations that it sponsored, CGMR also conveyed the mortgage
loans to CGMLT pursuant to an Assignment and Recognition Agreement or a Mortgage Loan Purchase Agreement. In these agreements, CGMR made certain representations and warranties to CGMLT regarding the groups of loans collateralizing the Certificates. These representations
17
and warranties were assigned by CGMLT to the trustees for the benefit of the Certificateholders. 2. 52. CGMLT
Defendant CGMLT is engaged in the securitization of mortgage loans as a
depositor. It is a special purpose entity formed for the sole purpose of purchasing mortgage loans, filing registration statements with the SEC, forming issuing trusts, assigning mortgage loans and all of its rights and interests in such mortgage loans to the trustee for the benefit of the certificateholders, and depositing the underlying mortgage loans into the issuing trusts. 53. Defendant CGMLT was the depositor for nine of the ten Securitizations. In its
capacity as depositor, CGMLT purchased the mortgage loans from CGMR (as sponsor) pursuant to the Assignment and Recognition Agreements or Mortgage Loan Purchase Agreements, as applicable. CGMLT then sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trusts. CGMLT, together with the other Defendants, was also responsible for preparing and filing the Registration Statements pursuant to which the Certificates were offered for sale. The trusts in turn held the mortgage loans for the benefit of the Certificateholders, and issued the Certificates in public offerings for sale to investors such as Fannie Mae and Freddie Mac. 3. 54. CGMI
Defendant CGMI, formerly known as Salomon Smith Barney, was founded in
1910 and acquired by Travelers Group in 1998, which subsequently merged with Citi that year. Defendant CGMI is an investment bank, and was, at all relevant times, a registered broker/dealer and one of the leading underwriters of mortgage- and other asset-backed securities in the United States. CGMI was Citis private label securities arm, specializing in nonconforming and alternative pools of loans. Mortgage Banking Magazine, CitiMortgage on the Move, December
18
2006. 55. Defendant CGMI was the lead underwriter for the Securitizations. In that role, it
was responsible for underwriting and managing the offer and sale of the Certificates to Fannie Mae and Freddie Mac and other investors, with the exception of the CMLTI 2006-AR2 Securitization, which was sold to the GSEs by non-party UBS Securities, LLC. CGMI was also obligated to conduct meaningful due diligence to ensure that the Registration Statements did not contain any material misstatements or omissions, including as to the manner in which the underlying mortgage loans were originated, transferred and underwritten. 4. 56. Citi
Defendant Citi wholly owns its subsidiaries CGMLT, CGMI, CGMR, and
CitiMortgage. Unlike typical arms-length securitizations, the Securitizations here involved various Citi subsidiaries and affiliates at virtually each step in the chain. With respect to over two-thirds of the Securitizations, the sponsor was CGMR, the depositor was CGMLT, the master servicer was CitiMortgage, and the lead underwriter was CGMI. As for the remaining deals, with the exception of CMLTI 2006-AR2, CGMI was the lead and selling underwriter. 57. As the sole corporate parent of CGMI, CGMLT, and CGMR, Citi had the
practical ability to direct and control the actions of CGMI, CGMLT, and CGMR related to the Securitizations, and in fact exercised such direction and control over the activities of CGMR, CGMLT, CitiMortgage, and CGMI related to the issuance and sale of the Certificates. 58. Citi, through its subsidiaries CGMI, CGMLT, CGMR, and CitiMortgage, was
deeply involved in the RMBS market. Citi expanded its share of the residential mortgagebacked securitization market to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and
19
omissions of material facts in the Registration Statements. 59. From 2002 to 2005, Citi experienced intense growth in its residential mortgage
business, doubling its origination business from $73 billion in 2002 to nearly $140 billion in 2005. Mortgage Banking Magazine, CitiMortgage on the Move, December 2006. The growth was even more striking at the subprime level. From 2005 to 2007, Citi issued at least $26.3 billion in subprime loans. Center for Public Integrity, The Subprime 25. Such massive quantities of loans were the result of rapid and uncontrolled growth. In 2006, Citis subprime lending increased by 85%, to a total of $38 billion. Mortgage Banking Magazine, Inside the Market Correction, May 2007. 60. As detailed above, the Securitizations here involved Citi entities, including the
aforementioned subsidiaries, at virtually each step in the process. Citi profited substantially from this vertically integrated approach to mortgage backed securitization. Furthermore, Citi shares, and, on information and belief, shared, overlapping management with the other Citi Defendant entities. For instance, Defendant Susan Mills was Vice President and Managing Director of Defendant CGMLT, and signed four Shelf Registration Statements on behalf of CGMLT; she is also the head of CGMIs Mortgage Finance Group. 5. 61. The Individual Defendants
Defendant Susan Mills was the Vice President and then Managing Director of
Defendant CGMLT. Under one of these two capacities, she signed the following Registration Statements: Registration Statement under file number 333-124036, filed with the SEC on April 13, 2005;
20
Registration Statement under file number 333-127834, filed with the SEC on August 25, 2005, and the related amendments on form S-3/A on or about September 7, 2005; Registration Statement under file number 333-131136, filed with the SEC on January 19, 2006, and the related amendments on form S-3/A on or about February 28, 2006, March 30, 2006, and April 5, 2006; and Registration Statement under file number 333-138237, filed with the SEC on October 25, 2006, and the related amendments on form S-3/A on or about November 17, 2006, December 4, 2006, and December 12, 2006. 62. Defendant Richard A. Isenberg was a Director and President (Principal Executive
Officer) of Defendant CGMLT. In that capacity, he signed the following Registration Statements: Registration Statement under file number 333-124036, filed with the SEC on April 13, 2005; and Registration Statement under file number 333-127834, filed with the SEC on August 25, 2005, and the related amendments on form S-3/A on or about September 7, 2005. 63. Defendant Randall Costa was a Director and President (Principal Executive
Officer) of Defendant CGMLT. In that capacity, he signed the following Registration Statements: Registration Statement under file number 333-131136, filed with the SEC on January 19, 2006, and the related amendments on form S-3/A on or about February 28, 2006, March 30, 2006, and April 5, 2006; and
21
Registration Statement under file number 333-138237, filed with the SEC on October 25, 2006, and the related amendments on form S-3/A on or about November 17, 2006, December 4, 2006, and December 12, 2006.
64.
Defendant Scott Freidenrich was a Treasurer (Principal Financial Officer) of
Defendant CGMLT. In that capacity, he signed the following Registration Statements: Registration Statement under file number 333-124036, filed with the SEC on April 13, 2005; Registration Statement under file number 333-127834, filed with the SEC on August 25, 2005, and the related amendments on form S-3/A on or about September 7, 2005; Registration Statement under file number 333-131136, filed with the SEC on January 19, 2006, and the related amendments on form S-3/A on or about February 28, 2006, March 30, 2006, and April 5, 2006; and Registration Statement under file number 333-138237, filed with the SEC on October 25, 2006, and the related amendments on form S-3/A on or about November 17, 2006, December 4, 2006, and December 12, 2006. 65. Defendant Mark I. Tsesarsky was a Director of Defendant CGMLT. In that
capacity, he signed the following Registration Statements: Registration Statement under file number 333-124036, filed with the SEC on April 13, 2005; Registration Statement under file number 333-127834, filed with the SEC on August 25, 2005, and the related amendments on form S-3/A on or about September 7, 2005;
22
Registration Statement under file number 333-131136, filed with the SEC on January 19, 2006, and the related amendments on form S-3/A on or about February 28, 2006, March 30, 2006, and April 5, 2006; and Registration Statement under file number 333-138237, filed with the SEC on October 25, 2006, and the related amendments on form S-3/A on or about November 17, 2006, December 4, 2006, and December 12, 2006. 66. Defendant Peter Patricola was a Controller of Defendant CGMLT. In that
capacity, he signed the following Registration Statements: Registration Statement under file number 333-124036, filed with the SEC on April 13, 2005; Registration Statement under file number 333-127834, filed with the SEC on August 25, 2005, and the related amendments on form S-3/A on or about September 7, 2005; Registration Statement under file number 333-131136, filed with the SEC on January 19, 2006, and the related amendments on form S-3/A on or about February 28, 2006, March 30, 2006, and April 5, 2006; and Registration Statement under file number 333-138237, filed with the SEC on October 25, 2006, and the related amendments on form S-3/A on or about November 17, 2006, December 4, 2006, and December 12, 2006. 67. Defendant Jeffrey Perlowitz was a Director of Defendant CGMLT. In that
capacity, he signed the following Registration Statements: Registration Statement under file number 333-124036, filed with the SEC on April 13, 2005;
23
Registration Statement under file number 333-127834, filed with the SEC on August 25, 2005, and the related amendments on form S-3/A on or about September 7, 2005; Registration Statement under file number 333-131136, filed with the SEC on January 19, 2006, and the related amendments on form S-3/A on or about February 28, 2006, March 30, 2006, and April 5, 2006; and Registration Statement under file number 333-138237, filed with the SEC on October 25, 2006, and the related amendments on form S-3/A on or about November 17, 2006, December 4, 2006, and December 12, 2006. 68. Defendant Evelyn Echevarria was a Director of Defendant CGMLT. In that
capacity, she signed the following Registration Statements: Registration Statement under file number 333-124036, filed with the SEC on April 13, 2005. Registration Statement under file number 333-127834, filed with the SEC on August 25, 2005, and the related amendments on form S-3/A on or about September 7, 2005; Registration Statement under file number 333-131136, filed with the SEC on January 19, 2006, and the related amendments on form S-3/A on or about February 28, 2006, March 30, 2006, and April 5, 2006; and Registration Statement under file number 333-138237, filed with the SEC on October 25, 2006, and the related amendments on form S-3/A on or about November 17, 2006, December 4, 2006, and December 12, 2006.
24
B. 69.
Defendants Failure To Conduct Proper Due Diligence The Defendants failed to conduct adequate and sufficient due diligence to ensure
2005 through 2007Citis involvement in the mortgage-backed securitization market was rapidly expanding. In an effort to increase revenue and profits, Citi vastly expanded the volume of mortgage-backed securities it issued as compared to prior years. From 2003 to 2004, the volume of mortgage loans that CGMR securitized more than doubled to $7.1 billion. In 2005, the volume again more than doubled from $7.1 billion to $18.4 billion. In 2006, CGMR securitized its largest volume of mortgage loans $21.5 billion. CGMRs growth in subprime loans was particularly astronomical. CGMR issued $300 million in subprime loans in 2003. By 2004, that number increased eight-fold to $2.4 billion, and then nearly quadrupled again in 2005 to $8.2 billion. By 2006, CGMR had securitized its largest volume of subprime loans, over $10.3 billion. See CMLTI 2007-AR7 Prospectus Supplement, filed May 30, 2007. 71. The Defendants had enormous financial incentives to complete as many offerings
as quickly as possible without regard to ensuring the accuracy or completeness of the Registration Statements or conducting adequate and reasonable due diligence of the underlying mortgage loans. For example, CGMLT, as the depositor, was paid a percentage of the total dollar amount of the offerings upon completion of the Securitizations, and CGMI, as the underwriter, was paid a commission based on the amount it received from the sale of the Certificates to the public. Thus, the greater the number of offerings, the greater the profit to CGMLT and CGMI.
25
72.
The push to securitize large volumes of mortgage loans contributed to the absence
of controls needed to prevent the inclusion of untrue statements and omissions of material facts in the Registration Statements. In particular, Defendants failed to conduct adequate diligence or otherwise to ensure the accuracy of the statements in the Registrations Statements pertaining to the Securitizations. 73. For instance, Citi retained third-parties, including Clayton Holdings, Inc.
(Clayton), to analyze the loans it was considering for inclusion in its securitizations, but waived a significant number of loans into its securitizations that these third-parties had recommended for exclusion, and did so without taking adequate steps to ensure that these loans had in fact been underwritten in accordance with the applicable guidelines or had compensating factors that excused the failure of the loans to comply with underwriting guidelines. On January 27, 2008, Clayton revealed that it had entered into an agreement with the New York Attorney General (the NYAG) to provide documents and testimony regarding its due diligence reports, including copies of the actual reports provided to its clients. According to The New York Times, as reported on January 27, 2008, Clayton told the NYAG that starting in 2005, it saw a significant deterioration of lending standards and a parallel jump in lending expectations and some investment banks directed Clayton to halve the sample of loans it evaluated in each portfolio. 74. Citi was negligent in allowing into the Securitizations a substantial number of
mortgage loans that, as reported to Citi by third-party due diligence firms, did not conform to the underwriting standards stated in the Registration Statements, including the Prospectuses and Prospectus Supplements. Even upon learning from its third-party due diligence firms that there were high percentages of defective or at least questionable loans in the sample of loans reviewed
26
by the third-party due diligence firms, Citi failed to take any additional steps to verify that the population of loans in the Securitizations did not include a similar percentage of defective and/or questionable loans. 75. Claytons trending reports revealed that in the period from the first quarter of
2006 to the second quarter of 2007, 42 percent of the mortgage loans Citi submitted to Clayton to review in RMBS loan pools were rejected by Clayton as falling outside the applicable underwriting guidelines. Of the mortgage loans that Clayton found defective, 31 percent of the loans were subsequently waived in by Citi without proper consideration and analysis of compensating factors and included in securitizations such as the ones in which Fannie Mae and Freddie Mac invested. See FCIC Report at 167. 76. Likewise, in 2006, Richard Bowen, the Business Chief Underwriter for
Correspondent Lending in the Consumer Lending Group within Citi, began raising serious concerns to Citis senior management about the poor quality of the loans Citi was acquiring from third-party originators and then securitizing. The Consumer Lending Group housed Citis consumer-lending activities, including prime and subprime mortgages, as well as Citis purchase of loans from originators other than Citis origination arm, CitiMortgage. As chief underwriter, Mr. Bowen was charged with the underwriting responsibility for over $90 billion annually of residential mortgage production; in other words, his responsibility was to ensure that these mortgages met the credit standards required by Citi credit policy. Written Testimony of Richard M. Bowen, III to the FCIC, April 7, 2010 (Bowen Testimony) at 1. 77. Mr. Bowen discovered serious issues with the loans Citi purchased, both prime
and subprime loans. On the prime side, Citi had represented and warranted that the mortgages were underwritten to Citis credit guidelines. However, in 2006, Mr. Bowen discovered that
27
some 60% of these mortgages were defective, with that figure rising to 80% in 2007. On the subprime side, vast pools of subprime loans, totaling over $300 million, were purchased even though they failed to meet Citis credit policy criteria. Bowen Testimony at 1-2. 78. Citis due diligence process was woefully inadequate. For example, an
underwriting department called Quality Assurance was supposed to review the prime loans that Citi purchased, as Citi would subsequently represent and warrant to investors that these loans met Citis underwriting criteria. According to Citis policy, at least 95% of the prime loans the Quality Assurance department reviewed were required to have an agree designation, meaning Citis underwriters agreed with the originators underwriting decision. The Quality Assurance Department would then report these results to the Third Party Originators Committee (TPO Committee), which had overall responsibility for managing the selling mortgage company relationships. Bowen Testimony at 4-5. 79. However, Mr. Bowen soon discovered that the reports to the TPO Committee
were, at the least, highly misleading. In fact, many of the agree decisions were actually agree contingent, meaning that the agree decision was contingent upon receiving documents that were missing from the loan file. Quality Assurance was reporting both types of designations together, even though the agree contingent decisions were missing documents required by Citis policies. In reality, only 40% of the loans Quality Assurance reviewed properly received an agree designation, with 55% receiving the misleading agree contingent label. Bowen Testimony at 5-6. A follow-up study found even more staggering results, with a 70% defect rate in the agree designations. Bowen Testimony at 7. 80. The same themes of underwriting breaches ran through the subprime origination
channel as well. According to Citis policy, Citi underwriters were required to underwrite a
28
statistically significant sample of a prospective pool of subprime loans, approving only those loans that met Citi policy guidelines. However, in the third quarter of 2006, Citis Wall Street Chief Risk Officer started changing many of the underwriting decisions from turn down to approve in order to artificially increase[] the approval rate on the sample. This higher approval rate was then used as justification to purchase these pools. Bowen Testimony 8-9. 81. These flawed due diligence practices were especially troubling, because, in the
words of Defendant Susan Mills, the Managing Director of Defendant CGMLT, these due diligence reviews served as the primary . . . means by which we evaluated the loans that we purchased and securitized. Written Testimony of Susan Mills to the FCIC, April 7, 2010 (Mills Testimony) at 4. 82. Defendant Mills personally witnessed a near tripling of early payment default
rates in the loans her group was purchasing during the period from 2005 to 2007. By the same token, Bowen repeatedly expressed concerns to his direct supervisor and company executives about the quality and underwriting of mortgages that CitiMortgage purchased and then sold to the GSEs. FCIC Report at 168. Yet Citi failed to take any corrective action or improve its due diligence practices. 83. To the contrary, despite these serious flaws in Citis due diligence practices,
securitization of these faulty loans became a factory line, in the words of former Citi CEO Charles Prince. As more and more of these subprime mortgages were created as raw material for the securitization process, not surprisingly in hindsight, more and more of it was of lower and lower quality. And at the end of that process, the raw material going into it was actually bad quality, it was toxic quality, and that is what ended up coming out the other end of the pipeline. FCIC Report at 102-03.
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III.
THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS A. 84. Compliance With Underwriting Guidelines The Prospectus Supplements for each Securitization describe the mortgage loan
part of the Registration Statement for each Securitization, were material to a reasonable investors decisions to purchase and invest in the Certificates because the failure to originate a mortgage loan in accordance with the applicable guidelines creates a higher risk of delinquency and default by the borrower, as well as a risk that losses upon liquidation will be higher, thus resulting in a greater economic risk to an investor. 86. The Prospectus Supplements for the Securitizations contained several key
statements with respect to the underwriting standards of the entities that originated the loans in the Securitizations. For example, the Prospectus Supplement for the CMLTI 2006-WF2 Securitization, for which Wells Fargo was the originator, CGMR was the sponsor, CGMLT was the depositor, and CGMI was the underwriter, stated that All of the mortgage loans were originated by Wells Fargo Bank or acquired by Wells Fargo Bank from correspondent lenders after re-underwriting such acquired mortgage loans generally in accordance with its underwriting guidelines then in effect. 87. The CMLTI 2006-WF2 Prospectus Supplement stated that the originator may
make the determination that the prospective borrower warrants loan parameters beyond those
30
shown above, but emphasized that such decisions are made [o]n a case-by-case basis and only upon the presence of acceptable compensating factors. 88. With respect to the information evaluated by the originator, the CMLTI 2006-
WF2 Prospectus Supplement stated that: The underwriting standards that guide the determination represent a balancing of several factors that may affect the ultimate recovery of the loan amount, including, among others, the amount of the loan, the ratio of the loan amount to the property value (i.e., the lower of the appraised value of the mortgaged property and the purchase price), the borrowers means of support and the borrowers credit history. 89. The Prospectus Supplement further stated that: Verifications of employment,
income, assets or mortgages may be used to supplement the loan application and the credit report in reaching a determination as to the applicants ability to meet his or her monthly obligations on the proposed mortgage loan, as well as his or her other mortgage payments (if any), living expenses and financial obligations. A mortgage verification involves obtaining information regarding the borrowers payment history with respect to any existing mortgage the applicant may have. This verification is accomplished by either having the present lender complete a verification of mortgage form, evaluating the information on the credit report concerning the applicants payment history for the existing mortgage, communicating, either verbally or in writing, with the applicants present lender or analyzing cancelled checks provided by the applicant. Verifications of income, assets or mortgages may be waived under certain programs offered by [the originator], but [the originators] underwriting guidelines require, in most instances, a verbal or written verification of employment to be obtained. In some cases, employment histories may be obtained through one of various employment verification sources, including the borrowers employer, employer-sponsored web sites, or third-party services
31
specializing in employment verifications. 90. The Prospectuses and Prospectus Supplements for each of the Securitizations had
similar representations to those quoted above. The relevant representations in the Prospectuses and Prospectus Supplement pertaining to originating bank underwriting standards for each Securitization are reflected in Appendix A to this Complaint. As discussed at paragraphs 120 through 149 below, in fact, the originators of the mortgage loans in the Supporting Loan Group for the Securitizations did not adhere to their stated underwriting guidelines, thus rendering the description of those guidelines in the Prospectuses and Prospectus Supplements false and misleading. 91. Further, for the vast majority of the Securitizations, the Prospectuses and
Prospectus Supplements described additional representations and warranties concerning the mortgage loans backing the Securitizations that were made by the originator to the sponsor in the PSA. Such representations and warranties, which are described more fully for each Securitization in Appendix A, included: (i) the mortgage loans were underwritten in accordance with the originators underwriting guidelines in effect at the time of origination, subject to only limited exceptions; (ii) the mortgage loan was made in compliance with, and is enforceable under, all applicable local, state and federal laws and regulations; (iii) each mortgage loan was current as to all required payments; (iv) the mortgage loan seller had good title to each mortgage loan and each loan was subject to no offsets, defenses, counterclaims, or rights of rescission; and (v) the origination and collection practices used by the originator with respect to each mortgage note and mortgage have been in all respects legal, proper, prudent and customary in the mortgage origination and servicing business. 92. The inclusion of these representations in the Prospectuses and Prospectus
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Supplements had the purpose and effect of providing additional assurances to investors regarding the quality of the mortgage collateral underlying the Securitizations and its compliance with the underwriting guidelines described in the Prospectuses and Prospectus Supplements. These representations were material to a reasonable investors decision to purchase the Certificates. B. 93. Statements Regarding Occupancy Status Of Borrower The Prospectus Supplements contained collateral group-level information about
the occupancy status of the borrowers of the loans in the Securitizations. Occupancy status refers to whether the property securing a mortgage is to be the primary residence of the borrower, a second home, or an investment property. The Prospectus Supplements for each of the Securitizations presented this information in tabular form, usually in a table entitled Occupancy Status of the Mortgage Loans. This table divided all the loans in the collateral group by occupancy status, e.g., into the categories: (i) Primary, or Owner Occupied; (ii) Second Home, or Secondary; and (iii) Investment or Non-Owner. For each category, the table stated the number of loans in that category. Occupancy statistics for the Supporting Loan Groups for each Securitization were reported in the Prospectus Supplements as follows:7 Table 4
Transaction
ARSI 2005-W2 CMLTI 2005-10 CMLTI 2005-7 CMLTI 2005-HE3 CMLTI 2005-HE4

Group I Group I-3 Group 1-2 Group I Group I
Primary or Owner Occupied

86.10% 72.35% 85.05% 92.08% 85.35%
Second Home/Secondary
1.10% 4.84% 2.93% 3.84% 1.76%
Investor
12.80% 22.81% 12.02% 4.08% 12.89%
Each Prospectus Supplement provides the total number of loans and the number of loans in the following categories: owner occupied, investor, and second home. These numbers have been converted to percentages.
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Transaction
CMLTI 2006-AR2 CMLTI 2006-AR5 CMLTI 2006-WF1 CMLTI 2006-WF2 CMLTI 2007-AR7

Group I-1 Group 1-2 Group I Group I Group 2

88.75% 89.26% 58.08% 60.10% 36.23%
4.20% 9.40% 4.79% 3.55% 8.83%
Investor
7.05% 1.34% 37.14% 36.36% 54.94%
94.
As Table 4 makes clear, the Prospectus Supplements for all but one Securitization
reported that a majority, and usually an overwhelming majority, of the mortgage loans in the Supporting Loan Groups were owner occupied, while a much smaller percentage were reported to be non-owner occupied (i.e. a second home or investor property). 95. The statements about occupancy status were material to a reasonable investors
decision to invest in the Certificates. Information about occupancy status is an important factor in determining the credit risk associated with a mortgage loan and, therefore, the securitization that it collateralizes. Because borrowers who reside in mortgaged properties are less likely to default and more likely to care for their primary residence than borrowers who purchase homes as second homes or investments and live elsewhere, the percentage of loans in the collateral group of a securitization that are not secured by mortgage loans on owner-occupied residences is an important measure of the risk of the certificates sold in that securitization. As stated in the Prospectus Supplement for the CMLTI 2005-HE4 Securitization and other Securitizations: With respect to each mortgaged property, unless otherwise provided in the related prospectus supplement, the borrower will have represented that the dwelling is either an owner-occupied primary residence or a vacation or second home that is not part of a mandatory rental pool and is suitable for year-round occupancy. 96. Other things being equal, the higher the percentage of loans not secured by
owner-occupied residences, the greater the risk of loss to the certificateholders. Even small
34
differences in the percentages of primary/owner-occupied, second home/secondary, and investment properties in the collateral group of a securitization can have a significant effect on the risk of each certificate sold in that securitization, and thus, are important to the decision of a reasonable investor whether to purchase any such certificate. As discussed at paragraphs 108 through 118 below, the Registration Statement for each Securitization materially overstated the percentage of loans in the Supporting Loan Groups that were owner occupied, thereby misrepresenting the degree of risk of the GSE Certificates. C. 97. Statements Regarding Loan-To-Value Ratios The loan-to-value ratio of a mortgage loan, or LTV, is the ratio of the balance of
the mortgage loan to the value of the mortgaged property when the loan is made. 98. The denominator in the LTV ratio is the value of the mortgaged property, and is
generally the lower of the purchase price or the appraised value of the property. In a refinancing or home equity loan, there is no purchase price to use as the denominator, so the denominator is often equal to the appraised value at the time of the origination of the refinanced loan. Accordingly, an accurate appraisal is essential to an accurate LTV ratio. In particular, an inflated appraisal will understate, sometimes greatly, the credit risk associated with a given loan. 99. The Prospectus Supplements for each Securitization also contained group-level
information about the LTV ratio for the underlying group of loans as a whole. The percentage of loans with an LTV ratio at or less than 80 percent and the percentage of loans with an LTV ratio greater than 100 percent as reported in the Prospectus Supplements for the Supporting Loan Groups are reflected in Table 5 below.8
As used in this Complaint, LTV refers to the original loan-to-value ratio for first lien mortgages and for properties with second liens that are subordinate to the lien that was included
35
Table 5
Transaction Supporting Loan Group
62.07% 87.38% 94.00% 72.59% 57.93% 96.28% 94.44% 46.05% 43.46% 88.12%
0% 0% 0% 0.03% 0% 0% 0% 0% 0% 0%
100.
As Table 5 makes clear, the Prospectus Supplement for eight of the ten
Securitizations reported that the majority of the mortgage loans in the Supporting Loan Groups had an LTV ratio of 80 percent or less, and the Prospectus Supplements for all but one of the Securitizations reported that no mortgage loans in the Supporting Loan Group had an LTV ratio over 100 percent. 101. The LTV ratio is among the most important measures of the risk of a mortgage
loan, and thus, it is one of the most important indicators of the default risk of the mortgage loans underlying the Certificates. The lower the ratio, the less likely that a decline in the value of the property will wipe out an owners equity, and thereby give an owner an incentive to stop making mortgage payments and abandon the property. This ratio also predicts the severity of loss in the event of default. The lower the LTV, the greater the equity cushion, so the greater the
in the securitization (i.e., only the securitized lien is included in the numerator of the LTV calculation). Where the securitized lien is junior to another loan, the more senior lien has been added to the securitized one to determine the numerator in the LTV calculation (this latter calculation is sometimes referred to as the combined-loan-to-value ratio, or CLTV).
36
likelihood that the proceeds of foreclosure will cover the unpaid balance of the mortgage loan. 102. Thus, LTV ratio is a material consideration to a reasonable investor in deciding
whether to purchase a certificate in a securitization of mortgage loans. Even small differences in the LTV ratios of the mortgage loans in the collateral group of a securitization have a significant effect on the likelihood that the collateral groups will generate sufficient funds to pay certificateholders in that securitization, and thus are material to the decision of a reasonable investor whether to purchase any such certificate. As discussed at paragraphs 113 through 118 below, the Registration Statements for the Securitizations materially overstated the percentage of loans in the Supporting Loan Groups with an LTV ratio at or less than 80 percent, and materially understated the percentage of loans in the Supporting Loan Groups with an LTV ratio over 100 percent, thereby misrepresenting the degree of risk of the GSE Certificates. D. 103. Statements Regarding Credit Ratings Credit ratings are assigned to the tranches of securities in mortgage-backed
securitizations by the credit rating agencies, including Moodys Investors Service, Standard & Poors, and Fitch Ratings. Each credit rating agency uses its own scale with letter designations to describe various levels of risk. In general, AAA or its equivalent ratings are at the top of the credit rating scale and are intended to designate the safest investments. C and D ratings are at the bottom of the scale and refer to investments that are currently in default and exhibit little or no prospect for recovery. At the time the GSEs purchased their GSE Certificates in the Securitizations, investments with AAA or its equivalent ratings historically experienced a loss rate of less than .05 percent. Investments with a BBB rating, or its equivalent, historically experienced a loss rate of less than one percent. As a result, RMBS securities with credit ratings between AAA or its equivalent through BBB or its equivalent were generally referred to as
37
investment grade. 104. Rating agencies determine the credit rating for each tranche of securities in a
mortgage-backed securitization by comparing the likelihood of contractual principal and interest payments to the credit enhancements available to protect investors. Rating agencies determine the likelihood of repayment by estimating cash-flows based on the quality of the underlying mortgages by using sponsor provided loan level data. Credit enhancements, such as subordination, represent the amount of cushion or protection from loss incorporated into a given securitization.9 This cushion is intended to improve the likelihood that holders of highly rated certificates receive the interest and principal to which they are contractually entitled. The level of credit enhancement offered is based on the credit characteristics of the loans in the underlying collateral group and entire securitization. Riskier loans underlying the securitization necessitate higher levels of credit enhancement to insure payment to senior certificate holders. If the collateral within the deal is of a higher quality, then rating agencies require less credit enhancement for AAA or its equivalent rating. 105. Credit ratings have been an important tool to gauge risk when making investment
decisions. In testimony before the Senate Permanent Subcommittee on Investigations, Susan Barnes, the North American Practice Leader for RMBS at S&P from 2005 to 2008, confirmed that the rating agencies relied upon investment banks to provide accurate information about the loan pools:
Subordination refers to the fact that the certificates for a mortgage-backed securitization are issued in a hierarchical structure, from senior to junior. The junior certificates are subordinate to the senior certificates in that, should the underlying mortgage loans become delinquent or default, the junior certificates suffer losses first. These subordinate certificates thus provide a degree of protection to the senior certificates from losses on the underlying loans.
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The securitization process relies on the quality of the data generated about the loans going into the securitizations. S&P relies on the data produced by others and reported to both S&P and investors about those loans . . . . S&P does not receive the original loan files for the loans in the pool. Those files are reviewed by the arranger or sponsor of the transaction, who is also responsible for reporting accurate information about the loans in the deal documents and offering documents to potential investors. (SPSI hearing testimony, April 23, 2010). 106. For almost a hundred years, investors like pension funds, municipalities,
insurance companies, and university endowments have relied heavily on credit ratings to assist them in distinguishing between safe and risky investments. Fannie Mae and Freddie Macs respective internal policies limited their purchases of private label RMBS to those rated AAA (or its equivalent), and in very limited instances, AA or A bonds (or their equivalent). 107. Each tranche in the Securitizations received a credit rating upon issuance, which
purported to describe the riskiness of that tranche. The Defendants reported the credit ratings for each tranche in the Prospectus Statements. The credit rating provided for each of the GSE Certificates was always AAA or its equivalent. The accuracy of these ratings was material to a reasonable investors decision to purchase the Certificates. As set forth in Table 8, infra at paragraph 153, the ratings for the Securitizations were inflated as a result of Defendants provision of incorrect data concerning the attributes of the underlying mortgage collateral to the ratings agencies, and, as a result, Defendants sold and marketed the GSE Certificates as AAA (or its equivalent) when, in fact, they were not. IV. FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS A. 108. The Statistical Data Provided In The Prospectus Supplements Concerning Owner Occupancy And LTV Ratios Was Materially False A review of loan-level data was conducted in order to assess whether the
39
statistical information provided in the Prospectus Supplements was true and accurate. For each Securitization, the sample consisted of 1,000 randomly selected loans per Supporting Loan Group, or all of the loans in the group if there were fewer than 1,000 loans in the Supporting Loan Group. The sample data confirms, at a statistically-significant level, material misrepresentations of underwriting standards and of certain key characteristics of the mortgage loans across the Securitizations. The data review demonstrates that the data concerning owner occupancy percentages and LTV ratios was false and misleading. 1. 109. Owner Occupancy Data Was Materially False
claimed, a number of tests were conducted, including, inter alia, (i) whether, months after the loan closed, the borrowers tax bill was being mailed to the property securing the mortgage or to a different address; (ii) whether the borrower had claimed a tax exemption on the property; and (iii) whether the mailing address of the property was reflected in the borrowers credit reports, tax records, or lien records. Failing two or more of these tests is a strong indication that the borrower did not live at the mortgaged property and instead used it as a second home or an investment property, both of which make it more likely that a borrower will not repay the loan. 111. A significant number of the loans failed two or more of these tests, indicating that
the owner occupancy statistics provided to Fannie Mae and Freddie Mac were materially false and misleading. For example, for the CMLTI 2005-HE3 Securitization, for which CGMR was
40
the sponsor, CGMLT was the depositor, and CGMI was the underwriter, the Prospectus Supplement stated that only 7.92 percent of the underlying properties by loan count in the Supporting Loan Group were not owner-occupied. But the data review revealed that, for 14.39 percent of the properties represented as owner-occupied, the owners in fact lived elsewhere, indicating that the true percentage of non-owner occupied properties was 21.17 percent, nearly triple the percentage reported in the Prospectus Supplement.10 112. The data review revealed that for each Securitization, the Prospectus Supplement
misrepresented the percentage of non-owner occupied properties. The true percentage of nonowner occupied properties, as determined by the data review, versus the percentage stated in the Prospectus Supplement for each Securitization is reflected in Table 6 below. Table 6 demonstrates that the Prospectus Supplements for each Securitization understated the percentage of non-owner occupied properties by at least 5 percent, and for many Securitizations by ten percent or more. Table 6
Transaction Supporting Loan Group Reported Percentage of Non-Owner Occupied Properties
13.90% 27.65%
Percentage of Properties Reported as Owner-Occupied With Strong Indication of NonOwner Occupancy11

11.81% 16.22%

24.07% 39.98%
Prospectus Understatement of Non-Owner Occupied Properties

10.17% 11.73%
ARSI 2005-W2 CMLTI 2005-10
Group I Group I-3
This conclusion is arrived at by summing (a) the stated non-owner-occupied percentage in the Prospectus Supplement (here, 7.92 percent), and (b) the product of (i) the stated owner-occupied percentage (here, 92.08 percent) and (ii) the percentage of the properties represented as owner-occupied in the sample that showed strong indications that their owners in fact lived elsewhere (here, 14.39 percent). As described more fully in paragraph 110, failing two or more tests of owneroccupancy is a strong indication that the borrower did not live at the mortgage property and instead used it as a second home or an investment property.
11
10
41
Transaction
Reported Percentage of Non-Owner Occupied Properties

14.95% 7.92% 14.65% 11.25% 10.74% 41.92% 39.90% 63.77%

18.07% 14.39% 15.57% 15.78% 18.70% 10.76% 12.56% 13.89%

30.32% 21.17% 27.94% 25.25% 27.43% 48.17% 47.45% 68.80%

15.37% 13.25% 13.29% 14.01% 16.69% 6.25% 7.55% 5.03%
CMLTI 2005-7 CMLTI 2005-HE3 CMLTI 2005-HE4 CMLTI 2006-AR2 CMLTI 2006-AR5 CMLTI 2006-WF1 CMLTI 2006-WF2 CMLTI 2007-AR7
Group 1-2 Group I Group I Group I-1 Group 1-2 Group I Group I Group 2
2. 113.
Loan-To-Value Data Was Materially False
Prospectus Supplements were materially false and understated, as more specifically set out below. For each of the sampled loans, an industry standard automated valuation model (AVM) was used to calculate the value of the underlying property at the time the mortgage loan was originated. AVMs are routinely used in the industry as a way of valuing properties during prequalification, origination, portfolio review and servicing. AVMs rely upon similar data as appraisersprimarily county assessor records, tax rolls, and data on comparable properties. AVMs produce independent, statistically-derived valuation estimates by applying modeling techniques to this data. 114. Applying the AVM to the available data for the properties securing the sampled
loans shows that the appraised value given to such properties was significantly higher than the actual value of such properties. The result of this overstatement of property values is a material understatement of LTV. That is, if a propertys true value is significantly less than the value used in the loan underwriting, then the loan represents a significantly higher percentage of the propertys value. This, of course, increases the risk a borrower will not repay the loan and the risk of greater losses in the event of a default. As stated in the Prospectus Supplement for CMLTI 2005-10, mortgage loans with high loan-to-value ratios leave the related borrower with
42
little or no equity in the related mortgaged property which may result in losses with respect to these mortgage loans. 115. For example, for the CMLTI 2006-WF1 Securitization, which was sponsored by
CGMR, deposited by CGMLT, and underwritten by CGMI, the Prospectus Supplement stated that no LTV ratios for the Supporting Loan Group were above 100 percent. In fact, 17.24 percent of the sample of loans included in the data review had LTV ratios above 100 percent. In addition, the Prospectus Supplement stated that 46.05 percent of the loans had LTV ratios at or below 80 percent. The data review indicated that only 36.35 percent of the loans had LTV ratios at or below 80 percent. 116. The data review revealed that for each Securitization, the Prospectus Supplement
misrepresented the percentage of loans with an LTV ratio above 100 percent, as well as the percentage of loans that had an LTV ratio at or below 80 percent. Table 7 reflects (i) the true percentage of mortgages in the Supporting Loan Group with LTV ratios above 100 percent, versus the percentage reported in the Prospectus Supplement; and (ii) the true percentage of mortgages in the Supporting Loan Group with LTV ratios at or below 80 percent, versus the percentage as reported in the Prospectus Supplement. The percentages listed in Table 7 were calculated by aggregated principal balance. Table 7
PROSPECTUS Supporting Loan Group Percentage of Loans Reported to Have LTV Ratio At Or Under 80%
62.07% 87.38% 94.00% 72.59% 57.93% 96.28% 94.44%
Transaction
DATA REVIEW True Percentage of Loans With LTV Ratio At Or Under 80%
45.67% 50.17% 49.18% 43.66% 44.45% 55.61% 62.25%

0% 0% 0% 0.03% 0% 0% 0%
12.38% 7.73% 7.71% 10.84% 14.50% 4.77% 5.16%
ARSI 2005-W2 CMLTI 2005-10 CMLTI 2005-7 CMLTI 2005-HE3 CMLTI 2005-HE4 CMLTI 2006-AR2 CMLTI 2006-AR5
Group I Group I-3 Group 1-2 Group I Group I Group I-1 Group 1-2
43
CMLTI 2006-WF1 CMLTI 2006-WF2 CMLTI 2007-AR7
Group I Group I Group 2
46.05% 43.46% 88.12%
36.35% 36.40% 49.76%
0% 0% 0%
17.24% 14.60% 16.71%
117.
As Table 7 demonstrates, the Prospectus Supplements for the Securitizations
reported that for all but one of the Securitizations none of the mortgage loans in the Supporting Loan Groups had an LTV ratio over 100 percent. With respect to that one exception, the percentage of mortgage loans with a reported LTV ratio over 100 percent was very smallless than 1 percent. In contrast, the data review revealed that at least 4.77 percent of the mortgage loans for each Securitization had an LTV ratio over 100 percent, and for most Securitizations this figure was much higher. Indeed, for six of the Securitizations the data review revealed that ten percent of the mortgages in the Supporting Loan Group had a true LTV ratio over 100 percent. 118. These inaccuracies with respect to reported LTV ratios also indicate that the
representations in the Registration Statements relating to appraisal practices were false, and that the appraisers themselves, in many instances, furnished appraisals that they understood were inaccurate and that they knew bore no reasonable relationship to the actual value of the underlying properties. Indeed, independent appraisers following proper practices, and providing genuine estimates as to valuation, would not systematically generate appraisals that deviate so significantly (and so consistently upward) from the true values of the appraised properties. This conclusion is further confirmed by the findings of the FCIC, which identified inflated appraisals as a pervasive problem during the period of the Securitizations, and determined through its investigation that appraisers were often pressured by mortgage originators, among others, to produce inflated results. See FCIC Report at 91-92.
44
B. 119.
The Originators Of The Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines The Registration Statements contained material misstatements and omissions
regarding compliance with underwriting guidelines. Indeed, the originators for the loans underlying the Securitizations systematically disregarded their respective underwriting guidelines in order to increase production and profits derived from their mortgage lending businesses. This is confirmed by the systematically misreported owner occupancy and LTV statistics, discussed above, and by (1) government investigations into originators underwriting practices, which have revealed widespread abandonment of the originators reported underwriting guidelines during the relevant period; (2) the collapse of the Certificates credit ratings; and (3) the surge in delinquency and default in the mortgages in the Securitizations. 1. Government Investigations Have Confirmed That The Originators Of The Loans In The Securitizations Systematically Failed To Adhere To Their Underwriting Guidelines
120.
For nine of the ten Securitizations the Citi Defendants sold to the GSEs, CGMR
would purchase loans originated by other entities, including CitiMortgage, as listed supra in paragraphs 26-27. The prospectus supplements for the Securitizations represented that the underlying mortgages were originated according to the originators guidelines. For example, the CMLTI 2006-WF2 Securitization stated that [a]ll of the mortgage loans were originated by Wells Fargo Bank or acquired by Wells Fargo Bank from correspondent lenders after reunderwriting such acquired mortgage loans generally in accordance with its underwriting guidelines then in effect. However, in reality, these originators systematically failed to adhere to their underwriting guidelines. 121. Several government reports and investigations have focused on the abandonment
of underwriting guidelines, describing rampant underwriting failures throughout the period of the
45
Securitizations, and, more specifically, describing underwriting failures by the very originators whose loans were included by the Citi Defendants in the Securitizations. 122. For instance, in November 2008, the Office of the Comptroller of the Currency,
an office within the United States Department of the Treasury, issued a report identifying the Worst Ten mortgage originators in the Worst Ten metropolitan areas. The worst originators were defined as those with the largest number of non-prime mortgage foreclosures for 20052007 originations. Numerous originators who originated loans that the Citi Defendants eventually sold to the GSEs are on that list, including Wells Fargo, Countrywide, American Home, Argent, and WMC. See Worst Ten in the Worst Ten, Office of the Comptroller of the Currency Press Release, November 13, 2008. 123. The Citi Defendants had the opportunity to review loan files from such originators
as part of their due diligence and their obligations in the securitization process. Such a review would have revealed that the actual underwriting practices of the originators, including originators such as Wells Fargo, Countrywide, American Home, Argent, and WMC were vastly inconsistent with the statements in the Offering Materials regarding the high standards of the originators and the Citi Defendants. That the originators had serious origination underwriting breakdowns is also confirmed by the testimony of Mr. Bowen, who gave detailed statistics about the reject rates for loans bought by Citigroup from third party originators like Wells Fargo, Countrywide, and American Home. i. 124. Wells Fargo
Wells Fargo Bank, N.A. originated all of the mortgage loans for the CMLTI
2006-WF1 and CMLTI 2006-WF2 offerings. Wells Fargo Bank, N.A. also originated approximately 78.90 percent of the Group I-1 Mortgage Loans in the CMLTI 2006-AR2
46
offering. 125. In March 2009, residential mortgage-backed securities investors filed suit against
Wells Fargo, alleging that it had misrepresented its underwriting guidelines and loan quality. See In re Wells Fargo Mortgage-Backed Certificates Litig., No. 09-CV-01376 (N.D. Cal. 2009). In denying in part a motion to dismiss, the court found that plaintiffs had adequately pled that variance from the stated [underwriting] standards was essentially [Wells Fargos] norm and that this conduct infected the entire underwriting process. In re Wells Fargo Mortgage-Backed Certificates Litig., 712 F. Supp. 2d 958, 972 (N.D. Cal. 2010). Wells Fargo agreed to settle the investors claims. 126. Further, a number of government actors have announced investigations of Wells
Fargos lending practices. In July 2009, the Attorney General of Illinois filed a lawsuit, People v. Wells Fargo & Co., No. 09-CH-26434 (Ill. Cir. Ct. 2009), alleging that Wells Fargo engaged in deceptive practices by misleading Illinois borrowers about their mortgage terms. The complaint details how borrowers were placed into loans that were unaffordable and unsuitable, and how Wells Fargo failed to maintain proper controls. 127. In April 2010, the City of Memphis filed its First Amended Complaint in
Memphis v. Wells Fargo Bank, No. 09-CV-02857 (W.D. Tenn. 2009), alleging that Wells Fargo failed to underwrite African-American borrowers properly. A similar lawsuit was filed by the City of Baltimore, Mayor and City Council of Baltimore v. Wells Fargo Bank, N.A., No. 08-CV00062 (D. Md. 2008). The City of Memphis and City of Baltimore complaints include sworn declarations from many former Wells Fargo employees, which provide evidence of predatory lending and abandonment of underwriting guidelines. For instance, Camille Thomas, a loan processor at Wells Fargo from January 2004 to January 2008, stated under oath that loans were
47
granted based on inflated appraisals, which allowed borrowers to get larger loans than they could afford due to the impact on the LTV calculation and some loans were even granted based on falsified income documents. Similarly, another affidavit by Doris Dancy, a credit manager at Wells Fargo from July 2007 to January 2008, stated that managers put pressure on employees to convince people to apply for loans, even if the person could not afford the loan or did not qualify for it. She was also aware that loan applications contained false data, used to get customers to qualify for loans. 128. The FCIC interviewed Darcy Parmer, a former employee of Wells Fargo, who
worked as an underwriter and a quality assurance analyst from 2001 until 2007. Ms. Parmer confirmed that, during her tenure, Wells Fargos underwriting standards were loosening, adding that they were being applied on the fly and that [p]eople were making it up as they went. She also told the FCIC that 99 percent of the loans she would review in a day would get approved, and that, even though she later became a fraud analyst, she never received any training in detecting fraud. The FCICs January 2011 Report described how hundreds and hundreds and hundreds of fraud cases that Ms. Palmer knew were identified within Wells Fargos home equity loan division were not reported to FinCEN.12 In addition, according to Ms. Palmer, at least half the loans she flagged for fraud were nevertheless funded, over her objections. 129. In July 2011, the Federal Reserve Board issued a consent cease and desist order
and assessed an $85 million civil money penalty against Wells Fargo & Co. and Wells Fargo Financial, Inc. According to the Federal Reserves press release, the order addressed in part
FinCEN is the Financial Crimes Enforcement Network, a bureau within the Treasury Department that collects and analyzes information regarding financial fraud.
12
48
allegations that Wells Fargo Financial sales personnel falsified information about borrowers incomes to make it appear that the borrowers qualified for loans when they would not have qualified based on their actual incomes. The Federal Reserve Board also found that the poor practices of Wells Fargo were fostered by Wells Fargo Financials incentive compensation and sales quota programs, and the lack of adequate controls to manage the risks resulting from these programs. ii. 130. Countrywide
Countrywide was similarly derelict in its underwriting obligations. Countrywide
originated approximately 43.26 percent of the Group I mortgage loans in the CMLTI 2006-AR5 offering. 131. In January 2011, the FCIC issued its final report, which detailed, among other
things, the collapse of mortgage underwriting standards and subsequent collapse of the mortgage market and wider economy. The FCIC Report singled out Countrywide for its role: Lenders made loans that they knew borrowers could not afford and that could cause massive losses to investors in mortgage securities. As early as September 2004, Countrywide executives recognized that many of the loans they were originating could result in catastrophic consequences. Less than a year later, they noted that certain high-risk loans they were making could result not only in foreclosures but also in financial and reputational catastrophe for the firm. But they did not stop. See FCIC Report, at xxii. 132. Countrywide has also been the subject of several investigations and actions
concerning its lax and deficient underwriting practices. In June 2009, for instance, the SEC initiated a civil action against Countrywide executives Angelo Mozilo (founder and Chief Executive Officer), David Sambol (Chief Operating Officer), and Eric Sieracki (Chief Financial Officer) for securities fraud and insider trading. In a September 16, 2010 opinion denying these
49
defendants motions for summary judgment, the United States District Court for the Central District of California found that the SEC raised genuine issues of fact as to, among other things, whether the defendants had misrepresented the quality of Countrywides underwriting processes. The court noted that the SEC presented evidence that Countrywide routinely ignored its official underwriting to such an extent that Countrywide would underwrite any loan it could sell into the secondary mortgage market, and that a significant portion (typically in excess of 20%) of Countrywides loans were issued as exceptions to its official underwriting guidelines . . . . The court concluded that a reasonable jury could conclude that Countrywide all but abandoned managing credit risk through its underwriting guidelines . . . . S.E.C. v. Mozilo, No. CV 093994, 2010 WL 3656068, at *10 (C.D. Cal. Sept. 16, 2010). Mozilo, Sambol, and Sieracki subsequently settled with the SEC. 133. The testimony and documents only recently made available to the GSEs by way
of the SECs investigation confirm that Countrywide was systematically abusing exceptions and low-documentation processes in order to circumvent its own underwriting standards. For example, in an April 13, 2006 e-mail, Mozilo wrote to Sieracki and others that he was concerned that certain subprime loans had been originated with serious disregard for process [and] compliance with guidelines, resulting in the delivery of loans with deficient documentation. Mozilo further stated that I have personally observed a serious lack of compliance within our origination system as it relates to documentation and generally a deterioration in the quality of loans originated versus the pricing of those loan[s]. iii. 134. American Home
Likewise, American Home failed to follow its origination guidelines. American
Home originated 83.30 percent of the mortgage loans in Loan Group I for the CMLTI 2007-AR7
50
offering. 135. An internal American Home Credit Update presentation from October 2005,
which was made public in June 2008, made clear that American Homes underwriting guidelines were to be either relaxed substantially or essentially rendered meaningless, in order to allow American Home to make loans to high-risk borrowers. Specifically, the Credit Update sets forth a new interpretation of guidelines that included: 136. Not requiring verification of income sources on stated income loans; Reducing the time that needs to have passed since the borrower was in bankruptcy or credit counseling; Reducing the required documentation for self-employed borrowers; and Broadening the acceptable use of second and third loans to cover the full property value. An internal American Home e-mail sent on November 2, 2006, made public in
June 2008, from Steve Somerman, an American Home Senior Vice President of Product and Sales Support in California and co-creator of the American Homes Choice Point Loans program, to loan officers nationwide, stated that American Home would make a loan to virtually any borrower, regardless of the borrowers ability to verify income, assets or even employment. The e-mail specifically encouraged loan officers to make a variety of loans that were inherently risky and extremely susceptible to delinquencies and default, including (1) stated income loans, where both the income and assets of the borrower were taken as stated on the credit application without verification; (2) NINA or No Income, No Asset loans, which allowed for loans to be made without any disclosure of the borrowers income or assets; and (3) No Doc loans, which allowed loans to be made to borrowers who did not disclose their income, assets or employment history. See Complaint, In re American Home Mortgage Securities Litigation, No. 07-MD-1898 (TCP) (E.D.N.Y. June 3, 2008).
51
137.
American Home is involved in several criminal probes and investigations, and
federal prosecutors have convicted one American Home sales executive, Kourash Partow, of mortgage fraud. See Judgment in a Criminal Case, U.S. v. Partow, Case No. 3:06-CR-00070-08HRH, Aug. 31, 2007; see also U.S. v. Partow, 283 Fed. Appx. 476 (9th Cir. 2008). After his conviction, Partow, who worked for Countrywide before joining American Home, sought a lighter sentence on the grounds that his former employers (Countrywide and American Home) both had knowledge of the loan document inaccuracies and in fact encouraged manipulation by intentionally misrepresenting the performance of loans and the adequacy of how the loans were underwritten. Partow admitted that he would falsify clients income or assets in order to get loans approved, and that American Home did not require documentary verification of such figures. Loan Data Focus of Probe, Countrywide Files May Have Included Dubious Information, The Wall Street Journal, March 22, 2008; MSNBC.com, Inside the fiasco that led to the mortgage mess and Countrywides collapse, updated March 22, 2009. iv. 138. Argent
Argent also failed to follow its underwriting guidelines. Argent originated
86.32% percent of the mortgage loans in Loan Group I for the CMLTI 2005-HE4 offering; it also originated the loans in the ARSI 2005-W2 offering. 139. According to a December 7, 2008 article in the Miami Herald, employees of
Argent Mortgage had a practice of actively assisting brokers to falsify information on loan applications. They would tutor[] . . . mortgage brokers in the art of fraud. Employees taught [brokers] how to doctor credit reports, coached them to inflate [borrower] income on loan applications, and helped them invent phantom jobs for borrowers so that loans could be approved. Borrowers Betrayed, Part 4, Miami Herald, Dec. 7, 2008.
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140.
Orson Benn, a former Argent Vice President who went to prison for his role in
facilitating mortgage fraud, has stated that at Argent the accuracy of loan applications was not a priority. Borrowers Betrayed, Part 4, Miami Herald, Dec. 7, 2008. Mr. Benn was the head of a crime ring that fabricated loan applications in order to pocket the loan fees; Mr. Benn himself pocketed a $3,000 kickback for each loan he helped secure. FCIC Report at 164. Of the 18 defendants charged in the Argent ring, 16 have been convicted or pled guilty, FCIC Report at 164, including Mr. Benn, who was sentenced to 18 years in prison, Ex-Argent Mortgage VP Sentenced For Fraud, North Country Gazette, Sept. 5, 2008. 141. Other jurisdictions have also investigated Argent for its mortgage origination
practices. On June 22, 2011, a grand jury in Cuyahoga County, Cleveland, indicted nine employees of Argent for their suspected roles in approving fraudulent home loans. The case, investigated by the Cuyahoga County Mortgage Fraud Task Force, alleges that the employees helped coach mortgage brokers about how to falsify loan documents to misstate the source or existence of down payments, as well as a borrowers income and assets. Argent was Clevelands number one lender in 2004, and originated over 10,000 loans during the time span 2002 through 2005. This was the first time in Ohio, and one of few instances nationwide, that a mortgage fraud investigation has led to criminal charges against employees of a subprime lender. Mark Gillespie, Former employees of subprime mortgage lender indicted by Cuyahoga County grand jury, The Plain Dealer, June 23, 2011. 142. Indeed, Jacquelyn Fishwick, who worked for more than two years at an Argent
loan processing center near Chicago as an underwriter and account manager, noted that some Argent employees played fast and loose with the rules. She personally saw some stuff [she] didnt agree with, such as [Argent] account managers remove documents from files and create
53
documents by cutting and pasting them. The Subprime House of Cards, Cleveland Plain Dealer, May 11, 2008. 143. Similarly, Argent was also not diligent about confirming accurate appraisals for
the properties for which it was issuing mortgages. Steve Jernigan, a fraud investigator at Argent, said that he once went to check on a subdivision for which Argent had made loans. The address on the loans turned out to be in the middle of a cornfield; the appraisals had all been fabricated. The same fake picture had been included in each file. Michael W. Hudson, Silencing the Whistle-blowers, The Investigative Fund, May 10, 2010. 144. In 2007, Citigroup acquired Argent from its parent ACC Capital Holdings Corp.
This acquisition is notable because Mr. Bowen, who was described above was a Chief Underwriter within Citigroups Consumer Lending Group was given the opportunity to review Argent before Citigroup acquired it. He reported that large numbers of Argents loans were not underwritten according to the representations that were there. FCIC Hearing Transcript, Apr. 7, 2010, p. 239. Despite Mr. Bowens warnings, however, Citigroup proceeded with the acquisition and in fact touted it, stating that [t]hrough this acquisition, we gain important operational and pricing efficiencies . . . from point of origination through securitization and servicing. Citigroup Press Release, Aug. 31, 2007. v. 145. WMC
WMC also failed to follow its underwriting guidelines. WMC originated 82.97
percent of the mortgage loans in Loan Group I for the CMLTI 2005-HE3 offering. 146. WMC employed reckless underwriting standards and practices, as described more
fully below, that resulted in a huge amount of foreclosures, ranking WMC fourth in the report presented to the FCIC in April 2010 identifying the Worst Ten mortgage originators in the
54
Worst Ten metropolitan areas. See Worst Ten in the Worst Ten, Office of the Comptroller of the Currency Press Release, November 13, 2008. General Electric, which had purchased WMC in 2004, closed down operations at WMC in late 2007 and took a $1.4 billion charge in the third quarter of that year. See, e.g., Diane Brady, Adventures of a Subprime Survivor, Bloomberg Businessweek, Oct. 29, 2007 (available at http://www.businessweek.com /magazine/content/07_44/b4056074.htm). 147. WMCs reckless loan originating practices were noticed by regulatory authorities.
In June 2008, the Washington State Department of Financial Institutions, Division of Consumer Services filed a Statement of Charges and Notice of Intention to Enter an Order to Revoke License, Prohibit From Industry, Impose Fine, Order Restitution and Collect Investigation Fees (the Statement of Charges) against WMC Mortgage and its principal owners individually. See Statement of Charges, No. C-07-557-08-SC01, Jun. 4, 2008. The Statement of Charges described a review of 86 loan files, which revealed that at least 76 of those loans were defective or otherwise in violation of Washington state law. Id. Among other things, the investigation uncovered that WMC had originated loans with unlicensed or unregistered mortgage brokers, understated amounts of finance charges on loans, understated amounts of payments made to escrow companies, understated annual percentage rates to borrowers and committed many other violations of Washington State deceptive and unfair practices laws. Id. vi. 148. Inflated Appraisals
The originators of the mortgage loans underlying the Securitizations went beyond
the systematic disregard of their own underwriting guidelines. Indeed, as the FCIC has confirmed, mortgage loan originators throughout the industry pressured appraisers, during the period of the Securitizations, to issue inflated appraisals that met or exceeded the amount needed
55
for the subject loans to be approved, regardless of the accuracy of such appraisals, and especially when the originators aimed at putting the mortgages into a package of mortgages that would be sold for securitization. This resulted in lower LTV ratios, discussed above, which in turn made the loans appear less risky to the investors than they were. 149. As described by Patricia Lindsay, a former wholesale lender who testified before
the FCIC in April 2010, appraisers fear[ed] for their livelihoods, and therefore cherry-picked data that would help support the needed value rather than finding the best comparables to come up with the most accurate value. See Written Testimony of Patricia Lindsay to the FCIC, April 7, 2010, at 5. Likewise, Jim Amorin, President of the Appraisal Institute, confirmed in his testimony that [i]n many cases, appraisers are ordered or severely pressured to doctor their reports and to convey a particular, higher value for a property, or else never see work from those parties again . . . . [T]oo often state licensed and certified appraisers are forced into making a Hobsons Choice. See Testimony of Jim Amorin to the FCIC, April 23, 2009, available at www.appraisalinstitute.org/newsadvocacy/downloads/ltrs_tstmny/2009/AI-ASA-ASFMRANAIFATestimonyonMortgageReform042309final.pdf. Faced with this choice, appraisers systematically abandoned applicable guidelines and over-valued properties in order to facilitate the issuance of mortgages that could then be collateralized into mortgage-backed securitizations 2. The Collapse Of The Certificates Credit Ratings Further Indicates That The Mortgage Loans Were Not Originated In Adherence To The Stated Underwriting Guidelines
150.
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assigned credit ratings of AAA or its equivalent, which purportedly reflected the description of the mortgage loan collateral and underwriting practices set forth in the Registration Statements. These ratings were artificially inflated, however, as a result of the very same misrepresentations that the Defendants made to investors in the Prospectus Supplements. 152. The Citi Defendants provided or caused to be provided loan level information to
the rating agencies that they relied upon to calculate the Certificates assigned ratings, including the borrowers LTV ratio, debt-to-income ratio, owner occupancy status, and other loan level information described in the aggregation reports Prospectus Supplements. Because the information that the Citi Defendants provided or caused to be was false, the ratings were inflated and the level of subordination that the rating agencies required for the sale of AAA (or its equivalent) certificates was inadequate to provide investors with the level of protection that those ratings signified. As a result, the GSEs paid Defendants inflated prices for purported AAA (or its equivalent) Certificates, unaware that those Certificates actually carried a severe risk of loss and inadequate credit enhancement. 153. Since the issuance of the Certificates, the ratings agencies have dramatically
Applicable ratings are shown in sequential order separated by forward slashes: Moodys/S&P/Fitch. A hyphen between forward slashes indicates that the relevant agency did not provide a rating at issuance.
13
57
Table 8
Transaction
Tranche
A1 IA3A 1A2 A1 A1 IA1 1A2A A1 A1 A2A
Rating at Issuance (Moodys/S&P/Fitch)

Aaa/AAA/AAA Aaa/AAA/-Aaa/Not Rated/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/--/AAA - -/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/--/AAA
Rating at July 31, 2011 (Moodys/S&P/Fitch)

Baa1/AA/B Caa3/CCC/-Caa3/--/D Aa1/AAA/AAA A3/AAA/BB Caa3/--/C - -/CCC/C Caa3/CCC/C Caa3/CCC/C Ca/--/D
3.
The Surge In Mortgage Delinquencies And Defaults Further Indicates That The Mortgage Loans Were Not Originated In Adherence To The Stated Underwriting Guidelines
154.
supposed to represent long-term, stable investments, a significant percentage of the mortgage loans backing the Certificates have defaulted, have been foreclosed upon, or are delinquent, resulting in massive losses to the Certificateholders. The overall poor performance of the mortgage loans is a direct consequence of the fact that they were not underwritten in accordance with the applicable underwriting guidelines as represented in the Registration Statements. 155. Loan groups that were properly underwritten and contained loans with the
characteristics represented in the Registration Statements would have experienced substantially fewer payment problems and substantially lower percentages of defaults, foreclosures, and delinquencies than occurred here. Table 9 reflects the percentage of loans in the Supporting Loan Groups that are in default, have been foreclosed upon, or are delinquent as of July 2011.
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Table 9
34.8% 28.1% 28.2% 70.7% 34.3% 14.3% 17.5% 32.9% 37.0% 53.8%
Transaction

156.
confirmed systematic underwriting failures by the originators responsible for the mortgage loans across the Securitizations, and the extraordinary drop in credit rating and rise in delinquencies across the Securitizations, all confirm that the mortgage loans in the Supporting Loan Groups, contrary to the representations in the Registration Statements, were not originated in accordance with the stated underwriting guidelines. V. FANNIE MAES AND FREDDIE MACS PURCHASES OF THE GSE CERTIFICATES AND THE RESULTING DAMAGES 157. In total, between September 13, 2005 and May 31, 2007, Fannie Mae and Freddie
Mac purchased over $3.5 billion in residential mortgage-backed securities issued in connection with the Securitizations. 158. Table 10 reflects Freddie Macs purchases of the Certificates.14
Purchased securities in Tables 10 and 11 are stated in terms of unpaid principal balance of the relevant Certificates. Purchase prices are stated in terms of percentage of par. The Settlement Date, refers to the date by which a buyer must pay for the securities delivered by the seller.
14
59
Table 10
Transaction Tranche CUSIP Settlement Date of Purchase by Freddie Mac
9/27/2005 9/13/2005 11/30/2005 5/31/2007
Initial Unpaid Principal Balance ($)

1,351,319,000 380,972,000 340,420,000 117,893,000

100 100 100 101.9063

CGMI CGMI CGMI CGMI
ARSI 2005-W2 CMLTI 2005HE3 CMLTI 2005HE4 CMLTI 2007AR7
A1 A1 A1 A2A
040104NW7 17307GXJ2 17307GQ84 17312YAB8
159.
Table 11 reflects Fannie Maes purchases of the Certificates:
Table 11
Transaction Tranche CUSIP Settlement Date of Purchase by Fannie Mae
2/3/2006 10/17/2005 6/30/2006

148,577,697 130,480,732 115,073,166

100.6719 100.2539 99.5703

CGMI CGMI UBS Securities LLC CGMI CGMI CGMI
CMLTI 200510 CMLTI 2005-7 CMLTI 2006AR2 CMLTI 2006AR5 CMLTI 2006WF1 CMLTI 2006WF2
IA3A 1A2 IA1
17307GT73 17307GA57 17307G6K9
1A2A A1 A1
17309FAD0 17307G4E5 17309BAL1
6/30/2006 3/30/2006 5/31/2006
36,920,000 425,206,000 484,445,000
99.8034 101.3047 101.1875
160.
quality and characteristics of the mortgage loans underlying the GSE Certificates, and the origination and underwriting practices used to make these loans, were material to a reasonable investors decision to purchase the GSE Certificates. 161. The false statements of material facts and omissions of material facts in the
Registration Statements, including the Prospectuses and Prospectus Supplements, directly caused Fannie Mae and Freddie Mac to suffer hundreds of millions of dollars in damages, including without limitation depreciation in the value of the securities. The mortgage loans underlying the GSE Certificates experienced defaults and delinquencies at a much higher rate than they would
60
have had the loan originators adhered to the underwriting guidelines set forth in the Registration Statements, and the payments to the Trusts were therefore much lower than they would have been had the loans been underwritten as described in the Registration Statements. 162. Fannie Maes and Freddie Macs losses have been much greater than they would
have been if the mortgage loans had the credit quality represented in the Registration Statements. 163. Defendants misstatements and omissions in the Registration Statements
regarding the true characteristics of the loans were the proximate cause of Fannie Maes and Freddie Macs losses relating to their purchase of the GSE Certificates. 164. Defendants misstatements and omissions in the Registration Statements
regarding the true characteristics of the loans were the proximate cause of Fannie Maes and Freddie Macs losses relating to their purchases of the GSE Certificates. Based upon sales of the Certificates or similar certificates in the secondary market, Defendants proximately caused hundreds of millions of dollars in damages to Fannie Mae and Freddie Mac in an amount to be determined at trial. FIRST CAUSE OF ACTION Violation of Section 11 of the Securities Act of 1933 (Against Defendants CGMI, CGMLT, and the Individual Defendants) 165. Plaintiff realleges each allegation above as if fully set forth herein, except to the
1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements. This claim is brought against Defendant CGMI with respect to each of the Registration Statements, and is brought against Defendants CGMLT and the Individual Defendants with respect to the Registration Statements
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filed by CGMLT that registered securities that were bona fide offered to the public on or after September 6, 2005. 167. This claim is predicated upon Defendant CGMIs strict liability for making false
and materially misleading statements in each of the Registration Statements for the Securitizations and for omitting facts necessary to make the facts stated therein not misleading. CGMLT and the Individual Defendants are strictly liable for making false and materially misleading statements in the Registration Statements filed by CGMLT that registered securities that were bona fide offered to the public on or after September 6, 2005, which are applicable to eight of the ten Securitizations (as specified in Tables 1 and 2 above), including the related Prospectus Supplements, and for omitting facts necessary to make the facts stated therein not misleading. 168. Defendant CGMI served as the underwriter of each of the Securitizations, and as
such, is liable for the misstatements and omissions in the Registration Statements under Section 11 of the Securities Act. 169. Defendant CGMLT filed the four Registration Statements under which nine of the
ten Securitizations were carried out. As a depositor, Defendant CGMLT is an issuer of the GSE Certificates issued pursuant to the Registration Statements it filed within the meaning of Section 2(a)(4) of the Securities Act, 15 U.S.C. 77b(a)(4), and in accordance with Section 11(a), 15 U.S.C. 77k(a). As such, it is liable under Section 11 of the Securities Act for the misstatements and omissions in those Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005. 170. At the time Defendant CGMLT filed four Registration Statements applicable to
nine of the Securitizations, the Individual Defendants were officers and/or directors of CGMLT.
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In addition, the Individual Defendants signed those Registration Statements and either signed or authorized another to sign on their behalf the amendments to those Registration Statements. As such, the Individual Defendants are liable under Section 11 of the Securities Act for the misstatements and omissions in those Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005. 171. At the time that they became effective, each of the Registration Statements
contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading, as set forth above. The facts misstated or omitted were material to a reasonable investor reviewing the Registration Statement, including to Fannie Mae and Freddie Mac. 172. The untrue statements of material facts and omissions of material facts in the
Registration Statements are set forth above in Section IV and pertain to, among other things, compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 173. Fannie Mae and Freddie Mac purchased or otherwise acquired the GSE
Certificates pursuant to the false and misleading Registration Statements. Fannie Mae and Freddie Mac made these purchases in the primary market and shortly after issuance. At the time they purchased the GSE Certificates, Fannie Mae and Freddie Mac did not know of the facts concerning the false and misleading statements and omissions alleged herein, and if they had known those facts, they would not have purchased the GSE Certificates. 174. CGMI owed to Fannie Mae, Freddie Mac, and other investors a duty to make a
reasonable and diligent investigation of the statements contained in the Registration Statements at the time they became effective to ensure that such statements were true and correct and that
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there were no omissions of material facts required to be stated in order to make the statements contained therein not misleading. The Individual Defendants owed the same duty with respect to the Registration Statements they signed that registered securities that were bona fide offered to the public on or after September 6, 2005, which are applicable to eight of the Securitizations. 175. CGMI and the Individual Defendants did not exercise such due diligence and
failed to conduct a reasonable investigation. In the exercise of reasonable care, these Defendants should have known of the false statements and omissions contained in or omitted from the Registration Statements filed in connection with the Securitizations, as set forth herein. In addition, CGMLT, though subject to strict liability without regard to whether it performed diligence, also failed to take reasonable steps to ensure the accuracy of the representations. 176. Fannie Mae and Freddie Mac sustained substantial damages as a result of the
misstatements and omissions in the Registration Statements. 177. The time period from June 2, 2009 through August 29, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and Citi, CGMI, CGMLT, Citibank NA, and CGMR. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). 178. By reason of the conduct herein alleged, CGMI, CGMLT, and the Individual
Defendants are jointly and severally liable for their wrongdoing. SECOND CAUSE OF ACTION Violation of Section 12(a)(2) of the Securities Act of 1933 (Against Defendants CGMLT and CGMI) 179. Plaintiff realleges each allegation above as if fully set forth herein, except to the
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180.
This claim is brought by Plaintiff pursuant to Section 12(a)(2) of the Securities
Act of 1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements for the Securitizations listed in paragraph 2, with the exception of CMLTI 2006-AR2. 181. This claim is predicated upon CGMIs negligence in making materially false and
misleading statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as Prospectuses) for each of the Securitizations listed in paragraph 2 that CGMI sold. Defendant CGMLT acted negligently in making false and materially misleading statements in the Prospectuses for the Securitizations carried out under the Registration Statements, which are applicable to nine of the Securitizations. 182. CGMI is prominently identified in the Prospectuses, the primary documents that it
used to sell the GSE Certificates, except for CMLTI 2006-AR2. CGMI offered the Certificates publicly, including selling to Fannie Mae and Freddie Mac its GSE Certificates, except for CMLTI 2006-AR2, as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. 183. CGMI offered and sold the GSE Certificates, except for CMLTI 2006-AR2, to
Fannie Mae and Freddie Mac by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances which they were made, not misleading. CGMI reviewed and participated in drafting the Prospectuses. 184. CGMI successfully solicited Fannie Maes and Freddie Macs purchases of the
GSE Certificates, except for CMLTI 2006-AR2. As underwriter, CGMI obtained substantial commissions based upon the amount it received from the sale of the Certificates to the public.
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185.
CGMI offered the GSE Certificates, except for CMLTI 2006-AR2, for sale, sold
them, and distributed them by the use of means or instruments of transportation and communication in interstate commerce. 186. CGMLT is prominently identified in the Prospectuses for the Securitizations
carried out under the Registration Statements it filed. These Prospectuses were the primary documents CGMLT used to sell Certificates for the nine Securitizations under those Registration Statements. CGMLT offered the Certificates publicly and actively solicited their sale, except for CMLTI 2006-AR2, including to Fannie Mae and Freddie Mac. 187. With respect to the nine Securitizations for which it filed Registration Statements,
CGMLT offered GSE Certificates, except for CMLTI 2006-AR2, to Fannie Mae and Freddie Mac by means of Prospectuses that contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. Upon information and belief, CGMLT reviewed and participated in drafting the Prospectuses. 188. CGMLT offered the GSE Certificates, except for CMLTI 2006-AR2, for sale by
the use of means or instruments of transportation and communication in interstate commerce. 189. Each of CGMI and CGMLT actively participated in the solicitation of the GSEs
purchase of the GSE Certificates, except for CMLTI 2006-AR2, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates, except for CMLTI 2006-AR2. 190. Each of the Prospectuses contained material misstatements of fact and omitted
facts necessary to make the facts stated therein not misleading. The facts misstated and omitted
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were material to a reasonable investor reviewing the Prospectuses, and were specifically material to Fannie Mae and Freddie Mac. 191. The untrue statements of material facts and omissions of material fact in the
Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 192. CGMLT and CGMI offered and sold the GSE Certificates, except for CMLTI
2006-AR2, offered pursuant to the Registration Statements directly to Fannie Mae and Freddie Mac, pursuant to the false and misleading Prospectuses. 193. CGMI owed to Fannie Mae and Freddie Mac, as well as to other investors in these
trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. CGMLT owed the same duty with respect to the Prospectuses for the Securitizations carried out under the four Registration Statements filed by it. 194. CGMLT and CGMI failed to exercise such reasonable care. These defendants in
the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above. 195. In contrast, Fannie Mae and Freddie Mac did not know, and in the exercise of
reasonable diligence could not have known, of the untruths and omissions contained in the Prospectuses at the time they purchased the GSE Certificates. If they had known of those untruths and omissions, they would not have purchased the GSE Certificates.
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196.
Fannie Mae and Freddie Mac acquired the GSE Certificates in the primary market
and shortly after issuance pursuant to the Prospectuses. 197. Fannie Mae and Freddie Mac sustained substantial damages in connection with
their investments in the GSE Certificates and have the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 198. The time period from June 2, 2009 through August 29, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and Citi, CGMI, CGMLT, Citibank NA, and CGMR. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). THIRD CAUSE OF ACTION Violation of Section 15 of the Securities Act of 1933 (Against Defendants CGMR, Citi, and the Individual Defendants) 199. Plaintiff realleges each allegation above as if fully set forth herein, except to the
77o (Section 15), against CGMR, Citi, and the Individual Defendants for controlling-person liability with regard to the Section 11 and Section 12(a)(2) causes of actions set forth above. 201. The Individual Defendants at all relevant times participated in the operation and
management of CGMLT and their related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of CGMLTs business affairs. Defendant Susan Mills was the Vice President and the Managing Director of CGMLT. Defendant Randall Costa was a President and Director of CGMLT. Defendant Richard A. Isenberg was a President and Director of CGMLT. Defendant Scott Freidenrich was a Treasurer and Principal Financial Officer of
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CGMLT. Defendant Peter Patricola was a Controller of CGMLT. Defendant Mark I. Tsesarsky was a Director of CGMLT. Defendant Jeffrey Perlowitz was a Director of CGMLT. Defendant Evelyn Echevarria was a Director of CGMLT. 202. Defendant CGMR was the sponsor for the nine Securitizations carried out under
the four Registration Statements filed by CGMLT, and culpably participated in the violations of Sections 11 and 12(a)(2) set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting CGMLT as the special purpose vehicle, and selecting CGMI as underwriter. In its role as sponsor, CGMR knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cash-flows from the mortgages would be issued by the relevant trusts. 203. Defendant CGMR also acted as the seller of the mortgage loans for the
Securitizations carried out under the four Registration Statements filed by CGMLT, in that it conveyed such mortgage loans to CGMLT pursuant to an Assignment and Recognition Agreement or a Mortgage Loan Purchase Agreement. 204. Defendant CGMR also controlled all aspects of the business of CGMLT, as
CGMLT was merely a special purpose entity created for the purpose of acting as a pass-through for the issuance of the Certificates. Upon information and belief, the officers and directors of CGMR overlapped with the officers and directors of CGMLT, such as Susan Mills, who was the Vice President and Managing Director of CGMLT, as well as head of CGMIs Mortgage Finance Group. In addition, because of its position as sponsor, CMGR was able to, and did in fact, control the contents of the four Registration Statements filed by CGMLT, including the
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Prospectuses and Prospectus Supplements, which pertained to nine Securitizations and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 205. Defendant Citi controlled the business operations of CGMLT and CGMI.
Defendant Citi is the corporate parent of CGMLT and CGMI. As the sole corporate parent of CGMI and CGMLT, Citi had the practical ability to direct and control the actions of CGMI and CGMLT in issuing and selling the Certificates, and in fact, exercised such direction and control over the activities of CGMLT and CGMI in connection with the issuance and sale of the Certificates. 206. Citi expanded its share of the residential mortgage-backed securitization market in
order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 207. Citi culpably participated in the violations of Section 11 and 12(a)(2) set forth
above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as CGMLT and the issuing trusts to serve as conduits for the mortgage loans. 208. Defendant Citi wholly owns CGMR, CGMI and CGMLT. Citi culpably
participated in the violations of Section 11 and 12(a)(2) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as CGMLT and the issuing trusts to serve as conduits for the mortgage loans. 209. Citi, CGMR, and the Individual Defendants are controlling persons within the
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meaning of Section 15 by virtue of their actual power over, control of, ownership of, and/or directorship of CGMI and CGMLT at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 210. Fannie Mae and Freddie Mac purchased in the primary market and shortly after
issuance the GSE Certificates issued pursuant to the Registration Statements, including the Prospectuses and Prospectus Supplements, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements, and were specifically material to Fannie Mae and Freddie Mac. 211. Fannie Mae and Freddie Mac did not know, and in the exercise of reasonable
diligence could not have known, of the misstatements and omissions in the Registration Statements. Had the GSEs known of those misstatements and omissions, they would not have purchased the GSE Certificates. 212. Fannie Mae and Freddie Mac have sustained damages as a result of the
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and Citi, CGMI, CGMLT, Citibank NA, and CGMR. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12).
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FOURTH CAUSE OF ACTION Violation of Section 13.1-522(A)(ii) of the Virginia Code (Against CGMI and CGMLT) 214. Plaintiff realleges each allegation above as if fully set forth herein, except to the
Virginia Code and is asserted on behalf of Freddie Mac. The allegations set forth below in this cause of action pertain to only those GSE Certificates identified in Table 10 above that were purchased by Freddie Mac on or after September 6, 2006. 216. This claim is predicated upon CGMIs negligence in making materially false and
misleading statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as Prospectuses) for the Securitizations listed in paragraph 2 that CGMI sold. Defendant CGMLT acted negligently in making materially false and misleading statements in the Prospectuses for the Securitizations effected under the four Shelf Registration Statements CGMLT filed, which are applicable to nine of the Securitizations. 217. CGMI is prominently identified in the Prospectuses, the primary documents it
used to sell the Certificates, except for CMLTI 2006-AR2. CGMI offered the Certificates publicly, including selling to Freddie Mac its GSE Certificates as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. 218. CGMI offered and sold the GSE Certificates, except for CMLTI 2006-AR2, to
Freddie Mac by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. CGMI reviewed and participated in drafting the Prospectuses.
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219.
CGMI successfully solicited Freddie Macs purchases of the GSE Certificates,
except for CMLTI 2006-AR2. As underwriter, CGMI obtained substantial commissions based on the amount it received from the sale of the Certificates to the public. 220. CGMI offered the GSE Certificates for sale, sold them, and distributed them,
except for CMLTI 2006-AR2, to Freddie Mac in the State of Virginia. 221. CGMLT is prominently identified in the Prospectuses for the Securitizations
carried out under the Registration Statements it filed. These Prospectuses were the primary documents CGMLT used to sell Certificates for the Securitizations under those Registration Statements. CGMLT offered the Certificates publicly and actively solicited their sale, except for CMLTI 2006-AR2, including to Freddie Mac. 222. With respect to the nine Securitizations for which it filed Registration Statements,
including the related Prospectus Supplements, CGMLT offered the GSE Certificates, except for CMLTI 2006-AR2, to Freddie Mac by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. Upon information and belief, CGMLT reviewed and participated in drafting the Prospectuses. 223. Each of CGMI and CGMLT actively participated in the solicitation of Freddie
Macs purchase of the GSE Certificates, except for CMLTI 2006-AR2, and did so in order to benefit itself. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates, except for CMLTI 2006-AR2. 224. Each of the Prospectuses contained material misstatements of fact and omitted
facts necessary to make the facts stated therein not misleading. The facts misstated and omitted
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were material to a reasonable investor reviewing the Prospectuses, and specifically to Freddie Mac. 225. The untrue statements of material facts and omissions of material facts in the
Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 226. CGMI and CGMLT offered and sold the GSE Certificates, except for CMLTI
2006-AR2, pursuant to the Registration Statements directly to Freddie Mac, pursuant to the materially false, misleading, and incomplete Prospectuses. 227. CGMI owed to Freddie Mac, as well as to other investors, a duty to make a
reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. CGMLT owed the same duty with respect to the Prospectuses for the Securitizations effected under the four Registration Statements filed by it. 228. CGMI and CGMLT failed to exercise such reasonable care. These defendants in
the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations, as set forth above. 229. In contrast, Freddie Mac did not know, and in the exercise of reasonable diligence
could not have known, of the untruths and omissions contained in the Prospectuses at the time it purchased the GSE Certificates. If Freddie Mac had known of those untruths and omissions, it would not have purchased the GSE Certificates.
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230.
Freddie Mac sustained substantial damages in connection with their investments
in the GSE Certificates and has the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 231. This action is brought within three years of the date that the FHFA was appointed
as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12). FIFTH CAUSE OF ACTION Violation of Section 13.1-522(C) of the Virginia Code (Against CGMR, Citi, and the Individual Defendants) 232. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 233. This claim is brought by Plaintiff under Section 13.1-522(C) of the Virginia Code
and is asserted on behalf of Freddie Mac. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 10 above that were purchased by Freddie Mac on or after September 6, 2006. This claim is brought against CGMR, Citi, and the Individual Defendants for controlling-person liability with regard to the Fourth Cause of Action set forth above. 234. The Individual Defendants at all relevant times participated in the operation and
management of CGMLT and its related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of CGMLTs business affairs. Defendant Susan Mills was the Vice President and Managing Director of Defendant CGMLT, and was also the head of CGMIs Mortgage Finance Group. Defendant Richard A. Isenberg was a Director and President of Defendant CGMLT. Defendant Randall Costa was a Director and President of Defendant CGMLT. Defendant Scott Freidenrich was a Treasurer of Defendant CGMLT. Defendant Mark
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I. Tsesarsky was a Director of Defendant CGMLT. Defendant Peter Patricola was a Controller of Defendant CGMLT. Defendant Jeffrey Perlowitz was a Director of Defendant CGMLT. Defendant Evelyn Echevarria was a Director of Defendant CGMLT. 235. Defendant CGMR was the sponsor for the nine Securitizations carried out under
the four Registration Statements filed by CGMLT, and culpably participated in the violation of Section 13.1-522(A)(ii) set forth above with respect to the offering of GSE Certificates by initiating the Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting CGMLT as the special purpose vehicle, and selecting CGMI as the lead underwriter. In its role as sponsor, CGMR knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cash-flows would be issued by the relevant trusts. 236. Defendant CGMR also acted as the seller of the mortgage loans for the
Securitizations carried out under the four Registration Statements filed by CGMLT, in that it conveyed such mortgage loans to the CGMLT pursuant to an Assignment and Recognition Agreement or a Mortgage Loan Purchase Agreement. 237. Defendant CGMR also controlled all aspects of the business of CGMLT, as
CGMLT was merely a special purpose vehicle created to for the purpose of acting as a passthrough for the issuance of the Certificates. Upon information and belief, the officers and directors of CGMR overlapped with the officers and directors of CGMLT, such as Susan Mills, who was the Vice President and Managing Director of CGMLT, as well as head of CGMIs Mortgage Finance Group. In addition, because of its position as sponsor, CGMR was able to, and did in fact, control the contents of the Registration Statements filed by CGMLT, including
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the Prospectuses and Prospectus Supplements, which pertained to nine Securitizations and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 238. Defendant Citi controlled the business operations of CGMLT and CGMI.
Defendant Citi is the corporate parent of CGMLT and CGMI. As the sole corporate parent of CGMI and CGMLT, Citi had the practical ability to direct and control the actions of CGMI and CGMLT in issuing and selling the Certificates, and in fact, exercised such direction and control over the activities of CGMLT and CGMI in connection with the issuance and sale of the Certificates. 239. Citi expanded its share of the residential mortgage-backed securitization market in
order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 240. Defendant Citi wholly owns CGMR, CGMI and CGMLT. Citi culpably
participated in the violation of Section 13.1-522(A)(ii) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as CGMLT and the issuing trusts to serve as conduits for the mortgage loans. 241. Citi, CGMR, and the Individual Defendants are controlling persons within the
meaning of Section 13.1-522(C) of the Virginia Code by virtue of their actual power over, control of, ownership of, and/or directorship of CGMLT and CGMI at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements.
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242.
Freddie Mac purchased the GSE Certificates, which were issued pursuant to the
Registration Statements, including the Prospectuses and Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements, and were specifically material to Freddie Mac. 243. Freddie Mac did not know, and in the exercise of reasonable diligence could not
have known, of the misstatements and omissions in the Registration Statements. Had Freddie Mac known of those misstatements and omissions, it would not have purchased the GSE Certificates. 244. Freddie Mac has sustained damages as a result of the misstatements and
omissions in the Registration Statements, for which it is entitled to compensation, and for which CGMR, Citi, and the Individual Defendants are jointly and severally liable. 245. This action is brought within three years of the date that the FHFA was appointed
as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12). SIXTH CAUSE OF ACTION Violation of Section 31-5606.05(a)(1)(B) of the District of Columbia Code (Against CGMLT and CGMI) 246. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 247. This claim is brought by Plaintiff pursuant to 31-5606.05(a)(1)(B) of the District
of Columbia Code and is asserted on behalf of Fannie Mae with respect to the GSE Certificates identified in Table 11 above that were purchased by Fannie Mae, which were issued pursuant to the Registration Statements for the Securitizations, with the exception of CMLTI 2006-AR2.
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248.
This claim is predicated upon CGMIs negligence in making materially false and
misleading statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as Prospectuses) for the Securitizations listed in paragraph 2 that CGMI sold. Defendant CGMLT acted negligently in making materially false and misleading statements in the Prospectuses for the Securitizations carried out under the four Registration Statements, which are applicable to nine of the Securitizations. 249. CGMI is prominently identified in the Prospectuses, the primary documents it
used to sell the Certificates, except for CMLTI 2006-AR2. CGMI offered the Certificates publicly, including selling to Fannie Mae the GSE Certificates, except for CMLTI 2006-AR2, as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. 250. CGMI offered and sold the GSE Certificates, except for CMLTI 2006-AR2, to
Fannie Mae by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. CGMI reviewed and participated in drafting the Prospectuses. 251. CGMI successfully solicited Fannie Maes purchases of the GSE Certificates,
except for CMLTI 2006-AR2. As underwriter, CGMI obtained substantial commissions based on the amount it received from the sale of the Certificates to the public. 252. CGMI offered the GSE Certificates for sale, sold them, and distributed them,
except for CMLTI 2006-AR2, to Fannie Mae in the District of Columbia. 253. CGMLT is prominently identified in the Prospectuses for the Securitizations
carried out under the Registration Statements it filed. These Prospectuses were the primary documents CGMLT used to sell Certificates for the Securitizations under those Registration
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Statements. CGMLT offered the Certificates publicly and actively solicited their sale, except for CMLTI 2006-AR2, including to Fannie Mae. 254. With respect to the nine Securitizations for which it filed Registration Statements,
including the related Prospectus Supplements, CGMLT offered the GSE Certificates, except for CMLTI 2006-AR2, to Fannie Mae by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. Upon information and belief, CGMLT reviewed and participated in drafting the Prospectuses. 255. Each of CGMI and CGMLT actively participated in the solicitation of the Fannie
Maes purchase of the GSE Certificates, except for CMLTI 2006-AR2, and did so in order to benefit itself. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates, except for CMLTI 2006-AR2. 256. Each of the Prospectuses contained material misstatements of fact and omitted
facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectuses, and specifically to Fannie Mae. 257. The untrue statements of material facts and omissions of material facts in the
Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 258. CGMI and CGMLT offered and sold the GSE Certificates, except for CMLTI
2006-AR2, pursuant to the Registration Statements directly to Fannie Mae pursuant to the
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materially false, misleading, and incomplete Prospectuses. 259. CGMI owed to Fannie Mae, as well as to other investors, a duty to make a
reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. CGMLT owed the same duty with respect to the Prospectuses for the Securitizations effected under the four Registration Statements filed by it. 260. CGMI and CGMLT failed to exercise such reasonable care. These defendants in
the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations, as set forth above. 261. In contrast, Fannie Mae did not know, and in the exercise of reasonable diligence
could not have known, of the untruths and omissions contained in the Prospectuses at the time it purchased the GSE Certificates. If Fannie Mae had known of those untruths and omissions, it would not have purchased the GSE Certificates. 262. Fannie Mae sustained substantial damages in connection with their investments in
the GSE Certificates and has the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 263. The time period from June 2, 2009 through August 29, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and Citi, CGMI, CGMLT, Citibank NA, and CGMR. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12).
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SEVENTH CAUSE OF ACTION Violation of Section 31-5606.05(c) of the District of Columbia Code (Against CGMR, Citi, and the Individual Defendants) 264. Plaintiff realleges each allegation above as if fully set forth herein, except to the
Code and is asserted on behalf of Fannie Mae. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 11 above, that were purchased by Fannie Mae, with the exception of CMLTI 2006-AR2. This claim is brought against CGMR, Citi, and the Individual Defendants for controlling-person liability with regard to the Sixth Cause of Action set forth above. 266. The Individual Defendants at all relevant times participated in the operation and
management of CGMLT and its related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of CGMLTs business affairs. Defendant Susan Mills was the Vice President and Managing Director of Defendant CGMLT, and was also the head of CGMIs Mortgage Finance Group. Defendant Richard A. Isenberg was a Director and President of Defendant CGMLT. Defendant Randall Costa was a Director and President of Defendant CGMLT. Defendant Scott Freidenrich was a Treasurer of Defendant CGMLT. Defendant Mark I. Tsesarsky was a Director of Defendant CGMLT. Defendant Peter Patricola was a Controller of Defendant CGMLT. Defendant Jeffrey Perlowitz was a Director of Defendant CGMLT. Defendant Evelyn Echevarria was a Director of Defendant CGMLT. 267. Defendant CGMR was the sponsor for the nine Securitizations carried out under
the four Registration Statements filed by CGMLT, and culpably participated in the violation of Section 31-5606.05(a)(1)(B) set forth above with respect to the offering of GSE Certificates by
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initiating the Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting CGMLT as the special purpose vehicle, and selecting CGMI as the lead underwriter. In its role as sponsor, CGMR knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cash-flows would be issued by the relevant trusts. 268. Defendant CGMR also acted as the seller of the mortgage loans for the
Securitizations carried out under the four Registration Statements filed by CGMLT, in that it conveyed such mortgage loans to the CGMLT pursuant to an Assignment and Recognition Agreement or a Mortgage Loan Purchase Agreement. 269. Defendant CGMR also controlled all aspects of the business of CGMLT, as
CGMLT was merely a special purpose vehicle created to for the purpose of acting as a passthrough for the issuance of the Certificates. Upon information and belief, the officers and directors of CGMR overlapped with the officers and directors of CGMLT, such as Susan Mills, who was the Vice President and Managing Director of CGMLT, as well as head of CGMIs Mortgage Finance Group. In addition, because of its position as sponsor, CGMR was able to, and did in fact, control the contents of the Registration Statements filed by CGMLT, including the Prospectuses and Prospectus Supplements, which pertained to nine Securitizations and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 270. Defendant Citi controlled the business operations of CGMLT and CGMI.
Defendant Citi is the corporate parent of CGMLT and CGMI. As the sole corporate parent of CGMI and CGMLIT, Citi had the practical ability to direct and control the actions of CGMI and
83
CGMLT in issuing and selling the Certificates, and in fact, exercised such direction and control over the activities of CGMLT and CGMI in connection with the issuance and sale of the Certificates. 271. Citi expanded its share of the residential mortgage-backed securitization market in
order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 272. Defendant Citi wholly owns CGMR, CGMI and CGMLT. Citi culpably
participated in the violation of Section 31-5606.05(a)(1)(B) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as CGMLT and the issuing trusts to serve as conduits for the mortgage loans. 273. Citi, CGMR, and the Individual Defendants are controlling persons within the
meaning of Section 31-5606.05(c) of the District of Columbia Code by virtue of their actual power over, control of, ownership of, and/or directorship of CGMLT and CGMI at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 274. Fannie Mae purchased the GSE Certificates, which were issued pursuant to the
Registration Statements, including the Prospectuses and Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements, and specifically to Fannie Mae. 275. Fannie Mae did not know, and in the exercise of reasonable diligence could not
84
have known, of the misstatements and omissions in the Registration Statements. Had Fannie Mae known of those misstatements and omissions, it would not have purchased the GSE Certificates. 276. Fannie Mae has sustained substantial damages as a result of the misstatements and
omissions in the Registration Statements, for which it is entitled to compensation, and for which CGMR, Citi, and the Individual Defendants are jointly and severally liable. 277. The time period from June 2, 2009 through August 29, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and Citi, CGMI, CGMLT, Citibank NA, and CGMR. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12). EIGHTH CAUSE OF ACTION Common Law Negligent Misrepresentation (Against Defendants CGMLT and CGMI) 278. forth herein. 279. This a claim for common law negligent misrepresentation against Defendants Plaintiff realleges each allegation in paragraphs 1 through 164 above as if fully set
CGMLT and CGMI. 280. Between September 13, 2005 and May 31, 2007, CGMI and CGMLT sold the
GSE Certificates to the GSEs as described above. Because CGMLT owned and then conveyed the underlying mortgage loans that collateralized the Securitizations for which it served as depositor, CGMLT had unique, exclusive, and special knowledge about the mortgage loans in the Securitizations through its possession of the loan files and other documentation. 281. Likewise, as lead underwriter of the Securitizations, CGMI was obligated toand
85
had the opportunity toperform sufficient due diligence to ensure that the Registration Statements for those Securitizations, including without limitation the corresponding Prospectus Supplements, did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. As a result of this privileged position as underwriterwhich gave it access to loan file information and obligated it to perform adequate due diligence to ensure the accuracy of the Registration StatementsCGMI had unique, exclusive, and special knowledge about the underlying mortgage loans in the Securitizations. 282. CGMI also had unique, exclusive, and special knowledge of the work of third-
party due diligence providers, such as Clayton, who identified significant failures of originators to adhere to the underwriting standards represented in the Registration Statements. The GSEs, like other investors, had no access to borrower loan files prior to the closing of the Securitizations and their purchase of the Certificates. Accordingly, when determining whether to purchase the GSE Certificates, the GSEs could not evaluate the underwriting quality or the servicing practices of the mortgage loans in the Securitizations on a loan-by-loan basis. The GSEs therefore reasonably relied on CGMIs knowledge and its express representations made prior to the closing of the Securitizations regarding the underlying mortgage loans. 283. CGMLT and CGMI were aware that the GSEs reasonably relied on CGMLTs
and CGMIs reputations and unique, exclusive, and special expertise and experience, as well as their express representations made prior to the closing of the Securitizations, and that the GSEs depended upon these Defendants for complete, accurate, and timely information. The standards under which the underlying mortgage loans were actually originated were known to these Defendants and were not known, and could not be determined, by the GSEs prior to the closing
86
of the Securitizations. In purchasing the GSE Certificates from CGMLT and CGMI, the GSEs relied on their special relationship with those Defendants, and the purchases were made, in part, in reliance on that relationship. 284. Based upon their unique, exclusive, and special knowledge and expertise about
the loans held by the trusts in the Securitizations, CGMLT and CGMI had a duty to provide the GSEs complete, accurate, and timely information regarding the mortgage loans and the Securitizations. CGMLT and CGMI breached their duty to provide such information to the GSEs by instead making to the GSEs untrue statements of material facts in the Securitizations, or otherwise misrepresenting to the GSEs material facts about the Securitizations. The misrepresentations are set forth in Section IV above, and include misrepresentations as to the accuracy of the represented credit ratings, compliance with underwriting guidelines for the mortgage loans, and the accuracy of the owner-occupancy statistics and the loan-to-value ratios applicable to the Securitizations, as disclosed in the terms sheets and Prospectus Supplements. 285. In addition, having made actual representations about the underlying collateral in
the Securitizations and the facts bearing on the riskiness of the Certificates, CGMLT and CGMI had a duty to correct misimpressions left by their statements, including with respect to any half truths. The GSEs were entitled to rely upon CGMLT and CGMIs representations about the Securitizations, and these Defendants failed to correct in a timely manner any of their misstatements or half truths, including misrepresentations as to compliance with underwriting guidelines for the mortgage loans. 286. Fannie Mae and Freddie Mac purchased the GSE Certificates based upon the
representations by the Citi Defendants as the sponsors, depositors, and lead and selling underwriters in all nine of the Citi-sponsored Securitizations. The Citi Defendants provided term
87
sheets to the GSEs that contained critical data as to the Securitizations, including with respect to anticipated credit ratings by the credit rating agencies, loan-to-value and combined loan-to-value ratios for the underlying collateral, and owner occupancy statistics. This data was subsequently incorporated into Prospectus Supplements that were received by the GSEs upon the close of each Securitization. 287. The GSEs relied upon the accuracy of the data transmitted to them and
subsequently reflected in the Prospectus Supplements. In particular, the GSEs relied upon the credit ratings that the credit rating agencies indicated they would bestow on the Certificates based on the information provided by CGMR and CGMI relating to the collateral quality of the underlying loans and the structure of the Securitization. These credit ratings represented a determination by the credit rating agencies that the GSE Certificates were AAA quality (or its equivalent)meaning the Certificates had an extremely strong capacity to meet the payment obligations described in the respective PSAs. 288. The Citi Defendants, as sponsors, depositors, and lead and selling underwriters in
all nine of the Citi-sponsored Securitizations, provided detailed information about the underlying collateral and structure of each Securitization it sponsored to the credit rating agencies. The credit rating agencies based their ratings on the information provided to them by the Citi Defendants, and the agencies anticipated ratings of the Certificates were dependent on the accuracy of that information. The GSEs relied on the accuracy of the anticipated credit ratings and the actual credit ratings assigned to the Certificates by the credit rating agencies, and upon the accuracy of the Citi Defendants representations in the term sheets and Prospectus Supplements. 289. In addition, the GSEs relied on the fact that the originators of the mortgage loans
88
in the Securitizations had acted in conformity with their underwriting guidelines, which were described in the Prospectus Supplements. Compliance with underwriting guidelines was a precondition to the GSEs purchase of the GSE Certificates in that the GSEs decision to purchase the Certificates was directly premised on their reasonable belief that the originators complied with applicable underwriting guidelines and standards. 290. In purchasing the GSE Certificates, the GSEs justifiably relied on the Citi
Defendants false representations and omissions of material fact detailed above, including the misstatements and omissions in the term sheets about the underlying collateral, which were reflected in the Prospectus Supplements. 291. But for the above misrepresentations and omissions, the GSEs would not have
proximate, and foreseeable result of CGMLTs and CGMIs misrepresentations, including any half truths. 293. The time period from June 2, 2009 through August 29, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and Citi, CGMI, CGMLT, Citibank NA, and CGMR. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12). PRAYER FOR RELIEF WHEREFORE Plaintiff prays for relief as follows: 294. An award in favor of Plaintiff against all Defendants, jointly and severally, for all
89
GSE Certificates, as well as lost principal and lost interest payments thereon; c. d. e. Attorneys fees and costs; Prejudgment interest at the maximum legal rate; and Such other and further relief as the Court may deem just and proper. JURY TRIAL DEMANDED 295. Pursuant to Federal Rule of Civil Procedure 38(b), Plaintiff hereby demands a
90
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK FEDERAL HOUSING FINANCE AGENCY, AS CONSERVATOR FOR THE FEDERAL NATIONAL MORTGAGE ASSOCIATION AND THE FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff, -againstCREDIT SUISSE HOLDINGS (USA), INC., CREDIT SUISSE (USA), INC., CREDIT SUISSE SECURITIES (USA) LLC, DLJ MORTGAGE CAPITAL, INC., CREDIT SUISSE FIRST BOSTON MORTGAGE SECURITIES CORPORATION, ASSET BACKED SECURITIES CORPORATION, CREDIT SUISSE FIRST BOSTON MORTGAGE ACCEPTANCE CORPORATION, ANDREW A. KIMURA, JEFFREY A. ALTABEF, EVELYN ECHEVARRIA, MICHAEL A. MARRIOTT, ZEV KINDLER, JOHN P. GRAHAM, THOMAS E. SIEGLER, THOMAS ZINGALLI, CARLOS ONIS, STEVEN L. KANTOR, JOSEPH M. DONOVAN, JULIANA JOHNSON, and GREG RICHTER, Defendants. ___ CIV. ___ (___)
TABLE OF CONTENTS Page NATURE OF ACTION ...................................................................................................................1 PARTIES .........................................................................................................................................9 The Plaintiff and the GSEs...................................................................................................9 The Defendants ....................................................................................................................9 The Non-Party Originators ................................................................................................13 JURISDICTION AND VENUE ....................................................................................................13 FACTUAL ALLEGATIONS ........................................................................................................14 I. THE SECURITIZATIONS................................................................................................14 A. B. C. Residential Mortgage-Backed Securitizations In General .....................................14 The Securitizations At Issue In This Case .............................................................16 The Securitization Process .....................................................................................20 1. 2. II. DLJ Mortgage Capital Groups Mortgage Loans in Special Purpose Trusts..........................................................................................................20 The Trusts Issue Securities Backed by the Loans ......................................21
THE DEFENDANTS PARTICIPATION IN THE SECURITIZATION PROCESS ..........................................................................................................................26 A. The Role of Each of the Defendants ......................................................................26 1. 2. 3. 4. 5. 6. DLJ Mortgage Capital................................................................................26 CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance ................................................................................28 CS Securities ..............................................................................................28 CS USA......................................................................................................29 CS Holdings ...............................................................................................29 The Individual Defendants .........................................................................30 i
B. III.
IV.
The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines .........................................................52 1. A Forensic Review of Loan Files Has Revealed Pervasive Failure to Adhere to Underwriting Guidelines.......................................................53 (a) (b) (c) (d) 2. Stated Income Was Not Reasonable ..............................................55 Evidence of Occupancy Misrepresentations ..................................57 Debts Incorrectly Calculated..........................................................58 Credit Inquiries That Indicated Misrepresentation of Debt ...........59
Government Investigations and Other Evidence Have Confirmed That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines .........61 Credit Suisse Routinely Included in Securitizations Mortgage Loans That Failed to Meet Underwriting Standards ..................................70 Credit Suisses Own Insurers Have Found That Loan Groups Securitized by Credit Suisse Are Full of Loans Originated in Violation of Underwriting Guidelines .......................................................72
3. 4.
ii
5.
The Collapse of the Certificates Credit Ratings Further Indicates That the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines .................................................................75 The Surge in Mortgage Delinquency and Default Further Demonstrates That the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines ....................................77
6.
V.
FIRST CAUSE OF ACTION ........................................................................................................83 Violation of Section 11 of the Securities Act of 1933 .......................................................83 SECOND CAUSE OF ACTION ...................................................................................................87 Violation of Section 12(a)(2) of the Securities Act of 1933 ..............................................87 THIRD CAUSE OF ACTION .......................................................................................................91 Violation of Section 15 of the Securities Act of 1933 .......................................................91 FOURTH CAUSE OF ACTION ...................................................................................................95 Violation of Section 13.1-522(A)(ii) of the Virginia Code ...............................................95 FIFTH CAUSE OF ACTION ........................................................................................................99 Violation of Section 13.1-522(C) of the Virginia Code ....................................................99 SIXTH CAUSE OF ACTION .....................................................................................................103 Violation of Section 31-5606.05(a)(1)(B) of the District of Columbia Code..................103 SEVENTH CAUSE OF ACTION ...............................................................................................107 Violation of Section 31-5606.05(c) of the District of Columbia Code............................107 EIGHTH CAUSE OF ACTION ..................................................................................................111 Common Law Negligent Misrepresentation ....................................................................111 PRAYER FOR RELIEF ..............................................................................................................117 JURY TRIAL DEMANDED .......................................................................................................118
iii
Plaintiff Federal Housing Finance Agency (FHFA), as conservator of The Federal National Mortgage Association (Fannie Mae) and The Federal Home Loan Mortgage Corporation (Freddie Mac), by its attorneys, Quinn Emanuel Urquhart & Sullivan, LLP, for its Complaint herein against Credit Suisse Holdings (USA), Inc. (CS Holdings); Credit Suisse (USA), Inc. (CS USA), Credit Suisse Securities (USA) LLC (CS Securities), DLJ Mortgage Capital, Inc. (DLJ Mortgage Capital), Credit Suisse First Boston Mortgage Securities Corporation (CSFB Mortgage Securities), Asset Backed Securities Corporation (Asset Backed Securities), Credit Suisse First Boston Mortgage Acceptance Corporation (CSFB Mortgage Acceptance) (collectively, Credit Suisse or the Credit Suisse Defendants), Andrew A. Kimura, Jeffrey A. Altabef, Evelyn Echevarria, Michael A. Marriott, Zev Kindler, John P. Graham, Thomas E. Siegler, Thomas Zingalli, Carlos Onis, Steven L. Kantor, Joseph M. Donovan, Juliana Johnson, and Greg Richter (the Individual Defendants) (together with the Credit Suisse Defendants, the Defendants) alleges as follows: NATURE OF ACTION 1. This action arises out of Defendants actionable conduct in connection with the
offer and sale of certain residential mortgage-backed securities to Fannie Mae and Freddie Mac (collectively, the Government Sponsored Enterprises or GSEs). These securities were sold pursuant to registration statements, including prospectuses and prospectus supplements that formed part of those registration statements, which contained materially false or misleading statements and omissions. Defendants falsely represented that the underlying mortgage loans complied with certain underwriting guidelines and standards, including representations that significantly overstated the ability of the borrowers to repay their mortgage loans. These representations were material to the GSEs, as reasonable investors, and their falsity violates Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77a et seq., Sections 1
13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, Sections 31-5606.05(a)(1)(B) and 315606.05(c) of the District of Columbia Code, and constitutes common law negligent misrepresentation. 2. Between September 28, 2005 and November 23, 2007, Fannie Mae and Freddie
Mac purchased over $14.1 billion in residential mortgage-backed securities (the GSE Certificates) issued in connection with 43 Credit Suisse-sponsored and/or Credit Suisseunderwritten securitizations.1 The GSE Certificates purchased by Freddie Mac, along with date and amount of the purchases, are listed below in Table 11. The GSE Certificates purchased by Fannie Mae, along with date and amount of the purchases, are listed below in Table 12. The 43 securitizations at issue are: i. American Home Mortgage Assets Trust Mortgage-Backed Pass-Through Certificates, Series 2005-1 (AHMA 2005-1); Ameriquest Mortgage Securities, Inc. Asset-Backed Pass-Through Certificates, Series 2005-R8 (AMSI 2005-R8); Ameriquest Mortgage Securities, Inc. Asset-Backed Pass-Through Certificates, Series 2005-R11 (AMSI 2005-R11); Ameriquest Mortgage Securities, Inc. Asset-Backed Pass-Through Certificates, Series 2006-R2 (AMSI 2006-R2); Asset Backed Securities Corporation Home Equity Loan Trust Asset Backed PassThrough Certificates, Series NC 2005-HE8 (ABSHE 2005-HE8); Asset Backed Securities Corporation Home Equity Loan Trust Asset Backed PassThrough Certificates, Series AEG 2006-HE1(ABSHE 2006-HE1); Asset Backed Securities Corporation Home Equity Loan Trust Asset Backed PassThrough Certificates, Series NC 2006-HE2 (ABSHE 2006-HE2);
ii.
iii.
iv.
v.
vi.
vii.
viii.
Asset Backed Securities Corporation Home Equity Loan Trust Asset Backed PassThrough Certificates, Series OOMC 2006-HE3 (ABSHE 2006-HE3); Asset Backed Securities Corporation Home Equity Loan Trust Asset Backed PassThrough Certificates, Series NC 2006-HE4 (ABSHE 2006-HE4); Asset Backed Securities Corporation Home Equity Loan Trust Asset Backed PassThrough Certificates, Series OOMC 2006-HE5 (ABSHE 2006-HE5); Asset Backed Securities Corporation Home Equity Loan Trust Asset Backed PassThrough Certificates, Series MO 2006-HE6 (ABSHE 2006-HE6); Asset Backed Securities Corporation Home Equity Loan Trust Asset Backed PassThrough Certificates, Series AMQ 2006-HE7 (ABSHE 2006-HE7); Asset Backed Securities Corporation Home Equity Loan Trust Asset Backed PassThrough Certificates, Series RFC 2007-HE1 (ABSHE 2007-HE1); Asset Backed Securities Corporation Home Equity Loan Trust Asset Backed PassThrough Certificates, Series AMQ 2007-HE2 (ABSHE 2007-HE2); Adjustable Rate Mortgage Trust Adjustable Rate Mortgage-Backed Pass-Through Certificates, Series 2005-10 (ARMT 2005-10); Adjustable Rate Mortgage Trust Adjustable Rate Mortgage-Backed Pass-Through Certificates, Series 2005-11 (ARMT 2005-11); Adjustable Rate Mortgage Trust Adjustable Rate Mortgage-Backed Pass-Through Certificates, Series 2005-12 (ARMT 2005-12); Adjustable Rate Mortgage Trust Adjustable Rate Mortgage-Backed Pass-Through Certificates, Series 2006-1 (ARMT 2006-1); CSFB Mortgage-Backed Trust Mortgage-Backed Pass-Through Certificates, Series 2005-11 (CSFB 2005-11); CSFB Mortgage-Backed Trust Mortgage-Backed Pass-Through Certificates, Series 2005-12 (CSFB 2005-12); CSMC Mortgage-Backed Trust Mortgage-Backed Pass-Through Certificates, Series 2006-1 (CSMC 2006-1); CSMC Asset-Backed Trust Asset-Backed Pass-Through Certificates, Series 2007NC1 OSI (CSMC 2007-NC1);
ix.
x.
xi.
xii.
xiii.
xiv.
xv.
xvi.
xvii.
xviii.
xix.
xx.
xxi.
xxii.
xxiii.
Fieldstone Mortgage Investment Trust Mortgage-Backed Notes, Series 2005-3 (FMIC 2005-3); Fieldstone Mortgage Investment Trust Mortgage-Backed Notes, Series 2007-1 (FMIC 2007-1); Fremont Home Loan Trust Mortgage-Backed Certificates, Series 2005-E (FHLT 2005-E); Home Equity Asset Trust Home Equity Pass-Through Certificates, Series 2005-7 (HEAT 2005-7); Home Equity Asset Trust Home Equity Pass-Through Certificates, Series 2005-8 (HEAT 2005-8); Home Equity Asset Trust Home Equity Pass-Through Certificates, Series 2005-9 (HEAT 2005-9); Home Equity Asset Trust Home Equity Pass-Through Certificates, Series 2006-1 (HEAT 2006-1); Home Equity Asset Trust Home Equity Pass-Through Certificates, Series 2006-3 (HEAT 2006-3); Home Equity Asset Trust Home Equity Pass-Through Certificates, Series 2006-4 (HEAT 2006-4); Home Equity Asset Trust Home Equity Pass-Through Certificates, Series 2006-5 (HEAT 2006-5); Home Equity Asset Trust Home Equity Pass-Through Certificates, Series 2006-6 (HEAT 2006-6); Home Equity Asset Trust Home Equity Pass-Through Certificates, Series 2006-7 (HEAT 2006-7); Home Equity Asset Trust Home Equity Pass-Through Certificates, Series 2006-8 (HEAT 2006-8); Home Equity Asset Trust Home Equity Pass-Through Certificates, Series 2007-1 (HEAT 2007-1); Home Equity Asset Trust Home Equity Pass-Through Certificates, Series 2007-2 (HEAT 2007-2);
xxiv.
xxv.
xxvi.
xxvii.
xxviii.
xxix.
xxx.
xxxi.
xxxii.
xxxiii.
xxxiv.
xxxv.
xxxvi.
xxxvii.
xxxviii.
Home Equity Asset Trust Home Equity Pass-Through Certificates, Series 2007-3 (HEAT 2007-3); Home Equity Mortgage Trust Home Equity Mortgage Pass-Through Certificates, Series 2006-6 (HEMT 2006-6); Home Equity Mortgage Loan Asset-Backed Certificates, Series INABS 2006-B (INABS 2006-B); Home Equity Mortgage Loan Asset-Backed Certificates, Series INABS 2006-C (INABS 2006-C); Home Equity Mortgage Loan Asset-Backed Certificates, Series INABS 2006-E (INABS 2006-E); New Century Home Equity Trust Asset Backed Notes, Series 2006-1 (NCHET 2006-1);
xxxix.
xl.
xli.
xlii.
xliii.
(collectively, the Securitizations). 3. Each Certificate was offered for sale pursuant to one of seventeen shelf
registration statements (the Shelf Registration Statements) filed with the Securities and Exchange Commission (the SEC). CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance filed eight of the Shelf Registration Statements that pertained to 32 of the Securitizations at issue.2 Those eight Shelf Registration Statements, and the amendments thereto, were signed by or on behalf of the Individual Defendants. With respect to all 43 of the Securitizations, CS Securities was the lead or co-lead underwriter, and with respect to all but two of the Securitizations, CS Securities was also the underwriter who sold the Certificates to the GSEs.
The remaining nine Shelf Registration Statements, accounting for the remaining eleven Securitizations, were filed and signed by non-parties. CS Securities was one of the lead underwriters for all nine of the remaining Shelf Registration Statements (pertaining to eleven securitizations). It served as the seller underwriter for seven of the Shelf Registration Statements (pertaining to nine securitizations). 5
4.
For each Securitization, a prospectus (Prospectus) and prospectus supplement
credit quality of the mortgage loans underlying the Securitizations, the creditworthiness of the borrowers of those underlying mortgage loans, and the origination and underwriting practices used to make and approve the loans. Such statements were material to a reasonable investors decision to invest in mortgage-backed securities by purchasing the Certificates. Unbeknownst to Fannie Mae and Freddie Mac, these statements were materially false, as significant percentages of the underlying mortgage loans were not originated in accordance with the represented underwriting standards and origination practices, and had materially poorer credit quality than what was represented in the Registration Statements. 6. For example, a forensic review of nearly 2,000 loan files for the supporting loan
groups of two SecuritizationsHEAT 2007-1 and HEAT 2007-2has revealed that for a majority of the loans in those Securitizations, there were numerous breaches of the originators underwriting guidelines, such as failure to evaluate the reasonableness of the borrowers stated income or to correctly account for the borrowers debt, both key factors bearing on eligibility for a mortgage loan. Adherence to underwriting guidelines, particularly on key criteria bearing on loan eligibility, is a material consideration to reasonable investors.
7.
Registration Statements also contained statistical summaries of the groups of
mortgage loans in each Securitization, such as the percentage of loans secured by owneroccupied properties and percentage of the loan groups aggregate principal balance with loan-tovalue ratios within specified ranges. This information was also material to reasonable investors. However, a loan level analysis of a sample of loans for each Securitizationa review that encompassed thousands of mortgages across all of the Securitizationshas revealed that these statistics were also false and omitted material facts due to widespread misstatement of borrowers incomes and debts, inflated property values, and misrepresentations of other key characteristics of the mortgage loans. 8. For example, the percentage of owner-occupied properties is a material risk factor
to the purchasers of Certificates, such as Fannie Mae and Freddie Mac, since a borrower who lives in a mortgaged property is generally less likely to stop paying his or her mortgage and more likely to take better care of the property. The loan level review reveals that the true percentage of owner-occupied properties for the loans supporting the GSE Certificates was materially lower than what was stated in the Prospectus Supplements. Likewise, the Prospectus Supplements misrepresented other material factors, including the true value of the mortgaged properties relative to the amount of the underlying loans, and the actual ability of the individual mortgage borrowers to satisfy their debts. 9. Defendants CS Securities (an underwriter), CSFB Mortgage Securities (a
depositor), Asset Backed Securities (a depositor), CSFB Mortgage Acceptance (a depositor), and the Individual Defendants are directly responsible for the misstatements and omissions of material fact contained in the Registration Statements because they prepared, signed, filed and/or used these documents to market and sell the Certificates to Fannie Mae and Freddie Mac.
10.
Defendants CS Holdings, CS USA, DLJ Mortgage Capital, and the Individual
Defendants are also responsible for the misstatements and omissions of material fact contained in the Registration Statements by virtue of their direction and control over Defendants CS Securities, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance. CS Holdings and CS USA directly participated in and exercised dominion and control over the business operations of CS Securities, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance. DLJ Mortgage Capital (the sponsor) directly participated in and exercised dominion and control over the business operations of Defendants CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance (collectively, Depositor Defendants). 11. Fannie Mae and Freddie Mac purchased over $14.1 billion of the Certificates
the Defendants for violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77k, 77l(a)(2), 77o, Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, Sections 31-5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, and for common law negligent misrepresentation.
PARTIES The Plaintiff and the GSEs 13. The Federal Housing Finance Agency is a federal agency located at 1700 G
Congress with a mission to provide liquidity, stability and affordability to the United States housing and mortgage markets. As part of this mission, Fannie Mae and Freddie Mac invested in residential mortgage-backed securities. Fannie Mae is located at 3900 Wisconsin Avenue, NW in Washington, D.C. Freddie Mac is located at 8200 Jones Branch Drive in McLean, Virginia. The Defendants 15. Defendant CS Holdings is a Delaware corporation with its principal place of
business in New York, New York. It is the direct parent corporation of CS USA and the indirect parent of CS Securities, DLJ Mortgage Capital, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance. 16. Defendant CS USA, formerly known as Credit Suisse First Boston (USA), Inc., is
a Delaware corporation with its principal place of business in New York, New York. It is
primarily engaged in the business of investment banking and is the direct subsidiary of CS Holdings and parent of CS Securities. 17. Defendant CS Securities, formerly known as Credit Suisse First Boston LLC
(CSFB), is a Delaware limited liability company with its principal place of business in New York, New York. It is an SEC-registered broker-dealer primarily engaged in the business of investment banking and is a wholly owned subsidiary of CS USA. It, or its predecessor, acted as the lead or co-lead underwriter for the Certificates at issue here. Fannie Mae and Freddie Mac purchased the GSE Certificates for 41 of the 43 Securitizations from CS Securities in its capacity as underwriter of the Securitizations. 18. Defendant DLJ Mortgage Capital is a Delaware corporation with its principal
place of business in New York, New York. It is a wholly owned subsidiary of CS Holdings, an affiliate of CS Securities and the Depositor Defendants, and is primarily engaged in the purchase of mortgage loans. DLJ Mortgage Capital acted as the sponsor for 33 of the 43 Securitizations. It also originated some of the Mortgage Loans underlying the HEMT 2006-6 Securitization, and acquired other Mortgage Loans underlying the Certificates from third-party originators. 19. Defendant CSFB Mortgage Securities is a Delaware corporation with its principal
place of business in New York, New York. It is a wholly owned subsidiary of CS Holdings and an affiliate of CS Securities and the other Depositor Defendants. CSFB Mortgage Securities acted as depositor in nineteen of the Securitizations. As depositor, it was also responsible for preparing and filing reports required under the Securities Exchange Act of 1934. 20. Defendant Asset Backed Securities is a Delaware corporation with its principal
place of business in New York, New York. It is a wholly owned subsidiary of CS Holdings and an affiliate of CS Securities and the other Depositor Defendants. Asset Backed Securities acted
10
as depositor in ten of the Securitizations. As depositor, it was also responsible for preparing and filing reports required under the Securities Exchange Act of 1934. 21. Defendant CSFB Mortgage Acceptance is a Delaware corporation with its
principal place of business in New York, New York. It is a wholly owned subsidiary of CS Holdings and an affiliate of CS Securities and the other Depositor Defendants. CSFB Mortgage Acceptance acted as depositor in three Securitizations. As depositor, it was also responsible for preparing and filing reports required under the Securities Exchange Act of 1934. 22. Defendant Andrew A. Kimura is an individual residing in Irvington, New York.
He served as President and Director of CSFB Mortgage Securities and CSFB Mortgage Acceptance. Mr. Kimura signed six of the Shelf Registration Statements and the amendments thereto. 23. Defendant Jeffrey A. Altabef is an individual residing in Chappaqua, New York.
He served as Vice President and Director of CSFB Mortgage Securities. Mr. Altabef signed five of the Shelf Registration Statements and the amendments thereto. 24. Defendant Evelyn Echevarria is an individual residing in Charlotte, North
Carolina. Ms. Echevarria served as Director of CSFB Mortgage Securities. Ms. Echevarria signed five of the Shelf Registration Statements and the amendments thereto. 25. Defendant Michael A. Marriott is an individual residing in New York, New York.
Mr. Marriott served as Director of CSFB Mortgage Securities. Mr. Marriott signed five of the Shelf Registration Statements and the amendments thereto. 26. Defendant Zev Kindler is an individual residing in Brooklyn, New York. Mr.
Kindler served as Treasurer of CSFB Mortgage Securities and CSFB Mortgage Acceptance. Mr. Kindler signed two of the Shelf Registration Statements and the amendments thereto.
11
27.
Defendant John P. Graham is an individual residing in New York, New York.
Mr. Graham served as Vice President of CSFB Mortgage Acceptance. Mr. Graham signed one of the Shelf Registration Statements and the amendment thereto. 28. Defendant Thomas E. Siegler served as Director of CSFB Mortgage Acceptance.
Mr. Siegler signed one of the Shelf Registration Statements and the amendment thereto. 29. Defendant Thomas Zingalli is an individual residing in Garden City, New York.
Mr. Zingalli served as Principal Accounting Officer and Comptroller of CSFB Mortgage Securities and CSFB Mortgage Acceptance. Mr. Zingalli also served as Vice President and Controller for Asset Backed Securities. Mr. Zingalli signed eight of the Shelf Registration Statements and the amendments thereto. 30. Defendant Carlos Onis served as a Director of CSFB Mortgage Securities. Mr.
Onis also served as Vice President and Director of Asset Backed Securities. Mr. Onis signed three of the Shelf Registration Statements and the amendments thereto. 31. Defendant Steven L. Kantor is an individual residing in New York, New York.
Mr. Kantor served as a Director of CSFB Mortgage Acceptance. He signed one of the Shelf Registration Statements and the amendment thereto. 32. Defendant Joseph M. Donovan is an individual residing in Armonk, New York.
Mr. Donovan served as President and Director of Asset Backed Securities. He signed two of the Shelf Registration Statements and the amendments thereto. 33. Defendant Juliana Johnson is an individual residing in Charlotte, North Carolina.
Ms. Johnson served as Director of Asset Backed Securities. Ms. Johnson signed two of the Shelf Registration Statements and the amendments thereto.
12
34.
Defendant Greg Richter is an individual residing in Bronxville, New York. Mr.
Richter served as Vice President of Asset Backed Securities. Mr. Richter signed two of the Shelf Registration Statements and the amendments thereto. The Non-Party Originators 35. The loans underlying the Certificates were acquired by the sponsor for each
Securitization from non-party mortgage originators,4 with the exception of 47.18 percent of the loans underlying the HEMT 2006-6 Securitization, which were originated by Defendant DLJ Mortgage Capital. The non-party originators responsible for the loans underlying the Certificates include Option One Mortgage Corporation (Option One), New Century Mortgage Corp. (New Century), Wells Fargo Bank, N.A. (Wells Fargo), and Ownit Mortgage Solutions, Inc. (Ownit), among others. JURISDICTION AND VENUE 36. Jurisdiction of this Court is founded upon 28 U.S.C. 1345, which gives federal
Securities Act claims asserted herein arise under Sections 11, 12(a)(2), and 15 of the Securities Act, 15 U.S.C. 77k, 77l(a)(2), 77o. This Court further has jurisdiction over the Securities Act claims pursuant to Section 22 of the Securities Act, 15 U.S.C. 77v.
Defendant DLJ Mortgage Capital was the sponsor or co-sponsor for 33 of the 43 Securitizations. The remaining ten Securitizations were sponsored by non-parties. In particular, Ameriquest Mortgage Company, Fremont Investment and Loan, Fieldstone Investment Corporation, IndyMac Bank F.S.B., and New Century Mortgage Corporation each sponsored one or more of those ten Securitizations. 13
38.
This Court has jurisdiction over the statutory claims of violations of Sections
13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code and Sections 31-5606.05(a)(1)(B) and 315606.05(c) of the District of Columbia Code, pursuant to this Courts supplemental jurisdiction under 28 U.S.C. 1367(a). This Court also has jurisdiction over the common law claim of negligent misrepresentation pursuant to this Courts supplemental jurisdiction under 28 U.S.C. 1367(a). 39. Venue is proper in this district pursuant to Section 22 of the Securities Act, 15
U.S.C. 77v, and 28 U.S.C. 1391(b). All of the Credit Suisse Defendants are principally located in this district, several of the Individual Defendants reside in this district, and many of the acts and transactions alleged herein, including the preparation and dissemination of the Registration Statements, occurred in substantial part within this district. Defendants are also subject to personal jurisdiction in this district. FACTUAL ALLEGATIONS I. THE SECURITIZATIONS A. 40. Residential Mortgage-Backed Securitizations In General Asset-backed securitization distributes risk by pooling cash-producing financial
the entity that acquires or originates the mortgage loans and initiates the securitization and the creation of a trust, to which the sponsor directly or indirectly transfers a portfolio of mortgage loans. The trust is established pursuant to a Pooling and Servicing Agreement entered into by, among others, the depositor for that securitization. In many instances, the transfer of assets to a trust is a two-step process: the financial assets are transferred by the sponsor first to an 14
intermediate entity, often a limited purpose entity created by the sponsor . . . and commonly called a depositor, and then the depositor will transfer the assets to the [trust] for the particular asset-backed transactions. Asset-Backed Securities, Securities Act Release No. 33-8518, Exchange Act Release No. 34-50905, 84 SEC Docket 1624 (Dec. 22, 2004). 42. Residential mortgage-backed securities are backed by the underlying mortgage
loans. Some residential mortgage-backed securitizations are created from more than one cohort of loans called collateral groups, in which case the trust issues securities backed by different groups. For example, a securitization may involve two groups of mortgages, with some securities backed primarily by the first group, and others primarily by the second group. Purchasers of the securities acquire an ownership interest in the assets of the trust, which in turn owns the loans. Within this framework, the purchasers of the securities acquire rights to the cash-flows from the designated mortgage group, such as homeowners payments of principal and interest on the mortgage loans held by the related trust. 43. Residential mortgage-backed securities are issued pursuant to registration
mortgage loans. The servicer is responsible for collecting homeowners mortgage loan payments, which the servicer remits to the trustee after deducting a monthly servicing fee. The servicers duties include making collection efforts on delinquent loans, initiating foreclosure
15
proceedings, and determining when to charge off a loan by writing down its balance. The servicer is required to report key information about the loans to the trustee. The trustee (or trust administrator) administers the trusts funds and delivers payments due each month on the certificates to the investors. B. 45. The Securitizations At Issue In This Case This case involves the 43 Securitizations listed in Table 1 below. CS Securities
served as lead or co-lead underwriter for all 43 of the Securitizations and sold the GSE Certificates to the GSEs for 41 of the Securitizations. In 33 of the Securitizations, DLJ Mortgage Capital served as the sponsor, and in 32 of those Securitizations, CSFB Mortgage Securities, Asset Backed Securities, or CSFB Mortgage Acceptance was the depositor and therefore the issuer and offeror of the Certificates. For each of the 43 Securitizations, the table below identifies (1) the sponsor, (2) the depositor, (3) the lead underwriter, (4) the principal amount issued for the tranches5 purchased by the GSEs, (5) the date of issuance, and (6) the loan group or groups backing the GSE Certificate for that Securitization (referred to as the Supporting Loan Groups). Table 1
Transaction Tranche Sponsor DLJ Mortgage Capital DLJ Mortgage Capital Depositor Asset Backed Securities Asset Backed Securities Lead Underwriter(s) CS Securities6 Principal Amount Issued ($) 185,074,000 Date of Issuance 10/28/2005 Supporting Loan Group(s) Group 1
A1 ABSHE 2005HE8 A1A
CS Securities
32,660,000
10/28/2005
Group 1
6
In this table, CS Securities refers to either CS Securities or its predecessor, CSFB. 16
Transaction
Tranche
Sponsor DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital Ameriquest Mortgage Company Ameriquest Mortgage Company
Depositor Asset Backed Securities Asset Backed Securities Asset Backed Securities Asset Backed Securities Asset Backed Securities Asset Backed Securities Asset Backed Securities Asset Backed Securities Asset Backed Securities Asset Backed Securities Asset Backed Securities
Lead Underwriter(s) CS Securities
Principal Amount Issued ($) 218,002,000
A2 ABSHE 2006HE1 ABSHE 2006HE2
A1
CS Securities
396,315,000
2/6/2006
Group 1
A1
CS Securities
298,145,000
3/24/2006
Group 1
A1 ABSHE 2006HE3 A2
CS Securities
192,683,000
4/17/2006
Group 1
CS Securities
187,698,000
4/17/2006
Group 2
A1 ABSHE 2006HE4 A2 ABSHE 2006HE5 ABSHE 2006HE6 ABSHE 2006HE7
CS Securities
153,485,000
4/28/2006
Group 1
CS Securities
173,090,000
4/28/2006
Group 2
A1
CS Securities
296,485,000
7/18/2006
Group 1
A1
CS Securities
178,248,000
11/30/2006
Group 1
A1
CS Securities
295,597,000
11/30/2006
Group 1
A1A ABSHE 2007HE1 A1B
CS Securities
71,333,000
2/6/2007
Group 1
Asset Backed Securities Asset Backed Securities American Home Mortgage Assets LLC Ameriquest Mortgage Securities Inc. Ameriquest Mortgage Securities Inc.
CS Securities
71,333,000
2/6/2007
Group 1
ABSHE 2007HE2
A1
CS Securities
107,228,000
5/31/2007
Group 1
AHMA 2005-1
3A21
CS Securities CS Securities (colead with Barclay Capital) CS Securities (colead with Deutsche Bank Securities Inc.)
100,470,000
10/31/2005
Group 3B
AMSI 2005-R8
A1
779,011,000
9/28/2005
Group 1
AMSI 2005-R11
A1
1,099,278,000
12/20/2005
Group 1
17
Transaction
Tranche
Sponsor Ameriquest Mortgage Company DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital Fremont Investment and Loan Fieldstone Investment Corp. Fieldstone Investment Corp. DLJ Mortgage Capital
Depositor Ameriquest Mortgage Securities Inc. CSFB Mortgage Securities CSFB Mortgage Securities CSFB Mortgage Acceptance CSFB Mortgage Securities CSFB Mortgage Acceptance CSFB Mortgage Acceptance CSFB Mortgage Securities CSFB Mortgage Securities CSFB Mortgage Securities CSFB Mortgage Securities CSFB Mortgage Securities CSFB Mortgage Securities Fremont Mortgage Securities Corp. Fieldstone Mortgage Investment Corp. Fieldstone Mortgage Investment Corp. CSFB Mortgage Securities
Lead Underwriter(s) CS Securities (colead with Morgan Stanley & Co. Inc.) CS Securities
Date of Issuance
AMSI 2006-R2
A1
3/29/2006
ARMT 2005-10
4A1
90,470,000
9/30/2005
Group 4
ARMT 2005-11
4A1
CS Securities
312,635,000
10/31/2005
Group 4
ARMT 2005-12
4A1
CS Securities
112,160,000
11/30/2005
Group 4
ARMT 2006-1
5A1
CS Securities
148,572,000
2/28/2006
Group 5
2A1 CSFB 2005-11 7A1
CS Securities
76,116,357
11/29/2005
Group 2
CS Securities
68,243,000
11/29/2005
Group 7
2A1
CS Securities
100,153,573
12/29/2005
Group 2
CSFB 2005-12
4A1
CS Securities
225,636,009
12/29/2005
Group 4
5A1
CS Securities
104,000,000 180,586,800
12/29/2005
Group 5
5A1 CSMC 2006-1 5A2 CSMC 2007NC1
CS Securities
1/30/2006
Group 5
CS Securities
20,065,200
1/30/2006
Group 5
1A1
CS Securities
286,133,341
8/31/2007
Group 1
FHLT 2005-E
1A1
CS Securities
728,502,000
12/20/2005
Group 1
FMIC 2005-3
1A
CS Securities
316,989,000
11/23/2005
Group 1
FMIC 2007-1
1A
CS Securities
124,711,000
4/12/2007
Group 1
HEAT 2005-7
1A1
CS Securities
250,000,000
10/3/2005
Group 1
18
Transaction
Tranche
Sponsor DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital IndyMac Bank, FSB IndyMac Bank, FSB IndyMac Bank, FSB IndyMac Bank, FSB IndyMac Bank, FSB New Century Mortgage Corp.
Depositor CSFB Mortgage Securities CSFB Mortgage Acceptance CSFB Mortgage Securities CSFB Mortgage Securities CSFB Mortgage Securities CSFB Mortgage Securities CSFB Mortgage Securities CSFB Mortgage Securities CSFB Mortgage Securities CSFB Mortgage Securities CSFB Mortgage Securities CSFB Mortgage Securities CSFB Mortgage Securities IndyMac ABS Inc. IndyMac ABS Inc. IndyMac ABS Inc. IndyMac ABS Inc. IndyMac ABS Inc. New Century Mortgage Securities LLC
Lead Underwriter(s) CS Securities
HEAT 2005-8
1A1
HEAT 2005-9
1A1
CS Securities
240,000,000
12/1/2005
Group 1
HEAT 2006-1
1A1
CS Securities
255,000,000
1/3/2006
Group 1
HEAT 2006-3
1A1
CS Securities
525,000,000
3/30/2006
Group 1
HEAT 2006-4
1A1
CS Securities
500,000,000
5/1/2006
Group 1
HEAT 2006-5
1A1
CS Securities
300,000,000
7/5/2006
Group 1
HEAT 2006-6
1A1
CS Securities
307,500,000
8/1/2006
Group 1
HEAT 2006-7
1A1
CS Securities
340,000,000
10/3/2006
Group 1
HEAT 2006-8
1A1
CS Securities
385,000,000
12/1/2006
Group 1
HEAT 2007-1
1A1
CS Securities
350,000,000
2/1/2007
Group 1
HEAT 2007-2
1A1
CS Securities
460,000,000
4/2/2007
Group 1
HEAT 2007-3
1A1
CS Securities
212,250,000
5/1/2007
Group 1
HEMT 2006-6
1A1
CS Securities CS Securities (colead with Lehman Brothers Inc.) CS Securities (colead with Lehman Brothers Inc.) CS Securities CS Securities (colead with Lehman Brothers Inc.) CS Securities (colead with Lehman Brothers Inc.) CS Securities (colead with Deutsche Bank Securities Inc.)
27,000,000
12/29/2006
Group 1
1A1 INABS 2006-B 1A2 INABS 2006-C 2A 1A1 INABS 2006-E 1A2
152,932,000
3/14/2006
Group 1
152,932,000 153,334,000 192,789,000
3/14/2006 6/15/2006 12/8/2006
Group 1 Group 2 Group 1
192,789,000
12/8/2006
Group 1
NCHET 2006-1
A1
456,811,000
3/30/2006
Group 1
19
C.
The Securitization Process 1. DLJ Mortgage Capital Groups Mortgage Loans in Special Purpose Trusts
46.
As the sponsor for 33 of the 43 Securitizations, Defendant DLJ Mortgage Capital
originated and purchased the mortgage loans underlying the Certificates for those 33 Securitizations after the loans were originated, either directly from the originators or through affiliates of the originators.7 47. DLJ Mortgage Capital8 then sold or co-sold the mortgage loans for 32 of the 33
Securitizations to one of the three Depositor Defendants: CSFB Mortgage Securities, Asset Backed Securities, or CSFB Mortgage Acceptance. With respect to one Securitization that DLJ Mortgage Capital sponsored, it sold the mortgage loan to a non-party depositor. With respect to the remaining ten Securitizations, non-party sponsors sold the mortgage loans to non-party depositors, as reflected in Table 1 at paragraph 45 above. Defendant CS Securities was the lead or co-lead underwriter for all eleven Securitizations in which the depositor is a non-party and the selling underwriter for nine of those eleven Securitizations. 48. The depositors for 32 of the Securitizations, Depositor Defendants CSFB
Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance were wholly owned, limited-purpose financial subsidiaries of CS Holdings and affiliates of DLJ Mortgage Capital and CS Securities. The sole purpose of the Depositor Defendants was to act as a conduit
Non-party sponsors Ameriquest Mortgage Company, Fremont Investment and Loan, Fieldstone Investment Corporation, IndyMac Bank F.S.B., and New Century Mortgage Corporation were each a sponsor of one or more of the remaining ten Securitizations. The sponsor for each Securitization is identified in Table 1 at paragraph 45 above. For the CSFB 2005-12 and CSMC 2006-1 Securitizations, GreenPoint Mortgage was the co-seller. 20
8
through which loans originated and acquired by DLJ Mortgage Capital could be securitized and sold to investors. 49. As part of each Securitization, DLJ Mortgage Capital or a non-party sponsor sold
the relevant mortgage loans to the depositor pursuant to a Mortgage Loan Purchase Agreement, Assignment and Assumption Agreement, or Pooling and Servicing Agreement that contained various representations and warranties regarding the mortgage loans. The depositor then conveyed the loans to a trust the depositor had established. 50. As part of each Securitization, the trustee, on behalf of the Certificateholders,
executed a Pooling and Servicing Agreement (PSA) with the relevant depositor and the parties responsible for monitoring and servicing the mortgage loans in that Securitization. The trust, administered by the trustee, held the mortgage loans pursuant to the related PSA and issued Certificates, including the GSE Certificates, backed by such loans. The GSEs purchased the GSE Certificates, through which they obtained an ownership interest in the assets of the trust, including the mortgage loans. 2. 51. The Trusts Issue Securities Backed by the Loans
PSAs, each trust issued Certificates backed by the underlying mortgage loans. The Certificates were then sold to investors like Fannie Mae and Freddie Mac, which thereby acquired an ownership interest in the assets of the corresponding trust. Each Certificate entitles its holder to a specified portion of the cashflows from the underlying mortgages in the Supporting Loan Group. The level of risk inherent in the Certificates was a function of the capital structure of the related transaction and the credit quality of the underlying mortgages. 52. The Certificates were issued pursuant to one of seventeen Shelf Registration
Statements, filed with the SEC on Form S-3. The Shelf Registration Statements were amended 21
by one or more Forms S-3/A filed with the SEC. Each Individual Defendant signed one or more of the eight Shelf Registration Statements, including any amendments thereto, which were filed by the Depositor Defendants. The SEC filing number, registrants, signatories and filing dates for the seventeen Shelf Registration Statements and amendments thereto, as well as the Certificates covered by each Shelf Registration Statement, are reflected in Table 2 below. Table 2
SEC Filing No. Date of Filing Date(s) Amended Covered Certificates Signatories of Registration Statement and Amendment(s)
Andrew A. Kimura Jeffrey A. Altabef Evelyn Echevarria Michael A. Marriott Zev Kindler Thomas Zingalli John P. Graham Carlos Onis Steven L. Kantor Thomas E. Siegler Andrew A. Kimura Zev Kindler Thomas Zingalli John P. Grazer Adam J. Bass Andrew L. Stidd Murray L. Zoota Louis J. Rampino Wayne Bailey Thomas Hayes Patrick Lamb Michael Strauss Stephen Hozie Thomas McDonagh Alan Horn John C. Kendall Michael J. Sonnenfeld Teresa McDermott Greg Richter Joseph M. Donovan Thomas Zingalli Carlos Onis Juliana Johnson
Registrant
333-120966
12/3/2004
1/5/2005
CSFB Mortgage Securities
ARMT 2005-10 ARMT 2005-11 HEAT 2005-7 HEAT 2005-8 HEAT 2006-3
333-120962
12/3/2004
1/5/2005
CSFB Mortgage Acceptance
ARMT 2005-12 CSFB 2005-11 HEAT 2005-9
333-121781
12/30/2004
N/A
Ameriquest Mortgage Securities Inc. Fremont Mortgage Securities Corp.
AMSI 2005-R8 AMSI 2005-R11
333-125587
6/7/2005
N/A
FHLT 2005-E
333-125741
6/10/2005
7/29/2005
American Home Mortgage Assets LLC Fieldstone Mortgage Investment Corp. Asset Backed Securities
AHMA 2005-1
333-125910
6/17/2005
7/1/2005
FMIC 2005-3 FMIC 2007-1 ABSHE 2005-HE8 ABSHE 2006-HE1 ABSHE 2006-HE2
333-127230
8/5/2005
8/23/2005
22
SEC Filing No.
Date of Filing
Date(s) Amended
Registrant
New Century Mortgage Securities LLC
Signatories of Registration Statement and Amendment(s)

Brad A. Morrice Patrick J. Flanagan Patti Dodge S. Blair Abernathy John Olinski Samir Grover Lynette Antosh Victor Woodworth Andrew A. Kimura Jeffrey A. Altabef Evelyn Echevarria Michael A. Marriott Thomas Zingalli Andrew A. Kimura Jeffrey A. Altabef Evelyn Echevarria Michael A. Marriott Thomas Zingalli Greg Richter Joseph M. Donovan Thomas Zingalli Carlos Onis Juliana Johnson John P. Grazer Adam J. Bass Andrew L. Stidd John Olinski S. Blair Abernathy Raphael Bostic Samir Grover Victor Woodworth Simon Heyrick9 S. Blair Abernathy John Olinski Raphael Bostic Simon Heyrick Victor Woodworth Andrew A. Kimura Jeffrey A. Altabef Evelyn Echevarria Michael A. Marriott Thomas Zingalli
333-127237
8/5/2005
N/A
NCHET 2006-1
333-127617
8/17/2005
N/A
IndyMac ABS Inc.
INABS 2006-B
333-127872
8/26/2005
12/7/2005
ARMT 2006-1 CSFB 2005-12 CSMC 2006-1 HEAT 2006-1 HEAT 2006-4 HEAT 2006-5 HEAT 2006-6 ABSHE 2006-HE3 ABSHE 2006-HE4 ABSHE 2006-HE5 ABSHE 2006-HE6 ABSHE 2006-HE7 ABSHE 2007-HE1 ABSHE 2007-HE2 AMSI 2006-R2
333-130884
1/6/2006
2/17/2006
333-131465
2/1/2006
3/15/2006 4/3/2006
Asset Backed Securities
333-131452
2/1/2006
N/A
Ameriquest Mortgage Securities Inc.
333-132042
2/24/2006
3/29/2006 4/13/2006 6/05/2007
Indy Mac MBS Inc.
INABS 2006-C
333-134691
6/2/2006
8/23/2006 10/10/2006
IndyMac ABS Inc.
INABS 2006-E
333-135481
6/30/2006
7/14/2006
HEAT 2006-7 HEAT 2006-8 HEAT 2007-1 HEAT 2007-2 HEMT 2006-6
For this Shelf Registration Statement, Samir Grover did not sign any of the amendments, and Simon Heyrick did not sign the Registration Statement. 23
SEC Filing No.
Date of Filing
Date(s) Amended
Registrant
Signatories of Registration Statement and Amendment(s)

Andrew A. Kimura Jeffrey A. Altabef Evelyn Echevarria Michael A. Marriott Thomas Zingalli
333-140945
2/28/2007
4/16/2007
CSMC 2007-NC1 HEAT 2007-3
53.
guidelines that purportedly were used in connection with the origination of the underlying mortgage loans. In addition, the Prospectus Supplements purport to provide accurate statistics regarding the mortgage loans in each group, including the ranges of and weighted average FICO credit scores of the borrowers, the ranges of and weighted average loan-to-value ratios of the loans, the ranges of and weighted average outstanding principal balances of the loans, the debtto-income ratios, the geographic distribution of the loans, the extent to which the loans were for purchase or refinance purposes, information concerning whether the loans were secured by a property to be used as a primary residence, second home, or investment property, and information concerning whether the loans were delinquent. 54. The Prospectus Supplements associated with each Securitization were filed with
the SEC as part of the Registration Statements. In the case of each Securitization, the Form 8-K attaching the PSA associated with the Securitization was also filed with the SEC.10 The date on which the Prospectus Supplement and Form 8-K were filed for each Securitization, as well as the filing number of the Shelf Registration Statement related to each, are set forth in Table 3 below.
In the case of four SecuritizationsABSHE 2005-HE8, CSFB 2005-12, FMIC 20053, and FMIC 2007-1the Form 8-K filing was not accompanied by the PSA.
10
24
Table 3
Transaction ABSHE 2005-HE8 ABSHE 2006-HE1 ABSHE 2006-HE2 ABSHE 2006-HE3 ABSHE 2006-HE4 ABSHE 2006-HE5 ABSHE 2006-HE6 ABSHE 2006-HE7 ABSHE 2007-HE1 ABSHE 2007-HE2 AHMA 2005-1 AMSI 2005-R8 AMSI 2005-R11 AMSI 2006-R2 ARMT 2005-10 ARMT 2005-11 ARMT 2005-12 ARMT 2006-1 CSFB 2005-11 CSFB 2005-12 CSMC 2006-1 CSMC 2007-NC1 FHLT 2005-E FMIC 2005-3 FMIC 2007-1 HEAT 2005-7 HEAT 2005-8 HEAT 2005-9 HEAT 2006-1 HEAT 2006-3 HEAT 2006-4 HEAT 2006-5 HEAT 2006-6 HEAT 2006-7 HEAT 2006-8 HEAT 2007-1 HEAT 2007-2 HEAT 2007-3 HEMT 2006-6 INABS 2006-B INABS 2006-C INABS 2006-E NCHET 2006-1 Date Prospectus Supplement Filed 10/28/2005 2/7/2006 3/23/2006 4/14/2006 5/1/2006 7/18/2006 12/1/2006 12/1/2006 2/6/2007 6/4/2007 10/31/2005 9/28/2005 12/19/2005 3/23/2006 9/30/2005 10/28/2005 11/29/2005 3/2/2006 12/2/2005 1/5/2006 2/1/2006 9/4/2007 12/20/2005 11/17/2005 4/12/2007 10/3/2005 11/2/2005 12/2/2005 1/4/2006 3/30/2006 5/1/2006 7/6/2006 8/1/2006 10/3/2006 12/4/2006 2/1/2007 4/2/2007 5/2/2007 12/29/2006 3/14/2006 6/15/2006 12/7/2006 3/29/2006 Date of Form 8-K Attaching PSA No PSA attached 2/21/2006 4/7/06 5/3/2006 5/12/2006 8/2/2006 12/15/2006 12/20/2006 2/21/2007 6/15/2007 11/15/2005 10/13/2005 1/5/2006 3/23/2006 10/14/2005 11/15/2005 12/15/2005 3/15/2006 12/23/2005 No PSA attached 2/14/2006 9/7/2007 1/4/2006 No PSA attached No PSA attached 10/18/2005 11/22/2005 12/19/2005 1/18/2006 4/14/2006 5/16/2006 7/20/2006 8/16/2006 10/18/2006 12/18/2006 2/16/2007 4/17/2007 5/16/2007 1/12/2006 3/29/2006 6/29/2006 2/26/2007 4/10/2006 Filing No. of Related Registration Statement 333-127230 333-127230 333-127230 333-131465 333-131465 333-131465 333-131465 333-131465 333-131465 333-131465 333-125741 333-121781 333-121781 333-131452 333-120966 333-120966 333-120962 333-127872 333-120962 333-127872 333-127872 333-140945 333-125587 333-125910 333-125910 333-120966 333-120966 333-120962 333-127872 333-120966 333-130884 333-130884 333-130884 333-135481 333-135481 333-135481 333-135481 333-140945 333-135481 333-127617 333-132042 333-134691 333-127237
55.
The Certificates were issued pursuant to the PSAs, and Defendant CS Securities
(or its predecessor CSFB) offered the GSE Certificates to Fannie Mae and Freddie Mac pursuant
25
to the Registration Statements, which, as noted previously, included the Prospectuses and Prospectus Supplements.11 In the case of 41 of the 43 Securitizations, Defendant CS Securities also sold the GSE Certificates to Fannie Mae and Freddie Mac. II. THE DEFENDANTS PARTICIPATION IN THE SECURITIZATION PROCESS A. 56. The Role of Each of the Defendants Each of the Defendants, including the Individual Defendants, had a role in the
securitization process and the marketing for most or all of the Certificates, which included purchasing the mortgage loans from the originators, arranging the Securitizations, selling the mortgage loans to the depositor, transferring the mortgage loans to the trustee on behalf of the Certificateholders, underwriting the public offering of the Certificates, structuring and issuing the Certificates, and marketing and selling the Certificates to investors such as Fannie Mae and Freddie Mac. 57. With respect to each Securitization, the depositor, underwriters, and Individual
Defendants who signed the Registration Statement, as well as the Defendants who exercised control over their activities, are liable, jointly and severally, as participants in the registration, issuance and offering of the Certificates, including issuing, causing, or making materially misleading statements in the Registration Statement, and omitting material facts required to be stated therein or necessary to make the statements contained therein not misleading. 1. 58. DLJ Mortgage Capital
Defendant DLJ Mortgage Capital has been involved in securitizations of various
assets since 1988 and was at all relevant times to this Complaint a leading sponsor of mortgage-
For the remaining two Securitizations, the selling underwriter was non-party Lehman Brothers. The selling underwriter for each Securitization is reflected at Tables 11 and 12 at paragraphs 179 and 180 below. 26
11
backed securities. As stated in the Prospectus Supplements, from 2003 to 2005, at the beginning of the period relevant to this Complaint, DLJ Mortgage Capital and its affiliates reported that they nearly doubled the value of residential mortgage loans they securitized, from more than $27 billion to approximately $50 billion. 59. Defendant DLJ Mortgage Capital acted as the sponsor of 33 of the 43
Securitizations. In that capacity, DLJ Mortgage Capital determined the structure of the Securitizations, initiated the Securitizations, originated and purchased the mortgage loans to be securitized, determined distribution of principal and interest, and provided data to the credit rating agencies to secure investment grade ratings for the GSE Certificates. For 32 of the 33 Securitizations, DLJ Mortgage Capital selected one of the Depositor DefendantsCSFB Mortgage Securities, Asset Backed Securities, or CSFB Mortgage Acceptanceas the special purpose vehicle that would be used to transfer the mortgage loans from DLJ Mortgage Capital to the trust.12 For each of the 33 of the Securitizations in which it acted as sponsor, DLJ Mortgage Capital selected CS Securities as the lead underwriter for the Securitizations. In its role as sponsor, DLJ Mortgage Capital knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing such loans would be issued by the relevant trusts. 60. Defendant DLJ Mortgage Capital also conveyed the mortgage loans to the
Depositor Defendants pursuant to a Mortgage Loan Purchase Agreement or Assignment and Assumption Agreement. In these agreements, DLJ Mortgage Capital made certain representations and warranties to the Depositor Defendants regarding the groups of loans
12
The sole exception is AHMA 2005-1, for which the depositor was American Home
Mortgage. 27
collateralizing the Certificates. These representations and warranties were assigned by the Depositor Defendants to the trustees for the benefit of the Certificateholders. 2. 61. CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance
Each of the Depositor Defendants was a special purpose entity formed solely for
the purpose of purchasing mortgage loans, filing registration statements with the SEC, forming issuing trusts, assigning mortgage loans and all of its rights and interests in such mortgage loans to the trustee for the benefit of the certificateholders, and depositing the underlying mortgage loans into the issuing trusts. 62. The Depositor Defendants were the depositors for 32 of the 43 Securitizations, as
identified in Table 1 at paragraph 45 above. In their capacity as depositors, each Depositor Defendant purchased mortgage loans from DLJ Mortgage Capital (as sponsor) pursuant to a Mortgage Loan Purchase Agreement or Assignment and Assumption Agreement, as applicable. Each Depositor Defendant then sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trust. The Depositor Defendants, along with the other Defendants, were also responsible for preparing and filing the Registration Statements pursuant to which the Certificates were offered for sale. The trusts in turn held the mortgage loans for the benefit of the Certificateholders, and issued the Certificates in public offerings for sale to investors such as Fannie Mae and Freddie Mac. 3. 63. CS Securities
Defendant CS Securities is an investment bank, and was, at all relevant times, a
registered broker/dealer and one of the leading underwriters of mortgage and other asset-backed securities in the United States.
28
64.
Defendant CS Securities (or its predecessor CSFB) was the lead or co-lead
underwriter for each of the 43 Securitizations. In that role, it was responsible for underwriting and managing the offer and sale of the Certificates to Fannie Mae and Freddie Mac and other investors. CS Securities was also obligated to conduct meaningful due diligence to ensure that the Registration Statements did not contain any material misstatements or omissions, including as to the manner in which the underlying mortgage loans were originated, transferred, and underwritten. 4. 65. CS USA
Defendant CS USA employed its wholly owned subsidiaries and affiliates CS
Securities, DLJ Mortgage Capital, and each of the Depositor Defendants, in the key steps of the securitization process. Unlike typical arms length securitizations, three-quarters of the Securitizations here involved various CS USA subsidiaries and affiliates at virtually each step in the chainthe sponsor was DLJ Mortgage Capital, the depositors were CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance. In each Securitization, the lead or co-lead underwriter was CS Securities. 66. As the corporate parent or affiliate of CS Securities, DLJ Mortgage Capital, and
the Depositor Defendants, CS USA had the practical ability to direct and control these Defendants actions related to the Securitizations, and in fact exercised such direction and control over their activities related to the issuance and sale of the Certificates. 5. 67. CS Holdings
Defendant CS Holdings wholly owns CS USA and is the ultimate U.S. parent of
CS Securities, DLJ Mortgage Capital, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance. As detailed above, the Securitizations involved Credit Suisse entities, including the aforementioned subsidiaries of CS Holdings, at virtually every step in the 29
process. CS Holdings profited substantially from this vertically integrated approach to mortgage-backed securitization. Furthermore, CS Holdings shares, and upon information and belief, shared, overlapping management with CS Securities. 6. 68. The Individual Defendants
Defendant Andrew A. Kimura was President and a Director of CSFB Mortgage
Capital and CSFB Mortgage Acceptance. In those capacities, Mr. Kimura signed five Shelf Registration Statements filed by CSFB Mortgage Securities and one Shelf Registration Statement filed by CSFB Mortgage Acceptance and the amendments thereto. These Shelf Registration Statements are applicable to 22 of the 43 Securitizations. 69. Defendant Jeffrey A. Altabef served as a Vice President and Director of CSFB
Mortgage Securities. In that capacity, Mr. Altabef signed five Shelf Registration Statements filed by CSFB Mortgage Securities and the amendments thereto. These Shelf Registration Statements are applicable to nineteen of the 43 Securitizations. 70. Defendant Evelyn Echevarria served as a Director of CSFB Mortgage Securities.
In that capacity, Ms. Echevarria signed five Shelf Registration Statements filed by CSFB Mortgage Securities and the amendments thereto. These Shelf Registration Statements are applicable to nineteen of the 43 Securitizations. 71. Defendant Michael A. Marriott served as Director of CSFB Mortgage Securities.
In that capacity, Mr. Marriott signed five Shelf Registration Statements filed by CSFB Mortgage Securities and the amendments thereto. These Shelf Registration Statements are applicable to nineteen of the 43 Securitizations. 72. Defendant Zev Kindler served as Treasurer of CSFB Mortgage Securities and
CSFB Mortgage Acceptance. In those capacities, Mr. Kindler signed one Shelf Registration Statement filed by CSFB Mortgage Securities and one Shelf Registration Statement filed by 30
CSFB Mortgage Acceptance and the amendments thereto. These Shelf Registration Statements are applicable to eight of the 43 Securitizations. 73. Defendant John P. Graham served as Vice President of CSFB Mortgage
Acceptance. In that capacity, Mr. Graham signed one Shelf Registration Statement filed by CSFB Mortgage Acceptance and the amendment thereto, applicable to three of the 43 Securitizations. 74. Defendant Thomas E. Siegler served as Director at CSFB Mortgage Acceptance.
In that capacity, Mr. Siegler signed one Shelf Registration Statement and the amendment thereto, applicable to three of the 43 Securitizations. 75. Defendant Thomas Zingalli served as Principal Accounting Officer and
Comptroller of CSFB Mortgage Securities and CSFB Mortgage Acceptance and also as Vice President and Controller for Asset Backed Securities. In those capacities, Mr. Zingalli signed five Shelf Registration Statements filed by CSFB Mortgage Securities, two filed by Asset Backed Securities, and one filed by CSFB Mortgage Acceptance and the amendments thereto. These Shelf Registration Statements are applicable to 32 of the 43 Securitizations. 76. Defendant Carlos Onis served as a Director of CSFB Mortgage Securities and
also as Vice President and Director of Asset Backed Securities. In those capacities, Mr. Onis signed one Shelf Registration Statement filed by CSFB Mortgage Securities and two Shelf Registration Statements filed by Asset Backed Securities and the amendments thereto. These Shelf Registration Statements are applicable to thirteen of the 43 Securitizations. 77. Defendant Steven L. Kantor served as a Director of CSFB Mortgage Acceptance.
In that capacity, Mr. Kantor signed one Shelf Registration Statement filed by CSFB Mortgage Acceptance and the amendment thereto, applicable to three of the 43 Securitizations.
31
78.
Defendant Joseph M. Donovan served as President and Director of Asset Backed
Securities. In that capacity, Mr. Donovan signed two Shelf Registration Statements filed by Asset Backed Securities and the amendments thereto, applicable to ten of the 43 Securitizations. 79. Defendant Juliana Johnson served as Director of Asset Backed Securities. In that
capacity, Ms. Johnson signed two Shelf Registration Statements filed by Asset Backed Securities and the amendments thereto, applicable to ten of the 43 Securitizations. 80. Defendant Greg Richter served as Vice President of Asset Backed Securities. In
that capacity, Mr. Richter signed two Shelf Registration Statements filed by Asset Backed Securities, and the amendments thereto, applicable to ten of the 43 Securitizations. B. 81. The Defendants Failure To Conduct Proper Due Diligence The Defendants failed to conduct adequate and sufficient due diligence to ensure
2005 through 2007Credit Suisses involvement in the mortgage-backed securitization market was rapidly expanding. The Defendants had enormous financial incentives to complete as many offerings as quickly as possible without regard to ensuring the accuracy or completeness of the Registration Statements, or conducting adequate and reasonable due diligence. For example, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance, as the depositors, were paid a percentage of the total dollar amount of the offerings upon completion of the Securitizations, and CS Securities, as the underwriter, was paid a commission based on the amount it received from the sale of the Certificates to the public. 83. The push to securitize large volumes of mortgage loans contributed to the absence
of controls needed to prevent the inclusion of untrue statements of material facts and omissions 32
of material facts in the Registration Statements. In particular, Defendants failed to conduct adequate diligence or otherwise to ensure the accuracy of the statements in the Registrations Statements pertaining to the Securitizations. 84. For instance, Credit Suisse retained third-parties, including Clayton Holdings, Inc.
(Clayton), to analyze the loans it was considering placing in its securitizations, but waived a significant number of loans into the Securitizations that these firms had recommended for exclusion, and did so without taking adequate steps to ensure that these loans had in fact been underwritten in accordance with applicable guidelines or had compensating factors that excused the loans non-compliance with those guidelines. On January 27, 2008, Clayton revealed that it had entered into an agreement with the New York Attorney General (the NYAG) to provide documents and testimony regarding its due diligence reports, including copies of the actual reports provided to its clients. According to The New York Times, as reported on January 27, 2008, Clayton told the NYAG that starting in 2005, it saw a significant deterioration of lending standards and a parallel jump in lending expectations and some investment banks directed Clayton to halve the sample of loans it evaluated in each portfolio. Just weeks after The New York Times reported on the shoddy lending standards of investment banks, on February 19, 2008, Credit Suisse announced write-downs of $2.8 billion in positions related to mortgage-backed securities and collateralized debt obligations. 85. Credit Suisse was negligent in allowing into the Securitizations a substantial
number of mortgage loans that, as reported to Credit Suisse by third-party due diligence firms, did not conform to the underwriting standards stated in the Registration Statements, including the Prospectuses and Prospectus Supplements. Even upon learning from the third-party due diligence firms that there were high percentages of defective or at least questionable loans in the
33
sample of loans reviewed by the third-party due diligence firms, Credit Suisse failed to take any additional steps to verify that the population of loans in the Securitizations did not include a similar percentage of defective and/or questionable loans. 86. Claytons trending reports revealed that in the period from the first quarter of
2006 to the second quarter of 2007, 32 percent of the mortgage loans Credit Suisse submitted to Clayton to review in residential mortgage-backed securities groups were rejected by Clayton as falling outside the applicable underwriting guidelines. Of the mortgage loans that Clayton found defective, one-third of the loans were subsequently waived in by Credit Suisse without proper consideration and analysis of compensating factors and included in securitizations such as the ones in which Fannie Mae and Freddie Mac invested here. See Clayton Trending Reports, available at http://fcic.law.stanford.edu/hearings/testimony/the-impact-of-the-financial-crisissacramento#documents. III. THE REGISTRATION STATEMENTS AND THE PROSPECTUS SUPPLEMENTS A. 87. Compliance With Underwriting Guidelines The Prospectus Supplements for each Securitization describe the mortgage loan
part of the Registration Statement for each Securitization, were material to a reasonable investors decision to purchase and invest in the Certificates because the failure to originate a mortgage loan in accordance with the applicable guidelines creates a higher risk of delinquency 34
statements with respect to the underwriting standards of the entities that originated the loans in the Securitizations. For example, the Prospectus Supplement for the HEAT 2007-1 Securitization, for which DLJ Mortgage Capital was the sponsor and CSFB Mortgage Securities was the depositor, stated that the mortgage loans were originated or acquired generally in accordance with the underwriting guidelines described in this prospectus. The underwriting guidelines referenced were those of Ownit, which originated 25.4 percent of the loans in the HEAT 2007-1 Securitization, as well as other originators who originated lesser percentages of the loans in the group, including EquiFirst Corporation (EquiFirst), Lime Financial Services Ltd., and AEGIS Mortgage Corporation. 90. The underwriting guidelines of Ownit, as described in the Prospectus Supplement,
in turn stated that they were designed to be used as a guide in determining the credit worthiness of the borrower and his/her ability to repay. 91. The Prospectus Supplement for the HEAT 2007-1 Securitization conditioned the
approval of any loan as an exception to the underwriting guidelines on the existence of compensating factors. It stated that: [e]xceptions to the guidelines were made if the loan met the primary criteria of the RightLoan [a proprietary loan product of Ownit] and offered supporting compensating factors when a deviation occurred. In all cases, the exception(s) and compensating factor(s) were clearly documented in the file . . . . 92. The Prospectus Supplement stated that in order to make this loan-by-loan
determination of the borrowers ability to repay, the underwriter must have collected and utilized
35
specified information, including the credit report, loan application, asset verifications, appraisal and other documents relevant to determining credit worthiness and risk. The guidelines required the originator to have analyzed the borrowers capacity, credit and collateral, where capacity meant a proven, historical cash flow, which would support the requested loan amount; credit was the borrowers willingness to repay his or her debts, as demonstrated primarily by the borrowers credit score; and collateral was the asset pledged by the borrower to the lender, as determined by an appraisal of the underlying property. The originator was required to conclude that the collateral was sufficient to secure the mortgage, in the event that the borrowers primary source of repayment, his or her cash flow, turned out to be insufficient. 93. The Prospectus and Prospectus Supplement for each of the Securitizations had
similar representations to those quoted above. The relevant representations in the Prospectus and Prospectus Supplement pertaining to originating entity underwriting standards for each Securitization are reflected in Appendix A to this Complaint. As discussed below at paragraphs 121 through 178, in fact, the originators of the mortgage loans in the Supporting Loan Group for the Securitizations did not adhere to their stated underwriting guidelines, thus rendering the description of those guidelines in the Prospectuses and Prospectus Supplements false and misleading. 94. Further, for most of the Securitizations, the Prospectuses and Prospectus
Supplements described additional representations and warranties concerning the mortgage loans backing the Securitizations. Such representations and warranties, which are described more fully for each Securitization in Appendix A, included: (i) the mortgage loans were underwritten in accordance with the originators underwriting guidelines in effect at the time of origination,
36
subject to only limited exceptions; and (ii) any and all requirements of any federal, state or local law applicable to the origination and servicing of the mortgage loans had been complied with. 95. The inclusion of these representations in the Prospectuses and Prospectus
Supplements had the purpose and effect of providing additional assurances to investors regarding the quality of the mortgage collateral underlying the Securitizations and the compliance of that collateral with the underwriting guidelines described in the Prospectuses and Prospectus Supplements. These representations were material to a reasonable investors decision to purchase the Certificates. B. 96. Statements Regarding Occupancy Status of Borrower The Prospectus Supplements contained collateral group-level information about
the occupancy status of the borrowers of the loans in the Securitizations. Occupancy status refers to whether the property securing a mortgage is to be the primary residence of the borrower, a second home, or an investment property. The Prospectus Supplements for each of the Securitizations presented this information in tabular form, usually in a table entitled Occupancy Status of the Mortgage Loans. This table divided all the loans in the collateral group by occupancy status, e.g., into the following categories: (i) Primary, or Owner Occupied; (ii) Second Home, or Secondary; and (iii) Investment or Non-Owner. For each category, the table stated the number of loans in that category. Occupancy statistics for the Supporting Loan Groups for each Securitization were reported in the Prospectus Supplements as follows:13
Each Prospectus Supplement provides the total number of loans and the number of loans in the following categories: owner occupied, second home, and investor. These numbers have been converted to percentages. 37
13
Table 4
Transaction Supporting Loan Group
Group 1 Group 2 ABSHE 2006-HE1 ABSHE 2006-HE2 ABSHE 2006-HE3 Group 1 Group 1 Group 1 Group 2 ABSHE 2006-HE4 ABSHE 2006-HE5 ABSHE 2006-HE6 ABSHE 2006-HE7 ABSHE 2007-HE1 ABSHE 2007-HE2 AHMA 2005-1 AMSI 2005-R8 AMSI 2005-R11 AMSI 2006-R2 ARMT 2005-10 ARMT 2005-11 ARMT 2005-12 ARMT 2006-1 CSFB 2005-11 Group 1 Group 2 Group 1 Group 1 Group 1 Group 1 Group 1 Group 3B Group 1 Group 1 Group 1 Group 4 Group 4 Group 4 Group 5 Group 2 Group 7 Group 2 CSFB 2005-12 Group 4 Group 5 CSMC 2006-1 CSMC 2007-NC1 FHLT 2005-E FMIC 2005-3 FMIC 2007-1 HEAT 2005-7 HEAT 2005-8 HEAT 2005-9 HEAT 2006-1 HEAT 2006-3 HEAT 2006-4 HEAT 2006-5 HEAT 2006-6 Group 5 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1

89.19 91.04 95.17 88.45 90.31 88.81 90.74 88.44 92.86 82.42 86.38 93.74 96.23 68.51 97.21 95.57 95.15 73.08 84.37 64.43 69.12 0.00 86.99 100.00 83.98 63.58 62.54 86.18 84.47 95.26 94.82 94.88 94.51 89.94 95.28 95.62 90.84 86.19 93.39
Second Home/ Secondary

2.96 1.85 0.75 4.03 1.60 2.05 3.91 3.10 1.55 1.50 0.74 2.70 0.26 3.32 0.61 0.82 0.42 3.93 7.60 8.03 4.41 7.59 1.49 0.00 2.51 3.20 3.78 4.69 1.07 0.00 0.00 0.72 0.57 1.06 0.58 0.60 1.01 1.02 0.54
Investor
ABSHE 2005-HE8
7.85 7.11 4.09 7.52 8.08 9.14 5.34 8.46 5.59 16.08 12.88 3.56 3.51 28.16 2.18 3.61 4.43 22.99 8.03 27.54 26.47 92.41 11.51 0.00 13.51 33.22 33.68 9.13 14.47 4.74 5.18 4.40 4.92 9.00 4.13 3.78 8.15 12.78 6.07
38
Transaction
HEAT 2006-7 HEAT 2006-8 HEAT 2007-1 HEAT 2007-2 HEAT 2007-3 HEMT 2006-6 INABS 2006-B INABS 2006-C INABS 2006-E NCHET 2006-1


94.12 94.75 94.01 91.67 94.01 100.00 88.09 90.60 90.70 85.31
Second Home/ Secondary

0.63 0.81 0.44 0.74 0.82 0.00 1.37 1.04 0.95 3.82
Investor
5.26 4.44 5.55 7.58 5.17 0.00 10.54 8.37 8.35 10.87
97.
reported that an overwhelming majority of the mortgage loans in the Supporting Loan Groups were owner occupied, while a small percentage were reported to be non-owner occupied (i.e., a second home or investor home).14 98. The statements about occupancy status were material to a reasonable investors
decision to invest in the Certificates. Information about occupancy status is an important factor in determining the credit risk associated with a mortgage loan and, therefore, the securitization that it collateralizes. Because borrowers who reside in mortgaged properties are less likely to default and are more likely to care for their primary residence than borrowers who purchase homes as second homes or investments and live elsewhere, the percentage of loans in the collateral group of a securitization that are secured by mortgage loans on owner-occupied residences is an important measure of the risk of the certificates sold in that securitization. 99. Other things being equal, the higher the percentage of loans not secured by
owner-occupied residences, the greater the risk of loss to the certificateholders. Even small differences in the percentages of primary/owner-occupied, second home/secondary, and The only exception is the mortgage loans in the Supporting Loan Group for tranche 2A1 of the CSFB 2005-11 Securitization, which contains 92.41 percent investor homes. 39
14
investment properties in the collateral group of a securitization can have a significant effect on the risk of each certificate sold in that securitization, and thus, are important to the decision of a reasonable investor whether to purchase any such certificate. As discussed below at paragraphs 111 to 114, the Registration Statement for each Securitization materially overstated the percentage of loans in the Supporting Loan Groups that were owner occupied, thereby misrepresenting the degree of risk of the GSE Certificates. C. 100. Statements Regarding Loan-to-Value Ratios The loan-to-value ratio of a mortgage loan, or LTV ratio, is the ratio of the
As used in this Complaint, LTV refers to the original loan-to-value ratio for first lien mortgages and for properties with second liens that are subordinate to the lien that was included in the securitization (i.e., only the securitized lien is included in the numerator of the LTV calculation). However, for second lien mortgages, where the securitized lien is junior to another loan, the more senior lien has been added to the securitized one to determine the numerator in the 40
15
Table 5
54.01 55.71 66.36 61.42 60.97 60.34 61.60 49.61 60.05 46.25 32.68 51.19 48.73 96.52 50.50 51.51 53.00 94.88 88.24 97.50 97.12 93.92 96.24 94.77 94.55 95.55 94.68 54.44 66.54 61.48 31.82 55.34 70.46 70.85 60.60
Transaction

Group 1
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
ABSHE 2005-HE8 ABSHE 2006-HE1 ABSHE 2006-HE2 ABSHE 2006-HE3
Group 2 Group 1 Group 1 Group 1 Group 2 Group 1
ABSHE 2006-HE4 ABSHE 2006-HE5 ABSHE 2006-HE6 ABSHE 2006-HE7 ABSHE 2007-HE1 ABSHE 2007-HE2 AHMA 2005-1 AMSI 2005-R8 AMSI 2005-R11 AMSI 2006-R2 ARMT 2005-10 ARMT 2005-11 ARMT 2005-12 ARMT 2006-1 CSFB 2005-11
Group 2 Group 1 Group 1 Group 1 Group 1 Group 1 Group 3B Group 1 Group 1 Group 1 Group 4 Group 4 Group 4 Group 5 Group 2 Group 7 Group 2
CSFB 2005-12
Group 4 Group 5
CSMC 2006-1 CSMC 2007-NC1 FHLT 2005-E FMIC 2005-3 FMIC 2007-1 HEAT 2005-7 HEAT 2005-8 HEAT 2005-9 HEAT 2006-1
Group 5 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1
LTV calculation (this latter calculation is sometimes referred to as the combined-loan-to-value ratio, or CLTV). 41
Transaction

Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 2 Group 1 Group 1
55.66 58.61 66.70 67.62 61.27 59.78 57.97 54.70 58.09 8.76 57.37 59.54 41.80 56.28
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
HEAT 2006-3 HEAT 2006-4 HEAT 2006-5 HEAT 2006-6 HEAT 2006-7 HEAT 2006-8 HEAT 2007-1 HEAT 2007-2 HEAT 2007-3 HEMT 2006-6 INABS 2006-B INABS 2006-C INABS 2006-E NCHET 2006-1
103.
As Table 5 makes clear, the Prospectus Supplement for nearly all of the
Securitizations reported that many or most of the mortgage loans in the Supporting Loan Groups had an LTV ratio of 80 percent or less,16 and the Prospectus Supplements for all of the Securitizations reported that zero mortgage loans in the Supporting Loan Group had an LTV ratio over 100 percent. 104. The LTV ratio is among the most important measures of the risk of a mortgage
loan, and thus, it is one of the most important indicators of the default risk of the mortgage loans underlying the Certificates. The lower the ratio, the less likely that a decline in the value of the property will wipe out an owners equity, and thereby give an owner an incentive to stop making mortgage payments and abandon the property. This ratio also predicts the severity of loss in the
The only exceptions are the ABSHE 2006-HE4 (Group 2), ABSHE 2006-HE6, ABSHE 2006-HE7, ABSHE 2007-HE2, FMIC 2007-1, HEMT 2006-6, and INABS 2006-E Securitizations, for which more than half of the mortgages were reported as having an LTV ratio greater than 80 percent and below 100 percent. 42
16
event of default. The lower the LTV, the greater the equity cushion, so the greater the likelihood that the proceeds of foreclosure will cover the unpaid balance of the mortgage loan. 105. Thus, LTV ratio is a material consideration to a reasonable investor in deciding
whether to purchase a certificate in a securitization of mortgage loans. Even small differences in the LTV ratios of the mortgage loans in the collateral group of a securitization have a significant effect on the likelihood that the collateral groups will generate sufficient funds to pay certificateholders in that securitization, and thus are material to the decision of a reasonable investor whether to purchase any such certificate. As discussed below at paragraphs 115 through 120, the Registration Statements for the Securitizations materially overstated the percentage of loans in the Supporting Loan Groups with an LTV ratio at or less than 80 percent, and materially understated the percentage of loans in the Supporting Loan Groups with an LTV ratio over 100 percent, thereby misrepresenting the degree of risk of the GSE Certificates.17 D. 106. Statements Regarding Credit Ratings Credit ratings are assigned to the tranches of mortgage-backed securitizations by
the credit rating agencies, including Moodys Investors Service, Standard & Poors, and Fitch Ratings. Each credit rating agency uses its own scale with letter designations to describe various levels of risk. In general, AAA or its equivalent ratings are at the top of the credit rating scale and are intended to designate the safest investments. C and D ratings are at the bottom of the scale and refer to investments that are currently in default and exhibit little or no prospect for recovery. At the time the GSEs purchased the GSE Certificates, investments with AAA or its equivalent ratings historically experienced a loss rate of less than .05 percent. Investments with
The lone exception is HEMT 2006-6, for which the Registration Statement understated the percentage of loans with an LTV ratio above 100 percent by 40 percent, but did not overstate the percentage of loans with an LTV ratio at or less than 80 percent. 43
17
a BBB rating, or its equivalent, historically experienced a loss rate of less than one percent. As a result, securities with credit ratings between AAA or its equivalent through BBB- or its equivalent were generally referred to as investment grade. 107. Rating agencies determine the credit rating for each tranche of a mortgage-backed
securitization by comparing the likelihood of contractual principal and interest repayment to the credit enhancements available to protect investors. Rating agencies determine the likelihood of repayment by estimating cashflows based on the quality of the underlying mortgages by using sponsor provided loan level data. Credit enhancements, such as subordination, represent the amount of cushion or protection from loss incorporated into a given securitization.18 This cushion is intended to improve the likelihood that holders of highly rated certificates receive the interest and principal to which they are contractually entitled. The level of credit enhancement offered is based on the make-up of the loans in the underlying collateral group and entire securitization. Riskier loans underlying the securitization necessitate higher levels of credit enhancement to insure payment to senior certificate holders. If the collateral within the deal is of a higher quality, then rating agencies require less credit enhancement for AAA or its equivalent rating. 108. Credit ratings have been an important tool to gauge risk when making investment
decisions. For almost a hundred years, investors like pension funds, municipalities, insurance companies, and university endowments have relied heavily on credit ratings to assist them in distinguishing between safe and risky investments. Fannie Mae and Freddie Macs respective
18
internal policies limited their purchases of private label residential mortgage-backed securities to those rated AAA (or its equivalent), and in very limited instances, AA of A bonds (or its equivalent). 109. Each tranche of the Securitizations received a credit rating upon issuance, which
purported to describe the riskiness of that tranche. The Defendants reported the credit ratings for each tranche in the Prospectus Supplements. The credit rating provided for each of the GSE Certificates was investment grade, almost always AAA or its equivalent. The accuracy of these ratings was material to a reasonable investors decision to purchase the GSE Certificates. As set forth in Table 9, at paragraph 174 below, the ratings for the Securitizations were inflated as a result of Defendants provision of incorrect data concerning the attributes of the underlying mortgage collateral to the ratings agencies, and, as a result, Defendants sold and marketed the GSE Certificates as AAA (or its equivalent) when, in fact, they were not. IV. FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS A. 110. The Statistical Data Provided in the Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False A review of loan-level data was conducted in order to assess whether the
statistical information provided in the Prospectus Supplements was true and accurate. For each Securitization, the sample consisted of 1,000 randomly selected loans per Supporting Loan Group, or all of the loans in the group if there were fewer than 1,000 loans in the Supporting Loan Group. The sample data confirms, on a statistically-significant basis, material misrepresentations of underwriting standards and of certain key characteristics of the mortgage loans across the Securitizations. The data review demonstrates that the data concerning owner occupancy and LTV ratios was materially false and misleading.
45
1. 111.
Owner Occupancy Data Was Materially False
claimed, a number of tests were conducted, including, inter alia, whether, months after the loan closed, the borrowers tax bill was being mailed to the property or to a different address; whether the borrower had claimed a tax exemption on the property; and whether the mailing address of the property was reflected in the borrowers credit reports, tax records, or lien records. Failing two or more of these tests is a strong indication that the borrower did not live at the mortgaged property and instead used it as a second home or an investment property, both of which make it much more likely that a borrower will not repay the loan. 113. A significant number of the loans failed two or more of these tests, indicating that
the owner occupancy statistics provided to Certificateholders, like Fannie Mae and Freddie Mac, were materially false and misleading. For example, for the HEAT 2007-1 Securitization, which was sponsored by DLJ Mortgage Capital and underwritten by CS Securities, the Prospectus Supplement stated that 5.99 percent of the underlying properties by loan count in the Supporting Loan Group were not owner-occupied. But the data review revealed that, for 13.54 percent of the properties represented as owner-occupied, the owners lived elsewhere, indicating that the true percentage of non-owner occupied properties was 18.72 percent, more than triple the percentage reported in the Prospectus Supplement.19
19
This conclusion is arrived at by summing: (a) the stated non-owner-occupied percentage in the Prospectus Supplement (here, 5.99 percent) and (b) the product of (i) the stated 46
114.
misrepresented the percentage of non-owner occupied properties. (The sole exception is CSFB 2005-11(Group 2), which involved a loan group described in the Prospectus Supplement as constituted of 100 percent non-owner occupied properties.) The true percentage of non-owner occupied properties, as determined by the data review, versus the percentage stated in the Prospectus Supplement for each Securitization is reflected in Table 6 below. Table 6 demonstrates that the Prospectus Supplements for each Securitization, with the sole exception of CSFB 2005-11(Group 2), understated the percentage of non-owner occupied properties by at least 4.85 percent, and for more than half of the Supporting Loan Groups by 10 percent or more. Table 6
10.81 8.96 4.83 11.55 9.69 11.19 9.26 11.56 7.14 17.58 13.62 6.26 3.77 31.49 2.79 4.43 4.85
Transaction

Group 1 Group 2 Group 1 Group 1 Group 1 Group 2 Group 1 Group 2 Group 1 Group 1 Group 1 Group 1 Group 1 Group 3B Group 1 Group 1 Group 1

10.57 11.24 10.47 13.55 9.35 9.48 11.80 10.29 11.15 10.97 11.52 9.72 10.90 17.55 9.99 9.42 9.32
Actual Percentage of Non-Owner Occupied Properties

20.23 19.20 14.79 23.53 18.13 19.61 19.96 20.66 17.50 26.62 23.57 15.38 14.25 43.51 12.50 13.42 13.72

9.42 10.24 9.96 11.98 8.44 8.42 10.70 9.10 10.36 9.04 9.95 9.12 10.49 12.02 9.71 9.00 8.87
ABSHE 2005-HE8 ABSHE 2006-HE1 ABSHE 2006-HE2 ABSHE 2006-HE3 ABSHE 2006-HE4 ABSHE 2006-HE5 ABSHE 2006-HE6 ABSHE 2006-HE7 ABSHE 2007-HE1 ABSHE 2007-HE2 AHMA 2005-1 AMSI 2005-R8 AMSI 2005-R11 AMSI 2006-R2
owner-occupied percentage (here, 94.01 percent) and (ii) the percentage of the properties represented as owner-occupied in the sample that showed strong indications that their owners in fact lived elsewhere (here, 13.54 percent). As described more fully in paragraph 112, failing two or more tests of owneroccupancy is a strong indication that the borrower did not live at the mortgaged property and instead used it as a second home or an investment property. 47
20
Transaction

Group 4 Group 4 Group 4 Group 5 Group 2 Group 7 Group 2 Group 4 Group 5 Group 5 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 2 Group 1 Group 1

26.92 15.63 35.57 30.88 100 13.01 0.00 16.02 36.42 37.46 13.82 15.53 4.74 5.18 5.12 5.49 10.06 4.72 4.38 9.16 13.81 6.61 5.88 5.25 5.99 8.33 5.99 0.00 11.91 9.40 9.30 14.69

16.77 17.27 12.50 15.27 0.00 16.47 17.46 11.06 16.97 17.92 9.62 14.99 12.77 11.00 11.26 10.40 11.62 10.75 11.89 11.71 9.28 11.41 13.85 10.98 13.54 11.81 10.26 4.85 14.27 10.50 12.07 12.90

39.17 30.20 43.63 41.44 100.00 27.33 17.46 25.31 47.21 48.67 22.11 28.20 16.90 15.61 15.80 15.32 20.51 14.96 15.74 19.80 21.80 17.26 18.92 15.65 18.72 19.15 15.63 4.85 24.48 18.92 20.25 25.69

12.25 14.57 8.06 10.56 0.00 14.33 17.46 9.29 10.79 11.21 8.29 12.66 12.16 10.43 10.68 9.83 10.45 10.24 11.37 10.64 8.00 10.65 13.04 10.40 12.73 10.82 9.65 4.85 12.57 9.52 10.95 11.00
ARMT 2005-10 ARMT 2005-11 ARMT 2005-12 ARMT 2006-1 CSFB 2005-11 CSFB 2005-12 CSMC 2006-1 CSMC 2007-NC1 FHLT 2005-E FMIC 2005-3 FMIC 2007-1 HEAT 2005-7 HEAT 2005-8 HEAT 2005-9 HEAT 2006-1 HEAT 2006-3 HEAT 2006-4 HEAT 2006-5 HEAT 2006-6 HEAT 2006-7 HEAT 2006-8 HEAT 2007-1 HEAT 2007-2 HEAT 2007-3 HEMT 2006-6 INABS 2006-B INABS 2006-C INABS 2006-E NCHET 2006-1
2. 115.
Prospectus Supplements were materially false and understated, as more specifically set out below. For each of the sampled loans, an industry standard automated valuation model (AVM) was used to calculate the value of the underlying property at the time the mortgage loan was originated. AVMs are routinely used in the industry as a way of valuing properties during prequalification, origination, portfolio review and servicing. AVMs rely upon similar data as appraisersprimarily county assessor records, tax rolls, and data on comparable 48
properties. AVMs produce independent, statistically-derived valuation estimates by applying modeling techniques to this data. 116. Applying the AVM to the available data for the properties securing the sampled
loans shows that the appraised value given to such properties was significantly higher than the actual value of such properties. The result of this overstatement of property values is a material understatement of LTV ratio. That is, if a propertys true value is significantly less than the value used in the loan underwriting, then the loan represents a significantly higher percentage of the propertys value. This, of course, increases the risk a borrower will not repay the loan and the risk of greater losses in the event of a default. As stated in the Prospectus Supplement for ABS 2005-HE8: Mortgage loans with high loan-to-value ratios may present a greater risk of loss than mortgage loans with lower loan-to-value ratios. 117. For example, for the HEAT 2007-1 Securitization, which was sponsored by DLJ
Mortgage Capital and underwritten by CS Securities, the Prospectus Supplement stated that no loans in the Supporting Loan Group had LTV ratios above 100 percent. In fact, 19.21 percent of the sample of loans included in the data review, based on total principal balance, had LTV ratios above 100 percent. In addition, the Prospectus Supplement stated that 57.97 percent of the loans had LTV ratios at or below 80 percent. The data review indicated that only 36.90 percent of the loans had LTV ratios at or below 80 percent. 118. The data review revealed that for each Securitization, the Prospectus Supplement
misrepresented the percentage of loans with an LTV ratio that were above 100 percent, as well the percentage of loans that had an LTV ratio at or below 80 percent. Table 7 reflects: (i) the true percentage of mortgages in the Supporting Loan Group with LTV ratios above 100 percent, versus the percentage reported in the Prospectus Supplement; and (ii) the true percentage of
49
mortgages in the Supporting Loan Group with LTV ratios at or below 80 percent, versus the percentage reported in the Prospectus Supplement. The percentages listed in Table 7 were calculated by aggregated principal balance. Table 7
54.01 55.71 66.36 61.42 60.97 60.34 61.60 49.61 60.05 46.25 32.68 51.19 48.73 96.52 50.50 51.51 53.00 94.88 88.24 97.50 97.12 93.92 96.24 94.77 94.55 95.55 94.68 54.44 66.54 61.48 31.82 55.34 70.46 70.85 60.60 55.66 58.61 66.70 67.62
Transaction
40.83 44.62 43.77 36.41 44.98 42.76 42.70 33.40 43.07 32.45 22.96 34.42 29.13 76.11 42.03 41.26 41.38 59.67 51.62 54.97 55.66 76.05 67.22 51.91 59.38 84.04 66.47 30.49 41.75 38.30 24.75 40.64 40.11 47.81 45.65 37.65 42.88 40.53 44.13

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
16.14 12.71 14.43 17.49 17.45 15.39 16.53 17.85 13.72 20.71 27.03 21.22 30.33 3.36 13.61 14.05 16.19 7.48 8.14 7.16 7.45 4.15 6.68 10.20 5.58 2.25 5.44 20.02 16.16 12.10 19.39 11.83 13.77 12.46 13.23 16.27 15.09 16.47 14.22
ABSHE 2005-HE8 ABSHE 2006-HE1 ABSHE 2006-HE2 ABSHE 2006-HE3 ABSHE 2006-HE4 ABSHE 2006-HE5 ABSHE 2006-HE6 ABSHE 2006-HE7 ABSHE 2007-HE1 ABSHE 2007-HE2 AHMA 2005-1 AMSI 2005-R8 AMSI 2005-R11 AMSI 2006-R2 ARMT 2005-10 ARMT 2005-11 ARMT 2005-12 ARMT 2006-1 CSFB 2005-11
CSFB 2005-12 CSMC 2006-1 CSMC 2007-NC1 FHLT 2005-E FMIC 2005-3 FMIC 2007-1 HEAT 2005-7 HEAT 2005-8 HEAT 2005-9 HEAT 2006-1 HEAT 2006-3 HEAT 2006-4 HEAT 2006-5 HEAT 2006-6
Group 1 Group 2 Group 1 Group 1 Group 1 Group 2 Group 1 Group 2 Group 1 Group 1 Group 1 Group 1 Group 1 Group 3B Group 1 Group 1 Group 1 Group 4 Group 4 Group 4 Group 5 Group 2 Group 7 Group 2 Group 4 Group 5 Group 5 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1
50
61.27 59.78 57.97 54.70 58.09 8.76 57.37 59.54 41.80 56.28
Transaction
38.89 36.53 36.90 30.94 34.09 9.06 39.83 45.35 21.78 43.04

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
16.82 17.78 19.21 26.79 20.48 40.52 14.47 13.90 25.06 14.87
HEAT 2006-7 HEAT 2006-8 HEAT 2007-1 HEAT 2007-2 HEAT 2007-3 HEMT 2006-6 INABS 2006-B INABS 2006-C INABS 2006-E NCHET 2006-1
119.
Securitizations reported that none of the mortgage loans in the Supporting Loan Groups had an LTV ratio over 100 percent. In contrast, the data review revealed that at least 2.25 percent of the mortgage loans for each Securitization had an LTV ratio over 100 percent, and for most Securitizations this figure was much larger. Indeed, for 39 of the Supporting Loan Groups, the data review revealed that more than 10 percent of the mortgages in the Supporting Loan Group had a true LTV ratio over 100 percent. For nine of the Supporting Loan Groups, the data review revealed that more than 20 percent of the mortgages in the Supporting Loan Group had a true LTV ratio over 100 percent. For one Supporting Loan Group, HEMT 2006-6 (Group 1), the data review revealed that more than 40 percent of the mortgages in the Supporting Loan Group had a true LTV ratio over 100 percent. 120. These inaccuracies with respect to reported LTV ratios also indicate that the
representations in the Registration Statements relating to appraisal practices were false, and that the appraisers themselves, in many instances, furnished appraisals that they understood were inaccurate and that they knew bore no reasonable relationship to the actual value of the underlying properties. Indeed, independent appraisers following proper practices, and providing 51
genuine estimates as to valuation, would not systematically generate appraisals that deviate so significantly (and so consistently upward) from the true values of the appraised properties. This conclusion is further confirmed by the findings of the Financial Crisis Inquiry Commission (the FCIC), which identified inflated appraisals as a pervasive problem during the period of the Securitizations, and determined through its investigation that appraisers were often pressured by mortgage originators, among others, to produce inflated results. See Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (2011) (the FCIC Report). B. 121. The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines The Registration Statements contained material misstatements and omissions
regarding compliance with underwriting guidelines. Indeed, the originators for the loans underlying the Securitizations systematically disregarded their respective underwriting guidelines in order to increase production and profits derived from their mortgage lending businesses. This is confirmed by the systematically misreported owner occupancy and LTV statistics, discussed above, and by: (1) a forensic review of nearly 2,000 loan files in the underlying loan groups of the HEAT 2007-1 and HEAT 2007-2 Securitizations; (2) government and other investigations into the originators underwriting practices, which revealed widespread abandonment of originators reported underwriting guidelines during the relevant period; (3) findings from the FCIC and others that Credit Suisse routinely included in securitizations loans that did not meet underwriting standards; (4) investigations by other plaintiffs who have sued Defendants for making misrepresentations in connection with other, similar securitizations that mortgage loans were originated in compliance with underwriting guidelines; (5) the collapse of
52
the Certificates credit ratings; and (6) the surge in delinquency and default in the mortgages in the Securitizations. 1. 122. A Forensic Review of Loan Files Has Revealed Pervasive Failure to Adhere to Underwriting Guidelines
A forensic review of 453 loans from the HEAT 2007-1 Securitization and 1,489
loans from the HEAT 2007-2 Securitization, for which DLJ Mortgage Capital served as the sponsor, CSFB Mortgage Securities as the depositor, and CS Securities as lead underwriter, has revealed that approximately 67 percent and 73 percent of the reviewed loans, respectively, were not underwritten in accordance with the underwriting guidelines. The forensic review consisted of an analysis of the loan file for each loan, including the documents submitted by the individual borrowers in support of their loan applications, as well as an analysis of information extrinsic to each loan file, such as the borrowers filings in bankruptcy proceedings or the borrowers motor vehicle registration or other documentation with pertinent information indicating a borrowers assets or residence. 123. The mortgage loans in the HEAT 2007-1 and HEAT 2007-2 Securitizations were
originated by Ownit, EquiFirst, Lime Financial Services, ResMAE Mortgage Corp. (ResMAE), among others. The Prospectus Supplements for the HEAT 2007-1 and HEAT 2007-2 Securitizations stated that the mortgage loans underlying the Securitizations were originated generally in accordance with the originators underwriting guidelines. The results of the forensic review demonstrate, however, that the disclosures in the Registration Statements, stating that the mortgage loans were underwritten in accordance with the guidelines described in the Prospectus Supplements, were materially false. 124. The Prospectus Supplements for HEAT 2007-1 and HEAT 2007-2 Securitizations
stated that the originators underwriting guidelines were primarily intended to assess the 53
likelihood that a borrower would be able to repay the loan based on an analysis of the applicants source of income and cash flow, a review of the applicants credit history and the asset or property pledged. Thus, the underwriting guidelines that were breached were designed to assess the likelihood a borrower would be able to repay the loan. The forensic review revealed breaches including the following types: failure to test the reasonableness of the borrowers stated income contributing to material misrepresentations of income; failure to investigate properly the borrowers intention to occupy the subject properties when red flags surfaced in the origination process that should have alerted the underwriter that the property was not intended as a primary residence; failure to calculate properly the borrowers outstanding debt causing the debt-toincome ratio (DTI) to exceed the maximum allowed under the underwriting guidelines; and failure to investigate properly red flags on the borrowers credit reports that should have alerted the underwriter to potential misrepresentations of outstanding debt. The results of the forensic review demonstrate that the disclosures in the
125.
Registration Statements, stating the mortgage loans were underwritten in accordance with applicable underwriting guidelines described in the Prospectus Supplements, were materially false. Moreover, although the Prospectus Supplements state that there may be compensating factors to warrant an exception to the applicable guidelines on a case-by-case basis, none of the loan files reflecting a breach of underwriting guidelines evidenced sufficient compensating factors to justify or support such an exception. In any event, breach rates of 67 percent and 73 percent for each of two Securitizations, respectively, could not possibly be explained by the proper application of any such exceptions. 126. The below examples from the forensic review of the HEAT 2007-1 and HEAT
2007-2 Securitizations illustrate the types of breaches discussed above that pervade the loan 54
groups for the Securitizations. These are examples of violations of the underwriting guidelines and are not a complete list of all the findings. (a) 127. Stated Income Was Not Reasonable
It is standard in the industry for underwriting guidelines to require a verification
of employment or reasonableness of stated income in the loan application. For example, as stated in the Prospectus Supplement for the HEAT 2007-1 and HEAT 2007-2 Securitizations, EquiFirsts underwriting guidelines require underwriters [to] verify the income of each applicant and in the case of stated income loans to determine that the income stated [is] reasonable and customary for the applicants line of work. The Prospectus Supplement for the HEAT 2007-2 Securitization stated that ResMAEs underwriting guidelines required that, [u]nder all programs, the income stated must be reasonable and customary for the applicants line of work. The originator Ownit, according to the Prospectus Supplement for the HEAT 2007-1 Securitization, required verification of employment for all loan programs. 128. The following examples from the forensic review of the HEAT 2007-1 and HEAT
2007-2 Securitizations reveal instances where there was no evidence that the underwriter of the mortgages tested the reasonableness of the borrowers stated income for the employment listed on the application as required by the recognized industry standard guidelines. Additionally, the forensic review verified the borrower actually misrepresented his or her income on the loan application. This misrepresentation resulted in a miscalculation of the borrowers DTI. Had the loan underwriter performed a reasonableness test as required by the recognized industry standard guidelines, the unreasonableness of the borrowers stated income would have been evident. A loan that closed in December 2006, in the principal amount of $366,300, was originated as a stated income loan. The final loan application stated that the borrower was employed as an estimating manager for an auto repair business and earned $7,840 monthly. The initial loan application, however, specified the borrowers monthly income to be $5,000. The borrowers 2006 W-2 Form 55
provided after closing verified that the borrower actually earned $49,452 per year, or $4,120 per month. The DTI at that salary would have been 90.56%, rather than 47.04%, and would have exceeded the guideline maximum of 50%. The loan defaulted, and the property was liquidated in a foreclosure sale, resulting in a loss of $207,209, which is over 56% of the original loan amount. A loan that closed in September 2006, in the principal amount of $303,600, was originated as a stated income loan. The application stated that the borrower was making $7,900 per month as a fork lift driver in California. According to Payscale.com, the average monthly salary at the 75th percentile for this same position in the same geographic region was $2,905. In addition, the borrower submitted 2006 income tax documents after closing that established his monthly income to be $3,172. A recalculation of DTI based on monthly verified income of $3,172 yields a DTI of 125.08%, which grossly exceeds the guideline maximum of 50%. The loan defaulted, and the property was liquidated in a foreclosure sale, resulting in a loss of $113,849, which is over 37% of the original loan amount. A loan that closed in January 2007, in the principal amount of $348,000, was approved as a stated income loan. As reported in the loan application, the borrower was employed as a restaurant manager for eight years earning $7,955 per month. The file contained no evidence that the underwriter assessed the reasonableness of the stated income. Salary.com reported the monthly salary at the 75th percentile for this position in the same geographic region as $5,395. The borrowers recalculated DTI using the more reasonable income is 73.53%, instead of 48.89%, and exceeds the guideline maximum of 50%. The loan defaulted, and the property was liquidated in a foreclosure sale, resulting in a loss of $346,637, which is over 99% of the original loan amount. A loan that closed in October 2006, in the principal amount of $175,900, was approved as a stated income loan. The borrower stated on her loan application that she was a cashier with monthly income of $3,500. Research conducted through CBSalary.com revealed the average monthly salary at the 75th percentile for a cashier in the same geographic region as the borrower was $2,060. The borrower subsequently declared bankruptcy and in her bankruptcy filings stated that her monthly income in 2006 was $2,278. A recalculation of DTI based on the borrowers true income yields an increase in the DTI from 46.06% to 70.75%, which exceeds the guideline maximum of 50%. The loan defaulted, and the property was liquidated in a foreclosure sale, resulting in a loss of $118,733, which is over 67% of the original loan amount. The results of the forensic review demonstrate that the statements in the
129.
Registration Statements concerning the reasonableness of the borrowers stated income were
56
materially false and misleading. In particular, a significant number of mortgage loans were made on the basis of stated incomes that were patently unreasonable. (b) 130. Evidence of Occupancy Misrepresentations
The following examples from the forensic review are instances where the loan
underwriters did not adequately question the borrowers intended occupancy of the subject property. Although the Prospectus Supplements for the HEAT 2007-1 and HEAT 2007-2 Securitizations reported that 94.01 percent and 91.67 percent, respectively, of the loans in the Supporting Loan Group were for owner-occupied properties, a significant number of the loan files that were reviewed indicated facts or circumstances that would have put a reasonable loan underwriter on notice of potential occupancy misrepresentations. The lack of compliance with the underwriting process in this regard materially increased the credit risk of the loan and the portfolio as investment and second home properties generally have a higher rate of default and higher loss severities than an owner-occupied primary residence. A loan that closed in December 2006 as a cash-out refinance, in the principal amount of $385,000, was originated under a full documentation loan program. The property was represented to be owner occupied. However, income and asset documentation, including paystubs, W-2 forms, and rental income reflect an address other than the subject property as the current address. The origination credit report also associated the borrower to a property other than the subject property. The borrower provided an electric bill prior to closing to support occupancy; however, the electric usage was a minimal bill and did not support occupancy. No evidence in the file indicates that the underwriting process addressed these inconsistencies. The loan defaulted, and the property is in the process of being liquidated in foreclosure proceedings. A loan that closed in August 2006, in the principal amount of $71,600, was originated under a no ratio loan program. The property was represented to be owner occupied. The subject property was located in Jacksonville, FL; however, at the time of origination, the loan file contained bank statements, a payoff letter from the previous mortgage holder, and the Articles of Incorporation for the borrowers business, all of which indicated the borrowers mailing address was in Coral Springs, FL. No evidence in the file indicates that the underwriter addressed these inconsistencies. The loan defaulted and the property was liquidated in a foreclosure sale, resulting in a loss of $70,912, which is 99% of the original loan amount. 57
A loan that closed in December 2006, in the principal amount of $220,000, was originated as a full documentation income loan. The property was represented to be owner occupied. However, the hazard insurance binder in the loan file reflected rental loss coverage, a red flag that the property was instead an investment property. Utility records obtained through Accurint associated the borrowers to another address from April 1997 to January 2011. The loan defaulted, and the property was liquidated in a foreclosure sale, resulting in a loss of $184,033, which is over 83% of the original loan amount. The results of the forensic review demonstrate that the statements in the
131.
Registration Statements concerning the borrowers occupancy status were materially false. In particular, the Prospectus Supplements materially understated the proportion of loans secured by non-owner occupied properties. (c) 132. Debts Incorrectly Calculated
Failure to incorporate all of a borrowers monthly obligations precludes the lender
from properly evaluating the borrowers ability to repay the loan. The HEAT 2007-1 Prospectus Supplement specified that originator Ownit applied maximum DTI ratios of 45% or 50% depending on credit score, LTV, documentation type and if the borrower was a first time home buyer. The same Ownit guidelines set forth that the DTI limit could be increased, but in no event to greater than 55 percent, where the borrower met a minimum disposable income requirement. 133. The following are examples of instances in which it was confirmed through the
forensic review that the underwriting process failed to incorporate all of the borrowers debt. When properly calculated, the borrowers actual DTI ratio exceeded the 55 percent limit stated in the Prospectus Supplements. The failure to properly calculate debt led to material misstatements regarding the credit risk of the securitized loans: A loan that closed in July 2006, in the principal amount of $244,500, was originated under a full documentation loan program. The origination credit report dated July 5, 2006 revealed a first mortgage in the amount of $165,600 and a second mortgage of $41,400, neither of which had been taken into account in calculating the borrowers 58
DTI. An Accurint search confirmed that the borrower purchased the property on May 26, 2006, prior to the closing of the subject loan. Recalculating the borrowers DTI based on the undisclosed monthly payments of $1,505 increases the DTI from 49.30% to 70.83%, a figure that exceeds the 55% guideline maximum. The loan defaulted and the property was liquidated in a foreclosure sale, resulting in a loss of $228,088.79, which is over 93% of the original loan amount. A loan that closed in December 2006, in the principal amount of $102,600 was originated under a full documentation loan program. Per public records, there was an undisclosed mortgage on the subject property opened on September 30, 2006 in the amount of $207,000, with a monthly payment of $2,043. Also, according to the origination credit report, on October 6, 2006, the borrower purchased a commercial property in the amount of $89,425 with a monthly payment of $1,013 that had not been included in the initial DTI calculation. A recalculation of DTI resulted in an increase from 53.29% to 74.43%, which exceeds the guideline maximum of 55%. The loan defaulted, and the property was liquidated in a foreclosure sale, resulting in a loss of $56,062, which is over 54% of the original loan amount. (d) 134. Credit Inquiries That Indicated Misrepresentation of Debt
It is a standard underwriting requirement that where several recent credit inquiries
are listed on the credit report obtained by the loan underwriter as part of evaluating the loan application, the underwriter should confirm that the inquiries were not the result of additional undisclosed debt. The following are examples of some of the instances where the borrowers credit reports indicated numerous credit inquiries that should have put the loan underwriters on notice for potential misrepresentations of debt obligations to be included in the borrowers DTI. In each case, there was no evidence in the origination loan file that the loan underwriter researched these credit inquiries or took any action to verify that such inquiries were not indicative of undisclosed liabilities of the borrower. A loan that closed in November 2006, in the principal amount of $84,000, was originated under a full documentation loan program. There was no evidence in the file that the originator requested or obtained an explanation from the borrower for the eight inquiries the borrower made from September 11, 2006 through November 7, 2006. A search of public records revealed three undisclosed mortgages securing two properties and obtained in the month prior to the subject transaction. On October 12, 2006, an unidentified lender closed a loan for the borrower in the amount of $71,250.00. In addition, on October 27, 2006, the borrower obtained two mortgages totaling $173,000. The recalculated DTI is 59
79.02%, instead of 40.85%, and exceeds the guideline maximum of 50%. The loan defaulted, and the property was liquidated in a foreclosure sale, resulting in a loss of $82,466.62, which is over 98% of the original loan amount. A loan that closed in December 2006, in the principal amount of $35,440, was originated under a full documentation loan program. There was no evidence in the file that the originator requested or obtained an explanation from the borrowers for the thirteen inquiries from November 7, 2006 through December 27, 2006 that were listed on the origination credit reports dated December 27, 2006. A review of the servicers credit report revealed that an undisclosed property was purchased on the same date as the subject closing, December 28, 2006. The recalculated DTI is 57.32%, instead of 42.67%, and exceeds the guideline maximum of 50%. The loan defaulted, and the property was liquidated in a foreclosure sale, resulting in a loss of $35,146, which is over 99% of the original loan amount. A loan that closed in November 2006, in the principal amount of $252,000, was originated as a stated income loan. There was no evidence in the file that the underwriter requested or obtained an explanation from the borrower for the four inquiries, dated from September 6, 2006 through October 11, 2006, listed on the origination credit report dated October 11, 2006. Had this red flag been investigated, the underwriter would have discovered that the borrower financed the purchase of another property on August 7, 2006 with a $178,200 first mortgage and a $44,600 second mortgage. The recalculated DTI is 148.73%, not 35.21%, and exceeds the guideline maximum of 50%. The loan defaulted, and the property was liquidated in a foreclosure sale, resulting in a loss of $223,901, which is over 88% of the original loan amount. Had the loan underwriting for each of these loans been conducted properly, as
135.
well as for the other loans in the Supporting Loan Group with these same fatal flaws, the credit inquiries would have been identified and the undisclosed liabilities would have been discovered. In each example, moreover, a recalculation of DTI based on the borrowers undisclosed debt yielded a DTI that exceeded the applicable underwriting guideline maximum. Failure to investigate these issues prevented the loan underwriting process from appropriately qualifying the loan and evaluating the borrowers ability to repay.
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2.
Government Investigations and Other Evidence Have Confirmed That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines
136.
The abandonment of underwriting guidelines is further confirmed by government
and other reporting that have described rampant underwriting failures throughout the period of the Securitizations and, more specifically, underwriting failures by the very originators whose loans were included by the Defendants in the Securitizations. 137. For instance, in November 2008, the Office of the Comptroller of the Currency
(OCC), an office within the United States Department of the Treasury, issued a report identifying the Worst Ten mortgage originators in the Worst Ten metropolitan areas. See OCC Press Release, Worst Ten in the Worst Ten, Nov. 13, 2008. The worst originators were defined as those with the largest number of non-prime mortgage foreclosures for 2005-2007 originations. The following entities that originated loans underlying the Securitizations, according to information made available in the Prospectus Supplements, are all on the Worst Ten list in at least one of the metropolitan areas identified in the report: Table 8 Originator Securitizations for which loans were originated21 ABSHE 2006-HE1 ABSHE 2007-HE1 HEAT 2006-4 HEAT 2007-1 CSMC 2006-1 AHMA 2005-1 ABSHE 2006-HE6 ABSHE 2006-HE7 ABSHE 2007-HE2 AMSI 2005-R8 AMSI 2005-R11 AMSI 2006-R2
Aegis Mortgage Corp.
American Home Mortgage
Ameriquest Mortgage Company
21
Some Securitizations had more than one originator. 61
Originator Argent Mortgage Company LLC Countrywide Home Loans, Inc. Decision One Mortgage Company, LLC Fieldstone Mortgage Company Fremont Investment and Loan IndyMac Bank F.S.B.
New Century Mortgage Corp.
Option One Mortgage Corp.
Ownit Mortgage Solutions, Inc.
Peoples Choice Financial Corp. ResMAE Mortgage Corp. Wells Fargo Bank, N.A.
Securitizations for which loans were originated21 ABSHE 2006-HE6 ABSHE 2006-HE7 ABSHE 2007-HE2 ARMT 2006-1 HEAT 2006-3 HEAT 2006-6 HEAT 2006-8 HEAT 2007-3 FMIC 2005-3 FMIC 2007-1 FHLT 2005-E INABS 2006-B INABS 2006-C INABS 2006-E ABSHE 2005-HE8 ABSHE 2006-HE2 ABSHE 2006-HE4 CSMC 2007-NC1 NCHET 2006-1 ABSHE 2006-HE3 ABSHE 2006-HE5 HEAT 2006-5 HEAT 2006-6 HEAT 2006-7 HEAT 2006-8 HEAT 2007-1 ABSHE 2007-HE1 HEAT 2007-2 CSMC 2006-1 HEAT 2006-3 HEAT 2006-4
138.
As far as can be discerned from the Prospectus Supplements, four prominent
originators of loans in the Loan Groups supporting the Certificates are Ownit, New Century, Option One, and Wells Fargo.22 139. Ownit, which originated loans for at least five of the Securitizations, was a
mortgage lender based in Agoura Hills, California. In September 2005, the investment bank The Prospectus Supplements do not often identify all of the originators of the mortgage loans in the groups, or even the most significant originators. 62
22
Merrill Lynch & Co. (Merrill Lynch) acquired a 20 percent stake in the company. According to Ownits founder and chief executive, William D. Dallas, after Merrill Lynch acquired that stake, it instructed Ownit to loosen underwriting standards and originate more stated income loans. Andrews, Edmund L., Busted: Life Inside the Great Mortgage Meltdown, W.W. Norton & Company, New York: 2009, at 158. As a result, the number of stated income loans jumped from near zero to over 30 percent. Id. at 155, 162. Ownit also lowered the credit scores it required from borrowers. Id. at 162. Ownit thus abandoned its underwriting standards in order to originate more loans. 140. New Century originated all of the loans for at least another five Securitizations.
As stated in the Prospectus Supplement for the ABSHE 2006-HE4 Securitization, [f]or the year ending December 31, 2005, New Century Financial Corporation originated $56.1 billion in mortgage loans. By the end of 2006, New Century Financial Corp., the parent of New Century, was the third largest subprime mortgage loan originator in the United States, with a loan production volume that year of $51.6 billion. And before its collapse in the first half of 2007, New Century Financial Corp. was one of the largest subprime lenders in the country. 141. In 2010, the OCC identified New Century as the worst subprime lender in the
country based on the delinquency rates of the mortgages it originated in the ten metropolitan areas between 2005 and 2007 with the highest rates of delinquency. See OCC Press Release, Worst Ten in the Worst Ten: Update, March 22, 2010. Further, in January 2011, the FCIC issued its final report, which detailed, among other things, the collapse of mortgage underwriting standards and subsequent collapse of the mortgage market and wider economy. The FCIC Report singled out New Century Financial Corp. for its role: New Centuryonce the nations second-largest subprime lenderignored early warnings that its own loan quality was deteriorating and stripped power from two 63
risk-control departments that had noted the evidence. In a June 2004 presentation, the Quality Assurance staff reported they had found severe underwriting errors, including evidence of predatory lending, federal and state violations, and credit issues, in 25% of the loans they audited in November and December 2003. In 2004, Chief Operating Officer and later CEO Brad Morrice recommended these results be removed from the statistical tools used to track loan performance, and in 2005, the department was dissolved and its personnel terminated. The same year, the Internal Audit department identified numerous deficiencies in loan files; out of nine reviews it conducted in 2005, it gave the companys loan production department unsatisfactory ratings seven times. Patrick Flanagan, president of New Centurys mortgage-originating subsidiary, cut the departments budget, saying in a memo that the group was out of control and tries to dictate business practices instead of audit. FCIC Report at 157. 142. On February 29, 2008, after an extensive document review and conducting over
100 interviews, Michael J. Missal, the Bankruptcy Court Examiner for New Century Financial Corp., issued a detailed report on the various deficiencies at the company, including lax mortgage standards and a failure to follow its own underwriting guidelines. Among his findings, the Examiner reported: New Century had a brazen obsession with increasing loan originations, without due regard to the risks associated with that business strategy. Although a primary goal of any mortgage banking company is to make more loans, New Century did so in an aggressive manner that elevated the risks to dangerous and ultimately fatal levels. New Century also made frequent exceptions to its underwriting guidelines for borrowers who might not otherwise qualify for a particular loan. A senior officer of New Century warned in 2004 that the number one issue is exceptions to the guidelines. Moreover, many of the appraisals used to value the homes that secured the mortgages had deficiencies. New Century layered the risks of loan products upon the risks of loose underwriting standards in its loan originations to high risk borrowers.
Final Report of Michael J. Missal, Bankruptcy Examiner, In re New Century TRS Holdings, Inc., No. 07-10416 (KJC) (Bankr. Del. Feb. 29, 2008), available at http://graphics8.nytimes.com/packages/pdf/business/Final_Report_New_Century.pdf. 64
143.
On December 9, 2009, the SEC charged three of New Century Financial Corp.s
top officers with violations of federal securities laws. The SECs complaint details how New Century Financial Corp.s representations regarding its underwriting guidelines, e.g., that it was committed to adher[ing] to high origination standards in order to sell [its] loan products in the secondary market and only approv[ing] subprime loan applications that evidence a borrowers ability to repay the loan, were blatantly false. See Complaint, S.E.C. v. Morrice et al., No. SACV 09-01426 (C.D. Cal. Dec. 9, 2009). 144. Patricia Lindsay, a former Vice President of Corporate Risk at New Century
Financial Corp., testified before the FCIC in April 2010 that, beginning in 2004, underwriting guidelines had been all but abandoned at New Century. Ms. Lindsay further testified that New Century systematically approved loans with 100 percent financing to borrowers with extremely low credit scores and no supporting proof of income. See Written Testimony of Patricia Lindsay for the FCIC Hearing, April 7, 2010 (Lindsay Testimony), http://fcicstatic.law.stanford.edu/cdn-media/fcic.testimony/2010-0407-Lindsay.pdf, at 3. 145. Option One originated all of the 2,704 mortgage loans in the Supporting Loan
Groups in the ABSHE 2006-HE3 Securitization and all of the 2,058 mortgage loans in the ABSHE 2006-HE5 Securitization. Option One has also been identified through multiple reports and investigations for its faulty underwriting. On June 3, 2008, for instance, the Attorney General for the Commonwealth of Massachusetts filed an action against Option One (the Option One Complaint), and its past and present parent companies, for their unfair and deceptive origination and servicing of mortgage loans. See Complaint, Commonwealth v. H&R Block, Inc., CV NO. 08-2474-BLS (Mass. Super. Ct. June 3, 2008). According to the Massachusetts Attorney General, since 2004, Option One had increasingly disregarded
65
underwriting standards and originated thousands of loans that [Option One] knew or should have known the borrowers would be unable to pay, all in an effort to increase loan origination volume so as to profit from the practice of packaging and selling the vast majority of [Option Ones] residential subprime loans to the secondary market. See Option One Complaint. 146. The Massachusetts Attorney General alleged that Option Ones agents and
brokers frequently overstated an applicants income and/or ability to pay, and inflated the appraised value of the applicants home, and that Option One avoided implementing reasonable measures that would have prevented or limited these fraudulent practices. Option Ones origination policies employed from 2004 through 2007 have resulted in an explosion of foreclosures. Id. at 1. 147. On November 24, 2008, the Superior Court of Massachusetts granted a
Block, Inc., Option Ones parent company, had agreed to settle the suit for approximately $125 million. See Massachusetts Attorney General Press Release, H&R Block Mortgage Company Will Provide $125 Million in Loan Modifications and Restitutions, Aug. 9, 2011. Media reports noted that the suit was being settled amidst ongoing discussions among multiple states attorneys general, federal authorities, and five major mortgage servicers, aimed at resolving investigations of the lenders foreclosure and mortgage-servicing practices. The Massachusetts
66
Attorney General released a statement saying that no settlement should include a release for conduct relating to the lenders packaging of mortgages into securitizations. See, e.g., Bloomberg.com, H&R Block, Massachusetts Reach $125 Million Accord in State Mortgage Suit, Aug. 9, 2011. 149. Wells Fargo originated 44.5 percent, 32.9 percent, and 21.9 percent of the loans
underlying the HEAT 2006-3, HEAT 2006-4, and CSMC 2006-1 Securitizations, respectively. Admissions, government investigations, and statements provided by insiders confirm that Wells Fargo was routinely approving loans that failed to meet its underwriting standards. 150. In March 2009, residential mortgage-backed securities investors filed suit against
Wells Fargo, alleging that it had misrepresented its underwriting guidelines and loan quality. See In re Wells Fargo Mortgage-Backed Certificates Litig., No. 09-CV-01376 (N.D. Cal. 2009). In denying in part a motion to dismiss, the court found that plaintiffs had adequately pled that variance from the stated [underwriting] standards was essentially [Wells Fargos] norm and that this conduct infected the entire underwriting process. In re Wells Fargo Mortgage-Backed Certificates Litig., 712 F. Supp. 2d 958, 972 (N.D. Cal. 2010). Wells Fargo agreed to settle the investors claims. 151. Further, a number of government actors have announced investigations of Wells
Fargos lending practices. In July 2009, the Attorney General of Illinois filed a lawsuit, People v. Wells Fargo & Co., No. 09-CH-26434 (Ill. Cir. Ct. 2009), alleging that Wells Fargo engaged in deceptive practices by misleading Illinois borrowers about their mortgage terms. The complaint details that borrowers were placed into loans that were unaffordable and unsuitable, and that Wells Fargo failed to maintain proper controls.
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152.
In April 2010, the City of Memphis filed its First Amended Complaint in
Memphis v. Wells Fargo Bank, No. 09-CV-02857 (W.D. Tenn. 2009), alleging that Wells Fargo failed to underwrite African-American borrowers properly. A similar lawsuit was filed by the City of Baltimore, Mayor and City Council of Baltimore v. Wells Fargo Bank, N.A., No. 08-CV00062 (D. Md. 2008). The City of Memphis and City of Baltimore complaints include sworn declarations from many former Wells Fargo employees, which provide evidence of predatory lending and abandonment of underwriting guidelines. 153. For instance, Camille Thomas, a loan processor at Wells Fargo from January 2004
to January 2008, stated under oath that loans were granted based on inflated appraisals, which allowed borrowers to get larger loans than they could afford due to the impact on the LTV calculation and some loans were even granted based on falsified income documents. Similarly, another affidavit by Doris Dancy, a credit manager at Wells Fargo from July 2007 to January 2008, stated that managers put pressure on employees to convince people to apply for loans, even if the person could not afford the loan or did not qualify for it. She was also aware that loan applications contained false data, used to get customers to qualify for loans. 154. The FCIC interviewed Darcy Parmer, a former employee of Wells Fargo, who
worked as an underwriter and a quality assurance analyst from 2001 until 2007. Ms. Parmer confirmed that, during her tenure, Wells Fargos underwriting standards were loosening, adding that they were being applied on the fly and that [p]eople were making it up as they went. She also told the FCIC that 99 percent of the loans she would review in a day would get approved, and that, even though she later became a fraud analyst, she never received any training in detecting fraud. The FCIC Report described how hundreds and hundreds and hundreds of fraud cases that Ms. Palmer knew were identified within Wells Fargos home
68
equity loan division were not reported to FinCEN.23 In addition, according to Ms. Palmer, at least half the loans she flagged for fraud were nevertheless funded, over her objections. 155. In July 2011, the Federal Reserve Board issued a consent cease and desist order
and assessed an $85 million civil money penalty against Wells Fargo & Co. and Wells Fargo Financial, Inc. According to the Federal Reserves press release, the order addressed in part allegations that Wells Fargo Financial sales personnel falsified information about borrowers incomes to make it appear that the borrowers qualified for loans when they would not have qualified based on their actual incomes. The Federal Reserve Board also found that the poor practices of Wells Fargo were fostered by Wells Fargo Financials incentive compensation and sales quota programs, and the lack of adequate controls to manage the risks resulting from these programs. 156. The originators of the mortgage loans underlying the Securitizations also went
beyond the systematic disregard of their own underwriting guidelines. The FCIC reviewed millions of pages of documents, interviewed more than 700 witnesses, and held 19 days of public hearings in New York, Washington, D.C., and communities across the country, as a means of examining the causes of the current financial and economic crisis in the United States. FCIC Report at xi. The FCIC confirmed that mortgage originators throughout the industry pressured appraisers, during the period of the Securitizations, to issue inflated appraisals that met or exceeded the amount needed for the subject loans to be approved, regardless of the accuracy of such appraisals, and especially when the originators aimed at putting the mortgages into a package of mortgages that would be sold for securitization. This resulted in lower LTV ratios, discussed above, which in turn made the loans appear to the investors less risky than they were. FinCEN is the Financial Crimes Enforcement Network, a bureau within the Treasury Department that collects and analyzes information regarding financial fraud. 69
23
157.
As described by Patricia Lindsay, the former wholesale lender who testified
before the FCIC in April 2010, appraisers fear[ed] for their livelihoods, and therefore cherry-picked data that would help support the needed value rather than finding the best comparables to come up with the most accurate value. See Lindsay Test. at 5. Likewise, Jim Amorin, President of the Appraisal Institute, confirmed in his testimony that [i]n many cases, appraisers are ordered or severely pressured to doctor their reports and to convey a particular, higher value for a property, or else never see work from those parties again . [T]oo often state licensed and certified appraisers are forced into making a Hobsons Choice. See Testimony of Jim Amorin to the FCIC, available at www.appraisalinstitute.org/newsadvocacy/downloads/ltrs_tstmny/2009/AI-ASA-ASFMRANAIFATestimonyonMortgageReform042309final.pdf. Faced with this choice, appraisers systematically abandoned applicable guidelines and over-valued properties in order to facilitate the issuance of mortgages that could then be collateralized into mortgage-backed securitizations. 3. 158. Credit Suisse Routinely Included in Securitizations Mortgage Loans That Failed to Meet Underwriting Standards
Credit Suisse itself has also been the subject of government investigations and
reports that have described and documented Credit Suisses failure to ensure that the mortgage loans it securitized were originated in compliance with applicable underwriting guidelines. 159. MBIA Insurance Corp. (MBIA), which has sued Credit Suisse Securities and
DLJ Mortgage Capital for breach of contract and fraud in connection with residential mortgagebacked securities securitizations for which MBIA provided financial guaranty insurance, reported at the end of April 2011 that the SEC has commenced an investigation of Credit Suisse and has subpoenaed from Credit Suisse documentation relating to the standards under which
70
loans securitized by Credit Suisse were originated. See Bloomberg.com, SEC Subpoenas Credit Suisse Over Mortgages, MBIA Says, May 5, 2011. 160. The Clayton trending reports described at paragraph 86 above, and summarized
by the FCIC, have also documented that Credit Suisse routinely waived into loan groups mortgage loans that did not comply with underwriting guidelines and without adequate consideration of compensating factors. The FCIC regarded Clayton, the firm Credit Suisse retained to analyze loans it placed in its securitizations, to have a unique inside view of the underwriting standards that originators were actually applying because of the volume of loans it examined during the housing boom. FCIC Report at 166, 167. 161. Clayton gave loans one of three grades Grade 3 loans failed to meet guidelines
and were not approved, while Grade 1 loans met guidelines. Id. at 166. Clayton also critically analyzed whether, to the extent a loan was deficient, any compensating factors existed. Id. Tellingly, only 54 percent of the nearly one-million loans reviewed by Clayton met guidelines, a number that its former president indicated signified there [was] a quality control issue in the factory for mortgage-backed securities. Id. 162. As related at paragraph 86 above, internal Clayton documents show that, contrary
to Defendants representations, a startlingly high percentage of loans reviewed by Clayton for Credit Suisse were defective, but were nonetheless included by the Defendants in loan groups sold to investors. According to a trending report made public in September 2010, Clayton found that 32 percent of the 56,300 loans that it reviewed for Defendants received the worst possible grade, i.e., they failed to conform to standards. Id. at 167. Credit Suisse waived into its groups one-third of those toxic loans that Clayton had identified as being outside the guidelines.
71
163.
The FCIC concluded that the waiver of rejected loans that were not subject to
any compensating factors rendered Defendants disclosures regarding their underwriting and due diligence processes even more misleading. The report concluded: [M]any prospectuses indicated that the loans in the pool either met guidelines outright or had compensating factors, even though Claytons records show that only a portion of the loans were sampled, and that of those that were sampled, a substantial percentage of Grade 3 loans were waived in. .... [O]ne could reasonably expect [the untested loans] to have many of the same deficiencies, at the same rate, as the sampled loans. Prospectuses for the ultimate investors in the mortgage-backed securities did not contain this information, or information on how few of the loans were reviewed, raising the question of whether the disclosures were materially misleading, in violation of the securities laws. FCIC Report at 167, 170 (emphasis added). 4. Credit Suisses Own Insurers Have Found That Loan Groups Securitized by Credit Suisse Are Full of Loans Originated in Violation of Underwriting Guidelines
164.
MBIA and Ambac Assurance Corporation (Ambac) provided financial guaranty
insurance on Credit Suisses securitizations in 2007. In connection with lawsuits they commenced against CS Securities and DLJ Mortgage Capital, MBIA and Ambac, who had contractual rights to obtain the loan files for the securitizations they insured, have disclosed the results of their own re-underwriting of loan files. The findings of these insurers reinforce the results of the forensic review conducted by Plaintiff FHFA of nearly 2,000 files relating to loans backing the HEAT 2007-1 and HEAT 2007-2 Securitizations. Specifically, they demonstrate that the essential characteristics of the mortgage loans underlying the Certificates sold to the GSEs were misrepresented and that the problems with the underwriting practices used to originate the mortgage loans were systemic. 72
165.
MBIA and Ambac are monoline insurers that wrote financial guaranty insurance
on HEMT 2007-2 and HEMT 2007-1, respectively. According to complaints filed in December 2009 and January 2010, MBIA and Ambac began investigating the quality of the underwriting used to originate the loans underlying the securitizations for which they provided insurance after the poor performance of the loans in the pools triggered their obligation to pay claims. The HEMT shelf is common to HEMT 2006-6, the offering from which Freddie Mac purchased Certificates. The parties, type of collateral, structure, timing, and disclosures made in connection with HEMT 2007-2 and 2007-1 were substantially similar to those present in the Securitizations. 166. As discussed in the complaint in the action entitled MBIA v. Credit Suisse Sec. et
al., No. 603751/09 (N.Y. Sup. Ct. Dec. 14, 2009), MBIA reviewed the loan origination files of 1,798 loans in the pool underlying HEMT 2007-2, of which 477 were selected at random. In its review, MBIA found that 85 percent of the loans contained breaches of DLJ Mortgage Capitals contractual representations and warranties to MBIA that the loans had been originated in compliance with underwriting guidelines. MBIA has alleged that these findings demonstrated a complete abandonment of applicable guidelines and prudent practices such that the loans were (i) made to numerous borrowers who were not eligible for the reduced documentation loan programs through which their loans were made, and (ii) originated in a manner that systematically ignored the borrowers inability to repay the loans. 167. MBIA also found pervasive violations of the originators actual underwriting
standards, and prudent and customary origination and underwriting practices, including (i) qualifying borrowers under reduced documentation programs who were ineligible for those programs; (ii) systemic failure to conduct the required income-reasonableness analysis for stated income loans, resulting in the rampant origination of loans to borrowers who made unreasonable
73
claims as to their income; and (iii) lending to borrowers with debt-to-income and loan-to-value ratios above the allowed maximums. 168. As described in the complaint in the action entitled Ambac v. DLJ Mortgage
Capital et al., No. 600070/2010 (N.Y. Sup. Ct. Jan. 22, 2010), Ambac reviewed the loan origination files of 1,134 loans in the pool underlying HEMT 2007-1, of which 390 were randomly selected. In its review, Ambac found that 80 percent of the loans breached DLJ Mortgage Capitals contractual representations and warranties to Ambac that the loans had been originated in compliance with underwriting guidelines. Ambacs findings as to the nature of the failure to comply with underwriting guidelines were similar to those of MBIA, described above. 169. MBIA has also recently filed briefing in which it states that Credit Suisse has
produced internal emails that prove that as early as February 2006, Credit Suisse itself had become aware that the mortgage loans that it was pooling for securitizations had been originated in violation of the applicable underwriting guidelines. According to MBIA, when faced with alarming early payment default rates on loans that it planned to securitize, Credit Suisse employees sought to obtain quality control reports. Those reports showed that substantial percentages of the delinquencies had been caused by substandard underwriting, misstated incomes, and undisclosed debts. See Pl.s Mem. in Further Supp. of Mot. to Compel at 9, MBIA v. Credit Suisse Sec., No. 600070/2010 (N.Y. Sup. Ct. May 5, 2011) (Doc. No. 113). 170. The findings of MBIA and Ambacincluding that over 80 percent of the loans in
the pools underlying securitizations sponsored and underwritten by Credit Suisse entities were not originated in compliance with the applicable underwriting guidelinesfully corroborate FHFAs analysis of the Securitizations, as described above in Sections IV.A and IV.B.1.
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5.
The Collapse of the Certificates Credit Ratings Further Indicates That the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines
171.
AAA or its equivalent to non-investment speculative grade, is further evidence of the originators systematic disregard of underwriting guidelines, indicating that the GSE Certificates were impaired from the start. 172. The GSE Certificates that Fannie Mae and Freddie Mac purchased were originally
assigned credit ratings of AAA or its equivalent, which purportedly reflected the description of the mortgage loan collateral and underwriting practices set forth in the Registration Statements. These ratings were artificially inflated, however, as a result of the very same misrepresentations that the Defendants made to investors in the Prospectus Supplements. 173. Credit Suisse provided loan-level information to the rating agencies that they
relied upon in order to calculate the Certificates assigned ratings, including the borrowers LTV ratio, debt-to-income ratio, owner occupancy status, and other loan-level information described in aggregation reports in the Prospectus Supplements. Because the information that Credit Suisse provided was false, the ratings were inflated and the level of subordination that the rating agencies required for the sale of AAA (or its equivalent) certificates was inadequate to provide investors with the level of protection that those ratings signified. As a result, the GSEs paid Defendants inflated prices for purported AAA (or its equivalent) Certificates, unaware that those Certificates actually carried a severe risk of loss and carried inadequate credit enhancement. 174. Since the issuance of the Certificates, the ratings agencies have dramatically
downgraded their ratings to reflect the revelations regarding the true underwriting practices used
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to originate the mortgage loans, and the true value and credit quality of the mortgage loans. Table 9 details the extent of the downgrades.8 Table 9
Transaction Tranche A1 ABSHE 2005-HE8 ABSHE 2006-HE1 ABSHE 2006-HE2 ABSHE 2006-HE3 ABSHE 2006-HE4 ABSHE 2006-HE5 ABSHE 2006-HE6 ABSHE 2006-HE7 ABSHE 2007-HE1 ABSHE 2007-HE2 AHMA 2005-1 AMSI 2005-R8 AMSI 2005-R11 AMSI 2006-R2 ARMT 2005-10 ARMT 2005-11 ARMT 2005-12 ARMT 2006-1 CSFB 2005-11 A1A A2 A1 A1 A1 A2 A1 A2 A1 A1 A1 A1A A1B A1 3A21 A1 A1 A1 4A1 4A1 4A1 5A1 2A1 7A1 2A1 CSFB 2005-12 CSMC 2006-1
8
Rating at Issuance (Moodys/S&P/Fitch) Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/AAA
Rating at July 31, 2011 (Moodys/S&P/Fitch) Aa2/AAA/-Aa3/AAA/-A2/AAA/-Ba2/AAA/CCC Caa1/BBB/CCC B1/AAA/CCC B1/AAA/CCC Ba1/AAA/CCC B1/AAA/CC Ba1/A/CCC Ba3/CCC/CC Caa3/B-/C Caa3/CCC/CC Caa3/CCC/CC Caa3/B/C Caa3/BB-/CCC Aa1/AAA/A A1/AAA/BB A3/AAA/B Caa3/CCC/-Ca/CCC/-Ca/CCC/-Ca/D/-Caa2/D/-Caa3/CCC/-Ca/D/-Caa3/D/-B3/B/-Caa2/CC/C
4A1 5A1 5A1
Applicable ratings are shown in sequential order separated by forward slashes: Moodys/S&P/Fitch. A hyphen between forward slashes indicates that the relevant agency did not provide a rating at issuance. 76
Transaction
Tranche 5A2
Rating at Issuance (Moodys/S&P/Fitch) Aaa/AAA/AAA --/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA
Rating at July 31, 2011 (Moodys/S&P/Fitch) C/CC/C --/CCC/CCC Ba3/AA-/CCC B1/A/B Caa2/B+/-Aa2/AAA/A Baa2/AAA/BB A2/AAA/BBB Aa2/AAA/BB B3/AAA/CCC Caa2/B-/CC Caa3/B-/C Ca/B-/C Ca/CCC/C Ca/CCC/C Ca/CCC/C Ca/CCC/C Ca/CCC/C Ca/CC/-Caa3/CCC/CC Caa3/CCC/CC Caa3/CCC/C Ca/CCC/C Ca/CCC/C Caa3/AAA/CC
CSMC 2007-NC1 FHLT 2005-E FMIC 2005-3 FMIC 2007-1 HEAT 2005-7 HEAT 2005-8 HEAT 2005-9 HEAT 2006-1 HEAT 2006-3 HEAT 2006-4 HEAT 2006-5 HEAT 2006-6 HEAT 2006-7 HEAT 2006-8 HEAT 2007-1 HEAT 2007-2 HEAT 2007-3 HEMT 2006-6 INABS 2006-B INABS 2006-C INABS 2006-E NCHET 2006-1
1A1 1A1 1A 1A 1A1 1A1 1A1 1A1 1A1 1A1 1A1 1A1 1A1 1A1 1A1 1A1 1A1 1A1 1A1 1A2 2A 1A1 1A2 A1
175.
According to a May 13, 2010 Reuters news article, the New York Attorney
General is conducting an investigation into whether eight banks, including [Credit Suisse], misled rating agencies with regard to mortgage-derivative deals. 6. The Surge in Mortgage Delinquency and Default Further Demonstrates That the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines
176.
supposed to represent long-term, stable investments, a significant percentage of the mortgage
77
loans backing the Certificates have defaulted, have been foreclosed upon, or are delinquent, resulting in massive losses to the Certificateholders. The overall poor performance of the mortgage loans is a direct consequence of the fact that they were not underwritten in accordance with applicable underwriting guidelines as represented in the Registration Statements. 177. Loan groups that were properly underwritten and contained loans with the
Loan Group 1 ABSHE 2005-HE8 Loan Group 2 ABSHE 2006-HE1 ABSHE 2006-HE2 ABSHE 2006-HE3 Loan Group 2 Loan Group 1 ABSHE 2006-HE4 Loan Group 2 ABSHE 2006-HE5 ABSHE 2006-HE6 ABSHE 2006-HE7 ABSHE 2007-HE1 ABSHE 2007-HE2 AHMA 2005-1 AMSI 2005-R8 AMSI 2005-R11 AMSI 2006-R2 ARMT 2005-10 ARMT 2005-11 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 3B Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 4 Loan Group 4 37.5 45.2 34.3 32.7 35.6 45.0 36.0 37.1 32.4 37.0 22.0 46.9 44.8 37.6 Loan Group 1 Loan Group 1 Loan Group 1 36.5 37.2 38.1 37.5
Transaction

32.2
78
Transaction
ARMT 2005-12 ARMT 2006-1 CSFB 2005-11

Loan Group 4 Loan Group 5 Loan Group 2 Loan Group 7 Loan Group 2

31.7 47.9 15.9 28.3 31.4 32.4 10.2 28.8 39.5 56.5 48.8 37.8 40.4 40.1 37.6 36.3 33.9 44.3 49.8 51.1 46.3 43.8 42.4 40.5 38.7 10.6 48.7 54.9 49.9 44.3
CSFB 2005-12
Loan Group 4 Loan Group 5
CSMC 2006-1 CSMC 2007-NC1 FHLT 2005-E FMIC 2005-3 FMIC 2007-1 HEAT 2005-7 HEAT 2005-8 HEAT 2005-9 HEAT 2006-1 HEAT 2006-3 HEAT 2006-4 HEAT 2006-5 HEAT 2006-6 HEAT 2006-7 HEAT 2006-8 HEAT 2007-1 HEAT 2007-2 HEAT 2007-3 HEMT 2006-6 INABS 2006-B INABS 2006-C INABS 2006-E NCHET 2006-1
Loan Group 5 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 2 Loan Group 1 Loan Group 1
178.
review of nearly 2,000 loan files for two of the Securitizations, the confirmed systematic underwriting failures by the originators responsible for the mortgage loans across the 79
Securitizations, the findings of the FCIC and others regarding Credit Suisses routine inclusion in securitizations of loans failing to conform to underwriting guidelines, the investigations, allegations of misconduct, and analyses of Credit Suisse by its own financial guaranty insurers, the extraordinary drop in credit ratings and rise in delinquencies across those Securitizations, all confirm that the mortgage loans in the Supporting Loan Groups, contrary to the representations in the Registration Statements, were not originated in accordance with the stated underwriting guidelines. V. FANNIE MAES AND FREDDIE MACS PURCHASES OF THE GSE CERTIFICATES AND THE RESULTING DAMAGES 179. In total, between September 28, 2005 and November 23, 2007, Fannie Mae and
Freddie Mac purchased over $14.1 billion in residential mortgage-backed securities issued in connection with the Securitizations. Table 11 reflects each of Freddie Macs purchases of the Certificates.24 Table 11
Settlement Date of Purchase by Freddie Mac 10/28/2005 2/6/2006 4/17/2006 4/28/2006 7/18/2006 11/30/2006 11/30/2006 Initial Unpaid Principal Balance 218,002,000 396,315,000 187,698,000 173,090,000 296,485,000 178,248,000 295,597,000 Purchase Price (% of Par) 100 100 100 100 100 100 100
Transaction
Tranche
CUSIP
Seller to Freddie Mac CS Securities25 CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities
ABSHE 2005HE8 ABSHE 2006HE1 ABSHE 2006HE3 ABSHE 2006HE4 ABSHE 2006HE5 ABSHE 2006HE6 ABSHE 2006HE7
A2 A1 A2 A2 A1 A1 A1
04541GUZ3 04541GVG4 04541GWZ1 04544GAC3 04544PAA7 04544NAA2 04544QAA5
25
24
Transaction
Tranche
CUSIP
Settlement Date of Purchase by Freddie Mac 2/6/2007 5/31/2007 9/28/2005 12/20/2005 3/29/2006 12/1/2005 12/30/2005 1/31/2006 1/31/2006 11/23/2007 12/20/2005 11/23/2005 4/12/2007 10/4/2005 11/2/2005 12/2/2005 1/4/2006 3/30/2006 5/1/2006 7/5/2006 8/1/2006 10/3/2006 12/1/2006 2/1/2007 4/2/2007 5/1/2007 12/29/2006 3/14/2006 12/8/2006 3/30/2006
Initial Unpaid Principal Balance 71,333,000 107,228,000 779,011,000 1,099,278,000 525,819,000 68,243,000 104,000,000 180,586,800 20,065,200 286,133,341.35 728,502,000 316,989,000 124,711,000 250,000,000 500,000,000 240,000,000 255,000,000 525,000,000 500,000,000 300,000,000 307,500,000 340,000,000 385,000,000 350,000,000 460,000,000 212,250,000 27,000,000 152,932,000 192,789,000 456,811,000
Purchase Price (% of Par) 100 100 100 100 100 100.08 96.57 100.70 100.70 94.5 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100.11 100 100 100 100
ABSHE 2007HE1 ABSHE 2007HE2 AMSI 2005-R8 AMSI 2005R11 AMSI 2006-R2 CSFB 2005-11 CSFB 2005-12 CSMC 2006-1 CSMC 2007NC1 FHLT 2005-E FMIC 2005-3 FMIC 2007-1 HEAT 2005-7 HEAT 2005-8 HEAT 2005-9 HEAT 2006-1 HEAT 2006-3 HEAT 2006-4 HEAT 2006-5 HEAT 2006-6 HEAT 2006-7 HEAT 2006-8 HEAT 2007-1 HEAT 2007-2 HEAT 2007-3 HEMT 2006-6 INABS 2006-B INABS 2006-E NCHET 2006-1
A1A A1 A1 A1 A1 7A1 5A1 5A1 5A2 1A1 1A1 1A 1A 1A1 1A1 1A1 1A1 1A1 1A1 1A1 1A1 1A1 1A1 1A1 1A1 1A1 1A1 1A2 1A1 A1
04544RAR6 04544TAA9 03072SN43 03072SU45 03072SZ32 2254W0PC3 225470RW5 225470WC3 225470WD1 12638LAR9 35729PMY3 31659TEE1 31659YAA2 437084NT9 437084PS9 437084QR0 437084RQ1 437084UK0 437084VJ2 437096AA8 437097AA6 43709NAA1 43709QAA4 43710LAA2 43710KAA4 43710TAA5 43709YAA7 456606KW1 43709XAA9 64352VQP9
CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities Lehman Brothers Lehman Brothers CS Securities
180.
Table 12 reflects each of Fannie Maes purchases of the Certificates.
Table 12
Settlement Date of Purchase by Fannie Mae 10/28/2005 10/28/2005 Initial Unpaid Principal Balance 185,074,000 32,660,000 Purchase Price (% of Par) 100 100
Transaction
Tranche
CUSIP
Seller to Fannie Mae CS Securities26 CS Securities
A1 ABSHE 2005-HE8 A1A
04541GUX8 04541GUY6
26
Transaction
Tranche
CUSIP
ABSHE 2006-HE2 ABSHE 2006-HE3 ABSHE 2006-HE4 ABSHE 2007-HE1 AHMA 2005-1 ARMT 2005-10 ARMT 2005-11 ARMT 2005-12 ARMT 2006-1 CSFB 2005-11 CSFB 2005-12 INABS 2006-B INABS 2006-C INABS 2006-E
A1 A1 A1 A1B 3A21 4A1 4A1 4A1 5A1 2A1 2A1 4A1 1A1 2A 1A2
04541GWB4 04541GWY4 04544GAA7 04544RAS4 02660VAG3 007036TK2 007036VG8 2254W0MK8 225470B77 2254W0NF8 225470RT2 225470RV7 456606KV3 43709BAB5 43709XAB7
Settlement Date of Purchase by Fannie Mae 3/24/2006 4/17/2006 4/28/2006 2/6/2007 10/31/2005 9/30/2005 10/31/2005 11/30/2005 2/28/2006 11/30/2005 12/30/2005 12/30/2005 3/14/2006 6/15/2006 12/8/2006
Initial Unpaid Principal Balance 298,145,000 192,683,000 153,485,000 71,333,000 100,470,000 80,470,000 312,635,000 112,160,000 74,286,000 76,116,357 100,153,573 225,636,009 152,932,000 153,334,000 192,789,000
Purchase Price (% of Par) 100 100 100 100 100 100.93 100.52 100.71 101.02 100.75 101.80 99.59 100 100 100
Seller to Fannie Mae CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities Lehman Brothers CS Securities Lehman Brothers
181.
Registration Statements, including the Prospectuses and Prospectus Supplements, directly caused Fannie Mae and Freddie Mac to suffer billions of dollars in damages, including without limitation depreciation in the value of the securities. The mortgage loans underlying the GSE Certificates experienced defaults and delinquencies at a much higher rate than they would have had the loan originators adhered to the underwriting guidelines set forth in the Registration Statements, and the payments to the trusts were therefore much lower than they would have been had the loans been underwritten as described in the Registration Statements.
82
183.
have been if the mortgage loans had the credit quality represented in the Registration Statements. 184. Credit Suisses misstatements and omissions in the Registration Statements
regarding the true characteristics of the loans were the proximate cause of Fannie Maes and Freddie Macs losses relating to their purchase of the GSE Certificates. Based upon sales of the Certificates or similar certificates in the secondary market, Credit Suisse proximately caused billions of dollars in damages to Fannie Mae and Freddie Mac in an amount to be determined at trial. FIRST CAUSE OF ACTION Violation of Section 11 of the Securities Act of 1933 (Against Defendants CS Securities, CSFB Mortgage Securities, Asset Backed Securities, Andrew A. Kimura, Jeffrey A. Altabef, Evelyn Echevarria, Michael A. Marriott, Thomas Zingalli, Carlos Onis, Joseph M. Donovan, Juliana Johnson, and Greg Richter) 185. Plaintiff repeats and realleges each and every allegation above as if fully set forth
herein, except to the extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 186. This claim is brought by Plaintiff pursuant to Section 11 of the Securities Act of
1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements. This claim is brought against Defendant CS Securities with respect to each of the Registration Statements. This claim is brought against (i) Defendant CSFB Mortgage Securities, (ii) Defendant Asset Backed Securities, and (iii) Defendants Andrew A. Kimura, Jeffrey A. Altabef, Evelyn Echevarria, Michael A. Marriott, Thomas Zingalli, Carlos Onis, Joseph M. Donovan, Juliana Johnson, and Greg Richter (the foregoing Individual Defendants collectively referred to as the Section 11 Individual Defendants), each with respect to the Registration Statements filed by CSFB
83
Mortgage Securities or Asset Backed Securities that registered securities that were bona fide offered to the public on or after September 6, 2005. 187. This claim is predicated upon the strict liability of Defendant CS Securities for
making false and materially misleading statements in each of the Registration Statements for the Securitizations and for omitting facts necessary to make the facts stated therein not misleading. Defendants CSFB Mortgage Securities, Asset Backed Securities, and the Section 11 Individual Defendants are strictly liable for making false and materially misleading statements in the Registration Statements filed by CSFB Mortgage Securities and Asset Backed Securities that registered securities that were bona fide offered to the public on or after September 6, 2005, which are applicable to 24 of the 43 Securitizations (as specified in Tables 1 and 2 above), including the related Prospectus Supplements, and for omitting facts necessary to make the facts stated therein not misleading. 188. Defendant CS Securities served as underwriter of each of the Securitizations, and
as such, is liable for the misstatements and omissions in the Registration Statements under Section 11 of the Securities Act. 189. Defendants CSFB Mortgage Securities and Asset Backed Securities filed
Registration Statements under which 29 of the 43 Securitizations were carried out. As depositors in those Securitizations, Defendants CSFB Mortgage Securities and Asset Backed Securities are issuers of the GSE Certificates issued pursuant to the Registration Statements they filed within the meaning of Section 2(a)(4) of the Securities Act, 15 U.S.C. 77b(a)(4), and in accordance with Section 11(a), 15 U.S.C. 77k(a). As such, these defendants are liable under Section 11 of the Securities Act for the misstatements and omissions in those six Registration Statements that
84
registered securities that were bona fide offered to the public on or after September 6, 2005 and applicable to 24 of the 43 Securitizations. 190. At the time Defendants CSFB Mortgage Securities and Asset Backed Securities
filed the Registration Statements applicable to 29 of the Securitizations, the Section 11 Individual Defendants were officers or directors of CSFB Mortgage Securities and Asset Backed Securities. In addition, the Section 11 Individual Defendants signed those Registration Statements and either signed or authorized another to sign on their behalf the amendments to those Registration Statements. As such, the Section 11 Individual Defendants are liable under Section 11 of the Securities Act for the misstatements and omissions in those Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005. 191. At the time that they became effective, each of the Registration Statements
Registration Statements are set forth above in Section IV and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, debt-to-income ratios, and credit ratings. 193. Fannie Mae and Freddie Mac purchased or otherwise acquired the GSE
Certificates pursuant to the false and misleading Registration Statements. Fannie Mae and Freddie Mac made these purchases in the primary market. At the time they purchased the GSE Certificates, Fannie Mae and Freddie Mac did not know of the facts concerning the false and
85
misleading statements and omissions alleged herein, and if the GSEs would have known those facts, they would not have purchased the GSE Certificates. 194. CS Securities owed to Fannie Mae, Freddie Mac, and other investors a duty to
make a reasonable and diligent investigation of the statements contained in each of the Registration Statements at the time they became effective to ensure that such statements were true and correct and that there were no omissions of material facts required to be stated in order to make the statements contained therein not misleading. The Section 11 Individual Defendants owed the same duty with respect to the Registration Statements that they signed that registered securities that were bona fide offered to the public on or after September 6, 2005, which are applicable to 24 of the Securitizations. 195. CS Securities and the Section 11 Individual Defendants did not exercise such due
diligence and failed to conduct a reasonable investigation. In the exercise of reasonable care, these Defendants should have known of the false statements and omissions contained in or omitted from the Registration Statements filed in connection with the Securitizations, as set forth herein. In addition, CSFB Mortgage Securities and Asset Backed Securities, though subject to strict liability without regard to whether they performed diligence, also failed to take reasonable steps to ensure the accuracy of the representations. 196. Fannie Mae and Freddie Mac sustained substantial damages as a result of the
misstatements and omissions in the Registration Statements. 197. The time period from July 29, 2011 through August 29, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between FHFA, Freddie Mac, Fannie Mae, CS USA, CS Securities, DLJ Mortgage Capital, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance. In addition, this action is
86
brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(2). 198. By reason of the conduct herein alleged, CS Securities, CSFB Mortgage
Securities, Asset Backed Securities, and the Section 11 Individual Defendants are jointly and severally liable for their wrongdoing. SECOND CAUSE OF ACTION Violation of Section 12(a)(2) of the Securities Act of 1933 (Against CS Securities, CSFB Mortgage Securities, Asset Backed Securities, CSFB Mortgage Acceptance) 199. Plaintiff repeats and realleges each and every allegation above as if fully set forth
herein, except to the extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 200. This claim is brought by Plaintiff pursuant to Section 12(a)(2) of the Securities
Act of 1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements in the Securitizations listed in paragraph 2 above. 201. This claim is predicated upon Defendant CS Securities negligence for making
false and materially misleading statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as Prospectuses) for each of the Securitizations other than the INABS 2006-B and INABS 2006-E Securitizations, for which CS Securities was not the selling underwriter. Defendants CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance acted negligently in making false and materially misleading statements in the Prospectuses for the 32 Securitizations carried out under the Registration Statements filed by the Depositor Defendants, as specified in Table 2 at paragraph 52 above. 87
202.
CS Securities is prominently identified in the Prospectuses, the primary
documents it used to sell the GSE Certificates. CS Securities offered the Certificates publicly, including selling to Fannie Mae and Freddie Mac their GSE Certificates, as set forth in the Prospectuses, including in the Method of Distribution section. 203. CS Securities offered and sold the GSE Certificates to Fannie Mae and Freddie
Mac by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. CS Securities reviewed and participated in drafting the Prospectuses. 204. CS Securities successfully solicited Fannie Maes and Freddie Macs purchases of
the GSE Certificates. As underwriter, CS Securities obtained substantial commissions based upon the amount received from the sale of the Certificates to the public. 205. CS Securities offered the GSE Certificates for sale, sold them, and distributed
them by the use of means or instruments of transportation and communication in interstate commerce, including communications between its representatives in New York and representatives of Fannie Mae in the District of Columbia and Freddie Mac in McLean, Virginia. 206. CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage
Acceptance are prominently identified in the Prospectuses for the Securitizations carried out under the eight Registration Statements that they filed. These Prospectuses were the primary documents each used to sell Certificates registered on those Registration Statements (the Depositor Defendant Registration Statements). CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance offered the Certificates publicly, including selling to Fannie Mae and Freddie Mac the GSE Certificates.
88
207.
CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage
Acceptance offered and sold the GSE Certificates offered pursuant to the Depositor Defendant Registration Statements to Fannie Mae and Freddie Mac by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. Upon information and belief, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance reviewed and participated in drafting the Prospectuses. 208. CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage
Acceptance successfully solicited Fannie Maes and Freddie Macs purchases of the GSE Certificates. CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance were paid a percentage of the total dollar value of each Securitization in which they participated. 209. CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage
Acceptance offered the GSE Certificates for sale, sold them, and distributed them by the use of means or instruments of transportation and communication in interstate commerce, including communications between its representatives in New York and representatives of Fannie Mae in the District of Columbia and Freddie Mac in McLean, Virginia. 210. Each of the Prospectuses contained material misstatements of fact and omitted
facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectuses. 211. The untrue statements of material facts and omissions of material fact in the
Registration Statements, which include the Prospectuses, are set forth above in Section IV, and
89
pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and credit ratings. 212. CS Securities, CSFB Mortgage Securities, Asset Backed Securities, and CSFB
Mortgage Acceptance offered and sold the GSE Certificates offered pursuant to the Depositor Defendant Registration Statements directly to Fannie Mae and Freddie Mac pursuant to the materially false, misleading, and incomplete Prospectuses. 213. CS Securities owed to Fannie Mae and Freddie Mac, as well as to other investors
in these trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance owed the same duty with respect to the Prospectuses for the Securitizations carried out under the Registration Statements they filed. 214. CS Securities, CSFB Mortgage Securities, Asset Backed Securities, and CSFB
Mortgage Acceptance failed to exercise such reasonable care. These Defendants, in the exercise of reasonable care, should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations, as set forth above. 215. In contrast, Fannie Mae and Freddie Mac did not know of the untruths and
omissions contained in the Prospectuses at the time they purchased the GSE Certificates. If the GSEs would have known of those untruths and omissions, they would not have purchased the GSE Certificates.
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216.
Fannie Mae and Freddie Mac acquired the GSE Certificates in the primary market
their investments in the GSE Certificates and have the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 218. The time period from July 29, 2011 through August 29, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between FHFA, Freddie Mac, Fannie Mae, CS USA, CS Securities, DLJ Mortgage Capital, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(2). THIRD CAUSE OF ACTION Violation of Section 15 of the Securities Act of 1933 (Against CS Holdings, CS USA, DLJ Mortgage Capital, and the Individual Defendants) 219. Plaintiff repeats and realleges each and every allegation above as if fully set forth
herein, except to the extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 220. This claim is brought under Section 15 of the Securities Act of 1933, 15 U.S.C.
77o (Section 15), against CS Holdings, CS USA, DLJ Mortgage Capital, and the Individual Defendants for controlling-person liability with regard to the Section 11 and Section 12(a)(2) causes of actions set forth above. 221. The Individual Defendants at all relevant times participated in the operation and
management of CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance, and conducted and participated, directly and indirectly, in the conduct of CSFB
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Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptances business affairs. Defendant Andrew A. Kimura was the President and Director of Defendant CSFB Mortgage Securities and CSFB Mortgage Acceptance. Defendant Jeffrey A. Altabef was Vice President and Director of Defendant CSFB Mortgage Securities. Defendant Evelyn Echevarria was Director of CSFB Mortgage Securities, and Defendant Michael A. Marriott was Director of CSFB Mortgage Securities. Defendant Zev Kindler was Treasurer of CSFB Mortgage Securities and CSFB Mortgage Acceptance. Defendant John P. Graham was Vice President of CSFB Mortgage Acceptance. Defendant Thomas E. Siegler was Director at CSFB Mortgage Acceptance. Defendant Thomas Zingalli was Principal Accounting Officer and Comptroller of CSFB Mortgage Securities and CSFB Mortgage Acceptance and also was Vice President and Controller for Asset Backed Securities. Defendant Carlos Onis was Director of CSFB Mortgage Securities and Vice President and Director of Asset Backed Securities. Defendant Steven L. Kantor was Director of CSFB Mortgage Acceptance. Defendant Joseph M. Donovan was President and Director of Asset Backed Securities. Defendant Juliana Johnson was Director of Asset Backed Securities. Defendant Greg Richter was Vice President of Asset Backed Securities. 222. Defendant DLJ Mortgage Capital was the sponsor for all 32 of the Securitizations
carried out under the Depositor Defendant Registration Statements, and culpably participated in the violations of Sections 11 and 12(a)(2) set forth above with respect to the offering of the GSE Certificates, by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance as the special purpose vehicle, and selecting CS Securities as underwriter. In its role as sponsor, with respect to the same securitizations, DLJ
92
Mortgage Capital knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 223. Defendant DLJ Mortgage Capital also acted as the seller of the mortgage loans for
the Securitizations carried out under the Depositor Defendant Registration Statements, in that it conveyed such mortgage loans to the Depositor Defendants pursuant to a Mortgage Loan Purchase Agreement or Assignment and Assumption Agreement. 224. Defendant DLJ Mortgage Capital also controlled all aspects of the business of
Defendants CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance, as the Depositor Defendants were merely special purpose entities created for the purpose of acting as a pass-through for the issuance of the Certificates. Because of its position as sponsor, DLJ Mortgage Capital was able to, and did in fact, control the contents of the Depositor Defendant Registration Statements, including the Prospectuses and Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 225. Defendant CS USA wholly owns Defendant CS Securities and controls its
business operations. As the sole corporate parent, CS USA had the practical ability to direct and control the actions of CS Securities in issuing and selling the Certificates in connection with the issuance and sale of the Certificates. 226. Defendant CS Holdings wholly owns CS USA and is the ultimate U.S. parent of
CS Securities, DLJ Mortgage Capital, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance. CS Holdings culpably participated in the violations of Section 11 and 12(a)(2) set forth above. Upon information and belief, the officers and directors of CS
93
Holdings overlapped with those of CS Securities. CS Holdings also oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as CSFB Mortgage Securities, Asset Backed Securities, CSFB Mortgage Acceptance, and the issuing trusts to serve as conduits for the mortgage loans. 227. DLJ Mortgage Capital and the Individual Defendants are controlling persons
within the meaning of Section 15 by virtue of their actual power over, control of, ownership of, and/or directorship of CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Depositor Defendant Registration Statements. 228. CS USA is a controlling person within the meaning of Section 15 by virtue of its,
actual power over, control of, ownership of, or directorship of Defendant CS Securities at the time of the wrongs alleged herein and as set forth herein, including its control over the content of each of the Registration Statements. 229. CS Holdings is a controlling person within the meaning of Section 15 by virtue of
its actual power over, control of, ownership of, or directorship of CS Securities, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance at the time of the wrongs alleged herein and as set forth herein, including its control over the content of each of the Registration Statements. 230. Fannie Mae and Freddie Mac purchased in the primary market Certificates issued
pursuant to the Registration Statements, including the Prospectuses and Prospectus Supplements, which, at the time they became effective, contained material misstatements of fact and omitted
94
facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements. 231. Fannie Mae and Freddie Mac did not know of the misstatements and omissions in
misstatements and omissions in the Registration Statements, for which they are entitled to compensation. 233. The time period from July 29, 2011 through August 29, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between FHFA, Freddie Mac, Fannie Mae, CS USA, CS Securities, DLJ Mortgage Capital, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(2). FOURTH CAUSE OF ACTION Violation of Section 13.1-522(A)(ii) of the Virginia Code (Against CS Securities, CSFB Mortgage Securities, Asset Backed Securities, CSFB Mortgage Acceptance) 234. Plaintiff repeats and realleges each and every allegation above as if fully set forth
herein, except to the extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 235. This claim is brought by Plaintiff pursuant to Section 13.1-522(A)(ii) of the
Virginia Code and is asserted on behalf of Freddie Mac. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 11 above that were purchased by Freddie Mac on or after September 6, 2006. 95
236.
This claim is predicated upon Defendant CS Securities negligence for making
false and materially misleading statements in the Prospectuses for each of the Securitizations other than the INABS 2006-B and INABS 2006-E Securitizations, for which CS Securities was not the selling underwriter. Defendants CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance acted negligently in making false and materially misleading statements in the Prospectuses for the 32 Securitizations carried out under the Depositor Defendant Registration Statements. 237. CS Securities is prominently identified in the Prospectuses, the primary
documents it used to sell the GSE Certificates. CS Securities offered the Certificates publicly, including selling to Freddie Mac the GSE Certificates, as set forth in the Prospectuses, including in the Method of Distribution section. 238. CS Securities offered and sold the GSE Certificates to Freddie Mac by means of
the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. CS Securities reviewed and participated in drafting the Prospectuses. 239. CS Securities successfully solicited Freddie Macs purchases of the GSE
Certificates. As underwriter, CS Securities obtained substantial commissions based upon the amount received from the sale of the Certificates to the public. 240. CS Securities offered the GSE Certificates for sale, sold them, and distributed
them to Freddie Mac in the State of Virginia. 241. CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage
Acceptance are prominently identified in the Prospectuses for the Securitizations carried out
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under the Depositor Defendant Registration Statements. These Prospectuses were the primary documents each used to sell Certificates registered on those Registration Statements. CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance offered the Certificates publicly, including selling to Freddie Mac the GSE Certificates. 242. CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage
Acceptance offered and sold the GSE Certificates offered pursuant to the Depositor Defendant Registration Statements to Freddie Mac by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. Upon information and belief, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance reviewed and participated in drafting the Prospectuses. 243. CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage
Acceptance successfully solicited Freddie Macs purchases of the GSE Certificates. CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance were paid a percentage of the total dollar value of each Securitization in which they participated. 244. Each of the Prospectuses contained material misstatements of fact and omitted
Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and credit ratings.
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246.
CS Securities, CSFB Mortgage Securities, Asset Backed Securities, and CSFB
Mortgage Acceptance offered and sold the GSE Certificates offered pursuant to the Depositor Defendant Registration Statements directly to Freddie Mac, pursuant to the materially false, misleading, and incomplete Prospectuses. 247. CS Securities owed to Freddie Mac, as well as to other investors in these trusts, a
duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance owed the same duty with respect to the Prospectuses for the Securitizations carried out under the Registration Statements they filed. 248. CS Securities, CSFB Mortgage Securities, Asset Backed Securities, and CSFB
Mortgage Acceptance failed to exercise such reasonable care. These Defendants, in the exercise of reasonable care, should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations, as set forth above. 249. In contrast, Freddie Mac did not know of the untruths and omissions contained in
the Prospectuses at the time it purchased the GSE Certificates. If Freddie Mac would have known of those untruths and omissions, it would not have purchased the GSE Certificates. 250. Freddie Mac sustained substantial damages in connection with its investments in
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251.
The time period from July 29, 2011 through August 29, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between FHFA, Freddie Mac, Fannie Mae, CS USA, CS Securities, DLJ Mortgage Capital, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(2). FIFTH CAUSE OF ACTION Violation of Section 13.1-522(C) of the Virginia Code (Against CS Holdings, CS USA, DLJ Mortgage Capital, and the Individual Defendants) 252. Plaintiff repeats and realleges each and every allegation above as if fully set forth
herein, except to the extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 253. This claim is brought under Section 13.1-522(C) of the Virginia Code and is
asserted on behalf of Freddie Mac. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 11 above that were purchased by Freddie Mac on or after September 6, 2006. This claim is brought against CS Holdings, CS USA, DLJ Mortgage Capital, and the Individual Defendants for controlling-person liability with regard to the Fourth Cause of Action set forth above. 254. The Individual Defendants at all relevant times participated in the operation and
management of CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance, and conducted and participated, directly and indirectly, in the conduct of CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptances business affairs. Defendant Andrew A. Kimura was the President and Director of Defendant CSFB Mortgage Securities and CSFB Mortgage Acceptance. Defendant Jeffrey A. Altabef was Vice
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President and Director of Defendant CSFB Mortgage Securities. Defendant Evelyn Echevarria was Director of CSFB Mortgage Securities, and Defendant Michael A. Marriott was Director of CSFB Mortgage Securities. Defendant Zev Kindler was Treasurer of CSFB Mortgage Securities and CSFB Mortgage Acceptance. Defendant John P. Graham was Vice President of CSFB Mortgage Acceptance. Defendant Thomas E. Siegler was Director at CSFB Mortgage Acceptance. Defendant Thomas Zingalli was Principal Accounting Officer and Comptroller of CSFB Mortgage Securities and CSFB Mortgage Acceptance and also was Vice President and Controller for Asset Backed Securities. Defendant Carlos Onis was Director of CSFB Mortgage Securities and Vice President and Director of Asset Backed Securities. Defendant Steven L. Kantor was Director of CSFB Mortgage Acceptance. Defendant Joseph M. Donovan was President and Director of Asset Backed Securities. Defendant Juliana Johnson was Director of Asset Backed Securities. Defendant Greg Richter was Vice President of Asset Backed Securities. 255. Defendant DLJ Mortgage Capital was the sponsor for all 32 of the Securitizations
carried out under the Depositor Defendant Registration Statements, and culpably participated in the violations of Section 13.1-522(A)(ii) of the Virginia Code set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance as the special purpose vehicles, and selecting CS Securities as underwriter. In its role as sponsor, with respect to the same securitizations, DLJ Mortgage Capital knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates
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representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 256. Defendant DLJ Mortgage Capital also acted as the seller of the mortgage loans for
CS Securities, DLJ Mortgage Capital, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance. CS Holdings culpably participated in the violations of Section 13.1-522(A)(ii) of the Virginia Code set forth above. Upon information and belief, the officers and directors of CS Holdings overlapped with those of CS Securities. CS Holdings also oversaw
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the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as CSFB Mortgage Securities, Asset Backed Securities, CSFB Mortgage Acceptance, and the issuing trusts to serve as conduits for the mortgage loans. 260. DLJ Mortgage Capital and the Individual Defendants are controlling persons
within the meaning of Section 13.1-522(C) of the Virginia Code by virtue of their actual power over, control of, ownership of, and/or directorship of CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Depositor Defendant Registration Statements. 261. CS USA is a controlling person within the meaning of Section 13.1-522(C) of the
Virginia Code by virtue of its, actual power over, control of, ownership of, or directorship of Defendant CS Securities at the time of the wrongs alleged herein and as set forth herein, including its control over the content of each of the Registration Statements. 262. CS Holdings is a controlling person within the meaning of Section 13.1-522(C) of
the Virginia Code by virtue of its actual power over, control of, ownership of, or directorship of CS Securities, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance at the time of the wrongs alleged herein and as set forth herein, including its control over the content of each of the Registration Statements. 263. Freddie Mac purchased the GSE Certificates issued pursuant to the Registration
Statements, including the Prospectuses and Prospectus Supplements, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make
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the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements. 264. Freddie Mac did not know of the misstatements and omissions in the Registration
omissions in the Registration Statements, for which it is entitled to compensation. 266. The time period from July 29, 2011 through August 29, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between FHFA, Freddie Mac, Fannie Mae, CS USA, CS Securities, DLJ Mortgage Capital, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance. This action is brought within three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). SIXTH CAUSE OF ACTION Violation of Section 31-5606.05(a)(1)(B) of the District of Columbia Code (Against CS Securities, CSFB Mortgage Securities, Asset Backed Securities, CSFB Mortgage Acceptance) 267. Plaintiff repeats and realleges each and every allegation above as if fully set forth
herein, except to the extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 268. This claim is brought by Plaintiff pursuant to Section 31-5606.05(a)(1)(B) of the
District of Columbia Code and is asserted on behalf of Fannie Mae. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 12 above that were purchased by Fannie Mae.
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269.
This claim is predicated upon Defendant CS Securities negligence for making
false and materially misleading statements in the Prospectuses for each of the Securitizations other than the INABS 2006-B and INABS 2006-E Securitizations, for which CS Securities was not the selling underwriter. Defendants CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance acted negligently in making false and materially misleading statements in the Prospectuses for the 32 Securitizations carried out under the Depositor Defendant Registration Statements. 270. CS Securities is prominently identified in the Prospectuses, the primary
documents it used to sell the GSE Certificates. CS Securities offered the Certificates publicly, including selling to Fannie Mae the GSE Certificates, as set forth in the Prospectuses, including in the Method of Distribution section. 271. CS Securities offered and sold the GSE Certificates to Fannie Mae by means of
the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. CS Securities reviewed and participated in drafting the Prospectuses. 272. CS Securities successfully solicited Fannie Maes purchases of the GSE
Certificates. As underwriter, CS Securities obtained substantial commissions based upon the amount received from the sale of the Certificates to the public. 273. CS Securities offered the GSE Certificates for sale, sold them, and distributed
them to Fannie Mae in the District of Columbia. 274. CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage
Acceptance are prominently identified in the Prospectuses for the Securitizations carried out
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under the Depositor Defendant Registration Statements. These Prospectuses were the primary documents each used to sell Certificates registered on those Registration Statements. CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance offered the Certificates publicly, including selling to Fannie Mae the GSE Certificates. 275. CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage
Acceptance offered and sold the GSE Certificates offered pursuant to the Depositor Defendant Registration Statements to Fannie Mae by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. Upon information and belief, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance reviewed and participated in drafting the Prospectuses. 276. CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage
Acceptance successfully solicited Fannie Maes purchases of the GSE Certificates. CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance were paid a percentage of the total dollar value of each Securitization in which they participated. 277. Each of the Prospectuses contained material misstatements of fact and omitted
Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and credit ratings.
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279.
CS Securities, CSFB Mortgage Securities, Asset Backed Securities, and CSFB
Mortgage Acceptance offered and sold the GSE Certificates offered pursuant to the Depositor Defendant Registration Statements directly to Fannie Mae, pursuant to the materially false, misleading, and incomplete Prospectuses. 280. CS Securities owed to Fannie Mae, as well as to other investors in these trusts, a
duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance owed the same duty with respect to the Prospectuses for the Securitizations carried out under the Registration Statements they filed. 281. CS Securities, CSFB Mortgage Securities, Asset Backed Securities, and CSFB
Mortgage Acceptance failed to exercise such reasonable care. These Defendants, in the exercise of reasonable care, should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations, as set forth above. 282. In contrast, Fannie Mae did not know of the untruths and omissions contained in
the Prospectuses at the time it purchased the GSE Certificates. If Fannie Mae would have known of those untruths and omissions, it would not have purchased the GSE Certificates. 283. Fannie Mae sustained substantial damages in connection with its investments in
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284.
statute of limitations purposes by virtue of a tolling agreement entered into between FHFA, Freddie Mac, Fannie Mae, CS USA, CS Securities, DLJ Mortgage Capital, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance. This action is brought within three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). SEVENTH CAUSE OF ACTION Violation of Section 31-5606.05(c) of the District of Columbia Code (Against CS Holdings, CS USA, DLJ Mortgage Capital, and the Individual Defendants) 285. Plaintiff repeats and realleges each and every allegation above as if fully set forth
herein, except to the extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 286. This claim is brought under Section 31-5606.05(c) of the District of Columbia
Code and is asserted on behalf of Fannie Mae. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 12 above that were purchased by Fannie Mae. This claim is brought against CS Holdings, CS USA, DLJ Mortgage Capital, and the Individual Defendants for controlling-person liability with regard to the Sixth Cause of Action set forth above. 287. The Individual Defendants at all relevant times participated in the operation and
management of CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance, and conducted and participated, directly and indirectly, in the conduct of CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptances business affairs. Defendant Andrew A. Kimura was the President and Director of Defendant CSFB Mortgage Securities and CSFB Mortgage Acceptance. Defendant Jeffrey A. Altabef was Vice
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President and Director of Defendant CSFB Mortgage Securities. Defendant Evelyn Echevarria was Director of CSFB Mortgage Securities, and Defendant Michael A. Marriott was Director of CSFB Mortgage Securities. Defendant Zev Kindler was Treasurer of CSFB Mortgage Securities and CSFB Mortgage Acceptance. Defendant John P. Graham was Vice President of CSFB Mortgage Acceptance. Defendant Thomas E. Siegler was Director at CSFB Mortgage Acceptance. Defendant Thomas Zingalli was Principal Accounting Officer and Comptroller of CSFB Mortgage Securities and CSFB Mortgage Acceptance and also was Vice President and Controller for Asset Backed Securities. Defendant Carlos Onis was Director of CSFB Mortgage Securities and Vice President and Director of Asset Backed Securities. Defendant Steven L. Kantor was Director of CSFB Mortgage Acceptance. Defendant Joseph M. Donovan was President and Director of Asset Backed Securities. Defendant Juliana Johnson was Director of Asset Backed Securities. Defendant Greg Richter was Vice President of Asset Backed Securities. 288. Defendant DLJ Mortgage Capital was the sponsor for all 32 of the Securitizations
carried out under the Depositor Defendant Registration Statements, and culpably participated in the violations of Section 31-5606.05(a)(1)(B) of the District of Columbia Code set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance as the special purpose vehicles, and selecting CS Securities as underwriter. In its role as sponsor, with respect to the same securitizations, DLJ Mortgage Capital knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that
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certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 289. Defendant DLJ Mortgage Capital also acted as the seller of the mortgage loans for
CS Securities, DLJ Mortgage Capital, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance. CS Holdings culpably participated in the violations of Section 315606.05(a)(1)(B) of the District of Columbia Code set forth above. Upon information and belief, the officers and directors of CS Holdings overlapped with those of CS Securities. CS Holdings
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also oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as CSFB Mortgage Securities, Asset Backed Securities, CSFB Mortgage Acceptance, and the issuing trusts to serve as conduits for the mortgage loans. 293. DLJ Mortgage Capital and the Individual Defendants are controlling persons
within the meaning of Section 31-5606.05(c) of the District of Columbia Code by virtue of their actual power over, control of, ownership of, and/or directorship of CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Depositor Defendant Registration Statements. 294. CS USA is a controlling person within the meaning of Section 31-5606.05(c) of
the District of Columbia Code by virtue of its, actual power over, control of, ownership of, or directorship of Defendant CS Securities at the time of the wrongs alleged herein and as set forth herein, including its control over the content of each of the Registration Statements. 295. CS Holdings is a controlling person within the meaning of Section 31-5606.05(c)
of the District of Columbia Code by virtue of its actual power over, control of, ownership of, or directorship of CS Securities, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance at the time of the wrongs alleged herein and as set forth herein, including its control over the content of each of the Registration Statements. 296. Fannie Mae purchased the GSE Certificates issued pursuant to the Registration
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the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements. 297. Fannie Mae did not know of the misstatements and omissions in the Registration
in the Registration Statements, for which it is entitled to compensation. 299. The time period from July 29, 2011 through August 29, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between FHFA, Freddie Mac, Fannie Mae, CS USA, CS Securities, DLJ Mortgage Capital, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance. This action is brought within three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). EIGHTH CAUSE OF ACTION Common Law Negligent Misrepresentation (Against CS Securities, CSFB Mortgage Securities, Asset Backed Securities, CSFB Mortgage Acceptance) 300. Plaintiff repeats and realleges each and every allegation above as if fully set forth
herein, except to the extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 301. This is a claim for common law negligent misrepresentation against Defendants
CS Securities, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance. 302. Between September 28, 2005 and November 23, 2007, CS Securities, CSFB
Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance sold the GSE 111
Certificates to the GSEs as described above. Because CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance owned and then conveyed the underlying mortgage loans that collateralized the Securitizations for which they served as depositor, the Depositor Defendants had unique, exclusive, and special knowledge about the mortgage loans in the Securitizations through their possession of the loan files and other documentation. 303. Likewise, as lead or co-lead underwriter for all of the Securitizations, CS
Securities was obligatedand had the opportunityto perform sufficient due diligence to ensure that the Registration Statements, including without limitation the corresponding Prospectus Supplements, did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. As a result of this privileged position as underwriterwhich gave it access to loan file information and obligated it to perform adequate due diligence to ensure the accuracy of the Registration StatementsCS Securities had unique, exclusive, and special knowledge about the underlying mortgage loans in the Securitizations. 304. CS Securities also had unique, exclusive, and special knowledge of the work of
third-party due diligence providers, such as Clayton, who identified significant failures of originators to adhere to the underwriting standards represented in the Registration Statements. The GSEs, like other investors, had no access to borrower loan files prior to the closing of the Securitizations and their purchase of the Certificates. Accordingly, when determining whether to purchase the GSE Certificates, the GSEs could not evaluate the underwriting quality or the servicing practices of the mortgage loans in the Securitizations on a loan-by-loan basis. The GSEs therefore reasonably relied on CS Securities knowledge and its express representations made prior to the closing of the Securitizations regarding the underlying mortgage loans.
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305.
The Depositor Defendants and CS Securities were aware that the GSEs
reasonably relied on the Depositor Defendants and CS Securities reputations and unique, exclusive, and special expertise and experience, as well as their express representations made prior to the closing of the Securitizations, and that the GSEs depended upon these Defendants for complete, accurate, and timely information. The standards under which the underlying mortgage loans were actually originated were known to these Defendants and were not known, and could not be determined, by the GSEs prior to the closing of the Securitizations. 306. Based upon their unique, exclusive, and special knowledge and expertise about
the loans held by the trusts in the Securitizations, the Depositor Defendants and CS Securities had a duty to provide the GSEs complete, accurate, and timely information regarding the mortgage loans and the Securitizations. The Depositor Defendants and CS Securities negligently breached their duty to provide such information to the GSEs by instead making to the GSEs untrue statements of material facts in the Securitizations, or otherwise misrepresenting to the GSEs material facts about the Securitizations. The misrepresentations are set forth in Section IV above, and include misrepresentations as to the accuracy of the represented credit ratings, compliance with underwriting guidelines for the mortgage loans, and the accuracy of the owneroccupancy statistics and the loan-to-value ratios applicable to the Securitizations, as disclosed in the term sheets and Prospectus Supplements. 307. In addition, having made actual representations about the underlying collateral in
the Securitizations and the facts bearing on the riskiness of the Certificates, the Depositor Defendants and CS Securities had a duty to correct misimpressions left by their statements, including with respect to any half truths. The GSEs were entitled to rely upon the Depositor Defendants and CS Securities representations about the Securitizations, and these Defendants
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failed to correct in a timely manner any of their misstatements or half truths, including misrepresentations as to compliance with underwriting guidelines for the mortgage loans. 308. Fannie Mae and Freddie Mac purchased the GSE Certificates based upon the
representations by Credit Suisse as the sponsor, depositor, and lead and selling underwriter in 32 Credit Suisse-sponsored Securitizations. The GSEs received term sheets containing critical data as to the Securitizations, including with respect to anticipated credit ratings by the credit rating agencies, loan-to-value and combined loan-to-value ratios for the underlying collateral, and owner occupancy statistics, which term sheets were delivered, upon information and belief, by CS Securities. This data was subsequently incorporated into Prospectus Supplements that were received by the GSEs upon the close of each Securitization. 309. The GSEs relied upon the accuracy of the data transmitted to them and
subsequently reflected in the Prospectus Supplements. In particular, the GSEs relied upon the credit ratings that the credit rating agencies indicated they would bestow on the Certificates based on the information provided by Credit Suisse relating to the collateral quality of the underlying loans and the structure of the Securitization. These credit ratings represented a determination by the credit rating agencies that the GSE Certificates were AAA quality (or its equivalent)meaning the Certificates had an extremely strong capacity to meet the payment obligations described in the respective PSAs. 310. Detailed information about the underlying collateral and structure of each
Securitization was provided or caused to be provided to the credit rating agencies by, upon information and belief, DLJ Mortgage Capital. The credit reporting agencies based their ratings on this information, and the agencies anticipated ratings of the Certificates were dependent on the accuracy of that information. The GSEs relied on the accuracy of the anticipated credit
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ratings and the actual credit ratings assigned to the Certificates by the credit rating agencies, and upon the accuracy of Credit Suisses representations in the term sheets and Prospectus Supplements. 311. In addition, the GSEs relied on the fact that the originators of the mortgage loans
in the Securitizations had acted in conformity with their underwriting guidelines, which were described in the Prospectus Supplements. Compliance with underwriting guidelines was a precondition to the GSEs purchase of the GSE Certificates in that the GSEs decision to purchase the Certificates was directly premised on their reasonable belief that the originators complied with applicable underwriting guidelines and standards. 312. In purchasing the GSE Certificates, the GSEs justifiably relied on Credit Suisses
false representations and omissions of material fact detailed above, including the misstatements and omissions in the term sheets about the underlying collateral, which were reflected in the Prospectus Supplements. 313. But for the above misrepresentations and omissions, the GSEs would not have
proximate, and foreseeable result of the Depositor Defendants and CS Securities misrepresentations, including any half truths. 315. The time period from July 29, 2011 through August 29, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between FHFA, Freddie Mac, Fannie Mae, CS USA, CS Securities, DLJ Mortgage Capital, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance. In addition, this action is
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brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(2).
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PRAYER FOR RELIEF WHEREFORE Plaintiff prays for relief as follows: 316. An award in favor of Plaintiff against all Defendants, jointly and severally, for all
Certificates, as well as lost principal and lost interest payments thereon; c. d. e. Attorneys fees and costs; Prejudgment interest at the maximum legal rate; and Such other and further relief as the Court may deem just and proper.
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UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK FEDERAL HOUSING FINANCE AGENCY, AS CONSERVATOR FOR THE FEDERAL NATIONAL MORTGAGE ASSOCIATION AND THE FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff, -againstDEUTSCHE BANK AG; TAUNUS CORPORATION; DB STRUCTURED PRODUCTS, INC.; DEUTSCHE BANK SECURITIES INC.; ACE SECURITIES CORP.; MORTGAGEIT SECURITIES CORP.; DOUGLAS K. JOHNSON; EVELYN ECHEVARRIA; AND JULIANA C. JOHNSON, Defendants.
___ CIV. ___ (___)
TABLE OF CONTENTS Page NATURE OF ACTION ...................................................................................................................1 PARTIES .........................................................................................................................................8 The Plaintiff and the GSEs...................................................................................................8 The Defendants ....................................................................................................................8 The Non-Party Originators ................................................................................................11 JURISDICTION AND VENUE ....................................................................................................11 FACTUAL ALLEGATIONS ........................................................................................................12 I. THE SECURITIZATIONS................................................................................................12 A. B. C. Residential Mortgage-Backed Securitizations In General .....................................12 The Securitizations At Issue In This Case .............................................................14 The Securitization Process .....................................................................................15 1. 2. II. DB Products Pools Mortgage Loans in Special Purpose Trusts ................15 The Trusts Issue Securities Backed by the Loans ......................................16
THE DEFENDANTS PARTICIPATION IN THE SECURITIZATION PROCESS ..........................................................................................................................20 A. The Role of Each of the Defendants ......................................................................20 1. 2. 3. 4. 5. 6. 7. DB Products ...............................................................................................20 DBS ............................................................................................................21 ACE............................................................................................................22 MIT Securities ...........................................................................................22 Deutsche Bank AG ....................................................................................23 Taunus ........................................................................................................23 The Individual Defendants .........................................................................23 i
B. III.
IV.
The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines .........................................................45 1. Government Investigations Have Confirmed That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines ..............................................................45 The Collapse of the Certificates Credit Ratings Further Indicates that the Mortgage Loans were not Originated in Adherence to the Stated Underwriting Guidelines .................................................................54 The Surge in Mortgage Delinquency and Default Further Demonstrates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines ....................................56
2.
3.
V.
DEUTSCHE BANK KNEW THAT THE REPRESENTATIONS IN THE REGISTRATION STATEMENTS WERE FALSE AND THAT THE GSES WOULD REASONABLY RELY ON THOSE MISREPRESENTATIONS ...................58 A. Deutsche Bank Knew, Through Its Own Due Diligence And The Findings Of Its Outside Consultants, That The Representations in the Registration Statements Were False ...........................................................................................59 1. Deutsche Bank Knew Based On Its Own Diligence That The Loans Were Not Adequately Underwritten ...............................................59 ii
2.
Deutsche Bank Also Knew, Based On The Findings Of Its Hired Consultants, That The Mortgage Loans Were Not Adequately Underwritten ..............................................................................................61
B.
Deutsche Bank Knew Based On Its Relationship With The Loan Originators That The Representations In The Registration Statements Were False .............................................................................................................64 1. 2. Deutsche Banks Role as Warehouse Lender Further Ensured that it Knew that the Representations Were False ............................................64 Deutsche Bank Knew That The Representations Were False Through Its Affiliation with MortgageIT ..................................................65
C. D.
Multiple Investigations Confirm that Deutsche Bank Knew that the Mortgage Loans Did Not Conform to the Stated Underwriting Guidelines ..........66 Multiple Witnesses, Including Former Deutsche Bank Personnel, Have Confirmed that Deutsche Bank Knew that the Mortgage Loans Did Not Conform to Stated Underwriting Guidelines .........................................................68 The GSEs Justifiably Relied on Deutsche Banks Representations ......................71
E. VI.
FIRST CAUSE OF ACTION ........................................................................................................75 SECOND CAUSE OF ACTION ...................................................................................................79 THIRD CAUSE OF ACTION .......................................................................................................83 FOURTH CAUSE OF ACTION ...................................................................................................86 FIFTH CAUSE OF ACTION ........................................................................................................90 SIXTH CAUSE OF ACTION .......................................................................................................93 SEVENTH CAUSE OF ACTION .................................................................................................97 EIGHTH CAUSE OF ACTION ..................................................................................................100 NINTH CAUSE OF ACTION .....................................................................................................103 TENTH CAUSE OF ACTION ....................................................................................................105 PRAYER FOR RELIEF ..............................................................................................................107 JURY TRIAL DEMANDED .......................................................................................................107 iii
Plaintiff Federal Housing Finance Agency (FHFA), as conservator of The Federal National Mortgage Association (Fannie Mae) and The Federal Home Loan Mortgage Corporation (Freddie Mac), by its attorneys, Quinn Emanuel Urquhart & Sullivan, LLP, for its Complaint herein against DB Structured Products, Inc. (DB Products), Deutsche Bank AG, Deutsche Bank Securities Inc. (DBS), Taunus Corporation (Taunus), ACE Securities Corp. (ACE); MortgageIT Securities Corp. (MIT Securities) (collectively, Deutsche Bank), Douglas K. Johnson, Evelyn Echevarria, and Juliana C. Johnson (the Individual Defendants) (together with Deutsche Bank, the Defendants) alleges as follows: NATURE OF ACTION 1. This action arises out of Defendants actionable conduct in connection with the
offer and sale of certain residential mortgage-backed securities (RMBS) to Fannie Mae and Freddie Mac (collectively, the Government Sponsored Enterprises or GSEs). These securities were sold pursuant to registration statements, including prospectuses and prospectus supplements that formed part of those registration statements, which contained materially false or misleading statements and omissions. Defendants falsely stated that the underlying mortgage loans complied with certain underwriting guidelines and standards. These false statements and misleading omissions significantly overstated the ability of the borrowers to repay their mortgage loans and the value of the collateralized property. These statements were material to the GSEs, as reasonable investors, and their falsity violates Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77a et seq., Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, Sections 31-5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, and constitutes negligent misrepresentation, common law fraud, and aiding and abetting fraud. 2. Between September 28, 2005 and June 29, 2007, Fannie Mae and Freddie Mac
purchased over $14.2 billion in residential mortgage-backed securities (the GSE Certificates) 1
issued in connection with 40 Deutsche Bank-sponsored and/or Deutsche Bank-underwritten securitizations.1 The GSE Certificates purchased by Freddie Mac, along with the date and amount of the purchases, are listed in Table 10. The GSE Certificates purchased by Fannie Mae, along with the date and amount of the purchases, are listed in Table 11. The 40 securitizations at issue are: i. ACE Securities Corp. Home Equity Loan Trust Asset-Backed Pass-Through Certificates, Series 2005-AG1 (ACE 2005-AG1); ii. ACE Securities Corp. Home Equity Loan Trust Asset-Backed Pass-Through Certificates, Series 2005-ASAP1(ACE 2005-ASAP1); iii. ACE Securities Corp. Home Equity Loan Trust Asset-Backed Pass-Through Certificates, Series 2005-HE6 (ACE 2005-HE6); iv. ACE Securities Corp. Home Equity Loan Trust Asset-Backed Pass-Through Certificates, Series 2005-HE7 (ACE 2005-HE7); v. ACE Securities Corp. Home Equity Loan Trust Asset-Backed Pass-Through Certificates, Series 2006-ASAP1 (ACE 2006-ASAP1); vi. ACE Securities Corp. Home Equity Loan Trust Asset-Backed Pass-Through Certificates, Series 2006-ASAP2 (ACE 2006-ASAP2); vii. ACE Securities Corp. Home Equity Loan Trust Asset-Backed Pass-Through Certificates, Series 2006-ASAP3 (ACE 2006-ASAP3); viii. ACE Securities Corp. Home Equity Loan Trust Asset-Backed Pass-Through Certificates, Series 2006-ASAP4 (ACE 2006-ASAP4); ix. ACE Securities Corp. Home Equity Loan Trust Asset-Backed Pass-Through Certificates, Series 2006-ASAP5 (ACE 2006-ASAP5); x. ACE Securities Corp. Home Equity Loan Trust Asset-Backed Pass-Through Certificates, Series 2006-ASAP6 (ACE 2006-ASAP6);
For purposes of this Complaint, the securities issued under the Registration Statements (as defined in footnote 2, above) are referred to as Certificates, while the particular Certificates that Fannie Mae and Freddie Mac purchased are referred to as the GSE Certificates. Holders of Certificates are referred to as Certificateholders. 2
xi. ACE Securities Corp. Home Equity Loan Trust Asset-Backed Pass-Through Certificates, Series 2006-CW1 (ACE 2006-CW1); xii. ACE Securities Corp. Home Equity Loan Trust Asset-Backed Pass-Through Certificates, Series 2006-FM1 (ACE 2006-FM1); xiii. ACE Securities Corp. Home Equity Loan Trust Asset-Backed Pass-Through Certificates, Series 2006-FM2 (ACE 2006-FM2); xiv. ACE Securities Corp. Home Equity Loan Trust Asset-Backed Pass-Through Certificates, Series 2006-HE1 (ACE 2006-HE1); xv. ACE Securities Corp. Home Equity Loan Trust Asset-Backed Pass-Through Certificates, Series 2006-HE2 (ACE 2006-HE2); xvi. ACE Securities Corp. Home Equity Loan Trust Asset-Backed Pass-Through Certificates, Series 2006-HE3 (ACE 2006-HE3); xvii. ACE Securities Corp. Home Equity Loan Trust Asset-Backed Pass-Through Certificates, Series 2006-HE4 (ACE 2006-HE4); xviii. ACE Securities Corp. Home Equity Loan Trust Asset-Backed Pass-Through Certificates, Series 2006-NC1 (ACE 2006-NC1); xix. ACE Securities Corp. Home Equity Loan Trust Asset-Backed Pass-Through Certificates, Series 2006-NC2 (ACE 2006-NC2); xx. ACE Securities Corp. Home Equity Loan Trust Asset-Backed Pass-Through Certificates, Series 2006-NC3 (ACE 2006-NC3); xxi. ACE Securities Corp. Home Equity Loan Trust Asset-Backed Pass-Through Certificates, Series 2006-OP1 (ACE 2006-OP1); xxii. ACE Securities Corp. Home Equity Loan Trust Asset-Backed Pass-Through Certificates, Series 2006-OP2 (ACE 2006-OP2); xxiii. ACE Securities Corp. Home Equity Loan Trust Asset-Backed Pass-Through Certificates, Series 2007-ASAP1 (ACE 2007-ASAP1); xxiv. ACE Securities Corp. Home Equity Loan Trust Asset-Backed Pass-Through Certificates, Series 2007-ASAP2 (ACE 2007-ASAP2); xxv. ACE Securities Corp. Home Equity Loan Trust Asset-Backed Pass-Through Certificates, Series 2007-ASL1 (ACE 2007-ASL1);
xxvi. ACE Securities Corp. Home Equity Loan Trust Asset-Backed Pass-Through Certificates, Series 2007-HE1 (ACE 2007-HE1); xxvii. ACE Securities Corp. Home Equity Loan Trust Asset-Backed Pass-Through Certificates, Series 2007-HE2 (ACE 2007-HE2); xxviii. ACE Securities Corp. Home Equity Loan Trust Asset-Backed Pass-Through Certificates, Series 2007-HE3 (ACE 2007-HE3); xxix. ACE Securities Corp. Home Equity Loan Trust Asset-Backed Pass-Through Certificates, Series 2007-HE4 (ACE 2007-HE4); xxx. ACE Securities Corp. Home Equity Loan Trust Asset-Backed Pass-Through Certificates, Series 2007-HE5 (ACE 2007-HE5); xxxi. ACE Securities Corp. Home Equity Loan Trust Asset-Backed Pass-Through Certificates, Series 2007-SL1 (ACE 2007-SL1); xxxii. ACE Securities Corp. Home Equity Loan Trust Asset-Backed Pass-Through Certificates, Series 2007-WM1 (ACE 2007-WM1); xxxiii. ACE Securities Corp. Home Equity Loan Trust Asset-Backed Pass-Through Certificates, Series 2007-WM2 (ACE 2007-WM2); xxxiv. Deutsche Alt-A Securities Mortgage Loan Trust Mortgage Pass-Through Certificates, Series 2007-OA4 (DBALT 2007-OA4); xxxv. IndyMac INDX Mortgage Loan Trust Mortgage Pass-Through Certificates, Series 2005-AR31 (INDX 2005-AR31); xxxvi. IndyMac INDX Mortgage Loan Trust Mortgage-Backed Certificates, Series 2006-AR9 (INDX 2006-AR9); xxxvii. MortgageIT Securities Corp. Mortgage Loan Trust Mortgage Pass-Through Certificates, Series 2007-1 (MHL 2007-1); xxxviii. New Century Home Equity Loan Trust Asset-Backed Notes, Series 2006-2 (NCHET 2006-2); xxxix. NovaStar Mortgage Funding Trust Asset-Backed Certificates, Series 2007-1 (NHEL 2007-1); xl. Residential Asset Securitization Trust Mortgage-Backed Certificates, Series 2005A15 (RAST 2005-A15); (collectively, the Securitizations). 4
3.
The Certificates were offered for sale pursuant to one of eight shelf registration
statements (the Shelf Registration Statements) filed with the Securities and Exchange Commission (the SEC). Defendant ACE filed three Shelf Registration Statements (the ACE Shelf Registration Statements, including any amendments thereto), which pertained to 34 of the Securitizations. The Individual Defendants signed the ACE Shelf Registration Statements and the amendments thereto. Defendant MIT Securities filed one Shelf Registration Statement, which pertained to the MHL 2007-1 Securitization. With respect to all of the Securitizations, DBS was the lead underwriter and the underwriter that sold the Certificates to the GSEs. 4. For each Securitization, a prospectus (Prospectus) and prospectus supplement
credit quality of the mortgage loans underlying the Securitizations, the creditworthiness of the borrowers of those underlying mortgage loans, and the origination and underwriting practices used to make and approve the loans. Such statements were material to a reasonable investors decision to invest in mortgage-backed securities by purchasing the Certificates. Unbeknownst to Fannie Mae and Freddie Mac, these statements were materially false, as significant percentages of the underlying mortgage loans were not originated in accordance with the represented
The term Registration Statement, as used herein, incorporates the Shelf Registration Statement, the Prospectus and the Prospectus Supplement for each referenced Securitization, except where otherwise indicated. 5
underwriting standards and origination practices and had materially poorer credit quality than what was represented in the Registration Statements. 6. The Registration Statements also contained statistical summaries of the groups of
mortgage loans in each Securitization, such as the percentage of loans secured by owneroccupied properties and the percentage of the loan groups aggregate principal balance with loan-to-value ratios within specified ranges. This information was also material to reasonable investors. However, a loan level analysis of a sample of loans for each Securitization a review that encompassed thousands of mortgages across all of the Securitizations has revealed that these statistics were also false and omitted material facts. 7. For example, the percentage of owner-occupied properties is a material risk factor
to the purchasers of Certificates, such as Fannie Mae and Freddie Mac, since a borrower who lives in a mortgaged property is generally less likely to stop paying his or her mortgage and more likely to take better care of the property. The loan level review reveals that the true percentage of owner-occupied properties for the loans supporting the GSE Certificates was materially lower than what was stated in the Prospectus Supplements. Likewise, the Prospectus Supplements misrepresented other material factors, including the true value of the mortgaged properties relative to the amount of the underlying loans and the actual ability of the individual mortgage holders to satisfy their debts. 8. Defendants DBS (which was the lead underwriter and sold the GSE Certificates to
the GSEs), ACE (which acted as the depositor in 34 of the Securitizations), MIT Securities (which acted as the depositor for the MHL 2007-1 Securitization), DB Products (as successorinterest to depositor MIT Securities), and the Individual Defendants (who signed the Registration Statements with respect to 34 of the Securitizations) are directly responsible for the
misstatements and omissions of material fact contained in the Registration Statements because they prepared, signed, filed and/or used these documents to market and sell the Certificates to Fannie Mae and Freddie Mac. 9. Defendants Deutsche Bank AG, Taunus and DB Products are each responsible for
the misstatements and omissions of material fact contained in the Registration Statements by virtue of their direction and control over Defendants DBS, ACE, and MIT Securities. Deutsche Bank AG exercised dominion and control over the business operations of DBS, ACE, and MIT Securities. Taunus exercised dominion and control over the business operations of DBS. DB Products (the sponsor) directly participated in and exercised dominion and control over the business operations of Defendants ACE and MIT Securities. 10. Fannie Mae and Freddie Mac purchased over $14.2 billion of the Certificates
pursuant to the Registration Statements filed with the SEC. These documents contained misstatements and omissions of material facts concerning the quality of the underlying mortgage loans, and the practices used to originate such loans. As a result of Defendants misstatements and omissions of material fact, Fannie Mae and Freddie Mac have suffered substantial losses as the value of their holdings has significantly deteriorated. 11. FHFA, as Conservator of Fannie Mae and Freddie Mac, brings this action against
the Defendants for violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77k, 77l(a)(2), 77o, Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, Sections 31-5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, and for negligent misrepresentation, common law fraud, and aiding and abetting fraud.
PARTIES The Plaintiff and the GSEs 12. The Federal Housing Finance Agency is a federal agency located at 1700 G
Street, NW, in Washington, D.C. FHFA was created on July 30, 2008 pursuant to the Housing and Economic Recovery Act of 2008 (HERA), Pub. L. No. 110-289, 122 Stat. 2654 (2008) (codified at 12 U.S.C. 4617), to oversee Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. On September 6, 2008, under HERA, the Director of FHFA placed Fannie Mae and Freddie Mac into conservatorship and appointed FHFA as conservator. In that capacity, FHFA has the authority to exercise all rights and remedies of the GSEs, including but not limited to, the authority to bring suits on behalf of and/or for the benefit of Fannie Mae and Freddie Mac. 12 U.S.C. 4617(b)(2). 13. Fannie Mae and Freddie Mac are government-sponsored enterprises chartered by
Congress with a mission to provide liquidity, stability and affordability to the United States housing and mortgage markets. As part of this mission, Fannie Mae and Freddie Mac invested in residential mortgage-backed securities. Fannie Mae is located at 3900 Wisconsin Avenue, NW in Washington, D.C. Freddie Mac is located at 8200 Jones Branch Drive in McLean, Virginia. The Defendants 14. Defendant Deutsche Bank AG is a German corporation with its principal place of
business in Frankfurt, Germany. Deutsche Bank AG is the largest banking institution in Germany. Deutsche Bank AGs U.S. headquarters are located at 60 Wall Street, New York, NY. Deutsche Bank AG has ownership and control of DB Products, DBS, ACE, and MIT Securities. 15. Defendant Taunus was founded in 1999 as the North American subsidiary of
Germanys Deutsche Bank AG. The company is headquartered at 60 Wall Street, New York,
NY. According Deutsche Bank AGs annual report, Taunus is a holding company for most of Deutsche Bank AGs subsidiaries in the United States. Taunus is the direct parent of DBS. 16. Defendant DBS is a Delaware corporation and an SEC registered broker-dealer
with its principal place of business at 60 Wall St., New York, NY 10005. DBS is a wholly owned subsidiary of Deutsche Bank AG. DBSs banking operations are limited to broker-dealer functions in the issuance and underwriting of residential and commercial mortgage-backed securities. DBS was the lead underwriter for each of the Securitizations, and was intimately involved in the offerings. Fannie Mae and Freddie Mac purchased all of the GSE Certificates from DBS in its capacity as underwriter of the Securitizations. 17. Defendant DB Products is a Delaware corporation with its principal place of
business at 60 Wall St., New York, NY 10005. DB Products is a wholly owned subsidiary of Deutsche Bank AG. DB Products was the sponsor for 35 of the Securitizations. 18. DB Products is also the successor-in-interest to MIT Securities, which was the
depositor for the MHL 2007-1 Securitization. MIT Securities was a wholly-owned subsidiary of MortgageIT Holdings, Inc. (MIT Holdings), and was organized for the purpose of serving as a private secondary mortgage market conduit. On or about January 2, 2007, DB Products filed Articles of Merger with the Maryland Secretary of State, which had the effect of consolidating and merging MIT Holdings (and thus MIT Securities) into DB Products. Under Maryland General Corporation Law, 3-114(f)(1), the effect of a consolidation or merger is that [t]he successor is liable for all the debts and obligations of each nonsurviving corporation . An existing claim, action, or proceeding pending against any nonsurviving corporation may be prosecuted to judgment as if the consolidation or merger had not taken place, or, on motion of
the successor of any party, the successor may be substituted as a party and the judgment against the nonsurviving corporation. 19. Defendant ACE is a special purpose Delaware corporation with its principal place
of business in Charlotte, North Carolina. ACE is a subsidiary of Deutsche Bank AG. ACE was formed to facilitate the sale of residential mortgage loans through securitization programs. ACE was the depositor for 34 of the Securitizations. ACE, as depositor, was also responsible for preparing and filing reports required under the Securities Exchange Act of 1934. 20. Defendant MIT Securities is a Delaware corporation with its principal place of
business in New York, New York. MIT Securities was organized for the purpose of serving as a private secondary mortgage market conduit. As discussed above in paragraph 18, DB Products is the successor in interest to MIT Securities. MIT Securities acted as the depositor for the MHL 2007-1 Securitization. 21. Defendant Douglas Johnson was the President and a Director of ACE, and the
President of its parent, Altamont. Mr. Johnson signed three of the Shelf Registration Statements and the amendments thereto. 22. Defendant Evelyn Echevarria was the Secretary and a Director of ACE, and a
Vice President of its parent, Altamont. Ms. Echevarria signed three of the Shelf Registration Statements and the amendments thereto. 23. Defendant Juliana Johnson was the Treasurer and a Director of ACE, and a Vice
President of its parent, Altamont. Ms. Johnson signed three of the Shelf Registration Statements and the amendments thereto.
10
The Non-Party Originators 24. The loans underlying 30 of the Securitizations were acquired by the sponsor from
non-party mortgage originators.3 The non-party originators principally responsible for the loans underlying the Certificates were: Countrywide Home Loans, Inc. (Countrywide), Fremont Investment & Loan (Fremont), IndyMac Bank F.S.B. (IndyMac), New Century Mortgage Corp. (New Century), and Option One Mortgage Corp. (Option One). JURISDICTION AND VENUE 25. Jurisdiction of this Court is founded upon 28 U.S.C. 1345, which gives federal
13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code and Sections 31-5606.05(a)(1)(B) and 315606.05(c) of the District of Columbia Code, pursuant to this Courts supplemental jurisdiction under 28 U.S.C. 1367(a). This Court also has jurisdiction over the common law claims of negligent misrepresentation, fraud, and aiding and abetting fraud, pursuant to this Courts supplemental jurisdiction under 28 U.S.C. 1367(a).
Defendant DB Products was the sponsor for 35 of the 40 Securitizations. The remaining five Securitizations were sponsored by non-parties. In particular, IndyMac Bank, F.S.B., sponsored three of the Securitizations; NovaStar Mortgage Inc., sponsored one of the Securitizations; and New Century Mortgage Corporation sponsored one of the Securitizations. 11
28.
Venue is proper in this district pursuant to Section 22 of the Securities Act of
1933, 15 U.S.C. 77v, and 28 U.S.C. 1391(b). Many of the acts and transactions alleged herein, including the preparation and dissemination of the Registration Statements, occurred in substantial part in New York County. Additionally, the GSE Certificates were actively marketed and sold from New York State and several of the Defendants have their principal place of business in New York County. Defendants are also subject to personal jurisdiction in this District. FACTUAL ALLEGATIONS I. A. 29. THE SECURITIZATIONS Residential Mortgage-Backed Securitizations In General Asset-backed securitization distributes risk by pooling cash-producing financial
the entity that acquires or originates the mortgage loans and initiates the securitizationand the creation of a trust, to which the sponsor directly or indirectly transfers a portfolio of mortgage loans. The trust is established pursuant to a Pooling and Servicing Agreement entered into by, among others, the depositor for that securitization. In many instances, the transfer of assets to a trust is a two-step process: the financial assets are transferred by the sponsor first to an intermediate entity, often a limited purpose entity created by the sponsor and commonly called a depositor, and then the depositor will transfer the assets to the [trust] for the particular asset-backed transactions. Asset-Backed Securities, Securities Act Release No. 33-8518, Exchange Act Release No. 34-50905, 84 SEC Docket 1624 (Dec. 22, 2004).
12
31.
Residential mortgage-backed securities are backed by the underlying mortgage
statements filed with the SEC. These registration statements include prospectuses, which explain the general structure of the investment, and prospectus supplements, which contain detailed descriptions of the mortgage groups underlying the certificates. Certificates are issued by the trust pursuant to the registration statement, the prospectus and the prospectus supplement. Underwriters sell the certificates to investors. 33. A mortgage servicer is necessary to manage the collection of proceeds from the
mortgage loans. The servicer is responsible for collecting homeowners mortgage loan payments, which the servicer remits to the trustee after deducting a monthly servicing fee. The servicers duties include making collection efforts on delinquent loans, initiating foreclosure proceedings, and determining when to charge off a loan by writing down its balance. The servicer is required to report key information about the loans to the trustee. The trustee (or trust administrator) administers the trusts funds and delivers payments due each month on the certificates to the investors.
13
B. 34.
The Securitizations At Issue In This Case This case involves the 40 Securitizations listed in paragraph 2 above, 35 of which
were sponsored by DB Products and all of which were underwritten by DBS. For each of the 40 Securitizations, Table 1 identifies: (1) the sponsor; (2) the depositor; (3) the lead underwriter; (4) the principal amount issued for the tranches4 purchased by the GSEs; (5) the date of issuance; and (6) the loan group or groups backing the GSE Certificate for that Securitization (referred to as the Supporting Loan Groups). Table 1
Transaction
ACE 2005-AG1 ACE 2005-ASAP1 ACE 2005-HE6 ACE 2005-HE7 ACE 2006-ASAP1 ACE 2006-ASAP2 ACE 2006-ASAP3 ACE 2006-ASAP4 ACE 2006-ASAP5 ACE 2006-ASAP6 ACE 2006-CW1 ACE 2006-FM1 ACE 2006-FM2 ACE 2006-HE1 ACE 2006-HE2 ACE 2006-HE3 ACE 2006-HE4 ACE 2006-NC1 ACE 2006-NC2 ACE 2006-NC3 ACE 2006-OP1 ACE 2006-OP2 ACE 2007-ASAP1 ACE 2007-ASAP2 ACE 2007-ASL1 ACE 2007-HE1 ACE 2007-HE2 ACE 2007-HE3
Tranche
A1A A1 A1 A1A A1 A1 A1 A1 A1A A1B A1A A1B A1 A1 A1 A1A A1B1 A1B2 A1 A1 A1 A1 A1 A1A A1B A1A A1B A1 A1 A1 A1 A1 A1 A1
Sponsor
DB Products DB Products DB Products DB Products DB Products DB Products DB Products DB Products DB Products DB Products DB Products DB Products DB Products DB Products DB Products DB Products DB Products DB Products DB Products DB Products DB Products DB Products DB Products DB Products DB Products DB Products DB Products DB Products DB Products DB Products DB Products DB Products DB Products DB Products
Depositor
ACE ACE ACE ACE ACE ACE ACE ACE ACE ACE ACE ACE ACE ACE ACE ACE ACE ACE ACE ACE ACE ACE ACE ACE ACE ACE ACE ACE ACE ACE ACE ACE ACE ACE
Lead Underwriter
DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS

181,194,000 199,395,000 531,329,000 572,103,000 200,510,000 219,739,000 351,056,000 285,643,000 204,109,000 124,883,000 166,575,000 96,477,000 348,483,000 379,752,000 331,351,000 757,819,000 417,082,000 104,270,000 417,932,000 585,651,000 224,129,000 596,262,000 310,440,000 411,186,000 310,606,000 356,901,000 180,507,000 355,789,000 284,631,000 196,819,000 28,625,000 299,722,000 283,073,000 222,412,000
Date of Issuance
10/28/2005 10/31/2005 9/28/2005 11/28/2005 1/30/2006 3/30/2006 5/30/2006 7/31/2006 9/28/2006 9/28/2006 11/29/2006 11/29/2006 7/25/2006 8/25/2006 10/30/2006 2/28/2006 2/28/2006 2/28/2006 4/28/2006 6/27/2006 9/28/2006 1/30/2006 9/15/2006 11/30/2006 11/30/2006 5/25/2006 5/25/2006 10/30/2006 3/15/2007 5/30/2007 2/15/2007 1/30/2007 3/8/2007 3/22/2007

IA I I IA I I I I IA IB IA IB I I I IA IB IB I I I I I IA IB IA IB I I I I I I I
Transaction
ACE 2007-HE4 ACE 2007-HE5 ACE 2007-SL1 ACE 2007-WM1 ACE 2007-WM2 DBALT 2007-OA4 INDX 2005-AR31 INDX 2006-AR9 MHL 2007-1 NCHET 2006-2 NHEL 2007-1 RAST 2005-A15
Tranche
A1 A1 A1 A1 A1 IIA1 IIIA1 2A1 2A1 1A1 A1 A1A 3A1 4A1
Sponsor
DB Products DB Products DB Products DB Products DB Products DB Products DB Products IndyMac IndyMac DB Products New Century NovaStar IndyMac IndyMac
Depositor
ACE ACE ACE ACE ACE ACE ACE IndyMac IndyMac MIT Securities New Century Securities NovaStar Funding IndyMac IndyMac
Lead Underwriter
DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS

320,222,000 156,231,000 48,608,000 219,104,000 203,823,000 151,671,000 149,369,000 247,033,000 188,330,000 440,151,000 435,122,000 803,560,000 170,981,200 209,067,600
Date of Issuance
4/30/2007 6/29/2007 3/2/2007 1/29/2007 3/30/2007 6/29/2007 6/29/2007 11/29/2005 4/27/2006 5/31/2007 6/29/2006 2/28/2007 12/29/2005 12/29/2005

I I I I I II III II II I I I III IV
C. The Securitization Process 1. 35. DB Products Pools Mortgage Loans in Special Purpose Trusts
As the sponsor for 35 of the 40 Securitizations, Defendant DB Products purchased
the mortgage loans underlying the Certificates for those 35 Securitizations after the loans were originated, either directly from the originators or through affiliates of the originators.5 36. DB Products then sold the mortgage loans for 34 of the Securitizations that it
sponsored to Defendant ACE. With respect to the MHL 2007-1 Securitization, DB Products transferred the mortgage loans to MIT Securities, an entity that it subsequently purchased and with respect to which it is liable as successor-in-interest, as discussed at paragraph 18, supra. With respect to the remaining five Securitizations, non-party sponsors sold the mortgage loans to non-party depositors, as reflected in Table 1; Defendant DBS was the lead and selling underwriter for all of those Securitizations.
Non-party IndyMac sponsored the INDX 2005-AR31, INDX 2006-AR9, and RAST 2005-AR15 Securitizations, and purchased the mortgage loans underlying those Certificates. Non-party NovaStar sponsored the NHEL 2007-1 Securitization, and purchased the underlying mortgage loans. Non-party New Century sponsored the NCHET 2006-2 Securitization, and purchased the mortgage loans underlying that Securitization. The sponsor for each Securitization is included in Table 1. 15
37.
ACE was a wholly-owned, limited-purpose subsidiary of Deutsche Bank AG.
ACEs sole purpose was to act as a conduit through which loans acquired by DB Products could be securitized and sold to investors. As depositor for 34 of the Securitizations, ACE transferred the relevant mortgage loans to the trusts. 38. MIT Securities, for which DB Products now stands as successor-in-interest, had,
as its sole purpose, acting as a conduit through which loans acquired by DB Products could be securitized and sold to investors. As depositor for one of the Securitizations (MHL 2007-1), MIT Securities transferred the relevant mortgage loans to the trust. 39. As part of each of the Securitizations, the trustee, on behalf of the
Certificateholders, executed a Pooling and Servicing Agreement (PSA) with the relevant depositor and the parties responsible for monitoring and servicing the mortgage loans in that Securitization. The trust, administered by the trustee, held the mortgage loans pursuant to the related PSA and issued Certificates, including the GSE Certificates, backed by such loans. The GSEs purchased the GSE Certificates, through which they obtained an ownership interest in the assets of the trust, including the mortgage loans. 2. 40. The Trusts Issue Securities Backed by the Loans
PSAs, each trust issued Certificates backed by the underlying mortgage loans. The Certificates were then sold to investors like Fannie Mae and Freddie Mac, which thereby acquired an ownership interest in the assets of the corresponding trust. Each Certificate entitles its holder to a specified portion of the cashflows from the underlying mortgages in the Supporting Loan Group. The level of risk inherent in the Certificates was a function of the capital structure of the related transaction and the credit quality of the underlying mortgages.
16
41.
The Certificates were issued pursuant to one of eight Shelf Registration
Statements filed with the SEC on a Form S-3. The Shelf Registration Statements were amended by one or more Forms S-3/As filed with the SEC. Each Individual Defendant signed the three ACE Shelf Registration Statements, including any amendments thereto. The SEC filing number, registrants, signatories and filing dates for all eight Shelf Registration Statements and amendments thereto, as well as the Certificates covered by each Shelf Registration Statement, are set forth in Table 2 below. Table 2
SEC File No. 333123741 Date Registration Statement Filed 4/1/2005 Date(s) Amended Registration Statement Filed 4/19/2005 Signatories of Registration Statement Douglas K. Johnson; Evelyn Echevarria; Juliana C. Johnson
Registrants
Covered Certificates ACE 2005-AG1 ACE 2005-ASAP1 ACE 2005-HE6 ACE 2005-HE7 ACE 2006-ASAP1 ACE 2006-ASAP2 ACE 2006-HE1 ACE 2006-NC1 ACE 2006-ASAP3 ACE 2006-ASAP4 ACE 2006-ASAP5 ACE 2006-ASAP6 ACE 2006-CW1 ACE 2006-FM1 ACE 2006-FM2 ACE 2006-HE2 ACE 2006-HE3 ACE 2006-HE4 ACE 2006-NC2 ACE 2006-NC3 ACE 2006-OP1 ACE 2006-OP2 ACE 2007-ASL1 ACE 2007-ASAP1 ACE 2007-HE1 ACE 2007-HE2 ACE 2007-HE3 ACE 2007-HE4 ACE 2007-SL1 ACE 2007-WM1 ACE 2007-WM2
Signatories of Amendments Douglas K. Johnson; Evelyn Echevarria; Juliana C. Johnson
ACE
333131727
2/10/2006
3/28/2006; 4/10/2006; 4/18/2006
ACE
Douglas K. Johnson; Evelyn Echevarria; Juliana C. Johnson
Douglas K. Johnson; Evelyn Echevarria; Juliana C. Johnson
17
SEC File No. 333141008 333127556
Date Registration Statement Filed 3/1/2007
Date(s) Amended Registration Statement Filed 4/2/2007
Registrants
Covered Certificates ACE 2007-ASAP2 ACE 2007-HE5 DBALT 2007-OA4 INDX 2005-AR31 RAST 2005-A15
Signatories of Registration Statement Douglas K. Johnson; Evelyn Echevarria; Juliana C. Johnson John Olinski; S. Blair Abernathy; Lynette Antosh; Samir Grover John Olinski; S. Blair Abernathy; Raphael Bostic; Samir Grover; Victor H. Woodworth Doug W. Naidus; Donald Epstein
Signatories of Amendments Douglas K. Johnson; Evelyn Echevarria; Juliana C. Johnson Not applicable
ACE
8/15/2005
Not applicable
IndyMac
333132042
2/24/2006
3/29/2006; 4/13/2006; 6/5/2007
IndyMac
INDX 2006-AR9
John Olinski; S. Blair Abernathy; Raphael Bostic; Simon Heyrick; Victor H. Woodworth Doug W. Naidus; Donald Epstein
333131288
1/26/2006
333131231
1/23/2006
333134461
5/25/2006
3/27/2006; 5/25/2006; 7/21/2006; 8/15/2006 3/7/2006; 3/24/2006; 4/6/2006; 4/12/2006 6/16/2006
MIT Securities
MHL 2007-1
New Century Securities
NCHET 2006-2
Brad A. Morrice; Patrick J. Flanagan; Patti Dodge Scott F. Hartman; Greg Metz; W. Lance Anderson; Mark Herpich
Brad A. Morrice; Kevin Cloyd; Patti Dodge Scott F. Hartman; Greg Metz; W. Lance Anderson; Mark Herpich
Novastar Funding
NHEL 2007-1
42.
guidelines that purportedly were used in connection with the origination of the underlying mortgage loans. In addition, the Prospectus Supplements purport to provide accurate statistics regarding the mortgage loans in each group, including the ranges of and weighted average FICO credit scores of the borrowers, the ranges of and weighted average loan-to-value ratios of the loans, the ranges of and weighted average outstanding principal balances of the loans, the debtto-income ratios, the geographic distribution of the loans, the extent to which the loans were for purchase or refinance purposes; information concerning whether the loans were secured by a property to be used as a primary residence, second home, or investment property; and information concerning whether the loans were delinquent.
18
43.
The Prospectus Supplements associated with each Securitization were filed with
Transaction ACE 2005-AG1 ACE 2005-ASAP1 ACE 2005-HE6 ACE 2005-HE7 ACE 2006-ASAP1 ACE 2006-ASAP2 ACE 2006-ASAP3 ACE 2006-ASAP4 ACE 2006-ASAP5 ACE 2006-ASAP6 ACE 2006-CW1 ACE 2006-FM1 ACE 2006-FM2 ACE 2006-HE1 ACE 2006-HE2 ACE 2006-HE3 ACE 2006-HE4 ACE 2006-NC1 ACE 2006-NC2 ACE 2006-NC3 ACE 2006-OP1 ACE 2006-OP2 ACE 2007-ASAP1 ACE 2007-ASAP2 ACE 2007-ASL1 ACE 2007-HE1 ACE 2007-HE2 ACE 2007-HE3 ACE 2007-HE4 ACE 2007-HE5 ACE 2007-SL1 ACE 2007-WM1 ACE 2007-WM2 DBALT 2007-OA4 INDX 2005-AR31 INDX 2006-AR9 MHL 2007-1 NCHET 2006-2 Date Prospectus Supplement Filed 10/26/2005 11/1/2005 9/30/2005 11/28/2005 1/30/2006 3/22/2006 5/26/2006 7/28/2006 10/13/2006 11/30/2006 7/20/2006 8/21/2006 10/30/2006 2/28/2006 4/27/2006 6/22/2006 9/27/2006 1/30/2006 9/15/2006 11/24/2006 5/19/2006 10/24/2006 3/19/2007 5/25/2007 2/15/2007 1/31/2007 3/12/2007 3/23/2007 4/30/2007 6/26/2007 3/2/2007 1/30/2007 4/2/2007 7/3/2007 11/30/2005 5/2/2006 6/1/2007 6/27/2006 Date Form 8-K Attaching PSA Filed 11/17/2005 11/15/2005 10/18/2005 1/4/2006 3/7/2006 4/27/2006 6/16/2006 8/4/2006 10/25/2006 1/10/2007 11/13/2006 11/3/2006 11/20/2006 5/5/2006 5/10/2006 7/17/2006 10/19/2006 3/7/2006 10/27/2006 12/19/2006 6/16/2006 11/16/2006 4/10/2007 6/25/2007 3/19/2007 3/23/2007 4/10/2007 4/12/2007 6/14/2007 8/21/2007 3/22/2007 4/16/2007 4/13/2007 7/16/2007 1/30/2006 5/12/2006 8/1/2007 7/14/2006 Filing No. of Related Registration Statement 333-123741 333-123741 333-123741 333-123741 333-123741 333-123741 333-131727 333-131727 333-131727 333-131727 333-131727 333-131727 333-131727 333-123741 333-131727 333-131727 333-131727 333-123741 333-131727 333-131727 333-131727 333-131727 333-131727 333-141008 333-131727 333-131727 333-131727 333-131727 333-131727 333-141008 333-131727 333-131727 333-131727 333-141008 333-127556 333-132042 333-131288 333-131231
19
Transaction NHEL 2007-1 RAST 2005-A15
Date Prospectus Supplement Filed 2/28/2007 12/30/2005
Date Form 8-K Attaching PSA Filed 4/9/2007 1/30/2006
Filing No. of Related Registration Statement 333-134461 333-127556
44.
The Certificates were issued pursuant to the PSAs, and Defendants offered and
sold the GSE Certificates to Fannie Mae and Freddie Mac pursuant to the Registration Statements, which, as noted previously, included the Prospectuses and Prospectus Supplements. II. A. 45. THE DEFENDANTS PARTICIPATION IN THE SECURITIZATION PROCESS The Role of Each of the Defendants Each of the Defendants, including the Individual Defendants, had a role in the
Defendants who signed the Registration Statement, as well as the Defendants who exercised control over their activities, are liable, jointly and severally, as participants in the registration, issuance and offering of the Certificates, including issuing, causing, or making materially misleading statements in the Registration Statement, and omitting material facts required to be stated therein or necessary to make the statements contained therein not misleading. 1. 47. DB Products
DB Products was purchased by Deutsche Bank in 1993 and began securitizing
residential mortgage loans in 2004. DB Products is a leading sponsor of mortgage-backed 20
securities. As stated in the Prospectus Supplement for the ACE 2007-WM2 Securitization, during the 2004, 2005 and 2006 fiscal years, DB Products securitized approximately $7.7 billion, $18.4 billion, and $23.9 billion of residential mortgage loans, respectively. 48. Defendant DB Products was the sponsor for 35 of the Securitizations. In that
capacity, DB Products initiated the Securitizations, purchased the mortgage loans to be securitized, and determined the structure of the Securitizations. DB Products also selected the depositor that would be used to transfer the mortgage loans from DB Products to the trusts, and selected the underwriter for the Securitizations. In its role as sponsor, DB Products knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing such loans would be issued by the relevant trusts. 49. Defendant DB Products also conveyed the mortgage loans to ACE for 34 of the
35 Securitizations that DB Products sponsored, and to MIT Securities for the Securitization that it sponsored. DB Products conveyed the loans to these entities, to serve as depositors for the Securitizations, pursuant to Mortgage Loan Purchase Agreements. In these agreements, DB Products made certain representations and warranties to the depositors regarding the group of loans collateralizing the Certificates. These representations and warranties were assigned by the depositors, including ACE with respect to 34 of the Securitizations, to the trustees for the benefit of the Certificateholders. 2. 50. DBS
Defendant DBS is an investment bank, and was, at all relevant times, a registered
broker/dealer and one of the leading underwriters of mortgage and other asset-backed securities in the United States. 51. Defendant DBS was the lead underwriter for each of the Securitizations. In that
role, DBS was responsible for underwriting and managing the offer and sale of the Certificates to 21
Fannie Mae and Freddie Mac and other investors. DBS was also obligated to conduct meaningful due diligence to ensure that the Registration Statements did not contain any material misstatements or omissions, including as to the manner in which the underlying mortgage loans were originated and underwritten. 3. 52. ACE
Defendant ACE is a special purpose entity formed solely for the purpose of
purchasing mortgage loans, filing registration statements with the SEC, forming issuing trusts, assigning mortgage loans and all of its rights and interests in such mortgage loans to the trustee for the benefit of the certificateholders, and depositing the underlying mortgage loans into the issuing trusts. 53. Defendant ACE was the depositor for 34 of the 40 Securitizations. In its capacity
as depositor, ACE purchased the mortgage loans from DB Products (as sponsor) pursuant to the Mortgage Loan Purchase Agreements. ACE then sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trusts. ACE, together with the other Defendants, was also responsible for preparing and filing the Registration Statements pursuant to which the Certificates were offered for sale. The trusts in turn held the mortgage loans for the benefit of the Certificateholders, and issued the Certificates in public offerings for sale to investors such as Fannie Mae and Freddie Mac. 4. 54. MIT Securities
Defendant MIT Securities acted as the depositor for the MHL 2007-1
Securitization. In its capacity as depositor, MIT Securities purchased the mortgage loans from DB Products pursuant to a Mortgage Loan Purchase Agreement. MIT Securities then sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trusts. MIT Securities was also responsible for preparing and filing the Registration Statement pursuant to 22
which the Certificates for that Securitization were offered for sale. The trusts in turn held the mortgage loans for the benefit of the Certificateholders, and issued the Certificates in public offerings for sale to investors such as Fannie Mae and Freddie Mac. 5. 55. Deutsche Bank AG
Defendant Deutsche Bank AG is the ultimate parent of DBS, DB Products, and
ACE. Deutsche Bank AG employed its subsidiaries, DBS, DB Products and ACE, in key steps of the securitization process. Unlike typical arms length transactions, the Securitizations here involved various Deutsche Bank AG subsidiaries and affiliates at virtually every step in the chain. With few exceptions, the sponsor was DB Products, the depositor was ACE and the lead underwriter was DBS. Deutsche Bank AG profited substantially from this vertically integrated approach to mortgage-backed securitization. 6. 56. Taunus
Defendant Taunus is Deutsche Bank AGs principal holding company in the
United States and the direct parent of DBS. It is a wholly owned subsidiary of Deutsche Bank AG. As the sole corporate parent of DBS, Taunus had the practical ability to direct and control the actions of DBS related to the Securitizations, and in fact exercised such direction and control over the activities of DBS related to the issuance and sale of the Certificates. 7. 57. The Individual Defendants
Defendant Douglas Johnson was the President and a Director of ACE, and the
President of its parent, Altamont. Mr. Johnson signed the ACE Shelf Registration Statements and amendments thereto. 58. Defendant Evelyn Echevarria was the Secretary and a Director of ACE, and a
Vice President of its parent, Altamont. Ms. Echevarria signed the ACE Shelf Registration Statements and the amendments thereto. 23
59.
Defendant Juliana Johnson was the Treasurer and a Director of ACE, and a Vice
President of its parent, Altamont. Ms. Johnson signed the ACE Shelf Registration Statements and the amendments thereto. B. 60. Defendants Failure To Conduct Proper Due Diligence Defendants failed to conduct adequate and sufficient due diligence to ensure that
the mortgage loans underlying the Securitizations complied with the representations in the Registration Statements. 61. During the time period in which the Certificates were issuedapproximately
2005 through 2007Deutsche Banks involvement in the mortgage-backed securitization market was rapidly expanding. In an effort to increase revenue and profits, Deutsche Bank vastly expanded the volume of mortgage-backed securities it issued as compared to prior years. In 2004, DB Products purchased and securitized approximately $7.7 billion in residential mortgage loans, using both prime and subprime loans; in 2005, DB Products securitized more than $18.4 billion in residential mortgage loans; and in the first three quarters of 2006 DB Products had already securitized over $23.9 billion in residential mortgage loans. See ACE 2007-WM2 Prospectus Supplement, filed Jan. 30, 2007. 62. At the same time, DBS was becoming one of the largest underwriters of subprime
residential mortgage-backed securities. According to an August 10, 2010 report by Compass Point Research & Trading LLC, citing the Bloomberg Asset Backed Alert, DBS ranks as the 12th largest underwriter of subprime residential mortgage-backed securities from 2005 through 2007, with a 3.7 percent market share. DBS underwrote over $20 billion of subprime residential mortgage-backed securities during this time period: approximately $5.5 billion in 2005, $4.3 billion in 2006, and $10.1 billion in 2007.
24
63.
Deutsche Banks participation in the securitization of residential mortgage loans
proved extremely lucrative. According to Deutsche Bank AGs 2006 Annual Report, the companys sustained expansion into residential mortgage-backed securities in the U.S. generated record revenues. 64. Defendants had enormous financial incentives to complete as many offerings as
quickly as possible without regard to ensuring the accuracy or completeness of the Registration Statements, or conducting adequate and reasonable due diligence. For example, ACE, as depositor, was paid a percentage of the total dollar amount of the offerings upon completion of the Securitizations, and DBS, as the underwriter, was paid a commission based on the amount it received from the sale of the Certificates to the public. 65. The push to securitize large volumes of mortgage loans contributed to the absence
of controls needed to prevent the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. In particular, Defendants failed to conduct adequate diligence or to otherwise ensure the accuracy of the statements in the Registration Statements pertaining to the Securitizations. 66. The Financial Crisis Inquiry Commission (FCIC)6 specifically found in its
report issued January 2011 (the FCIC Report) that due diligence practices across many mortgage corporations, including Deutsche Bank and its subsidiary DB Products, were insufficient: Some mortgage securitizers did their own due diligence, but seemed to devote only limited resources to it . Deutsche Bank and JP Morgan [] also had only small due diligence teams.
The Financial Crisis Inquiry Commission was created by the Fraud Enforcement and Recovery Act of 2009, and was established to examine the causes, domestic and global, of the current financial and economic crisis in the United States. 25
FCIC Report at 278 (emphasis added). 67. The failure to perform proper due diligence led to sponsors, depositors and
underwriters, including Defendants, sponsoring, marketing, and selling poor-quality securities. As stated in the April 13, 2011 report of the Senate Permanent Subcommittee on Investigations entitled Wall Street and the Financial Crisis: Anatomy of a Financial Collapse (the LevinCoburn Report): Both Goldman Sachs and Deutsche Bank underwrote securities using loans from subprime lenders known for issuing high risk, poor quality mortgages, and sold risky securities to investors across the United States and around the world. The Levin-Coburn Report made clear, moreover, that these underwriters sold securitizations collateralized by these highrisk mortgages without fully disclosing the risks. Id. 68. The Levin-Coburn Report likewise revealed that ACE, the depositor for all but six
of the Securitizations, did not follow its underwriting guidelines. For instance, in an email cited in the report, Deutsche Bank employee Greg Lippman discussed several mortgage-backed securitizations and stated that ACE is generally horrible. See Levin-Coburn Report at 339. 69. DBS also retained third-parties, including Clayton Holdings, Inc. (Clayton), to
analyze the loans it was considering placing in its securitizations, but waived a significant number of loans into the securitizations that these firms had recommended for exclusion, and did so without taking adequate steps to ensure that these loans had in fact been underwritten in accordance with applicable guidelines or had compensating factors that excused the loans noncompliance with those guidelines. On January 27, 2008, Clayton revealed that it had entered into an agreement with the New York Attorney General (the NYAG) to provide documents and testimony regarding its due diligence reports, including copies of the actual reports provided to its clients. According to The New York Times, as reported on January 27, 2008, Clayton told the
26
NYAG that starting in 2005, it saw a significant deterioration of lending standards and a parallel jump in lending expectations and some investment banks directed Clayton to halve the sample of loans it evaluated in each portfolio. Jenny Anderson & Vikas Bajaj, Loan Reviewer Aiding Inquiry into Big Banks, N.Y. Times, Jan. 27, 2008. 70. Deutsche Bank was negligent in allowing into the Securitizations a substantial
number of mortgage loans that, as reported to Deutsche Bank by third-party due diligence firms, did not conform to the underwriting standards stated in the Registration Statements, including the Prospectuses and Prospectus Supplements. Even upon learning from the third-party due diligence firms that there were high percentages of defective or at least questionable loans in the sample of loans reviewed by the third-party due diligence firms, Deutsche Bank failed to take any additional steps to verify that the population of loans in the Securitizations did not include a similar percentage of defective and/or questionable loans. 71. Claytons trending reports revealed that in the period from the first quarter of
2006 to the second quarter of 2007, 34.9 percent of the mortgage loans Deutsche Bank submitted to Clayton for review in residential mortgage-backed securities groups were rejected by Clayton as falling outside applicable underwriting guidelines. Of the mortgage loans that Clayton found defective, 50 percent of the loans were subsequently waived in by Deutsche Bank without proper consideration and analysis of compensating factors and included in securitizations such as the ones in which Fannie Mae and Freddie Mac invested here. See Clayton Trending Reports, available at http://fcic.law.stanford.edu/hearings/testimony/the-impact-of-the-financial-crisissacramento#documents.
27
III. A. 72.
THE REGISTRATION STATEMENTS AND THE PROSPECTUS SUPPLEMENTS Compliance With Underwriting Guidelines The Prospectus Supplements for each Securitization describe the mortgage loan
part of the Registration Statement for each Securitization, were material to a reasonable investors decision to purchase and invest in the Certificates because the failure to originate a mortgage loan in accordance with the applicable guidelines creates a higher risk of delinquency and default by the borrower, as well as a risk that losses upon liquidation will be higher, thus resulting in greater economic risk to an investor. 74. The Prospectus Supplements for the Securitizations contained several key
statements with respect to the underwriting standards of the entities that originated the loans in the Securitizations. For example, the Prospectus Supplement for the ACE 2006-FM1 Securitization, for which DB Products was the sponsor, ACE was the depositor and DBS was the underwriter, stated that: [the] [m]ortgage loans are underwritten in accordance with Fremonts current underwriting programs. 75. The Prospectus Supplement for the ACE 2006-FM1 Securitization stated that,
[o]n a case by case basis, loans that did not meet Fremonts underwriting guidelines, as described in the Prospectus Supplement, may nonetheless have been included in the Securitization, but only where compensating factors existed. 28
76.
With respect to the information evaluated by the originator, the Prospectus
Supplement stated that: [Fremont] considers, among other things, a mortgagors credit history, repayment ability and debt service-to-income ratio, as well as the value, type and use of the mortgaged property. 77. Further, the ACE 2006-FM1 Prospectus Supplement stated that Fremont
performed additional reviews to ensure that the origination guidelines were being followed: Fremont conducts a number of quality control procedures, including a post-funding review as well as a full re-underwriting of a random selection of loans to assure asset quality. Under the funding review, all loans are reviewed to verify credit grading, documentation compliance and data accuracy. Under the asset quality procedure, a random selection of each months originations is reviewed. The loan review confirms the existence and accuracy of legal documents, credit documentation, appraisal analysis and underwriting decision. 78. The Prospectus and Prospectus Supplement for each of the Securitizations had
similar representations to those quoted above. The relevant representations in the Prospectus and Prospectus Supplement pertaining to originating entity underwriting standards for each Securitization are reflected in Appendix A to this Complaint. As discussed below at paragraphs 106 through 132, in fact, the originators of the mortgage loans in the Supporting Loan Group for the Securitizations did not adhere to their stated underwriting guidelines, thus rendering the description of those guidelines in the Prospectuses and Prospectus Supplements false and misleading. 79. Further, for the vast majority of the Securitizations, the Prospectuses and
Prospectus Supplements included additional representations and warranties concerning the mortgage loans backing the Securitizations that were made by the originator to the seller in the
29
PSA. Such representations and warranties, which are described more fully for each Securitization in Appendix A, included that the mortgage loans were underwritten in accordance with the originators underwriting guidelines in effect at the time of origination, subject to only limited exceptions. 80. The inclusion of these representations in the Prospectuses and Prospectus
the occupancy status of the borrowers of the loans in the Securitizations. Occupancy status refers to whether the property securing a mortgage is to be the primary residence of the borrower, a second home, or an investment property. The Prospectus Supplements for each of the Securitizations presented this information in tabular form, usually in a table entitled Occupancy Status of the Mortgage Loans. This table divided all the loans in the collateral group by occupancy status, e.g., into the following categories: (i) Primary, or Owner Occupied; (ii) Second Home, or Secondary; and (iii) Investment or Non-Owner. For each category, the table stated the number of loans in that category. Occupancy statistics for the
30
Supporting Loan Groups for each Securitization were reported in the Prospectus Supplements as follows:7 Table 4
Supporting Loan Group Group IA Group I Group I Group IA Group I Group I Group I Group I Group IA Group IB Group IA Group IB Group I Group I Group I Group IA Group IB Group I Group I Group I Group I Group I Group IA Group IB Group IA Group IB Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Primary or Owner Occupied (%) 97.16 96.78 88.08 92.84 97.04 96.17 97.29 97.41 96.31 99.26 96.54 96.81 95.16 90.37 90.35 89.25 94.41 90.60 93.37 91.15 83.55 93.30 82.52 94.32 88.00 92.54 90.64 96.13 94.78 100.00 91.91 88.68 92.56 90.09 87.14 100.00 94.02 95.49 Second Home/Secondary (%) 2.84 0.73 1.06 3.50 0.50 1.06 0.35 0.40 1.14 0.08 0.58 0.82 0.90 0.89 1.02 1.09 0.57 0.92 0.62 0.75 4.05 0.81 4.51 0.76 1.65 0.48 0.54 0.69 0.82 0.00 1.25 0.46 1.16 1.59 1.30 0.00 3.66 3.72 Investment (%) 0.00 2.49 10.86 3.66 2.46 2.78 2.36 2.20 2.55 0.65 2.88 2.36 3.93 8.75 8.64 9.66 5.02 8.47 6.01 8.10 12.40 5.88 12.97 4.92 10.35 6.98 8.82 3.19 4.39 0.00 6.84 10.86 6.28 8.33 11.56 0.00 2.32 0.78
Transaction ACE 2005-AG1 ACE 2005-ASAP1 ACE 2005-HE6 ACE 2005-HE7 ACE 2006-ASAP1 ACE 2006-ASAP2 ACE 2006-ASAP3 ACE 2006-ASAP4 ACE 2006-ASAP5 ACE 2006-ASAP6 ACE 2006-CW1 ACE 2006-FM1 ACE 2006-FM2 ACE 2006-HE1 ACE 2006-HE2 ACE 2006-HE3 ACE 2006-HE4 ACE 2006-NC1 ACE 2006-NC2 ACE 2006-NC3 ACE 2006-OP1 ACE 2006-OP2 ACE 2007-ASAP1 ACE 2007-ASAP2 ACE 2007-ASL1 ACE 2007-HE1 ACE 2007-HE2 ACE 2007-HE3 ACE 2007-HE4 ACE 2007-HE5 ACE 2007-SL1 ACE 2007-WM1 ACE 2007-WM2
7
Each Prospectus Supplement provides the total number of loans and the number of loans in the following categories: owner occupied, investor, and second home. These numbers have been converted to percentages. 31
Transaction
Supporting Loan Group Group II Group III Group II Group II Group I Group I Group I Group III Group IV
DBALT 2007-OA4 INDX 2005-AR31 INDX 2006-AR9 MHL 2007-1 NCHET 2006-2 NHEL 2007-1 RAST 2005-A15
Primary or Owner Occupied (%) 64.02 64.12 82.76 82.56 61.96 85.02 86.87 84.51 66.67
Second Home/Secondary (%) 6.39 10.11 4.49 2.69 2.83 2.58 2.76 3.70 4.76
Investment (%) 29.60 25.77 12.76 14.74 35.21 12.40 10.37 11.79 28.57
82.
decision to invest in the Certificates. Information about occupancy status is an important factor in determining the credit risk associated with a mortgage loan and, therefore, the securitization that it collateralizes. Because borrowers who reside in mortgaged properties are less likely to default than borrowers who purchase homes as second homes or investments and live elsewhere, and are more likely to care for their primary residence, the percentage of loans in the collateral group of a securitization that are secured by mortgage loans on owner-occupied residences is an important measure of the risk of the certificates sold in that securitization. 84. Other things being equal, the higher the percentage of loans not secured by
owner-occupied residences, the greater the risk of loss to the certificateholders. Even small differences in the percentages of primary/owner-occupied, second home/secondary, and investment properties in the collateral group of a securitization can have a significant effect on the risk of each certificate sold in that securitization, and thus, are important to the decision of a 32
reasonable investor whether to purchase any such certificate. As discussed in Section IV.A.1, below, the Registration Statement for each Securitization materially overstated the percentage of loans in the Supporting Loan Groups that were owner occupied, thereby misrepresenting the degree of risk of the GSE Certificates. C. 85. Statements Regarding Loan-to-Value Ratios The loan-to-value ratio of a mortgage loan, or LTV ratio, is the ratio of the
Table 5
Percentage of Loans, by Aggregate Principal Balance, with LTV Less than or Equal to 80% 53.56 81.79 58.98 63.19 83.88 82.93 82.81 79.68 75.16 73.79 63.98 58.72 63.34 65.70 66.39 64.38 69.52 63.48 68.18 61.88 54.46 54.13 55.97 56.24 68.71 70.55 57.82 52.62 47.95 0.44 62.24 64.47 58.60 56.62 47.21 7.73 67.71 69.33 88.55 86.18 96.96 99.33 94.93 51.52 46.77 Percentage of Loans, by Aggregate Principal Balance, with LTV Greater than 100% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Transaction
ACE 2005-AG1 ACE 2005-ASAP1 ACE 2005-HE6 ACE 2005-HE7 ACE 2006-ASAP1 ACE 2006-ASAP2 ACE 2006-ASAP3 ACE 2006-ASAP4 ACE 2006-ASAP5 ACE 2006-ASAP6 ACE 2006-CW1 ACE 2006-FM1 ACE 2006-FM2 ACE 2006-HE1 ACE 2006-HE2 ACE 2006-HE3 ACE 2006-HE4 ACE 2006-NC1 ACE 2006-NC2 ACE 2006-NC3 ACE 2006-OP1 ACE 2006-OP2 ACE 2007-ASAP1 ACE 2007-ASAP2 ACE 2007-ASL1 ACE 2007-HE1 ACE 2007-HE2 ACE 2007-HE3 ACE 2007-HE4 ACE 2007-HE5 ACE 2007-SL1 ACE 2007-WM1 ACE 2007-WM2 DBALT 2007-OA4 INDX 2005-AR31 INDX 2006-AR9 MHL 2007-1 NCHET 2006-2 NHEL 2007-1
Group IA Group I Group I Group IA Group I Group I Group I Group I Group IA Group IB Group IA Group IB Group I Group I Group I Group IA Group IB Group I Group I Group I Group I Group I Group IA Group IB Group IA Group IB Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group II Group III Group II Group II Group I Group I Group I
34
RAST 2005-A15
Group III Group IV
92.62 92.24
0.00 0.00
88.
As Table 5 makes clear, the Prospectus Supplements for nearly all of the
Securitizations reported that many or most of the mortgage loans in the Supporting Loan Groups had an LTV ratio of 80 percent or less,9 and the Prospectus Supplement for all of the Securitizations reported that none of the mortgage loans in the Supporting Loan Groups had an LTV ratio over 100 percent. 89. The LTV ratio is among the most important measures of the risk of a mortgage
loan, and thus it is one of the most important indicators of the default risk of the mortgage loans underlying the Certificates. The lower the ratio, the less likely that a decline in the value of the property will wipe out an owners equity, and thereby give an owner an incentive to stop making mortgage payments and abandon the property. This ratio also predicts the severity of loss in the event of default. The lower the LTV ratio, the greater the equity cushion, so the greater the likelihood that the proceeds of foreclosure will cover the unpaid balance of the mortgage loan. 90. Even small differences in the LTV ratios of the mortgage loans in the collateral
group of a securitization can have a significant effect on the likelihood that the collateral groups will generate sufficient funds to pay certificateholders in that securitization, and thus are material to the decision of a reasonable investor whether to purchase any such certificate. As stated in the Prospectus Supplement for the NCHET 2006-2 Securitization: Mortgage loans with a loan-tovalue ratio of greater than 80% may present a greater risk of loss than mortgage loans with loanto-value ratios of 80% or below. As discussed below in Section IVA2, the Registration Statements for the Securitizations materially overstated the percentage of loans in the Supporting The only exceptions are the ACE 2007-ASL1 and ACE 2007-SL1 Securitizations, for which the majority of mortgage loans was reported as having an LTV ratio greater than 80 percent and below 100 percent. 35
9
Loan Groups with an LTV ratio at or less than 80 percent, and materially understated the percentage of loans in the Supporting Loan Groups with an LTV ratio over 100 percent, thereby misrepresenting the degree of risk of the GSE Certificates.10 D. 91. Statements Regarding Credit Ratings Credit ratings are assigned to the tranches of mortgage-backed securitizations by
securitization by comparing the likelihood of contractual principal and interest repayment to the credit enhancements available to protect investors. Rating agencies determine the likelihood of repayment by estimating cashflows based on the quality of the underlying mortgages by using sponsor provided loan level data. Credit enhancements, such as subordination, represent the
The lone exception is that ACE 2007-ASL1 Securitization, for which the Registration Statement understated the percentage of loans with an LTV ratio above 100 percent by 42.2 percent, but did not overstate the percentage of loans with an LTV ratio at or less than 80 percent. 36
10
amount of cushion or protection from loss incorporated into a given securitization.11 This cushion is intended to improve the likelihood that holders of highly rated certificates receive the interest and principal to which they are contractually entitled. The level of credit enhancement offered is based on the make-up of the loans in the underlying collateral group and the entire securitization. Riskier loans underlying the securitization necessitate higher levels of credit enhancement to insure payment to senior certificate holders. If the collateral within the deal is of a higher quality, then rating agencies require less credit enhancement for AAA or its equivalent rating. 93. Credit ratings have been an important tool to gauge risk when making investment
decisions. For almost a hundred years, investors like pension funds, municipalities, insurance companies, and university endowments have relied heavily on credit ratings to assist them in distinguishing between safe and risky investments. Fannie Mae and Freddie Macs respective internal policies limited their purchases of private label residential mortgage-backed securities to those rated AAA (or its equivalent), and in very limited instances, AA or A bonds (or their equivalent). 94. Each tranche of the Securitizations received a credit rating upon issuance, which
purported to describe the riskiness of that tranche. The Defendants reported the credit ratings for each tranche in the Prospectus Supplements. The credit rating provided for each of the GSE Certificates was investment grade, almost always AAA or its equivalent. The accuracy of these ratings was material to a reasonable investors decision to purchase the Certificates. As set
11
forth in Table 8, the ratings for the Securitizations were inflated as a result of Defendants provision of incorrect data concerning the attributes of the underlying mortgage collateral to the ratings agencies, and, as a result, Defendants sold and marketed the GSE Certificates as AAA (or its equivalent) when, in fact, they were not. IV. A. 95. FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS The Statistical Data Provided in the Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False A review of loan-level data was conducted in order to assess whether the
statistical information provided in the Prospectus Supplements was true and accurate. For each Securitization, the sample consisted of 1,000 randomly selected loans per Supporting Loan Group, or all of the loans in the group if there were fewer than 1,000 loans in the Supporting Loan Group. The sample data confirms, on a statistically-significant basis, material misrepresentations of underwriting standards and of certain key characteristics of the mortgage loans across the Securitizations. The data review demonstrates that the data concerning owner occupancy and LTV ratios was materially false and misleading. 1. 96. Owner Occupancy Data Was Materially False
claimed, a number of tests were conducted, including, inter alia, whether, months after the loan closed, the borrowers tax bill was being mailed to the property or to a different address; whether the borrower had claimed a tax exemption on the property; and whether the mailing address of 38
the property was reflected in the borrowers credit reports, tax records, or lien records. Failing two or more of these tests is a strong indication that the borrower did not live at the mortgaged property and instead used it as a second home or an investment property, both of which make it much more likely that a borrower will not repay the loan. 98. A significant number of the loans failed two or more of these tests, indicating that
the owner occupancy statistics provided to Fannie Mae and Freddie Mac were materially false and misleading. For example, for the ACE 2005-ASAP1 Securitization, for which DB Products was the sponsor, ACE the depositor and DBS the underwriter, the Prospectus Supplement stated that only 3.22 percent of the underlying properties by loan count in the Supporting Loan Group were not owner-occupied, and therefore 96.78 percent were owner-occupied. But the data review revealed that for 10.30 percent of the properties represented as owner-occupied, the owners lived elsewhere, indicating that the true percentage of non-owner occupied properties was 13.19 percent, more than three times the percentage reported in the Prospectus Supplement.12 99. The data review revealed that for each Securitization, the Prospectus Supplement
misrepresented the percentage of non-owner occupied properties. The true percentage of nonowner occupied properties, as determined by the data review, versus the percentage stated in the Prospectus Supplement for each Securitization is reflected in Table 6 below. Table 6 demonstrates that the Prospectus Supplements for each Securitization understated the percentage
This conclusion is arrived at by summing (a) the stated non-owner-occupied percentage in the Prospectus Supplement (here, 3.22 percent), and (b) the product of (i) the stated owner-occupied percentage (here, 96.78 percent) and (ii) the percentage of the properties represented as owner-occupied in the sample that showed strong indications that their owners in fact lived elsewhere (here, 10.30 percent). 39
12
of non-owner occupied properties by at least 7.90 percent, and for many Securitizations by 10 percent or more. Table 6
Percentage of NonOwner Occupied Properties Reported in Prospectus 2.84 3.22 11.92 7.16 2.96 3.83 2.71 2.59 3.69 0.74 3.46 3.19 4.84 9.63 9.65 10.75 5.59 9.40 6.63 8.85 16.45 6.70 17.48 5.68 12.00 7.46 9.36 3.87 5.22 0.00 8.09 11.32 7.44 Percentage of Properties Reported as OwnerOccupied With Strong Indication of Non-Owner Occupancy13 10.73 10.30 12.86 9.82 10.19 8.86 10.02 9.97 10.37 10.85 10.44 11.54 12.23 13.53 14.45 12.66 14.05 10.05 10.76 10.45 10.85 13.28 10.83 11.88 9.68 10.19 10.66 10.41 9.74 9.79 11.15 12.30 13.51 Actual Percentage of NonOwner Occupied Properties Prospectus Understatement of Non-Owner Occupied Properties (%)
Transaction
ACE 2005-AG1 ACE 2005-ASAP1 ACE 2005-HE6 ACE 2005-HE7 ACE 2006-ASAP1 ACE 2006-ASAP2 ACE 2006-ASAP3 ACE 2006-ASAP4 ACE 2006-ASAP5 ACE 2006-ASAP6 ACE 2006-CW1 ACE 2006-FM1 ACE 2006-FM2 ACE 2006-HE1 ACE 2006-HE2 ACE 2006-HE3 ACE 2006-HE4 ACE 2006-NC1 ACE 2006-NC2 ACE 2006-NC3 ACE 2006-OP1 ACE 2006-OP2 ACE 2007-ASAP1 ACE 2007-ASAP2 ACE 2007-ASL1 ACE 2007-HE1 ACE 2007-HE2 ACE 2007-HE3
13
Group IA Group I Group I Group IA Group I Group I Group I Group I Group IA Group IB Group IA Group IB Group I Group I Group I Group IA Group IB Group I Group I Group I Group I Group I Group IA Group IB Group IA Group IB Group I Group I Group I Group I Group I Group I Group I
13.26 13.19 23.24 16.28 12.85 12.36 12.46 12.30 13.68 11.50 13.53 14.36 16.48 21.86 22.71 22.05 18.85 18.50 16.67 18.38 25.51 19.09 26.41 16.89 20.52 16.89 19.02 13.88 14.45 9.79 18.33 22.22 19.95
10.42 9.97 11.33 9.12 9.89 8.52 9.75 9.71 9.99 10.77 10.08 11.17 11.64 12.23 13.06 11.30 13.26 9.10 10.04 9.52 9.06 12.39 8.94 11.21 8.52 9.43 9.66 10.00 9.23 9.79 10.25 10.90 12.50
As described supra, failing two or more tests of owner-occupancy is a strong indication that the borrower did not live at the mortgaged property and instead used it as a second home or an investment property. 40
Transaction
Percentage of NonOwner Occupied Properties Reported in Prospectus 9.91 12.86 0.00 5.98 4.51 35.98 35.88 17.24 17.44 38.04 14.98 13.13 15.49 33.33
ACE 2007-HE4 ACE 2007-HE5 ACE 2007-SL1 ACE 2007-WM1 ACE 2007-WM2 DBALT 2007-OA4 INDX 2005-AR31 INDX 2006-AR9 MHL 2007-1 NCHET 2006-2 NHEL 2007-1 RAST 2005-A15
Group I Group I Group I Group I Group I Group II Group III Group II Group II Group I Group I Group I Group III Group IV
Percentage of Properties Reported as OwnerOccupied With Strong Indication of Non-Owner Occupancy13 11.42 14.34 13.59 13.24 14.19 18.01 16.82 15.00 13.73 12.91 9.29 13.06 12.50 14.12
Actual Percentage of NonOwner Occupied Properties
Prospectus Understatement of Non-Owner Occupied Properties (%)
20.20 25.35 13.59 18.43 18.06 47.52 46.67 29.66 28.77 46.04 22.88 24.47 26.05 42.75
10.28 12.49 13.59 12.44 13.55 11.53 10.79 12.41 11.33 8.00 7.90 11.34 10.56 9.41
2. 100.
loans shows that the appraised value given to such properties was significantly higher than the actual value of such properties. The result of this overstatement of property values is a material 41
understatement of the LTV ratio. That is, if a propertys true value is significantly less than the value used in the loan underwriting, then the loan represents a significantly higher percentage of the propertys value. This, of course, increases the risk a borrower will not repay the loan and the risk of greater losses in the event of a default. As stated in the Prospectus Supplement for the ACE 2005-ASAP1 Securitization, [t]he rate of default on mortgage loans with high Loan-toValue Ratios, may be higher than for other types of mortgage loans. 102. For example, for the ACE 2007-HE1 Securitization, for which DB Products was
the sponsor, ACE the depositor and DBS the underwriter, the Prospectus Supplement stated that no LTV ratios for the Supporting Loan Group were above 100 percent. In fact, 20.90 percent of the sample of loans included in the data review had LTV ratios above 100 percent. In addition, the Prospectus Supplement stated that 62.24 percent of the loans had LTV ratios at or below 80 percent. The data review indicated, however, that only 31.20 percent of the loans had LTV ratios at or below 80 percent. 103. The data review revealed that for each Securitization, the Prospectus Supplement
misrepresented the percentage of loans with an LTV ratio above 100 percent, as well as the percentage of loans that had an LTV ratio at or below 80 percent. Table 7 reflects (i) the true percentage of mortgages in the Supporting Loan Group with LTV ratios above 100 percent, versus the percentage reported in the Prospectus Supplement; and (ii) the true percentage of mortgages in the Supporting Loan Group with LTV ratios at or below 80 percent, versus the percentage reported in the Prospectus Supplement. The percentages listed in Table 7 were calculated by aggregated principal balance.
42
Table 7
PROSPECTUS Percentage of Loans Reported to Have LTV Ratio At Or Less Than 80% 53.56 81.79 58.98 63.19 83.88 82.93 82.81 79.68 75.16 73.79 63.98 58.72 63.34 65.70 66.39 64.38 69.52 63.48 68.18 61.88 54.46 54.13 55.97 56.24 68.71 70.55 57.82 52.62 47.95 0.44 62.24 64.47 58.60 56.62 47.21 7.73 67.71 69.33 88.55 86.18 96.96 99.33 94.93 51.52 DATA REVIEW True Percentage of Loans With LTV Ratio At Or Less Than 80% 32.62 50.09 39.16 42.27 48.66 48.24 44.35 44.90 44.40 45.06 35.57 34.20 43.55 34.08 40.28 44.55 31.89 40.44 42.42 37.72 44.01 34.29 39.48 38.76 47.61 49.45 40.21 29.62 26.72 1.44 31.20 42.01 39.28 28.41 29.61 5.67 35.36 39.55 52.11 47.35 61.77 68.27 52.21 46.23 PROSPECTUS Percentage of Loans Reported to Have LTV Ratio Over 100% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 DATA REVIEW True Percentage of Loans With LTV Ratio Over 100% 17.24 8.47 15.56 16.25 7.56 7.56 9.65 12.92 13.16 14.87 16.72 22.82 12.92 16.19 17.19 13.47 15.24 15.46 13.27 19.93 13.06 18.64 17.83 19.47 12.73 11.82 17.33 23.09 27.14 42.23 20.90 16.55 21.64 25.85 31.34 43.91 16.97 19.99 16.65 18.78 5.42 4.37 12.83 11.53
Transaction
Supporting Loan Group Group IA Group I Group I Group IA Group I Group I Group I Group I Group IA Group IB Group IA Group IB Group I Group I Group I Group IA Group IB Group I Group I Group I Group I Group I Group IA Group IB Group IA Group IB Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group II Group III Group II Group II Group I Group I
ACE 2005-AG1 ACE 2005-ASAP1 ACE 2005-HE6 ACE 2005-HE7 ACE 2006-ASAP1 ACE 2006-ASAP2 ACE 2006-ASAP3 ACE 2006-ASAP4 ACE 2006-ASAP5 ACE 2006-ASAP6 ACE 2006-CW1 ACE 2006-FM1 ACE 2006-FM2 ACE 2006-HE1 ACE 2006-HE2 ACE 2006-HE3 ACE 2006-HE4 ACE 2006-NC1 ACE 2006-NC2 ACE 2006-NC3 ACE 2006-OP1 ACE 2006-OP2 ACE 2007-ASAP1 ACE 2007-ASAP2 ACE 2007-ASL1 ACE 2007-HE1 ACE 2007-HE2 ACE 2007-HE3 ACE 2007-HE4 ACE 2007-HE5 ACE 2007-SL1 ACE 2007-WM1 ACE 2007-WM2 DBALT 2007-OA4 INDX 2005-AR31 INDX 2006-AR9 MHL 2007-1 NCHET 2006-2
43
PROSPECTUS Percentage of Loans Reported to Have LTV Ratio At Or Less Than 80% 46.77 92.62 92.24
DATA REVIEW True Percentage of Loans With LTV Ratio At Or Less Than 80% 29.59 80.43 65.49
Transaction
Supporting Loan Group Group I Group III Group IV
NHEL 2007-1 RAST 2005-A15
DATA REVIEW Percentage of True Loans Reported Percentage of to Have LTV Loans With Ratio Over LTV Ratio 100% Over 100% 0.00 25.53 0.00 2.99 0.00 6.20 PROSPECTUS
104.
Securitizations reported that none of the mortgage loans in the Supporting Loan Groups had an LTV ratio over 100 percent. In contrast, the data review revealed that at least 2.99 percent of the mortgage loans for each Securitization had an LTV ratio over 100 percent, and for most Securitizations this figure was much larger. Indeed, for 33 of the 40 Securitizations, the data review revealed that more than 10 percent of the mortgages in the Supporting Loan Group had a true LTV ratio over 100 percent. For 25 Securitizations, the data review revealed that more than 15 percent of the mortgages in the Supporting Loan Group had a true LTV ratio over 100 percent. 105. These inaccuracies with respect to reported LTV ratios also indicate that the
representations in the Registration Statements relating to appraisal practices were false, and that the appraisers themselves, in many instances, furnished appraisals that they understood were inaccurate and that they knew bore no reasonable relationship to the actual value of the underlying properties. Indeed, independent appraisers following proper practices and providing genuine estimates as to valuation would not systematically generate appraisals that deviate so significantly (and so consistently upward) from the true values of the appraised properties. This conclusion is further confirmed by the findings of the FCIC, which identified inflated appraisals as a pervasive problem during the period of the Securitizations, and determined through its investigation that appraisers were often pressured by mortgage originators, among 44
others, to produce inflated results. See FCIC, Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (January 2011), at 91. B. 106. The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines The Registration Statements contained material misstatements and omissions
regarding compliance with underwriting guidelines. Indeed, the originators for the loans underlying the Securitizations systematically disregarded their respective underwriting guidelines in order to increase production and profits derived from their mortgage lending businesses. This is confirmed by the systematically misreported owner occupancy and LTV statistics, discussed above, and by (1) government investigations into the originators underwriting practices, which have revealed widespread abandonment of the originators reported underwriting guidelines during the relevant period; (2) the collapse of the Certificates credit ratings; and (3) the surge in delinquency and default in the mortgages in the Securitizations. 1. Government Investigations Have Confirmed That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines
107.
reports and investigations that have described rampant underwriting failures throughout the period of the Securitizations, and, more specifically, have described underwriting failures by the very originators whose loans were included by the Defendants in the Securitizations. 108. For example, in November 2008, the Office of the Comptroller of the Currency,
an office within the United States Department of the Treasury, issued a report identifying the Worst Ten mortgage originators in the Worst Ten metropolitan areas. The worst originators were defined as those with the largest number of non-prime mortgage foreclosures for 200545
2007 originations. Fremont, Countrywide, IndyMac, New Century and Option One, which originated many of the loans for the Securitizations at issue here, were all on that list. New Century was in fact identified as the worst subprime lender in the country based on the delinquency rates of the mortgages it originated in the ten metropolitan areas between 2005 and 2007 with the highest rates of delinquency. See Worst Ten in the Worst Ten, Office of the Comptroller of the Currency Press Release (Nov. 13, 2008), available at http://www.occ.treas.gov/news-issuances/news-releases/2009/nr-occ-2009-112b.pdf. 109. Countrywide originated the loans for four of the Securitizations. In January 2011,
the FCIC issued its final report, which detailed, among other things, the collapse of mortgage underwriting standards and subsequent collapse of the mortgage market and wider economy. See Financial Crisis Inquiry Commission, Final Report of the National Commission of the Causes of the Financial and Economic Crisis in the United States (2011) (FCIC Report). The FCIC Report singled out Countrywide for its role: Lenders made loans that they knew borrowers could not afford and that could cause massive losses to investors in mortgage securities. As early as September 2004, Countrywide executives recognized that many of the loans they were originating could result in catastrophic consequences. Less than a year later, they noted that certain high-risk loans they were making could result not only in foreclosures but also in financial and reputational catastrophe for the firm. But they did not stop. See FCIC Report at xxii. 110. Countrywide has also been the subject of several investigations and actions
concerning its lax and deficient underwriting practices. In June 2009, for instance, the SEC initiated a civil action against Countrywide executives Angelo Mozilo (founder and Chief Executive Officer), David Sambol (Chief Operating Officer), and Eric Sieracki (Chief Financial Officer) for securities fraud and insider trading. In a September 16, 2010 opinion denying these 46
defendants motions for summary judgment, the United States District Court for the Central District of California found that the SEC raised genuine issues of fact as to, among other things, whether the defendants had misrepresented the quality of Countrywides underwriting processes. The court noted that the SEC presented evidence that Countrywide routinely ignored its official underwriting to such an extent that Countrywide would underwrite any loan it could sell into the secondary mortgage market, and that a significant portion (typically in excess of 20%) of Countrywides loans were issued as exceptions to its official underwriting guidelines . The court concluded that a reasonable jury could conclude that Countrywide all but abandoned managing credit risk through its underwriting guidelines . S.E.C. v. Mozilo, No. CV 09-3994, 2010 WL 3656068, at *10 (C.D. Cal. Sept. 16, 2010). Mozilo, Sambol, and Sieracki subsequently settled with the SEC. 111. The testimony and documents only recently made available to the GSEs by way
of the SECs investigation confirm that Countrywide was systematically abusing exceptions and low-documentation processes in order to circumvent its own underwriting standards. For example, in an April 13, 2006 e-mail, Mozilo wrote to Sieracki and others that he was concerned that certain subprime loans had been originated with serious disregard for process [and] compliance with guidelines, resulting in the delivery of loans with deficient documentation. Mozilo further stated that I have personally observed a serious lack of compliance within our origination system as it relates to documentation and generally a deterioration in the quality of loans originated versus the pricing of those loan[s]. 112. New Century originated the loans for five of the Securitizations. As stated in the
Prospectus Supplement for the NCHET 2007-1 Securitization, [f]or the quarter ending March 31, 2006, New Century Financial Corporation originated $13.4 billion in mortgage loans. By
47
the end of 2006, New Century was the third largest subprime mortgage loan originator in the United States, with a loan production volume that year of $51.6 billion. And before its collapse in the first half of 2007, New Century was one of the largest subprime lenders in the country. Further, in its January 2011 report, the FCIC, as it had with Countrywide, singled out New Century for its role: New Centuryonce the nations second-largest subprime lender ignored early warnings that its own loan quality was deteriorating and stripped power from two risk-control departments that had noted the evidence. In a June 2004 presentation, the Quality Assurance staff reported they had found severe underwriting errors, including evidence of predatory lending, federal and state violations, and credit issues, in 25% of the loans they audited in November and December 2003. In 2004, Chief Operating Officer and later CEO Brad Morrice recommended these results be removed from the statistical tools used to track loan performance, and in 2005, the department was dissolved and its personnel terminated. The same year, the Internal Audit department identified numerous deficiencies in loan files; out of nine reviews it conducted in 2005, it gave the companys loan production department unsatisfactory ratings seven times. Patrick Flanagan, president of New Centurys mortgage-originating subsidiary, cut the departments budget, saying in a memo that the group was out of control and tries to dictate business practices instead of audit. 113. On February 29, 2008, after an extensive document review and conducting over
100 interviews, Michael J. Missal, the Bankruptcy Court Examiner for New Century, issued a detailed report on the various deficiencies at New Century, including lax mortgage standards and a failure to follow its own underwriting guidelines. Among his findings, the Examiner reported: New Century had a brazen obsession with increasing loan originations, without due regard to the risks associated with that business strategy. Although a primary goal of any mortgage banking company is to make more loans, New Century did so in an aggressive manner that elevated the risks to dangerous and ultimately fatal levels. New Century also made frequent exceptions to its underwriting guidelines for borrowers who might not otherwise qualify for a particular loan. A senior officer of New Century warned in 2004 that the number one issue is exceptions to the guidelines. Moreover,
48
many of the appraisals used to value the homes that secured the mortgages had deficiencies. New Century layered the risks of loan products upon the risks of loose underwriting standards in its loan originations to high risk borrowers.
Final Report of Michael J. Missal, Bankruptcy Examiner, In re New Century TRS Holdings, Inc., No. 07-10416 (KJC) (Bankr. Del. Feb. 29, 2008), available at http://graphics8.nytimes.com/packages/pdf/business/Final_Report_New_Century.pdf. 114. On December 9, 2009, the SEC charged three of New Centurys top officers with
testified before the FCIC in April 2010 that, beginning in 2004, underwriting guidelines had been all but abandoned at New Century. Ms. Lindsay further testified that New Century systematically approved loans with 100 percent financing to borrowers with extremely low credit scores and no supporting proof of income. See Written Testimony of Patricia Lindsay for the FCIC Hearing, April 7, 2010 (Lindsay Testimony), http://fcic-static.law.stanford.edu/cdnmedia/fcic.testimony/2010-0407-Lindsay.pdf, at 3. 116. Option One, which originated the loans for two Securitizations, has also been
identified through multiple reports and investigations for its faulty underwriting. On June 3, 2008, for instance, the Attorney General for the Commonwealth of Massachusetts filed an action against Option One (the Option One Complaint), and its past and present parent companies, for
49
their unfair and deceptive origination and servicing of mortgage loans. See Complaint, Commonwealth v. H&R Block, Inc., CV NO. 08-2474-BLS (Mass. Super. Ct. June. 3, 2008). According to the Massachusetts Attorney General, since 2004, Option One had increasingly disregarded underwriting standards and originated thousands of loans that [Option One] knew or should have known the borrowers would be unable to pay, all in an effort to increase loan origination volume so as to profit from the practice of packaging and selling the vast majority of [Option Ones] residential subprime loans to the secondary market. See Option One Complaint. The Massachusetts Attorney General alleged that Option Ones agents and brokers frequently overstated an applicants income and/or ability to pay, and inflated the appraised value of the applicants home, and that Option One avoided implementing reasonable measures that would have prevented or limited these fraudulent practices. Option Ones origination policies employed from 2004 through 2007 have resulted in an explosion of foreclosures. Id. at 1. 117. On November 24, 2008, the Superior Court of Massachusetts granted a
Block, Inc., Option Ones parent company, had agreed to settle the suit for approximately $125 million. See Massachusetts Attorney General Press Release, H&R Block Mortgage Company Will Provide $125 Million in Loan Modifications and Restitutions, Aug. 9, 2011. Media reports noted that the suit was being settled amidst ongoing discussions among multiple states
50
attorneys general, federal authorities, and five major mortgage servicers, aimed at resolving investigations of the lenders foreclosure and mortgage-servicing practices. The Massachusetts Attorney General released a statement saying that no settlement should include a release for conduct relating to the lenders packaging of mortgages into securitizations. See, e.g., Bloomberg.com, H&R Block, Massachusetts Reach $125 Million Accord in State Mortgage Suit, Aug. 9, 2011. 119. On October 4, 2007, the Commonwealth of Massachusetts, through its Attorney
General, brought an enforcement action against Fremont, which originated loans for six of the Securitizations, for an array of unfair and deceptive business conduct, on a broad scale. See Complaint, Commonwealth v. Fremont Investment & Loan and Fremont General Corp., No. 074373 (Mass. Super. Ct.) (the Fremont Complaint). According to the complaint, Fremont (i) approve[ed] borrowers without considering or verifying the relevant documentation related to the borrowers credit qualifications, including the borrowers income; (ii) approv[ed] borrowers for loans with inadequate debt-to-income analyses that do not properly consider the borrowers ability to meet their overall level of indebtedness and common housing expenses; (iii) failed to meaningfully account for [ARM] payment adjustments in approving and selling loans; (iv) approved borrowers for these ARM loans based only on the initial fixed teaser rate, without regard for borrowers ability to pay after the initial two year period; (v) consistently failed to monitor or supervise brokers practices or to independently verify the information provided to Fremont by brokers; and (vi) ma[de] loans based on information that Fremont knew or should have known was inaccurate or false, including, but not limited to, borrowers income, property appraisals, and credit scores. See Fremont Complaint.
51
120.
On December 9, 2008, the Supreme Judicial Court of Massachusetts affirmed a
preliminary injunction that prevented Fremont from foreclosing on thousands of its loans issued to Massachusetts residents. As a basis for its unanimous ruling, the Supreme Judicial Court found that the record supported the lower courts conclusions that Fremont made no effort to determine whether borrowers could make the scheduled payments under the terms of the loan, and that Fremont knew or should have known that [its lending practices and loan terms] would operate in concert essentially to guarantee that the borrower would be unable to pay and default would follow. Commonwealth v. Fremont Inv. & Loan, 897 N.E.2d 548, 556 (Mass. 2008). The terms of the preliminary injunction were made permanent by a settlement reached on June 9, 2009. 121. IndyMac, which originated the loans for three of the Securitizations, was the
subject of a February 26, 2009 report issued by the Office of Inspector General (OIG) of the U.S. Department of Treasury, entitled Safety and Soundness: Material Loss Review of IndyMac Bank, FSB (the OIG Report). The OIG Report found that IndyMac Bank had embarked on a path of aggressive growth that was supported by its high risk business strategy of originating Alt-A loans on a large scale and then packag[ing] them together in securities and selling them on the secondary market to investors. OIG Report at 2, 6, 7. The OIG Report further stated that: To facilitate this level of [loan] production IndyMac often did not perform adequate underwriting . Id. at 2. 122. A June 30, 2008 report issued by the Center for Responsible Lending (CRL)
also found that IndyMac Bank often ignored its stated underwriting and appraisal standards and encouraged its employees to approve loans regardless of the borrowers ability to repay them. See IndyMac: What Went Wrong? How an Alt-A Leader Fueled its Growth with Unsound and
52
Abusive Mortgage Lending (the CRL Report). For example, the CRL Report noted that IndyMac Bank engaged in unsound and abusive lending practices and allowed outside mortgage brokers and in-house sales staffers to inflate applicants [financial information] [to] make them look like better credit risks. See CRL Report at 2, 8. 123. The originators of the mortgage loans underlying the Securitizations went beyond
the systematic disregard of their own underwriting guidelines. Indeed, as the FCIC has confirmed, mortgage loan originators throughout the industry pressured appraisers, during the period of the Securitizations, to issue inflated appraisals that met or exceeded the amount needed for the subject loans to be approved, regardless of the accuracy of such appraisals, and especially when the originators aimed at putting the mortgages into a package of mortgages that would be sold for securitization. This resulted in lower LTV ratios, which in turn made the loans appear to the investors less risky than they were. 124. As described by New Centurys Patricia Lindsay, a former wholesale lender, in
her testimony to the FCIC, appraisers fear[ed] for their livelihoods, and therefore cherrypicked data that would help support the needed value rather than finding the best comparables to come up with the most accurate value. See Written Testimony of Particia Lindsay to the FCIC, April 7, 2010, at 5. Likewise, Jim Amorin, President of the Appraisal Institute, confirmed in his testimony that [i]n many cases, appraisers are ordered or severely pressured to doctor their reports and to convey a particular, higher value for a property, or else never see work from those parties again [T]oo often state licensed and certified appraisers are forced into making a Hobsons Choice. See Testimony of Jim Amorin to the FCIC, available at www.appraisalinstitute.org/newsadvocacy/downloads/ltrs_tstmny/2009/AI-ASA-ASFMRANAIFATestimonyonMortgageReform042309final.pdf. Faced with this choice, appraisers
53
systematically abandoned applicable guidelines and over-valued properties in order to facilitate the issuance of mortgages that could then be collateralized into mortgage-backed securitizations. 2. The Collapse of the Certificates Credit Ratings Further Indicates that the Mortgage Loans were not Originated in Adherence to the Stated Underwriting Guidelines
125.
assigned credit ratings of AAA or its equivalent, which purportedly reflected the description of the mortgage loan collateral and underwriting practices set forth in the Registration Statements. These ratings were artificially inflated, however, as a result of the very same misrepresentations that the Defendants made to investors in the Prospectus Supplements. 127. Deutsche Bank provided or caused to be provided loan-level information to the
rating agencies that they relied upon in order to calculate the Certificates assigned ratings, including the borrowers LTV ratio, debt-to-income ratio, owner occupancy status and other loan level information described in aggregation reports in the Prospectus Supplements. Because the information that Deutsche Bank provided or caused to be provided was false, the ratings were inflated and the level of subordination that the rating agencies required for the sale of AAA (or its equivalent) certificates was inadequate to provide investors with the level of protection that those ratings signified. As a result, the GSEs paid Defendants inflated prices for purported AAA (or its equivalent) Certificates, unaware that those Certificates actually carried a severe risk of loss and carried inadequate credit enhancement.
54
128.
Since the issuance of the Certificates, the ratings agencies have dramatically
Transaction ACE 2005-AG1 ACE 2005-ASAP1 ACE 2005-HE6 ACE 2005-HE7 ACE 2006-ASAP1 ACE 2006-ASAP2 ACE 2006-ASAP3 ACE 2006-ASAP4 ACE 2006-ASAP5 ACE 2006-ASAP6 ACE 2006-CW1 ACE 2006-FM1 ACE 2006-FM2 ACE 2006-HE1 ACE 2006-HE2 ACE 2006-HE3 ACE 2006-HE4 ACE 2006-NC1 ACE 2006-NC2 ACE 2006-NC3 ACE 2006-OP1 ACE 2006-OP2 ACE 2007-ASAP1 ACE 2007-ASAP2 ACE 2007-ASL1 ACE 2007-HE1 ACE 2007-HE2 ACE 2007-HE3 ACE 2007-HE4
14
Tranche A1A A1 A1 A1A A1 A1 A1 A1 A1A A1B A1A A1B A1 A1 A1 A1A A1B1 A1B2 A1 A1 A1 A1 A1 A1A A1B A1A A1B A1 A1 A1 A1 A1 A1 A1 A1
Rating at Issuance (Moodys/S&P/Fitch) Aaa/AAA/-Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/--
Rating at July 31, 2011 (Moodys/S&P/Fitch) A3/AA+/-Aa2/AAA/-A1/AAA/BBB Aa1/AA-/-Ba3/BB/-Ba2/A+/-Caa2/A-/-Caa2/BB+/-Caa3/B+/-Caa2/B+/-Caa3/CCC/-Caa3/CCC/-Caa2/CCC/-Ca/CCC/-Ca/CCC/-Ba2/B/CCC Baa3/BB/CCC Ca/CCC/CC Caa2/B-/CC Caa3/CCC/-Caa3/CCC/-B2/B-/-Caa3/CCC/-Ca/CCC/-Ca/CCC/-Caa2/BBB+/-Caa1/AA/-Caa3/BBB+/-Caa3/B-/-Caa3/CCC/-C/CC/-Caa3/CCC/-Caa3/CCC/-Ca/CCC/-Ca/CCC/--
Applicable ratings are shown in sequential order separated by forward slashes: Moodys/S&P/Fitch. Hyphens between forward slashes indicate that the relevant agency did not provide a rating at issuance. 55
Transaction ACE 2007-HE5 ACE 2007-SL1 ACE 2007-WM1 ACE 2007-WM2 DBALT 2007-OA4 INDX 2005-AR31 INDX 2006-AR9 MHL 2007-1 NCHET 2006-2 NHEL 2007-1 RAST 2005-A15
Tranche A1 A1 A1 A1 IIA1 IIIA1 2A1 2A1 1A1 A1 A1A 3A1 4A1
Rating at Issuance (Moodys/S&P/Fitch) Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/--
Rating at July 31, 2011 (Moodys/S&P/Fitch) Ca/CCC/-C/CC/-Ca/CCC/-Ca/CCC/-Caa2/B/CCC Ca/CCC/CC Caa3/CCC/-Caa3/CC/-Ca/D/-Caa3/B-/-Caa3/CCC/-Caa3/D/-Caa3/D/--
3.
129.
supposed to represent long-term, stable investments, a significant percentage of the mortgage loans backing the Certificates have defaulted, have been foreclosed upon, or are delinquent, resulting in massive losses to the Certificateholders. The overall poor performance of the mortgage loans is further evidence of and a direct consequence of the fact that they were not underwritten in accordance with applicable underwriting guidelines as represented in the Registration Statements. 130. Loan groups that were properly underwritten and contained loans with the
characteristics represented in the Registration Statements would have experienced substantially fewer payment problems and substantially lower percentages of defaults, foreclosures, and delinquencies than occurred here. Table 9 reflects the percentage of loans in the Supporting Loan Groups that are in default, have been foreclosed upon, or are delinquent as of July 2011.
56
Table 9
Transaction ACE 2005-AG1 ACE 2005-ASAP1 ACE 2005-HE6 ACE 2005-HE7 ACE 2006-ASAP1 ACE 2006-ASAP2 ACE 2006-ASAP3 ACE 2006-ASAP4 ACE 2006-ASAP5 ACE 2006-ASAP6 ACE 2006-CW1 ACE 2006-FM1 ACE 2006-FM2 ACE 2006-HE1 ACE 2006-HE2 ACE 2006-HE3 ACE 2006-HE4 ACE 2006-NC1 ACE 2006-NC2 ACE 2006-NC3 ACE 2006-OP1 ACE 2006-OP2 ACE 2007-ASAP1 ACE 2007-ASAP2 ACE 2007-ASL1 ACE 2007-HE1 ACE 2007-HE2 ACE 2007-HE3 ACE 2007-HE4 ACE 2007-HE5 ACE 2007-SL1 ACE 2007-WM1 ACE 2007-WM2 DBALT 2007-OA4 INDX 2005-AR31 INDX 2006-AR9 MHL 2007-1 NCHET 2006-2 NHEL 2007-1 RAST 2005-A15 Loan Group Group IA Group I Group I Group IA Group I Group I Group I Group I Group IA Group IB Group IA Group IB Group I Group I Group I Group IA Group IB Group I Group I Group I Group I Group I Group IA Group IB Group IA Group IB Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group II Group III Group II Group II Group I Group I Group I Group III Group IV Percentage of Delinquent/Defaulted/Foreclosed Loans 44.3 26.7 40.2 48.5 47.6 36.5 40.8 35.6 35.6 31.2 33.3 33.5 63.2 55.5 71.7 47.6 60.6 35.7 38.4 36.4 39.1 70.7 65.9 66.0 45.6 41.3 40.5 37.2 46.8 18.9 35.3 37.0 44.5 67.3 49.5 13.8 74.6 39.0 44.8 55.9 18.8 32.0 34.4 45.5 52.3 20.8 28.5
57
131.
In July 2010, the Financial Industry Regulatory Authority (FINRA) fined DBS
$7.5 million based on findings that DBS misstated delinquency data. Specifically, FINRA alleged that DBS made misrepresentations in the Prospectus Supplements of the ACE 2006ASAP1 and ACE 2006-ASAP2 Securitizations, as well as 14 other securitizations. In a FINRA Letter of Acceptance, Waiver and Consent from DB Securities, dated July 7, 2010, DBS accepted and consented to (without admitting or denying) the findings of the FINRA Department of Enforcement that the prospectus supplements at issue reported fewer delinquencies contained in the mortgage pool than would have been reported had the [represented] method actually been employed . DBSIs negligent misrepresentations concerning the methodology for calculating delinquency rates in six subprime RMBS securitizations constituted a violation of NASD Rule 2110. 132. The confirmed misstatements concerning owner occupancy and LTV ratios; the
confirmed systematic underwriting failures by the originators responsible for the mortgage loans across the Securitizations; and the extraordinary drop in credit rating and rise in delinquencies across those Securitizations all confirm that the mortgage loans in the Supporting Loan Groups, contrary to the representations in the Registration Statements, were not originated in accordance with the stated underwriting guidelines. V. DEUTSCHE BANK KNEW THAT THE REPRESENTATIONS IN THE REGISTRATION STATEMENTS WERE FALSE AND THAT THE GSES WOULD REASONABLY RELY ON THOSE MISREPRESENTATIONS The allegations in this section (paragraphs 133 through 166, below) are made in
133.
support of Plaintiffs common law fraud claims, not in support of Plaintiffs claims under (i) Sections 11, 12(a)(2) and 15 of the Securities Act, (ii) Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, or (iii) Sections 31-5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, which are based solely on strict liability and negligence. 58
134.
The same evidence discussed above not only shows that Defendants
representations were untrue, but that Deutsche Bank knew, or was reckless in not knowing, that it was falsely representing the underwriting process and the risk profiles of the mortgage loans. For instance: The extreme discrepancies in basic information about the underlying mortgage loans, such as owner occupancy and LTV statistics, demonstrates a systemic underwriting failure about which Deutsche Bank knew or was reckless in not knowing. Clayton, who acted as credit risk manager in many of the Securitizations, admitted that in the period from the first quarter of 2006 to the second quarter of 2007, 34.9 percent of the mortgage loans Deutsche Bank submitted to Clayton to review in RMBS loan pools were rejected by Clayton as falling outside the applicable underwriting guidelines, and yet Deutsche Bank waived half of those loans into its securitizations. The Levin-Coburn Report found that Deutsche Bank underwrote securities using loans from subprime lenders known for issuing high risk, poor quality mortgages, and sold risky securities to investors across the United States and around the world. Levin-Coburn Report at 11. Indeed, numerous government investigations have separately confirmed that Deutsche Bank relied on loan originators who, inter alia, were out of control, had a brazen obsession with increasing loan originations, without due regard to the risks, did not perform adequate underwriting, and essentially guarantee[d] that the borrower[s] would be unable to pay and default would follow.
A. Deutsche Bank Knew, Through Its Own Due Diligence And The Findings Of Its Outside Consultants, That The Representations in the Registration Statements Were False 1. 135. Deutsche Bank Knew Based On Its Own Diligence That The Loans Were Not Adequately Underwritten
In the Prospectus Supplements, Deutsche Bank assured investors that, as one of
its quality control procedures, it re-underwrote sample pools of the loans it purchased from originators to ensure that those loans were originated in compliance with applicable underwriting guidelines. For instance:
59
The Sponsor conducts a number of quality control procedures, including a full re-underwriting of a random selection of mortgage loans to assure asset quality. Under the asset quality procedure, a random selection of each months originations is reviewed. The mortgage loan review confirms the existence and accuracy of legal documents, credit documentation, appraisal analysis and underwriting decision. A report detailing audit findings and level of error is sent monthly to management for response. The audit findings and management responses are then reviewed by the Sponsors senior management. Adverse findings are tracked monthly and over a rolling six month period. ACE 2006-ASAP5 Prospectus Supplement, filed on Oct. 13, 2006. Similar representations are made in the Prospectus Supplements for the other Securitizations. 136. This protocol was confirmed by the FCICs interview of Joseph Swartz, who
served as a vice president of Deutsche Banks due diligence department, which oversaw all of Deutsche Banks residential mortgage business. Transcript of July 21, 2010 FCIC Staff Interview with Joseph Swartz, at 54. According to Swartz: We did kind of a pre-due diligence review inside Deutsche Bank. I had a team of people that assisted me and I liked to try and find underwriters to bring in for my team, people who understood how to look at loans and credit bureaus, and we would run through credit bureaus hour after hour through hundreds and hundreds of loans, loans that had drifted to see, Is there anything about this credit, about the borrower that is alarming? Swartz Interview at 9. 137. Deutsche Banks pre-review necessarily would have revealed to Deutsche Bank
that the underwriting performed with respect to a significant portion of the mortgage loans being designated for inclusion in its securitizations, including the Securitizations here, was deficient and that numerous loans failed to meet the specific criteria described in the Registration Statements. Indeed, as set forth in Tables 6 and 7, the loan level data for LTV ratios and owner occupancy was not just misreported in a few Securitizations; rather, that data was
60
misrepresented, systematically, in every one of the 40 Securitizations. Furthermore, the statistics were consistently misrepresented so as to make the underlying mortgage loans appear less risky than they actually were. 138. In fact, Deutsche Bank did not conduct extensive diligence to ensure the accuracy
of its representations. Rather, as the FCIC concluded, Deutsche devoted inadequate resources to performing diligence on the loans that it collateralized for its securitizations, including the Securitizations here. FCIC Report at 168. Even its limited diligence, however, was more than enough to reveal defects in the loan underwritingindeed, those defects were pervasiveand Deutsche Bank nevertheless failed to exclude faulty loans from its securitizations. Unlike Deutsche Bank, the GSEs did not have access to the loan files for the individual mortgages, and were not in a position to detect the underwriting failures that would have been readily apparent to Deutsche in its capacity as sponsor, depositor and underwriter for the Securitizations. 2. Deutsche Bank Also Knew, Based On The Findings Of Its Hired Consultants, That The Mortgage Loans Were Not Adequately Underwritten
139.
As discussed above, Deutsche Bank, in addition to performing its own limited
diligence, retained outside consultants, including Clayton, to review samples of the loans. Claytons reports reveal that from January 2006 to June 2007, 35 percent of the mortgages Deutsche Bank submitted to Clayton for review were rejected as outside underwriting guidelines. Of the mortgages that Clayton found defective, some 50 percent were subsequently waived in by Deutsche Bank and included in securitizations, like the ones in which the GSEs invested. Of the nine banks that FCIC investigated, Deutsche Bank was second both in the number of loans rejected by Clayton and in the number of loans it subsequently waived in. 140. Thus, Deutsche Bank systematically accepted loans that its own hired consultants
had determined and had advised Deutsche Bank were not properly underwritten. 61
Claytons personnel provided insight into Deutsche Banks decision making in testimony before the FCIC. For example, Claytons Vice President Vicki Beal agreed during her testimony that Deutsche Bank waived a high number of rejected loans because it was trying to get this stuff out the door. Transcript of July 22, 2010 FCIC Staff Interview of Vicki Beal, at 112:19-113:1. According to Ms. Beal, the reasoning behind Deutsche Banks high waiver rate was: Were not holding it on our books. Were pushing it out. Well take anything [any loan] and do it. Beal Tr. at 112:21-113:1. 141. In 2006, Clayton began to produce trending reports for some of its clients,
including Deutsche Bank, which specified the extent to which Clayton was detecting faulty loans. Ms. Beal recalled that Deutsche Banks Managing Director, Michael Commaroto, did not receive the first trending report well. Beal Tr. at 110:21-25. Commaroto expressed concern that [i]n the hands of the wrong people it could be misunderstood. Beal Tr. at 111:1-16. According to Beal, Commaroto was probably . . . defensive about the fact that Deutsche Bank was securitizing loans without regard for their quality. Beal Tr. at 112:19-113:1. A former Executive Vice President of Clayton, Kerry ONeill, reported to the FCIC that not only did the meeting with Commaroto not go over so well, but that it was explosive. Transcript of August 8, 2010 FCIC Staff Interview of Kerry ONeill, at 13:9-14. According to ONeill, Commaroto was displeasedcertainly unhappy, so much so, that what happened was scary. ONeill Tr. at 113:19-20; 114:10-11. 142. In response to Claytons findings, Deutsche Bank did not improve its practices by
excluding the faulty loans identified by Clayton, or by expanding the number of loans that were subject to review. Just the opposite. According to Swartz, the sample size of loans to be reviewed by Clayton was negotiated between the trader and the loan seller neither of which
62
had any incentive to increase the sample size because it could result in more loans being rejected from the pool. Indeed, the traders were very, very sensitive about sample size and they always wanted . . . to sample less. However, as the FCIC pointed out, one could reasonably expect [the untested loans] to have many of the same deficiencies, and at the same rate, as the sampled loans. The FCIC therefore concluded that the failure by Deutsche Bank and other investment banks to disclose the Clayton findings in the offering materials for the RMBS rais[ed] the question whether the disclosures were materially misleading, in violation of the securities laws. (Emphasis added.) 143. Finally, Deutsche Bank was not content simply to let poor loans pass into its
securitizations in exchange for fees. Deutsche Bank took the fraud further, affirmatively seeking to profit from this knowledge. Rather than rejecting the loans that Clayton identified as defective, as it should have, Deutsche Bank used the evidence of underwriting defects to negotiate lower prices for the loans and thus boost Deutsche Banks own profits. According to the September 2010 FCIC testimony of Claytons former president, D. Keith Johnson, the investment banks would use the exception reports to force a lower price for themselves, and not for the benefit of investors at all: I dont think that we added any value to the investor, the end investor, to get down to your point. I think only our value was done in negotiating the purchase between the seller and securitizer. Perhaps the securitizer was able to negotiate a lower price, and could maximize the line. We added no value to the investor, to the rating agencies. FCIC Staff Intv with D. Keith Johnson, Clayton Holdings, LLC (Sept. 2, 2010), available at http://fcic.law.stanford.edu/resource/interviews. In other words, rather than reject defective loans from collateral pools, or cease doing business with consistently failing originators, investment banks like Deutsche Bank would instead use the Clayton 63
data simply to insist on a lower price from the loan originators, leaving more room for its own profits while the defective loans were hidden from investors such as Fannie Mae and Freddie Mac in the securitization pools. B. Deutsche Bank Knew Based On Its Relationship With The Loan Originators That The Representations In The Registration Statements Were False 1. 144. Deutsche Banks Role as Warehouse Lender Further Ensured that it Knew that the Representations Were False
Defendants operatedand made huge profitson every level of the
securitization process, acting as originators, underwriters, sponsors, sellers, and depositors. As a result of this vertical integration, Defendants were able to maximize the output of their securitization business, and were also keenly aware of the underwriting failures that permeated the underlying collateral. 145. In order to ensure that a large volume of mortgage loans would be available to
feed its securitization machine, Deutsche Bank established lines of credit with loan originators. These credit lines, in turn, were secured by the very mortgage loans that Deutsche Bank would purchase for securitization. Deutsche Banks privileged position as a source of warehouse lines of credit gave it unique knowledge of the conditions under which mortgage loans were originated. These arrangements also allowed Deutsch Bank to control the origination practices of these lenders, which depended on Deutsche Bank for funding, and gave Deutsche Bank an inside look into the true quality of the loans they originated. As one industry publication explained, warehouse lenders like Deutsche Bank have detailed knowledge of the lenders operations. Kevin Connor, Wall Street and the Making of the Subprime Disaster, at 11 (2007). 146. The Senate Permanent Committee on Investigations aptly summarized Deutsche
Banks misconduct during the gold rush years of subprime lending: Deutsche Bank underwrote securities using loans from subprime lenders known for issuing high risk, poor 64
quality mortgages, and sold risky securities to investors across the United States and around the world. They also enabled the lenders to acquire new funds to originate still more high risk, poor quality loans. Levin-Coburn Report at 11. 2. 147. Deutsche Bank Knew That The Representations Were False Through Its Affiliation with MortgageIT
As part of its strategy to gain control of the securitization process, and to ensure a
steady supply of mortgage loans to securitize, Deutsche Bank acquired a number of loan originators, including MortgageIT, Inc. (Mortgage IT). Announcing the MortgageIT acquisition in a July 12, 2006 press release, Deutsche Bank boasted that the vertical integration of a leading mortgage originator like MortgageIT will provide significant competitive advantages, such as access to a steady source of product for distribution into the mortgage capital markets. 148. Indeed, controlling a subprime lender allowed an investment bank like Deutsche
Bank to dictate underwriting standards at the origination level and guarantee a constant stream of loans to securitize and sell to investors like the GSEs. Because Deutsche Bank needed high volumes of loans to securitizeand because it passed off the default risk to investorsDeutsche Bank had every incentive to, and in fact did, lower the underwriting standards at its affiliated lenders. 149. MortgageIT originated 22.69 percent of the loans in the ACE 2007-HE5
Securitization and 100 percent of the loans in the MHL 2007-1 Securitization, and was thus directly responsible for whether the underlying mortgage loans for those Securitizations conformed to the representations made in their prospective Registration Statements. As set forth in Tables 6 and 7, above, moreover, the Registration Statements for these Securitizations vastly misrepresented key data, including LTV ratios and owner occupancy percentages. It is not 65
possible that MortgageITwhich, by this time, was an arm of Deutsche Bankcould examine the income, liabilities, credit history, employment history, credit reports, personal information, and property appraisals for each loan in these Securitizations, all of which it purportedly did as a part of its underwriting, and still misstate the quality of the mortgage loans to the extent that it did. C. Multiple Investigations Confirm that Deutsche Bank Knew that the Mortgage Loans Did Not Conform to the Stated Underwriting Guidelines 150. An investigation by the Financial Industry Regulatory Authority (FINRA)
confirms that several Securitizations contain material misrepresentations. Indeed, FINRA found that with respect to sixteen securitizations, including nine of the Securitizations in this action,15 Deutsche Bank continued to refer customers in its prospectus materials to the erroneous [delinquency] data even after it became aware that the static pool information underreported historical delinquency rates. FINRA Letter at 2. Thus, the FINRA investigation confirms not only that Deutsche Bank knew that the representations in its Registration Statements were false, but that Deutsche Bank failed to correct the misrepresentations and actively directed investors to rely on those misrepresentations. 151. The United States Department of Justice (DOJ) has reached similar
conclusions. On August 22, 2011, the DOJ filed a complaint against Deutsche Bank and MortgageIT, accusing the two companies of knowingly, wantonly, and recklessly permitting violations of underwriting guidelines. See Am. Compl. United States v. Deutsche Bank AG, et al., No. 11 Civ. 2976 (S.D.N.Y. 2011) (the DOJ Complaint). The DOJ alleged that Deutsche Bank and MortgageIT falsely represented that mortgages included in certain Deutsche Bank and
ACE 2007-ASL1, ACE 2007-SL1, ACE 2007-HE1, ACE 2007-HE2, ACE 2007HE3, ACE 2007-HE4, ACE 2007-HE5, ACE 2007-ASAP1 and ACE 2007-ASAP2. 66
15
MortgageIT RMBS including the ACE 2006-ASAP1 and ACE 2006-ASAP2 Securitizations complied with certain federal origination requirements, materially similar to the underwriting standards applicable here. 152. According to the DOJ complaint, Deutsche Bank and MortgageIT failed to
implement basic quality control procedures to ensure that the loans it originated conformed to these requirements. DOJ Complaint at 29. The DOJ further detailed Mortgage ITs lax underwriting processes over several years. Among other things, the DOJ reported that MortgageIT had no in-house quality control procedure in place until late 2005; that it instead contracted with a vendor who prepared letters detailing serious underwriting violations; and that MortgageIT employees, rather than reviewing and acting upon those findings, stuffed the letters, unopened and unread, in a closet in MortgageITs Manhattan headquarters. Id. at 31 32. 153. Beginning in December 2004, Mortgage ITs quality control manager attempted
to implement MortgageITs first quality control system. However, according to the DOJ, that system quickly proved dysfunctional and never worked. For example, in late 2004-early 2005, the quality control manager identified a MortgageIT underwriter who engag[ed] in the pattern of serious underwriting violations with common brokers, which included submitting ineligible and/or fraudulent mortgages. The quality control manager asked MortgageITs President and other senior executives to take action, but neither the President, nor other executives acted on the report. Id. at 33. 154. The situation did not improve with Deutsche Banks acquisition of Mortgage IT.
In fact, beginning in 2006, during the period in which Deutsche Bank initially announced the planned acquisition and performed its diligence for that transaction, Mortgage IT, in an effort
67
[t]o increase sales, further cut down its quality control procedures, shifting the work of quality control personnel from quality control reviews of closed mortgages . . . to assistance with production. This led the DOJ to conclude that after Deutsche Bank acquired MortgageIT, it not only failed to fix the existing quality control deficiencies at MortgageIT, but it made a very bad problem even worse. Id. at 3536 (emphasis added). D. Multiple Witnesses, Including Former Deutsche Bank Personnel, Have Confirmed that Deutsche Bank Knew that the Mortgage Loans Did Not Conform to Stated Underwriting Guidelines 155. Emails and testimony from the Levin-Coburn Report further confirm that
Deutsche Bank knew that the representations in the Registration Statements were false. For instance, Deutsche Bank employee Greg Lippmann stated, in an email dated September 21, 2006, that ace is generally horrible. See Levin-Coburn Report at 339. This assessment was of course correctas reflected above in Table 1, ACE was the depositor for 34 of the 40 Securitizations, and the Registration Statements for all of those Securitizations misstated key loan data, including owner occupancy percentages and LTV ratios. In other emails, Mr. Lippmann was more explicit, calling Deutsche Banks residential mortgage-backed securitizations crap and pigs and predicting, correctly (though without advising the GSEs or other investors), that they would lose value. Id. at 10 (Lippman emails of September 1, 2006, and August 4, 2006, respectively). 156. Even more troubling, at the same time that Deutsche Bank was marketing its
residential mortgage-backed securitizations to investors, it allowed Mr. Lippmann to develop a large proprietary short position for the bank in the RMBS market, which ultimately resulted in a profit of $1.5 billion, which Mr. Lippmann claims is more money on a single position than any other trade had ever made for Deutsche Bank in its history. Id. Mr. Lippmanns emails and the huge profit that Deutsch Bank reaped by betting against mortgage-backed securities through 68
its short position confirm that Deutsche Bank was aware that the mortgage loans underlying the Securitizations were much riskier than indicated by the representations in the Registration Statements. 157. Other former Deutsche Bank employees have described the manner in which
Deutsche Bank used the false information in the Registration Statements to obtain AAA credit ratings essential for marketing Certificates to investors such as the GSEs. Just as the GSEs relied on Defendants to provide accurate information concerning the credit quality of the mortgage pools, the rating agencies relied on Defendants to provide them with accurate information on which to base their ratings. As Susan Barnes, the North American Practice Leader for RMBS at S&P from 2005 to 2008, explained: The securitization process relies on the quality of the data generated about the loans going into the securitizations. S&P relies on the data produced by others and reported to both S&P and investors about those loans. At the time that it begins its analysis of a securitization, S&P received detailed data concerning the loan characteristics of each of the loans in the poolup to 70 separate characteristics for each loan in a pool of, potentially, thousands of loans. S&P does not receive the original loan files for the loans in the pool. Those files are reviewed by the arranger or sponsor of the transaction, who is also responsible for reporting accurate information about the loans in the deal documents and offering documents to potential investors. Transcript of Testimony of Susan Barnes before the Senate Permanent Subcommittee on Investigations, April 23, 2010, at 9 (emphasis added). 158. Defendants fed the rating agencies the same false loan level data regarding loan-
to-value ratios, owner-occupancy status, home values, and debt-to-income ratios that they provided to investors in aggregate form in the Prospectuses and Prospectus Supplements. The rating agencies then input this false data into their quantitative models to assess the credit risk associated with the RMBS, project likely future defaults, and ultimately, determine the ratings on 69
Defendants RMBS products. As a result, Defendants essentially pre-determined the ratings by feeding bad data into the ratings system. 159. In addition to feeding the rating agencies bad loan data, Deutsche Bank pressured
rating agencies into assigning ratings that Deutsche Bank knew were inflated. For example, in a March 2007 email, obtained by Senate investigators, a Moodys analyst complained to a colleague that after Moodys suggested certain downward rating adjustments for a particular RMBS, a Deutsche Bank investment banker push[ed] back dearly saying that the deal has been marketed already and that we [Moodys] came back too late with this discovery. According to the analyst, the investment banker further argued that it was hard for Deutsche Bank to change the structure at this point, effectively conceding that the rating assigned to the RMBS would not reflect the actual likelihood of default. Levin-Coburn Report at 280, fn. 1082. 160. In another instance, a Deutsche Bank banker expressly encouraged an analyst at
Moodys to focus on short term profits at the expense of rating accuracy. The Former Senior Vice President and Senior Credit Officer at Moodys, Richard Michalek, testified to the Senate Permanent Subcommittee on Investigations that a Deutsche Bank investment banker once told Michalek: Ill be gone, youll be gone. So why are you making life difficult right now over this particular comment? According to Michalek, the comment exemplified short-term thinking on the part the investment banks: Short term, get this deal done, get this quarter closed, get this bonus booked, because I do not know whether or not my group is going to be here at the end of next quarter, so I have to think of this next bonus. Transcript of Testimony of Richard Michalek before the Senate Permanent Subcommittee on Investigations, April 23, 2010, Vol. 3 at 44.
70
E. The GSEs Justifiably Relied on Deutsche Banks Representations 161. Fannie Mae and Freddie Mac purchased the GSE Certificates based on the
representations by Deutsche Bank as the sponsor, depositor, and lead and selling underwriter. Deutsche Bank provided term sheets to the GSEs that contained critical data as to the Securitizations, including with respect to anticipated credit ratings by the credit rating agencies, loan-to-value and combined loan-to-value ratios for the underlying collateral, and owner occupancy statistics. This data was subsequently incorporated into Prospectus Supplements that were received by the GSEs upon the close of each Securitization. 162. The GSEs relied upon the accuracy of the data transmitted to them and
subsequently reflected in the Prospectus Supplements. In particular, the GSEs relied upon the credit ratings that the credit rating agencies indicated they would bestow on the Certificates. These credit ratings represented a determination by the credit rating agencies that the GSE Certificates were AAA quality (or its equivalent) meaning the Certificates had an extremely strong capacity to meet the payment obligations described in the respective PSAs. 163. Deutsche Bank, in its various roles as sponsor, depositor, and lead and selling
underwriter in the Securitizations, provided detailed information about the collateral and structure of each Securitization it sponsored to the credit rating agencies. The credit rating agencies based their ratings on the information provided to them by Deutsche Bank, and the agencies anticipated ratings of the Certificates were dependant on the accuracy of that information. The GSEs relied on the accuracy of the anticipated credit ratings and the actual credit ratings assigned to the Certificates by the credit rating agencies, and upon the accuracy of Deutsche Banks representations in the term sheets and Prospectus Supplements. 164. In addition, the GSEs relied on the fact that the originators of the mortgage loans
in the Securitizations had acted in conformity with their underwriting guidelines, which were 71
described in the Prospectus Supplements. Compliance with underwriting guidelines was a sine qua non to agreeing to purchase the Certificates, since the strength of the mortgage loan collateral and the GSEs decision to purchase the Certificates was directly premised on the GSEs reasonable belief that applicable underwriting standards had been observed. 165. In purchasing the GSE Certificates, the GSEs justifiably relied on Deutsche
Banks false representations and omissions of material fact detailed above, including the misstatements and omissions in the term sheets about the underlying collateral, which were reflected in the Prospectus Supplements. These representations materially altered the total mix of information upon which the GSEs made their purchasing decisions. 166. But for the above misrepresentations and omissions, the GSEs would not have
purchased or acquired the Certificates as they ultimately did, because those representations and omissions were material to their decision to acquire the GSE Certificates, as described above. VI. 167. FANNIE MAES AND FREDDIE MACS PURCHASES OF THE GSE CERTIFICATES AND THE RESULTING DAMAGES In total, between September 28, 2005 and June 29, 2007, Fannie Mae and Freddie
Mac purchased over $14.2 billion in residential mortgage-backed securities issued in connection with the Securitizations. Table 10 sets forth each of Freddie Macs purchases of the GSE Certificates.16 Table 10
Settlement Date of Purchase by Freddie Mac 10/28/2005 10/31/2005 9/28/2005 Initial Unpaid Principal Balance 181,194,000.00 199,395,000.00 531,329,000.00 Purchase Price (% of Par) 100.00 100.00 100.00 Seller to Freddie Mac DBS DBS DBS
Transaction ACE 2005-AG1 ACE 2005-ASAP1 ACE 2005-HE6

16
Tranche A1A A1 A1
CUSIP 004427BV1 004421SY0 004421SG9
Transaction ACE 2005-HE7 ACE 2006-ASAP1 ACE 2006-ASAP2 ACE 2006-ASAP3 ACE 2006-ASAP4 ACE 2006-ASAP5 ACE 2006-ASAP6 ACE 2006-CW1 ACE 2006-FM1 ACE 2006-FM2 ACE 2006-HE1 ACE 2006-HE2 ACE 2006-HE3 ACE 2006-HE4 ACE 2006-NC1 ACE 2006-NC3 ACE 2006-OP1 ACE 2006-OP2 ACE 2007-ASAP1 ACE 2007-ASAP2 ACE 2007-ASL1 ACE 2007-HE1 ACE 2007-HE2 ACE 2007-HE3 ACE 2007-HE4 ACE 2007-HE5 ACE 2007-SL1 ACE 2007-WM1 ACE 2007-WM2 DBALT 2007-OA4 INDX 2006-AR9 MHL 2007-1 NCHET 2006-2 NHEL 2007-1
Tranche A1A A1 A1 A1 A1 A1A A1A A1 A1 A1 A1A A1 A1 A1 A1 A1A A1A A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 IIA1 2A1 1A1 A1 A1A
CUSIP 004421TV5 004421VS9 004421XB4 00442VAA5 00441UAA8 004422AA9 00443KAA8 00441QAA7 00441VAA6 00442CAA7 004421WJ8 004421YR8 00441TAA1 00442BAA9 004421UP6 00442EAC9 00442PAA8 00441YAA0 00442JAA2 00442UAA7 00443MAA4 00443LAA6 00443PAA7 00442GAA8 00442LAA7 000797AA8 00442FAA0 004424AA5 00442KAA9 25151XAC5 45661EGE8 61915YAA9 64360YAP0 669971AA1
Settlement Date of Purchase by Freddie Mac 11/28/2005 1/30/2006 3/30/2006 5/30/2006 7/31/2006 9/28/2006 11/29/2006 7/25/2006 8/29/2006 10/30/2006 2/28/2006 4/28/2006 6/27/2006 9/28/2006 1/30/2006 11/30/2006 5/25/2006 10/30/2006 3/15/2007 5/30/2007 2/15/2007 1/30/2007 3/8/2007 3/22/2007 4/30/2007 6/29/2007 3/2/2007 1/29/2007 3/30/2007 6/29/2007 4/28/2006 5/31/2007 6/29/2006 2/28/2007
Initial Unpaid Principal Balance 572,103,000.00 200,510,000.00 219,739,000.00 351,056,000.00 285,643,000.00 204,109,000.00 166,575,000.00 348,483,000.00 379,752,000.00 331,351,000.00 757,819,000.00 417,932,000.00 585,651,000.00 224,129,000.00 596,262,000.00 411,186,000.00 356,901,000.00 355,789,000.00 284,631,000.00 196,819,000.00 28,625,000.00 299,722,000.00 283,073,000.00 222,412,000.00 320,222,000.00 156,231,000.00 48,608,000.00 219,104,000.00 203,823,000.00 151,671,000.00 188,330,000.00 440,151,000.00 435,122,000.00 803,560,000.00
Purchase Price (% of Par) 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 99.96 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.52 100.00 100.00 100.00
Seller to Freddie Mac DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS
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168.
Table 11 sets forth each of Fannie Maes purchases of the Certificates:
Table 11
Settlement Date of Purchase by Fannie Mae 9/15/2006 2/28/2006 2/28/2006 9/28/2006 11/30/2006 5/25/2006 11/29/2006 6/29/2007 11/30/2005 12/29/2005 12/30/2005 Initial Unpaid Principal Balance 310,440,000 417,082,000 104,270,000 124,883,000 310,606,000 180,507,000 96,477,000 149,369,000 247,033,000 170,981,200 209,067,600 Purchase Price (% of Par) 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 99.77 99.30 100.23 Seller to Fannie Mae DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS DBS
Transaction ACE 2006-NC2 ACE 2006-HE1 ACE 2006-ASAP5 ACE 2006-NC3 ACE 2006-OP1 ACE 2006-ASAP6 DBALT 2007-OA4 INDX 2005-AR31 RAST 2005-A15 RAST 2005-A15
Tranche A1 A1B1 A1B2 A1B A1B A1B A1B IIIA1 2A1 3A1 4A1
CUSIP 00441XAA2 004421WK5 004421WL3 004422AB7 00442EAD7 00442PAB6 00443KAB6 25151XAE1 45660LW39 45660L4E6 45660L4F3
169.
Registration Statements, including the Prospectuses and Prospectus Supplements, directly caused Fannie Mae and Freddie Mac to suffer billions of dollars in damages, including without limitation depreciation in the value of the Certificates. The mortgage loans underlying the GSE Certificates experienced defaults and delinquencies at a much higher rate than they would have had the loan originators adhered to the underwriting guidelines set forth in the Registration Statements, and the payments to the trusts were therefore much lower than they would have been had the loans been underwritten as described in the Registration Statements.
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171.
regarding the true characteristics of the loans were the proximate cause of Fannie Maes and Freddie Macs losses relating to their purchases of the GSE Certificates. Based upon sales of the Certificates or similar certificates on the secondary market, Defendants proximately caused billions of dollars in damages to Fannie Mae and Freddie Mac in an amount to be determined at trial. FIRST CAUSE OF ACTION Violation of Section 11 of the Securities Act of 1933 (Against Defendants DBS, ACE, MIT Securities, DB Products, and the Individual Defendants) 173. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. This cause of action specifically excludes the allegations as to Defendants scienter, including those set forth in Section V. 174. This claim is brought by Plaintiff pursuant to Section 11 of the Securities Act of
1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements. This claim is brought against Defendant DBS with respect to each of the Registration Statements, against Defendant MIT Securities with respect to the MHL 2007-1 Securitization, and against Defendant ACE and the Individual Defendants with respect to the Registration Statements filed by ACE that registered securities that were bona fide offered to the public on or after September 6, 2005. 175. Defendant DBS is strictly liable for making false and materially misleading
statements in each of the Registration Statements, and for omitting facts necessary to make the 75
facts stated therein not misleading. Defendant ACE and the Individual Defendants are strictly liable for making false and materially misleading statements in the ACE Shelf Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005, and for omitting facts necessary to make the facts stated therein not misleading. Defendants MIT Securities and DB Products (as successor-in-interest to MIT Securities) are strictly liable for making false and materially misleading statements in the Registration Statement filed by MIT Securities, which is applicable the MHL 2007-1 Securitization, and for omitting facts necessary to make the facts stated therein not misleading. 176. Defendant DBS served as underwriter of each Securitization, and as such, is liable
for the misstatements and omissions in the Registration Statements under Section 11 of the Securities Act. 177. Defendant ACE filed three Registration Statements under which 34 of the 40
Securitizations were carried out. As depositor, Defendant ACE is an issuer of the GSE Certificates issued pursuant to the Registration Statements ACE filed within the meaning of Section 2(a)(4) of the Securities Act, 15 U.S.C. 77b(a)(4), and in accordance with Section 11(a), 15 U.S.C. 77k(a). As such, ACE is liable under Section 11 of the Securities Act for the misstatements and omissions in the ACE Shelf Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005. 178. At the time Defendant ACE filed three Registration Statements applicable to 34 of
the Securitizations, the Individual Defendants were officers and/or directors of ACE. In addition, the Individual Defendants signed those Registration Statements and either signed or authorized another to sign on their behalf the amendments to those Registration Statements. As such, the Individual Defendants are liable under Section 11 of the Securities Act for the
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misstatements and omissions in the ACE Shelf Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005. 179. Defendant MIT Securities filed the Registration Statement under which the MHL
2007-1 Securitization was carried out. As depositor, MIT Securities is an issuer of the MHL 2007-1 Certificate within the meaning of Section 2(a)(4) of the Securities Act, 15 U.S.C. 77b(a)(4), and in accordance with Section 11(a), 15 U.S.C. 77k(a). As such, MIT Securities is liable for the misstatements and omissions in this Registration Statement under Section 11 of the Securities Act. As discussed at paragraph 18 above, in January 2007, Defendant DB Products acquired MIT Securities. Defendant DB Products is liable as successor-in-interest to MIT Securities for the misstatements and omissions in that Registration Statement under Section 11 of the Securities Act. 180. At the time that they became effective, each of the Registration Statements
Certificates pursuant to the false and misleading Registration Statements. Fannie Mae and Freddie Mac made these purchases in the primary market. At the time they purchased the GSE Certificates, Fannie Mae and Freddie Mac did not know of the facts concerning the false and
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misleading statements and omissions alleged herein, and if the GSEs would have known those facts, they would not have purchased the GSE Certificates. 183. DBS owed to Fannie Mae, Freddie Mac, and other investors a duty to make a
reasonable and diligent investigation of the statements contained in the Registration Statements at the time they became effective to ensure that such statements were true and correct and that there were no omissions of material facts required to be stated in order to make the statements contained therein not misleading. The Individual Defendants owed the same duty with respect to the ACE Shelf Registration Statements that they signed that registered securities that were bona fide offered to the public on or after September 6, 2005. 184. DBS and the Individual Defendants did not exercise such due diligence and failed
to conduct a reasonable investigation. In the exercise of reasonable care, these Defendants should have known of the false statements and omissions contained in or omitted from the Registration Statements filed in connection with the Securitizations, as set forth herein. In addition, ACE and MIT Securities, though subject to strict liability without regard to whether they performed diligence, also failed to take reasonable steps to ensure the accuracy of the representations. As discussed at paragraph 18 above, DB Products is liable as successor-ininterest to MIT Securities, which it acquired in January 2007. 185. Fannie Mae and Freddie Mac sustained substantial damages as a result of the
misstatements and omissions in the Registration Statements. 186. The time period from July 1, 2011 through August 29, 2011 is tolled for statute
of limitations purposes by virtue of a tolling agreement entered into between FHFA, Fannie Mae, Freddie Mac, DB Products, ACE, DBS, MIT Holdings, MIT Securities and Altamont. In
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addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). 187. By reason of the conduct herein alleged, DBS, ACE, MIT Securities, DB Products
(as successor-in-interest to MIT Securities), and the Individual Defendants are jointly and severally liable for their wrongdoing. SECOND CAUSE OF ACTION Violation of Section 12(a)(2) of the Securities Act of 1933 (Against DBS, ACE, MIT Securities, and DB Products) 188. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. This cause of action specifically excludes the allegations as to Defendants scienter, including those set forth in Section V. 189. This claim is brought by Plaintiff pursuant to Section 12(a)(2) of the Securities
Act of 1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements in the Securitizations listed in paragraph 2. 190. This claim is predicated upon DBSs negligence in making false and materially
misleading statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as Prospectuses) for each of the Securitizations. Defendant ACE acted negligently in making false and materially misleading statements in the Prospectuses for the Securitizations carried out under the Registration Statements it filed, which are applicable to 34 of the Securitizations. Defendant MIT Securities acted negligently in making false and materially misleading statements in the Prospectuses for the Securitization carried out under the Registration Statement it filed, which is applicable to the MHL 2007-1
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Securitization. As discussed at paragraph 18, above, DB Products is liable as successor-ininterest to MIT Securities, which it acquired in January 2007. 191. DBS is prominently identified in the Prospectuses, the primary documents that
were used to sell the GSE Certificates. DBS offered the Certificates publicly, including selling to Fannie Mae and Freddie Mac their GSE Certificates, as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. 192. DBS offered and sold the GSE Certificates to Fannie Mae and Freddie Mac by
means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. DBS reviewed and participated in drafting the Prospectuses. 193. DBS successfully solicited Fannie Maes and Freddie Macs purchase of the GSE
Certificates. As underwriter, DBS obtained substantial commissions based on the amount received from the sale of the Certificates to the public. 194. DBS offered the GSE Certificates for sale, sold them, and distributed them by the
use of means or instruments of transportation and communication in interstate commerce. 195. ACE is prominently identified in the Prospectuses for the Securitizations carried
out under the Registration Statements that it filed. These Prospectuses were the primary documents each used to sell Certificates for the 34 Securitizations under those Registration Statements. MIT Securities is prominently identified in the Prospectus for the Securitization carried out under the Registration Statement that it filed. These Prospectuses were the primary documents each used to sell the Certificates. ACE and MIT Securities offered the Certificates publicly and actively solicited their sale, including to Fannie Mae and Freddie Mac. As
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discussed at paragraph 18, above, DB Products is liable as successor-in-interest to MIT Securities, which it acquired in January 2007. 196. With respect to the Securitizations for which they filed Registration Statements,
ACE and MIT Securities offered the GSE Certificates to Fannie Mae and Freddie Mac by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. ACE and MIT Securities reviewed and participated in drafting the Prospectuses. 197. ACE and MIT Securities offered the GSE Certificates for sale by the use of means
or instruments of transportation and communication in interstate commerce. 198. ACE and MIT Securities actively participated in the solicitation of the GSEs
purchase of the GSE Certificates, and did so in order benefit themselves. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in the marketing of the GSE Certificates. 199. Each of the Prospectuses contained material misstatements of fact and omitted
facts and information necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectuses. 200. The untrue statements of material facts and omissions of material fact in the
Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, and loan-to-value ratios. 201. DBS, ACE and MIT Securities offered and sold the GSE Certificates offered
pursuant to the Registration Statements directly to Fannie Mae and Freddie Mac, pursuant to the false and misleading Prospectuses.
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202.
DBS owed to Fannie Mae and Freddie Mac, as well as to other investors in these
trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. ACE and MIT Securities owed the same duty with respect to the Prospectuses for the Securitizations carried out under the Registration Statements filed by them. 203. DBS, ACE and MIT Securities failed to exercise such reasonable care. These
defendants should have known, in the exercise of reasonable care, that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above. As discussed at paragraph 18, above, DB Products is liable as successor-in-interest to MIT Securities, which it acquired in January 2007. 204. In contrast, Fannie Mae and Freddie Mac did not know of the untruths and
their investments in the GSE Certificates and have the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 207. The time period from July 1, 2011 through August 29, 2011 is tolled for statute
of limitations purposes by virtue of a tolling agreement entered into between FHFA, Fannie Mae, Freddie Mac, DB Products, ACE, DBS, MIT Holdings, MIT Securities and Altamont. In
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addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). THIRD CAUSE OF ACTION Violation of Section 15 of the Securities Act of 1933 (Against DB Products, Deutsche Bank AG, Taunus, and the Individual Defendants) 208. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. This cause of action specifically excludes the allegations as to Defendants scienter, including those set forth in Section V. 209. This claim is brought under Section 15 of the Securities Act of 1933, 15 U.S.C.
77o (Section 15), against DB Products, Deutsche Bank AG, Taunus, and the Individual Defendants for controlling-person liability with regard to the Section 11 and Section 12(a)(2) causes of actions set forth above. 210. The Individual Defendants at all relevant times participated in the operation and
management of ACE and its related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of ACEs business affairs. Defendant Douglas K. Johnson was the President and Director of Defendant ACE. Defendant Evelyn Echevarria was the Secretary and Director of Defendant ACE. Defendant Juliana C. Johnson was the Treasurer and Director of Defendant ACE. 211. Defendant DB Products was the sponsor for 35 of the Securitizations, and
culpably participated in the violations of Sections 11 and 12(a)(2) set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting ACE and MIT Securities as the special purpose vehicles, and selecting DBS as underwriter. In its role as
83
sponsor, DB Products knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 212. Defendant DB Products also acted as the seller of the mortgage loans for 35 of the
Securitizations, carried out under the Registration Statements filed by ACE and MIT Securities, in that it conveyed such mortgage loans to Defendant ACE or MIT Securities pursuant to a Mortgage Loan Purchase Agreement. In addition, because of its position as sponsor, DB Products was able to, and did in fact, control the contents of the Registration Statements, including the Prospectuses and Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 213. Defendant DB Products also controlled all aspects of the business of ACE, as
ACE was merely a special purpose entity created for the purpose of acting as a pass-through for the issuance of the Certificates. In addition, because of its position as sponsor, DB Products was able to, and did in fact, control the contents of the Registration Statements filed by ACE, including the Prospectuses and Prospectus Supplements, which pertained to 34 Securitizations and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 214. Defendant Deutsche Bank AG controlled the business operations of DBS and
ACE. Defendant Taunus controlled the business operations of DBS. Deutsche Bank AG and Taunus culpably participated in the violations of Section 11 and 12(a)(2) set forth above. As the ultimate corporate parent of DBS and ACE, Deutsche Bank AG had the practical ability to direct and control the actions of these entities in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of DBS and ACE in connection with the
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issuance and sale of the Certificates. As the direct parent of DBS, Taunus had the practical ability to direct and control the actions of this entity in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of DBS in connection with the issuance and sale of the Certificates. 215. Deutsche Bank AG expanded its share of the residential mortgage-backed
securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 216. DB Products, Deutsche Bank AG, Taunus and the Individual Defendants are
controlling persons within the meaning of Section 15 by virtue of their actual power over, control of, ownership of, and/or directorship of DBS and/or ACE at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 217. Deutsche Bank AG and Taunus culpably participated in the violations of
Section 11 and 12(a)(2) set forth above. They oversaw the actions of the Deutsche Bank subsidiaries, including DBS and ACE, and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as ACE and the issuing trusts to serve as conduits for the mortgage loans 218. Fannie Mae and Freddie Mac purchased in the primary market Certificates issued
pursuant to the Registration Statements, including the Prospectuses and Prospectus Supplements, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements.
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219.
misstatements and omissions in the Registration Statements, for which they are entitled to compensation. 221. The time period from July 1, 2011 through August 29, 2011 is tolled for statute of
limitations purposes by virtue of a tolling agreement entered into between FHFA, Fannie Mae, Freddie Mac, DB Products, ACE, DBS, MIT Holdings, MIT Securities and Altamont. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). FOURTH CAUSE OF ACTION Violation of Section 13.1-522(A)(ii) of the Virginia Code (Against DBS, ACE, MIT Securities, and DB Products) 222. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. This cause of action specifically excludes the allegations as to Defendants scienter, including those set forth in Section V. 223. This claim is brought by Plaintiff pursuant to Section 13.1-522(A)(ii) of the
Virginia Code and is asserted on behalf of Freddie Mac. The allegations set forth below in this Cause of Action pertain only to those GSE Certificates identified in Table 10 above that were purchased by Freddie Mac on or after September 6, 2006. 224. This claim is predicated upon DBSs negligence in making false and materially
misleading statements in the Prospectuses for each of the Securitizations (as supplemented by the
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Prospectus Supplements, hereinafter referred to in this Section as Prospectuses). Defendant ACE acted negligently in making false and materially misleading statements in the Prospectuses for the Securitizations carried out under the Registration Statements it filed. Defendant MIT Securities acted negligently in making false and materially misleading statements in the Prospectuses for the Securitization carried out under the Registration Statement it filed, which is applicable to the MHL 2007-1 Securitization. As discussed at paragraph 18 above, DB Products is liable as successor-in-interest to MIT Securities, which it acquired in January 2007. 225. DBS is prominently identified in the Prospectuses, the primary documents that
were used to sell the GSE Certificates. DBS offered the Certificates publicly, including selling to Freddie Mac the GSE Certificates, as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. 226. DBS offered and sold the GSE Certificates to Freddie Mac by means of the
Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. DBS reviewed and participated in drafting the Prospectuses. 227. DBS successfully solicited Freddie Macs purchase of the GSE Certificates. As
underwriter, DBS obtained substantial commissions based on the amount received from the sale of the Certificates to the public. 228. DBS offered the GSE Certificates for sale, sold them, and distributed them to
Freddie Mac in the State of Virginia. 229. ACE is prominently identified in the Prospectuses for the Securitizations carried
out under the Registration Statements that they filed. These Prospectuses were the primary documents each used to sell Certificates for these Securitizations. MIT Securities is prominently
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identified in the Prospectus for the Securitization carried out under the Registration Statement that it filed. These Prospectuses were the primary documents each used to sell the Certificates. ACE and MIT Securities offered the Certificates publicly and actively solicited their sale, including to Freddie Mac. As discussed at paragraph 18, above, DB Products is liable as successor-in-interest to MIT Securities, which it acquired in January 2007. 230. With respect to the Securitizations for which they filed Registration Statements,
ACE and MIT Securities offered the GSE Certificates to Freddie Mac by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. ACE and MIT Securities reviewed and participated in drafting the Prospectuses. 231. ACE and MIT Securities actively participated in the solicitation of Freddie Macs
pursuant to the Registration Statements directly to Freddie Mac, pursuant to the false and misleading Prospectuses.
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235.
DBS owed to Freddie Mac, as well as to other investors in these trusts, a duty to
make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. ACE and MIT Securities owed the same duty with respect to the Prospectuses for the Securitizations carried out under the Registration Statements filed by them. 236. DBS, ACE and MIT Securities failed to exercise such reasonable care. These
defendants should have known, in the exercise of reasonable care, that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above. As discussed at paragraph 18 above, DB Products is liable as successor-in-interest to MIT Securities, which it acquired in January 2007. 237. In contrast, Freddie Mac did not know of the untruths and omissions contained in
the GSE Certificates and has the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 239. The time period from July 1, 2011 through August 29, 2011 is tolled for statute
of limitations purposes by virtue of a tolling agreement entered into between FHFA, Fannie Mae, Freddie Mac, DB Products, ACE, DBS, MIT Holdings, MIT Securities and Altamont. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12).
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FIFTH CAUSE OF ACTION Violation of Section 13.1-522(C) of the Virginia Code (Against DB Products, Deutsche Bank AG, Taunus and the Individual Defendants) 240. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. This cause of action specifically excludes the allegations as to Defendants scienter, including those set forth in Section V. 241. This claim is brought under Section 13.1-522(C) of the Virginia Code and is
asserted on behalf of Freddie Mac. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 10 above that were purchased by Freddie Mac on or after September 6, 2006. 242. The Individual Defendants at all relevant times participated in the operation and
culpably participated in the violations of Section 13.1-522(A)(ii) set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting ACE and MIT Securities as the special purpose vehicles, and selecting DBS as underwriter. In its role as sponsor, DB Products knew and intended that the mortgage loans it purchased would be sold in
90
connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 244. Defendant DB Products also acted as the seller of the mortgage loans for 35 of the
Securitizations, carried out under the Registration Statements filed by ACE and MIT Securities, in that it conveyed such mortgage loans to Defendant ACE or MIT Securities pursuant to a Mortgage Loan Purchase Agreement. In addition, because of its position as sponsor, DB Products was able to, and did in fact, control the contents of the Registration Statements, including the Prospectuses and Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 245. Defendant DB Products also controlled all aspects of the business of ACE, as
ACE. Defendant Taunus controlled the business operations of DBS. Deutsche Bank AG and Taunus culpably participated in the violations of Section 13.1-522(A)(ii) set forth above. As the ultimate corporate parent of DBS and ACE, Deutsche Bank AG had the practical ability to direct and control the actions of these entities in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of DBS and ACE in connection with the issuance and sale of the Certificates. As the direct parent of DBS, Taunus had the practical
91
ability to direct and control the actions of this entity in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of DBS in connection with the issuance and sale of the Certificates. 247. Deutsche Bank AG expanded its share of the residential mortgage-backed
controlling persons within the meaning of Section 13.1-522(C) by virtue of their actual power over, control of, ownership of, and/or directorship of DBS and/or ACE at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 249. Deutsche Bank AG and Taunus culpably participated in the violations of Section
13.1-522(A)(ii) set forth above. They oversaw the actions of the Deutsche Bank subsidiaries, including DBS and ACE, and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as ACE and the issuing trusts to serve as conduits for the mortgage loans 250. Freddie Mac purchased Certificates issued pursuant to the Registration
Statements, including the Prospectuses and Prospectus Supplements, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements.
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251.
Freddie Mac did not know of the misstatements and omissions in the Registration
omissions in the Registration Statements, for which it is entitled to compensation. 253. The time period from July 1, 2011 through August 29, 2011 is tolled for statute of
limitations purposes by virtue of a tolling agreement entered into between FHFA, Fannie Mae, Freddie Mac, DB Products, ACE, DBS, MIT Holdings, MIT Securities and Altamont. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). SIXTH CAUSE OF ACTION Violation of Section 31-5606.05(a)(1)(B) of the District of Columbia Code (Against DBS, ACE, MIT Securities, and DB Products) 254. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. This cause of action specifically excludes the allegations as to Defendants scienter, including those set forth in Section V. 255. This claim is brought by Plaintiff pursuant to Section 31-5606.05(a)(1)(B) of the
District of Columbia Code and is asserted on behalf of Fannie Mae with respect to the GSE Certificates identified in Table 11 above. 256. This claim is predicated upon DBSs negligence in making false and materially
misleading statements in the Prospectuses for each of the Securitizations (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as Prospectuses). Defendant ACE acted negligently in making false and materially misleading statements in the Prospectuses
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for the Securitizations carried out under the Registration Statements it filed, which are applicable to 34 of the Securitizations. Defendant MIT Securities acted negligently in making false and materially misleading statements in the Prospectuses for the Securitization carried out under the Registration Statement it filed, which is applicable to the MHL 2007-1 Securitization. As discussed at paragraph 18, above, DB Products is liable as successor-in-interest to MIT Securities, which it acquired in January 2007. 257. DBS is prominently identified in the Prospectuses, the primary documents that
were used to sell the GSE Certificates. DBS offered the Certificates publicly, including selling to Fannie Mae the GSE Certificates, as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. 258. DBS offered and sold the GSE Certificates to Fannie Mae by means of the
Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. DBS reviewed and participated in drafting the Prospectuses. 259. DBS successfully solicited Fannie Maes purchase of the GSE Certificates. As
underwriter, DBS obtained substantial commissions based upon the amount received from the sale of the Certificates to the public. 260. DBS offered the GSE Certificates for sale, sold them, and distributed them to
Fannie Mae in the District of Columbia. 261. ACE is prominently identified in the Prospectuses for the Securitizations carried
out under the Registration Statements that it filed. These Prospectuses were the primary documents each used to sell Certificates for the 34 Securitizations under those Registration Statements. MIT Securities is prominently identified in the Prospectus for the Securitization
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carried out under the Registration Statement that it filed. These Prospectuses were the primary documents each used to sell the Certificates. ACE and MIT Securities offered the Certificates publicly and actively solicited their sale, including to Fannie Mae. As discussed at paragraph18 above, DB Products is liable as successor-in-interest to MIT Securities, which it acquired in January 2007. 262. With respect to the Securitizations for which they filed Registration Statements,
ACE and MIT Securities offered the GSE Certificates to Fannie Mae by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. ACE and MIT Securities reviewed and participated in drafting the Prospectuses. 263. ACE and MIT Securities actively participated in the solicitation of Fannie Maes
pursuant to the Registration Statements directly to Fannie Mae, pursuant to the false and misleading Prospectuses.
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267.
DBS owed to Fannie Mae, as well as to other investors in these trusts, a duty to
make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. ACE and MIT Securities owed the same duty with respect to the Prospectuses for the Securitizations carried out under the Registration Statements filed by them. 268. DBS, ACE and MIT Securities failed to exercise such reasonable care. These
defendants should have known, in the exercise of reasonable care, that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above. As discussed at paragraph 18 above, DB Products is liable as successor-in-interest to MIT Securities, which it acquired in January 2007. 269. In contrast, Fannie Mae did not know of the untruths and omissions contained in
the Prospectuses at the time they purchased the GSE Certificates. If Fannie Mae would have known of those untruths and omissions, it would not have purchased the GSE Certificates. 270. Fannie Mae sustained substantial damages in connection with their investments in
the GSE Certificates and have the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 271. The time period from July 1, 2011 through August 29, 2011 is tolled for statute
of limitations purposes by virtue of a tolling agreement entered into between FHFA, Fannie Mae, Freddie Mac, DB Products, ACE, DBS, MIT Holdings, MIT Securities and Altamont. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12).
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SEVENTH CAUSE OF ACTION Violation of Section 31-5606.05(c) of the District of Columbia Code (Against DB Products, Deutsche Bank AG, Taunus, and the Individual Defendants) 272. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. This cause of action specifically excludes the allegations as to Defendants scienter, including those set forth in Section V. 273. This claim is brought under Section 31-5606.05(c) of the District of Columbia
Code and is asserted on behalf of Fannie Mae, which purchased the GSE Certificates identified in Table 11 above. 274. The Individual Defendants at all relevant times participated in the operation and
culpably participated in the violations of Section 31-5606.05(a)(1)(B) set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting ACE and MIT Securities as the special purpose vehicles, and selecting DBS as underwriter. In its role as sponsor, DB Products knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts.
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276.
Defendant DB Products also acted as the seller of the mortgage loans for 35 of the
Securitizations carried out under the Registration Statements filed by ACE and MIT Securities, in that it conveyed such mortgage loans to Defendant ACE or MIT Securities pursuant to a Mortgage Loan Purchase Agreement. In addition, because of its position as sponsor, DB Products was able to, and did in fact, control the contents of the Registration Statements, including the Prospectuses and Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 277. Defendant DB Products also controlled all aspects of the business of ACE, as
ACE. Defendant Taunus controlled the business operations of DBS. Deutsche Bank AG and Taunus culpably participated in the violations of Section 31-5606.05(a)(1)(B) set forth above. As the ultimate corporate parent of DBS and ACE, Deutsche Bank AG had the practical ability to direct and control the actions of these entities in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of DBS and ACE in connection with the issuance and sale of the Certificates. As the direct parent of DBS, Taunus had the practical ability to direct and control the actions of this entity in issuing and selling the Certificates, and in
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fact exercised such direction and control over the activities of DBS in connection with the issuance and sale of the Certificates. 279. Deutsche Bank AG expanded its share of the residential mortgage-backed
controlling persons within the meaning of Section 31-5606.05(c) by virtue of their actual power over, control of, ownership of, and/or directorship of DBS and/or ACE at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 281. Deutsche Bank AG and Taunus culpably participated in the violations of Section
31-5606.05(a)(1)(B) set forth above. They oversaw the actions of the Deutsche Bank subsidiaries, including DBS and ACE, and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as ACE and the issuing trusts to serve as conduits for the mortgage loans 282. Fannie Mae purchased Certificates issued pursuant to the Registration Statements,
including the Prospectuses and Prospectus Supplements, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements.
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283.
Fannie Mae did not know of the misstatements and omissions in the Registration
in the Registration Statements, for which it is entitled to compensation. 285. The time period from July 1, 2011 through August 29, 2011 is tolled for statute of
limitations purposes by virtue of a tolling agreement entered into between FHFA, Fannie Mae, Freddie Mac, DB Products, ACE, DBS, MIT Holdings, MIT Securities and Altamont. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). EIGHTH CAUSE OF ACTION Common Law Negligent Misrepresentation (Against DB Products, DBS, ACE, and MIT Securities) 286. 287. Plaintiff realleges each allegation above as if fully set forth herein. This is a claim for common law negligent misrepresentation against Defendants
DB Products, DBS, ACE, and MIT Securities. 288. Between September 28, 2005 and June 29, 2007, DBS, ACE and MIT Securities
sold the GSE Certificates to the GSEs as described above. Because ACE owned and then conveyed the underlying mortgage loans that collateralized the Securitizations for which it served as depositor, ACE had unique, exclusive, and special knowledge about the mortgage loans in the Securitizations through its possession of the loan files and other documentation. MIT Securities, for which DB Products is successor-in-interest, owned and then conveyed the underlying mortgage loans that collateralized the MHL 2007-1 Securitization. MIT Securities
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had unique, exclusive, and special knowledge about the mortgage loans in the MHL 2007-1 Securitization through its possession of the loan files and other documentation. 289. As underwriter for all of the Securitizations, DBS was obligated to and had the
opportunity to perform sufficient due diligence to ensure that the Registration Statements, including without limitation the corresponding Prospectus Supplements, did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. As a result of this privileged position as underwriter which gave it access to loan file information and obligated it to perform adequate due diligence to ensure the accuracy of the Registration Statements DBS had unique, exclusive, and special knowledge about the underlying mortgage loans in the Securitizations. 290. DBS also had unique, exclusive, and special knowledge of the work of third-party
due diligence providers, such as Clayton, who identified significant failures of originators to adhere to the underwriting standards represented in the Registration Statements. The GSEs, like other investors, had no access to borrower loan files prior to the closing of the Securitizations and their purchase of the Certificates. Accordingly, when determining whether to purchase the GSE Certificates, the GSEs could not evaluate the underwriting quality or the servicing practices of the mortgage loans in the Securitizations on a loan-by-loan basis. The GSEs therefore reasonably relied on DBSs knowledge and its express representations made prior to the closing of the Securitizations regarding the underlying mortgage loans. 291. MIT Securities unique, exclusive, and special knowledge and expertise about the
loans held by the trust in the MHL 2007-1 Securitization, created a special relationship of trust
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and confidence between MIT Securities and Freddie Mac, and gave rise to a specific duty of disclosure by MIT Securities, for which DB Products is now successor-in-interest. 292. DBS, ACE, and MIT Securities were aware that the GSEs reasonably relied on
DBSs, ACEs, and MIT Securities reputations and unique, exclusive, and special expertise and experience, as well as their express representations made prior to the closing of the Securitizations, and depended upon these Defendants for complete, accurate, and timely information. The standards under which the underlying mortgage loans were actually originated were known to these Defendants and were not known, and could not be determined, by the GSEs prior to the closing of the Securitizations. 293. Based upon their unique, exclusive, and special knowledge and expertise about
the loans held by the trusts in the Securitizations, DBS, ACE, and MIT Securities had a duty to provide the GSEs complete, accurate, and timely information regarding the mortgage loans and the Securitizations. DBS, ACE, and MIT Securities negligently breached their duty to provide such information to the GSEs by instead making to the GSEs untrue statements of material facts in the Securitizations, or otherwise misrepresenting to the GSEs material facts about the Securitizations. The misrepresentations are set forth in Section IV above, and include misrepresentations as to compliance with underwriting guidelines for the mortgage loans. 294. In addition, having made actual representations about the underlying collateral in
the Securitizations and the facts bearing on the riskiness of the Certificates, DBS, ACE, and MIT Securities had a duty to correct misimpressions left by their statements, including with respect to any half truths. The GSEs were entitled to rely upon Defendants representations about the Securitizations, and Defendants failed to correct in a timely manner any of their misstatements or
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half truths, including misrepresentations as to compliance with underwriting guidelines for the mortgage loans. 295. The GSEs reasonably relied on the information provided by DBS, ACE, and MIT
Securities, and DBS, ACE, and MIT Securities knew that the GSEs were acting in reliance on such information. The GSEs were damaged in an amount to be determined at trial as a direct, proximate, and foreseeable result of the misrepresentations of DBS, ACE, and MIT Securities, including any half truths. Defendant DB Products is liable as successor-in-interest to MIT Securities for damages that were the direct, proximate, and foreseeable result of the misrepresentations, including any half truths, made by MIT Securities in connection with Freddie Macs purchase of the MHL 2007-1 Certificates. 296. The time period from July 1, 2011 through August 29, 2011 is tolled for statute of
limitations purposes by virtue of a tolling agreement entered into between FHFA, Fannie Mae, Freddie Mac, DB Products, ACE, DBS, MIT Holdings, MIT Securities and Altamont. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). NINTH CAUSE OF ACTION Common Law Fraud (Against DB Products, ACE, MIT Securities, and DBS) 297. 298. Plaintiff realleges each allegation above as if fully set forth herein. This is a claim for common law fraud against Defendants DB Products, ACE,
MIT Securities, and DBS with respect to the Securitizations that DB Products sponsored. Defendant DB Products is also liable for common law fraud as successor-in-interest to MIT Securities, as discussed above at paragraph 18.
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299.
The material representations set forth above were fraudulent, and Deutsche
Banks representations falsely and misleadingly misrepresented and omitted material statements of fact. 300. DB Products, ACE, MIT Securities, and DBS knew, or were reckless in not
knowing, that their representations and omissions were false and/or misleading at the time they were made. 301. Each of DB Products, ACE, MIT Securities and DBS made the misleading
statements for the purpose of inducing the GSEs to purchase the GSE Certificates. 302. The GSEs justifiably relied on DB Products, ACEs, MIT Securities, and DBSs
false representations and misleading omissions. 303. Had the GSEs known the true facts regarding DBSs underwriting practices and
quality of the mortgage loans collateralizing the GSE Certificates, they would not have purchased the GSE Certificates. 304. As a result of the foregoing, the GSEs have suffered damages according to proof.
In the alternative, Plaintiff hereby demands rescission and makes any necessary tender of the GSE Certificates. 305. DB Products, ACEs, MIT Securities, and DBSs misconduct was intentional
and wanton. The immediate victims of DB Products, ACEs, MIT Securities, and DBSs fraud were Fannie Mae and Freddie Mac, two entities whose primary mission was assuring affordable housing to millions of Americans. Further, the public nature of the harm is apparent in the congressional hearings and federal enforcement actions that have been pursued against Deutsche Bank as a direct result of its fraudulent conduct at issue in this Complaint. See, e.g., the LevinCoburn Report; the FCIC Report; the DoJ Complaint. Punitive damages are therefore warranted
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for DB Products, ACEs, MIT Securities, and DBSs actions in order to punish and deter them from future misconduct. 306. The time period from July 1, 2011 through August 29, 2011 is tolled for statute of
limitations purposes by virtue of a tolling agreement entered into between FHFA, Fannie Mae, Freddie Mac, DB Products, ACE, DBS, MIT Holdings, MIT Securities and Altamont. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). TENTH CAUSE OF ACTION Aiding and Abetting Fraud (Against DB Products, ACE, and MIT Securities) 307. 308. Plaintiff realleges each allegation above as if fully set forth herein. This is a claim for aiding and abetting fraud against Defendants DB Products,
ACE, and MIT Securities with respect to the Securitizations DB Products sponsored. 309. DB Products, as sponsor for 35 of the Securitizations, substantially assisted
DBSs fraud by choosing which mortgage loans would be included in those Securitizations. It also extended warehouse lines of credit to mortgage originators that it knew had shoddy standards with the intent of later purchasing and securitizing those loans to purchasers, such as the GSEs. DB Products action in assisting in the origination of, and then purchasing, poorly underwritten loans was an integral part of the Securitizations. 310. ACE, as depositor for 34 of the Securitizations, substantially assisted DBSs fraud
by issuing the Registration Statements that were used to offer publicly the Certificates. As the issuer of the Certificates, ACE was an integral part of DBSs sale of the Certificates to the GSEs. 311. MIT Securities, as depositor for the MHL 2007-1 Securitization, substantially
assisted DBSs fraud by issuing the Registration Statement that was used to offer publicly the
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GSE Certificate for that Securitization. As the issuer of that Certificate, MIT Securities was an integral part of DBSs sale of that Certificate to the GSEs. As discussed above in paragraph 18, DB Products is liable as the successor-in-interest to MIT Securities. 312. As described above, DBS made fraudulent and untrue statements of material fact
and omitted to state material facts regarding the true credit quality of the GSE Certificates, the true rate of owner occupancy, the true LTV and CLTV ratio of the underlying mortgage loans, and compliance by the originators with applicable underwriting guidelines. 313. The central role of ACE, MIT Securities and DB Products in Deutsche Banks
vertically integrated sales strategy for the Certificates substantially assisted in DBSs fraud. DB Products, as the purchaser of the underlying mortgage loans, worked closely with ACE and MIT Securities, as the vehicles for securitizing the mortgage loans, which in turn worked closely with DBS, as the distribution arm for the Certificates that were collateralized by those mortgage loans and then sold to the GSEs. Each of ACE, MIT Securities and DB Products worked hand-inglove to provide DBS with Certificates that it could fraudulently sell to the GSEs. 314. ACEs, MIT Securities, and DB Products substantial assistance in DBSs fraud
played a significant and material role in inducing the GSEs to purchase the GSE Certificates. As a direct, proximate and foreseeable result of ACEs, MIT Securities and DB Products aiding and abetting DBS in its fraud against the GSEs, the GSEs have been damaged in an amount to be determined at trial. 315. Because ACE, MIT Securities, and DB Products aided and abetted DBSs fraud
willfully and wantonly, and because, by their acts, ACE, MIT Securities, and DB Products knowingly affected the general public, including but not limited to all persons with interests in the Certificates, FHFA is entitled to recover punitive damages.
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316.
The time period from July 1, 2011 through August 29, 2011 is tolled for statute of
limitations purposes by virtue of a tolling agreement entered into between FHFA, Fannie Mae, Freddie Mac, DB Products, ACE, DBS, MIT Holdings, MIT Securities and Altamont. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). PRAYER FOR RELIEF WHEREFORE Plaintiff prays for relief as follows: 317. An award in favor of Plaintiff against all Defendants, jointly and severally, for all
damages sustained as a result of Defendants wrongdoing, in an amount to be proven at trial, but including: a. Rescission and recovery of the consideration paid for the GSE Certificates, with interest thereon; b. Each GSEs monetary losses, including any diminution in value of the GSE Certificates, as well as lost principal and lost interest payments thereon; c. Punitive damages; d. Attorneys fees and costs; e. Prejudgment interest at the maximum legal rate; and f. Such other and further relief as the Court may deem just and proper. JURY TRIAL DEMANDED 318. Pursuant to Federal Rule of Civil Procedure 38(b), Plaintiff hereby demands a
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UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK FEDERAL HOUSING FINANCE AGENCY, AS CONSERVATOR FOR THE FEDERAL NATIONAL MORTGAGE ASSOCIATION AND THE FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff, -againstHSBC NORTH AMERICA HOLDINGS INC., HSBC USA INC., HSBC MARKETS (USA) INC., HSBC BANK USA, N.A., HSI ASSET SECURITIZATION CORPORATION, HSBC SECURITIES (USA) INC., NEAL LEONARD, GERARD MATTIA, TODD WHITE, NORMAN CHALEFF, and JON VOIGTMAN, Defendants.
___ CIV. ___ (___)
TABLE OF CONTENTS Page NATURE OF ACTION ...................................................................................................................1 PARTIES .........................................................................................................................................6 The Plaintiff and the GSEs...................................................................................................6 The Defendants ....................................................................................................................6 The Non-Party Originators ..................................................................................................8 JURISDICTION AND VENUE ......................................................................................................9 FACTUAL ALLEGATIONS ........................................................................................................10 I. THE SECURITIZATIONS................................................................................................10 A. B. C. Residential Mortgage-Backed Securitizations in General .....................................10 The Securitizations At Issue in This Case .............................................................11 The Securitization Process .....................................................................................13 1. 2. II. HSBC Bank Groups Mortgage Loans in Special Purpose Trusts ..............13 The Trusts Issue Securities Backed by the Loans ......................................14
THE DEFENDANTS PARTICIPATION IN THE SECURITIZATION PROCESS ..........................................................................................................................16 A. The Role of Each of the Defendants ......................................................................16 1. 2. 3. 4. 5. 6. 7. HSBC Bank................................................................................................17 HSI Asset ...................................................................................................17 HSBC Securities ........................................................................................18 HSBC USA ................................................................................................19 HSBC Markets ...........................................................................................19 HSBC North America ................................................................................19 The Individual Defendants .........................................................................20 i
B. III.
Defendants Failure to Conduct Proper Due Diligence .........................................21
IV.
The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines .........................................................38 1. Government Investigations Have Confirmed That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines ..............................................................39 The Collapse of the Certificates Credit Ratings Further Indicates That the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines .................................................................46 The Surge in Mortgage Delinquency and Default Further Demonstrates That the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines ....................................48
2.
3.
V.
FIRST CAUSE OF ACTION ........................................................................................................52 SECOND CAUSE OF ACTION ...................................................................................................55 THIRD CAUSE OF ACTION .......................................................................................................58 FOURTH CAUSE OF ACTION ...................................................................................................61 ii
FIFTH CAUSE OF ACTION ........................................................................................................64 SIXTH CAUSE OF ACTION .......................................................................................................67 SEVENTH CAUSE OF ACTION .................................................................................................70 EIGHTH CAUSE OF ACTION ....................................................................................................73 PRAYER FOR RELIEF ................................................................................................................77 JURY TRIAL DEMANDED .........................................................................................................79
iii
Plaintiff Federal Housing Finance Agency (FHFA), as conservator of The Federal National Mortgage Association (Fannie Mae) and The Federal Home Loan Mortgage Corporation (Freddie Mac), by its attorneys, Quinn Emanuel Urquhart & Sullivan, LLP, for its Complaint herein against HSBC North America Holdings Inc. (HSBC North America), HSBC USA Inc. (HSBC USA), HSBC Markets (USA) Inc. (HSBC Markets), HSBC Bank USA, N.A. (HSBC Bank), HSI Asset Securitization Corporation (HSI Asset), HSBC Securities (USA) Inc. (HSBC Securities) (collectively, HSBC or the HSBC Defendants), Neal Leonard, Gerard Mattia, Todd White, Norman Chaleff, and Jon Voigtman (the Individual Defendants) (together with the HSBC Defendants, the Defendants) alleges as follows: NATURE OF ACTION 1. This action arises out of Defendants actionable conduct in connection with the
2.
Between December 20, 2005 and July 3, 2007, Fannie Mae and Freddie Mac
purchased over $6.2 billion in residential mortgage-backed securities (the GSE Certificates) issued in connection with 17 HSBC-sponsored securitizations.1 The GSE Certificates purchased by Freddie Mac, along with the date and amount of the purchases, are listed infra in Table 10. The GSE Certificates purchased by Fannie Mae, along with the date and amount of the purchases, are listed infra in Table 11. The 17 securitizations at issue are: i. ii. iii. iv. v. vi. vii. viii. ix. x. First Franklin Mortgage Loan Trust 2006-FF1, Mortgage Pass-Through Certificates, Series 2006-FF1 (FFML 2006-FF1) First Franklin Mortgage Loan Trust 2006-FF5, Mortgage Pass-Through Certificates, Series 2006-FF5 (FFML 2006-FF5) First Franklin Mortgage Loan Trust 2006-FF7, Mortgage Pass-Through Certificates, Series 2006-FF7 (FFML 2006-FF7) First Franklin Mortgage Loan Trust 2006-FF9, Mortgage Pass-Through Certificates, Series 2006-FF9 (FFML 2006-FF9) First Franklin Mortgage Loan Trust 2006-FF11, Mortgage Pass-Through Certificates, Series 2006-FF11 (FFML 2006-FF11) HSI Asset Securitization Corporation Trust 2005-I1, Mortgage Pass-Through Certificates, Series 2005-I1 (HASC 2005-I1) HSI Asset Securitization Corporation Trust 2006-HE1, Mortgage Pass-Through Certificates, Series 2006-HE1 (HASC 2006-HE1) HSI Asset Securitization Corporation Trust 2006-HE2, Mortgage Pass-Through Certificates, Series 2006-HE2 (HASC 2006-HE2) HSI Asset Securitization Corporation Trust 2006-NC1, Mortgage Pass-Through Certificates, Series 2006-NC1 (HASC 2006-NC1) HSI Asset Securitization Corporation Trust 2006-OPT1, Mortgage Pass-Through Certificates, Series 2006-OPT1 (HASC 2006-OPT1)
For purposes of this Complaint, the securities issued under the Registration Statements (as defined in note 2, infra) are referred to as Certificates, while the particular Certificates that Fannie Mae and Freddie Mac purchased are referred to as the GSE Certificates. Holders of Certificates are referred to as Certificateholders. 2
xi. xii. xiii. xiv. xv. xvi. xvii.
HSI Asset Securitization Corporation Trust 2006-OPT2, Mortgage Pass-Through Certificates, Series 2006-OPT2 (HASC 2006-OPT2) HSI Asset Securitization Corporation Trust 2006-OPT3, Mortgage Pass-Through Certificates, Series 2006-OPT3 (HASC 2006-OPT3) HSI Asset Securitization Corporation Trust 2006-OPT4, Mortgage Pass-Through Certificates, Series 2006-OPT4 (HASC 2006-OPT4) HSI Asset Securitization Corporation Trust 2007-HE1 Mortgage Pass-Through Certificates, Series 2007-HE1 (HASC 2007-HE1) HSI Asset Securitization Corporation Trust 2007-HE2, Mortgage Pass-Through Certificates, Series 2007-HE2 (HASC 2007-HE2) HSI Asset Securitization Corporation Trust 2007-OPT1, Mortgage Pass-Through Certificates, Series 2007-OPT1 (HASC 2007-OPT1) HSI Asset Securitization Corporation Trust 2007-WF1, Mortgage Pass-Through Certificates, Series 2007-WF1 (HASC 2007-WF1)
(collectively, the Securitizations). 3. The Certificates were offered for sale pursuant to one of three shelf registration
statements (the Shelf Registration Statements) filed by Defendant HSI Asset with the Securities and Exchange Commission (the SEC). The three Shelf Registration Statements, and the amendments thereto, were signed by or on behalf of the Individual Defendants. For all of the Securitizations, HSBC Securities was the lead underwriter and the underwriter who sold the GSE Certificates to the GSEs. 4. For each Securitization, a prospectus (Prospectus) and prospectus supplement
(Prospectus Supplement) were filed with the SEC as part of the Registration Statement2 for that Securitization. The GSE Certificates were marketed and sold to Fannie Mae and Freddie
Mac pursuant to the Registration Statements, including the Shelf Registration Statements and the corresponding Prospectuses and Prospectus Supplements. 5. The Registration Statements contained statements about the characteristics and
credit quality of the mortgage loans underlying the Securitizations, and the origination and underwriting practices used to make and approve the loans. Such statements were material to a reasonable investors decision to invest in mortgage-backed securities by purchasing the Certificates. Unbeknownst to Fannie Mae and Freddie Mac, these statements were materially false, as significant percentages of the underlying mortgage loans were not originated in accordance with the represented underwriting standards and origination practices, and had materially poorer credit quality than what was represented in the Registration Statements. 6. The Registration Statements also contained statistical summaries of the groups of
mortgage loans in each Securitization, such as the percentage of loans secured by owneroccupied properties and the percentage of the loan groups aggregate principal balance with loan-to-value ratios within specified ranges. This information also was material to reasonable investors. However, a loan-level analysis of a sample of loans for each Securitizationa review that encompassed thousands of mortgages across all of the Securitizationshas revealed that these statistics were also false and omitted material facts due to inflated property values and misstatements of other key characteristics of the mortgage loans. 7. For example, the percentage of owner-occupied properties is a material risk factor
to the purchasers of Certificates, such as Fannie Mae and Freddie Mac, since a borrower who lives in a mortgaged property is generally less likely to stop paying his or her mortgage and more likely to take better care of the property. The loan-level review reveals that the true percentage of owner-occupied properties for the loans supporting the GSE Certificates was materially lower
than what was stated in the Prospectus Supplements. Likewise, the Prospectus Supplements misrepresented other material factors, including the true value of the mortgaged properties relative to the amount of the underlying loans. 8. Defendants HSBC Securities (an underwriter), HSI Asset (a depositor), and the
Individual Defendants are directly responsible for the misstatements and omissions of material fact contained in the Registration Statements because they prepared, signed, filed and/or used these documents to market and sell the Certificates to Fannie Mae and Freddie Mac. 9. Defendants HSBC North America, HSBC USA, HSBC Markets, HSBC Bank,
and the Individual Defendants are also responsible for the misstatements and omissions of material fact contained in the Registration Statements by virtue of their direction and control over Defendants HSBC Securities and HSI Asset. HSBC North America, HSBC USA, and HSBC Markets directly participated in and exercised dominion and control over the business operations of HSBC Securities and HSI Asset. HSBC Bank (the sponsor) directly participated in and exercised dominion and control over the business operations of HSI Asset. 10. Fannie Mae and Freddie Mac purchased over $6.2 billion of the Certificates
pursuant to the Registration Statements filed with the SEC. These documents contained misstatements and omissions of material facts concerning the quality of the underlying mortgage loans and the practices used to originate such loans. As a result of Defendants misstatements and omissions of material fact, Fannie Mae and Freddie Mac have suffered substantial losses as the value of their holdings has significantly deteriorated. 11. FHFA, as Conservator of Fannie Mae and Freddie Mac, brings this action against
the Defendants for violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77k, 77l(a)(2), 77o, Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code,
Sections 31-5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, and for common law negligent misrepresentation. PARTIES The Plaintiff and the GSEs 12. The Federal Housing Finance Agency is a federal agency located at 1700 G
Street, NW in Washington, D.C. FHFA was created on July 30, 2008 pursuant to the Housing and Economic Recovery Act of 2008 (HERA), Pub. L. No. 110-289, 122 Stat. 2654 (2008) (codified at 12 U.S.C. 4617), to oversee Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. On September 6, 2008, under HERA, the Director of FHFA placed Fannie Mae and Freddie Mac into conservatorship and appointed FHFA as conservator. In that capacity, FHFA has the authority to exercise all rights and remedies of the GSEs, including, but not limited to, the authority to bring suits on behalf of and/or for the benefit of Fannie Mae and Freddie Mac. 12 U.S.C. 4617(b)(2). 13. Fannie Mae and Freddie Mac are government-sponsored enterprises chartered by
Congress with a mission to provide liquidity, stability and affordability to the United States housing and mortgage markets. As part of this mission, Fannie Mae and Freddie Mac invested in residential mortgage-backed securities. Fannie Mae is located at 3900 Wisconsin Avenue, NW in Washington, D.C. Freddie Mac is located at 8200 Jones Branch Drive in McLean, Virginia. The Defendants 14. Defendant HSBC North America is a Delaware corporation and headquartered at
452 Fifth Avenue, New York, New York 10018. It is one of the nations ten largest bank holding companies by assets and is a wholly owned subsidiary of HSBC Holdings plc, one of the worlds largest banking groups by assets.
15.
Defendant HSBC USA is a Maryland corporation and headquartered at 452 Fifth
Avenue, New York, New York 10018. It is a wholly owned subsidiary of HSBC North America. HSBC USAs principal subsidiary is HSBC Bank. 16. Defendant HSBC Markets is a Delaware corporation with its principal place of
business at 452 Fifth Avenue, New York, New York 10018. It is a wholly owned subsidiary of HSBC North America and the direct parent of HSI Asset and HSBC Securities. 17. Defendant HSBC Securities is a Delaware corporation with its principal place of
business at 452 Fifth Avenue, New York, New York 10018. HSBC Securities is a direct, wholly owned subsidiary of HSBC Markets. HSBC Securities is an SEC-registered brokerdealer. It was the lead underwriter for each of the Securitizations, and was intimately involved in the offerings. Fannie Mae and Freddie Mac purchased all of the GSE Certificates from HSBC Securities in its capacity as the underwriter of the Securitizations. 18. Defendant HSBC Bank, a national banking association, is a New York
corporation with its principal place of business at 452 Fifth Avenue, New York, New York 10018. HSBC Bank is the principal subsidiary of HSBC USA. HSBC Bank was the sponsor for all of the Securitizations. 19. Defendant HSI Asset is a Delaware corporation with its principal place of
business at 452 Fifth Avenue, New York, New York 10018. HSI Asset is a direct, wholly owned subsidiary of HSBC Markets. HSI Asset was the depositor for all the Securitizations at issue in this action. HSI Asset, as the depositor, was also responsible for preparing and filing reports required under the Securities Exchange Act of 1934. 20. Defendant Neal Leonard is an individual residing in Mount Kisco, New York.
Mr. Leonard was, at relevant times, Chairman, Principal Executive Officer, and Director of HSI
Asset. He was also co-head of mortgage-backed securities at HSBC Securities. Mr. Leonard signed all three Shelf Registration Statements and the amendments thereto, and, upon information and belief, did so in New York, New York. 21. Defendant Gerard Mattia is an individual residing in Armonk, New York. Mr.
Mattia was, at relevant times, Treasurer, Principal Financial Officer, Principal Accounting Officer, and a Director of HSI Asset. He was also an inside director of HSBC Securities. Mr. Mattia signed all three Shelf Registration Statements and the amendments thereto, and, upon information and belief, did so in New York, New York. 22. Defendant Todd White is an individual residing in Hamel, Minnesota. Mr. White
was, at relevant times, co-head of mortgage-backed securities at HSBC Securities. He was also a Director of HSI Asset. Mr. White signed all three Shelf Registration Statements and the amendments thereto, and, upon information and belief, did so in New York, New York. 23. Defendant Norman Chaleff is an individual residing in West Orange, New Jersey.
Mr. Chaleff was, at relevant times, a Director of HSI Asset. Mr. Chaleff signed one Shelf Registration Statement and, upon information and belief, did so in New York, New York. 24. Defendant Jon Voigtman is an individual residing in Summit, New Jersey. Mr.
Voigtman was, at relevant times, a Managing Director at both HSBC Securities and HSI Asset. Mr. Voigtman signed two Shelf Registration Statements, as well as amendments to one of those Shelf Registration Statements, and the amendment to another Shelf Registration Statement, and, upon information and belief, did so in New York, New York. The Non-Party Originators 25. The loans underlying the Certificates were acquired by HSBC Bank, as the
sponsor for each Securitization, from non-party mortgage originators. The originators principally responsible for the loans underlying the Certificates include First Franklin Financial 8
Corporation (First Franklin); Option One Mortgage Corporation (Option One); New Century Mortgage Corporation (New Century); WMC Mortgage Corp. (WMC); and Countrywide Home Loans, Inc. (Countrywide). JURISDICTION AND VENUE 26. Jurisdiction of this Court is founded upon 28 U.S.C. 1345, which gives federal
13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code and Sections 31-5606.05(a)(1)(B) and 315606.05(c) of the District of Columbia Code, pursuant to this Courts supplemental jurisdiction under 28 U.S.C. 1367(a). This Court also has jurisdiction over the common law claim of negligent misrepresentation pursuant to this Courts supplemental jurisdiction under 28 U.S.C. 1367(a). 29. Venue is proper in this district pursuant to Section 22 of the Securities Act, 15
U.S.C. 77v, and 28 U.S.C. 1391(b). All of the HSBC Defendants are principally located in this district, two of the Individual Defendants reside in this district, and many of the acts and transactions alleged herein, including the preparation and dissemination of the Registration Statements, occurred in substantial part within this district. Defendants are also subject to personal jurisdiction in this district.
FACTUAL ALLEGATIONS I. THE SECURITIZATIONS A. 30. Residential Mortgage-Backed Securitizations in General Asset-backed securitization distributes risk by pooling cash-producing financial
the entity that acquires or originates the mortgage loans and initiates the securitizationand the creation of a trust, to which the sponsor directly or indirectly transfers a portfolio of mortgage loans. The trust is generally established pursuant to a Pooling and Servicing Agreement entered into by, among others, the depositor for that securitization. In many instances, the transfer of assets to a trust is a two-step process: the financial assets are transferred by the sponsor first to an intermediate entity, often a limited purpose entity created by the sponsor . . . and commonly called a depositor, and then the depositor will transfer the assets to the [trust] for the particular asset-backed transactions. Asset-Backed Securities, Securities Act Release No. 33-8518, Exchange Act Release No. 34-50905, 84 SEC Docket 1624 (Dec. 22, 2004). 32. Residential mortgage-backed securities are backed by the underlying mortgage
loans. Some residential mortgage-backed securitizations are created from more than one cohort of loans called collateral groups, in which case the trust issues securities backed by different groups. For example, a securitization may involve two groups of mortgages, with some securities backed primarily by the first group, and others primarily by the second group. Purchasers of the securities acquire an ownership interest in the assets of the trust, which in turn owns the loans. Within this framework, the purchasers of the securities acquire rights to the
10
cash-flows from the designated mortgage group, such as homeowners payments of principal and interest on the mortgage loans held by the related trust. 33. Residential mortgage-backed securities are issued pursuant to registration
statements filed with the SEC. These registration statements include prospectuses, which explain the general structure of the investment, and prospectus supplements, which contain detailed descriptions of the mortgage groups underlying the certificates. Certificates are issued by the trust pursuant to the registration statement, the prospectus and the prospectus supplement. Underwriters sell the certificates to investors. 34. A mortgage servicer is necessary to manage the collection of proceeds from the
mortgage loans. The servicer is responsible for collecting homeowners mortgage loan payments, which the servicer remits to the trustee after deducting a monthly servicing fee. The servicers duties include making collection efforts on delinquent loans, initiating foreclosure proceedings, and determining when to charge off a loan by writing down its balance. The servicer is required to report key information about the loans to the trustee. The trustee (or trust administrator) administers the trusts funds and delivers payments due each month on the certificates to the investors. B. 35. The Securitizations At Issue in This Case This case involves the 17 Securitizations listed in paragraph 2 supra, all of which
were sponsored by HSBC Bank and underwritten by HSBC Securities. For each Securitization, Table 1 identifies: (1) the sponsor; (2) the depositor; (3) the lead underwriter; (4) the principal amount issued for the tranches3 purchased by the GSEs; (5) the date of issuance; and (6) the loan
group or groups backing the GSE Certificate for that Securitization (referred to as the Supporting Loan Groups). Table 1
Lead Underwriter Principal Amount Issued ($)
266,292,000.00
Transaction
Tranche
Sponsor
Depositor
Date of Issuance

Group I
FFML 2006-FF1
IA
HSBC Bank
HSI Asset
HSBC Securities
1/27/2006
FFML 2006-FF5
IA
HSBC Bank
HSI Asset
HSBC Securities
401,180,000.00
5/5/2006
Group I
FFML 2006-FF7
IA
HSBC Bank
HSI Asset
HSBC Securities
336,603,000.00
5/31/2006
Group I
FFML 2006-FF9
IA
HSBC Bank
HSI Asset
HSBC Securities
712,134,000.00
7/7/2006
Group I
IA1 FFML 2006-FF11 IA2
HSBC Bank
HSI Asset
HSBC Securities
547,964,800.00
9/6/2006
Group I
HSBC Bank
HSI Asset
HSBC Securities
136,991,200.00
9/6/2006
Group I
HASC 2005-I1
IA
HSBC Bank
HSI Asset
HSBC Securities
132,963,000.00
12/20/2005
Group I
HASC 2006-HE1
IA
HSBC Bank
HSI Asset
HSBC Securities
591,377,000.00
11/3/2006
Group I
HASC 2006-HE2
IA
HSBC Bank
HSI Asset
HSBC Securities
384,335,000.00
12/5/2006
Group I
HASC 2006-NC1
IA
HSBC Bank
HSI Asset
HSBC Securities
119,285,000.00
3/7/2006
Group I
HASC 2006-OPT1
IA
HSBC Bank
HSI Asset
HSBC Securities
265,088,000.00
2/3/2006
Group I
HASC 2006-OPT2
IA
HSBC Bank
HSI Asset
HSBC Securities
368,076,000.00
2/28/2006
Group I
IA HASC 2006-OPT3 IIA
HSBC Bank
HSI Asset
HSBC Securities
141,005,000.00
5/12/2006
Group I
HSBC Bank
HSI Asset
HSBC Securities
230,449,000.00
4/5/2006
Group II
12
Transaction
Tranche
Sponsor
Depositor
Lead Underwriter

284,847,000.00
Date of Issuance

Group I
HASC 2006-OPT4
IA
HSBC Bank
HSI Asset
HSBC Securities
4/28/2006
HASC 2007-HE1
IA
HSBC Bank
HSI Asset
HSBC Securities
371,150,000.00
3/8/2007
Group I
HASC 2007-HE2
IA
HSBC Bank
HSI Asset
HSBC Securities
326,874,000.00
5/4/2007
Group I
HASC 2007-OPT1
IA
HSBC Bank
HSI Asset
HSBC Securities
438,787,000.00
1/30/2007
Group I
HASC 2007-WF1
IA
HSBC Bank
HSI Asset
HSBC Securities
195,515,000.00
7/3/2007
Group I
C.
The Securitization Process 1. HSBC Bank Groups Mortgage Loans in Special Purpose Trusts
36.
As the sponsor for the Securitizations, Defendant HSBC Bank purchased
mortgage loans after the loans were originated, either directly from the originators or through affiliates of the originators. HSBC Bank then sold the mortgage loans to Defendant HSI Asset, the depositor. HSI Asset was a wholly owned, limited-purpose financial subsidiary of HSBC Markets and an affiliate of HSBC Bank. The sole purpose of HSI Asset was to act as a conduit through which loans acquired by HSBC Bank could be securitized and sold to investors. 37. For each of the Securitizations, HSBC Bank sold the relevant mortgage loans to
HSI Asset pursuant to a Mortgage Loan Purchase Agreement, which contained various representations and warranties regarding the mortgage loans. 38. As part of each of the Securitizations, the trustee, on behalf of the
Certificateholders, executed a Pooling and Servicing Agreement (PSA) with the relevant depositor and the parties responsible for monitoring and servicing the mortgage loans in that Securitization. The trust, administered by the trustee, held the mortgage loans pursuant to the 13
related PSA and issued Certificates, including the GSE Certificates, backed by such loans. The GSEs purchased the GSE Certificates, through which they obtained an ownership interest in the assets of the trust, including the mortgage loans. 2. 39. The Trusts Issue Securities Backed by the Loans
PSAs, each trust issued Certificates backed by the underlying mortgage loans. The Certificates were then sold to investors like Fannie Mae and Freddie Mac, which thereby acquired an ownership interest in the assets of the corresponding trust. Each Certificate entitles its holder to a specified portion of the cashflows from the underlying mortgages in the Supporting Loan Group. The level of risk inherent in the Certificates was a function of the capital structure of the related transaction and the credit quality of the underlying mortgages. 40. The Certificates were issued pursuant to one of three Shelf Registration
Statements, filed with the SEC on a Form S-3. The Shelf Registration Statements were amended by one or more Forms S-3/A filed with the SEC. The Individual Defendants each signed one or more of the Shelf Registration Statements (and/or one of the amendments) that were filed by HSI Asset. The SEC filing number, registrant, signatories and filing dates for the Shelf Registration Statements and amendments thereto, as well as the Certificates covered by each Shelf Registration Statement, are set forth in Table 2 below. Table 2
SEC File No.
333124032

4/13/2005

7/7/2005
Registrant
FFML 2006-FF1 HASC 2005-I1 HASC 2006-NC1 HASC 2006-OPT1 HASC 2006-OPT2

Neal Leonard, Gerard Mattia, Todd White, Norman Chaleff
Neal Leonard, Gerard Mattia, Todd White, Jon Voigtman
HSI Asset
14
SEC File No.
Registrant
FFML 2006-FF5 FFML 2006-FF7 FFML 2006-FF9 FFML 2006-FF11 HASC 2006-HE1 HASC 2006-HE2 HASC 2006-OPT3 HASC 2006-OPT4 HASC 2007-HE1 HASC 2007-OPT1 HASC 2007-HE2 HASC 2007-WF1
333131607
2/6/2006
3/9/2006 3/21/2006 3/28/2006
HSI Asset
333140923
2/27/2007
3/27/2007
HSI Asset
Neal Leonard, Gerard Mattia, Todd White
41.
guidelines that purportedly were used in connection with the origination of the underlying mortgage loans. In addition, the Prospectus Supplements purport to provide accurate statistics regarding the mortgage loans in each group, including the ranges of and weighted average FICO credit scores of the borrowers, the ranges of and weighted average loan-to-value ratios of the loans, the ranges of and weighted average outstanding principal balances of the loans, the debtto-income ratios, the geographic distribution of the loans, the extent to which the loans were for purchase or refinance purposes; information concerning whether the loans were secured by a property to be used as a primary residence, second home, or investment property; and information concerning whether the loans were delinquent. 42. The Prospectus Supplements associated with each Securitization were filed with
the SEC as part of the Registration Statements. The Form 8-Ks attaching the PSAs for each Securitization were also filed with the SEC. The date on which the Prospectus Supplement and Form 8-K were filed for each Securitization, as well as the filing number of the Shelf Registration Statement related to each, are set forth in Table 3 below.
15
Table 3
333-124032 333-131607 333-131607 333-131607 333-131607 333-124032 333-131607 333-131607 333-124032 333-124032 333-124032 333-131607 333-131607 333-131607 333-140923 333-131607 333-140923
Transaction

1/27/2006 5/8/2006 5/31/2006 7/10/2006 8/16/2006 12/21/2005 11/3/2006 12/5/2006 3/8/2006 2/7/2006 3/1/2006 4/5/2006 5/1/2006 3/12/2007 5/7/2007 1/31/2007 7/3/2007
Date of Filing Form 8-K Attaching PSA

2/9/2006 5/19/2006 6/14/2006 N.A. 9/19/2006 1/4/2006 11/21/2006 1/8/2007 3/21/2006 2/21/2006 3/14/2006 4/19/2006 5/17/2006 3/22/2007 5/21/2007 2/9/2007 7/18/2007
FFML 2006-FF1 FFML 2006-FF5 FFML 2006-FF7 FFML 2006-FF9 FFML 2006-FF11 HASC 2005-I1 HASC 2006-HE1 HASC 2006-HE2 HASC 2006-NC1 HASC 2006-OPT1 HASC 2006-OPT2 HASC 2006-OPT3 HASC 2006-OPT4 HASC 2007-HE1 HASC 2007-HE2 HASC 2007-OPT1 HASC 2007-WF1
43.
The Certificates were issued pursuant to the PSAs, and Defendant HSBC
Securities offered and sold the GSE Certificates to Fannie Mae and Freddie Mac pursuant to the Registration Statements, which, as noted previously, included the Prospectuses and Prospectus Supplements. II. THE DEFENDANTS PARTICIPATION IN THE SECURITIZATION PROCESS A. 44. The Role of Each of the Defendants Each of the Defendants, including the Individual Defendants, had a role in the
securitization process and the marketing of the Certificates, which included purchasing the mortgage loans from the originators, arranging the Securitizations, selling the mortgage loans to the depositor, transferring the mortgage loans to the trustee on behalf of the Certificateholders, underwriting the public offering of the Certificates, structuring and issuing the Certificates, and marketing and selling the Certificates to investors such as Fannie Mae and Freddie Mac. 45. With respect to each Securitization, the depositor, underwriter, and Individual
Defendants who signed the Registration Statement, as well as the Defendants who exercised 16
control over their activities, are liable, jointly and severally, as participants in the registration, issuance and offering of the Certificates, including issuing, causing, or making materially misleading statements in the Registration Statement, and omitting material facts required to be stated therein or necessary to make the statements contained therein not misleading. 1. 46. HSBC Bank
Defendant HSBC Bank is the principal subsidiary of HSBC USA and a wholly
owned subsidiary of HSBC North America. HSBC Bank acted as the sponsor of each of the 17 Securitizations. In that capacity, HSBC Bank determined the structure of the Securitizations, initiated the Securitizations, purchased the mortgage loans to be securitized, determined distribution of principal and interest, and provided data to the credit rating agencies to secure investment grade ratings for the GSE Certificates. HSBC Bank also selected HSI Asset as the special purpose vehicle that would be used to transfer the mortgage loans from HSBC Bank to the trusts, and selected HSBC Securities as the lead underwriter for the Securitizations. In its role as sponsor, HSBC Bank knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing such loans would be issued by the relevant trusts. 47. Defendant HSBC Bank also conveyed the mortgage loans to HSI Asset pursuant
to a Mortgage Loan Purchase Agreement. In this agreement, HSBC Bank made certain representations and warranties to HSI Asset regarding the groups of loans collateralizing the Certificates. These representations and warranties were assigned by HSI Asset to the trustees for the benefit of the Certificateholders. 2. 48. HSI Asset
HSI Asset is a direct, wholly owned subsidiary of HSBC Markets and a wholly
owned subsidiary of HSBC North America. It is a special purpose entity formed solely for the 17
purpose of purchasing mortgage loans, filing registration statements with the SEC, forming issuing trusts, assigning mortgage loans and all of its rights and interests in such mortgage loans to the trustee for the benefit of the certificateholders, and depositing the underlying mortgage loans into the issuing trusts. 49. In its capacity as depositor, HSI Asset purchased the mortgage loans from HSBC
Bank pursuant to a Mortgage Loan Purchase Agreement. HSI Asset then sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trusts. HSI Asset, together with the other Defendants, was also responsible for preparing and filing the Registration Statements pursuant to which the Certificates were offered for sale. The trusts in turn held the mortgage loans for the benefit of the Certificateholders, and issued the Certificates in public offerings for sale to investors such as Fannie Mae and Freddie Mac. 3. 50. HSBC Securities
Defendant HSBC Securities is an investment bank, and was, at all relevant times,
a registered broker-dealer and a major underwriter of mortgage- and other asset-backed securities in the United States. HSBC Securities is a direct, wholly owned subsidiary of HSBC Markets and a wholly owned subsidiary of HSBC North America. 51. Defendant HSBC Securities was the lead underwriter for each of the
Securitizations. In that role, it was responsible for underwriting and managing the offer and sale of the Certificates to Fannie Mae and Freddie Mac and other investors. HSBC Securities was also obligated to conduct meaningful due diligence to ensure that the Registration Statements did not contain any material misstatements or omissions, including as to the manner in which the underlying mortgage loans were originated, transferred, and underwritten.
18
4. 52.
HSBC USA
Defendant HSBC USA employed its wholly owned subsidiary HSBC Bank to
serve as the sponsor for the Securitizations. As the corporate parent of HSBC Bank, HSBC USA had the practical ability to direct and control HSBC Banks actions related to the Securitizations, and in fact exercised such direction and control over the activities of this entity related to the issuance and sale of the Certificates. 5. 53. HSBC Markets
Defendant HSBC Markets employed its wholly owned subsidiaries, HSI Asset
and HSBC Securities, in the key steps of the securitization process. Unlike typical arms length securitizations, the Securitizations here involved the subsidiaries and affiliates of HSBC Markets at virtually each step in the chainthe sponsor was HSBC Bank, the depositor was HSI Asset, and the lead underwriter was HSBC Securities. 54. As the corporate parent of HSI Asset and HSBC Securities, HSBC Markets had
the practical ability to direct and control these Defendants actions related to the Securitizations, and in fact exercised such direction and control over the activities of these entities related to the issuance and sale of the Certificates. 6. 55. HSBC North America
Defendant HSBC North America wholly owns HSBC USA and HSBC Markets
and is the ultimate US-based parent of HSBC Bank, HSI Asset, and HSBC Securities. As detailed, supra, the Securitizations here involved HSBC entities, including the aforementioned subsidiaries of HSBC North America, at virtually each step in the process. HSBC North America profited substantially from this vertically integrated approach to mortgage-backed securitization. Furthermore, HSBC North America shares, and, on information and belief, shared, overlapping management with the other Defendant entities. For example, Irene Dorner is 19
President and Chief Executive Officer at HSBC Bank, President at HSBC USA, and is part of the senior management team at HSBC North America. 7. 56. The Individual Defendants
Defendant Neal Leonard was Chairman, Principal Executive Officer, and a
Director of HSI Asset. In that capacity, Mr. Leonard signed Shelf Registration Statements applicable to all of the Securitizations and either signed or authorized another to sign the amendments to those Shelf Registration Statements. 57. Defendant Gerard Mattia was Treasurer, Principal Financial Officer, Principal
Accounting Officer, and a Director of HSI Asset. In that capacity, Mr. Mattia signed Shelf Registration Statements applicable to all of the Securitizations and either signed or authorized another to sign the amendments to those Shelf Registration Statements. 58. Defendant Todd White was a Director of HSI Asset. In that capacity, Mr. White
signed Shelf Registration Statements applicable to all of the Securitizations and either signed or authorized another to sign the amendments to those Shelf Registration Statements. 59. Defendant Norman Chaleff was a Director at HSI Asset. In that capacity, Mr.
Chaleff signed one Shelf Registration Statement applicable to five of the Securitizations. 60. Defendant Jon Voigtman was Managing Director at both HSBC Securities and
HSI Asset. In that capacity, Mr. Voigtman signed two Shelf Registration Statements applicable to twelve of the Securitizations, as well as the amendments to one of those Shelf Registration Statements, and the amendment to another Shelf Registration Statement applicable to five of the Securitizations.
20
B. 61.
Defendants Failure to Conduct Proper Due Diligence Defendants failed to conduct adequate and sufficient due diligence to ensure that
the mortgage loans underlying the Securitizations complied with the representations in the Registration Statements. 62. HSBC Bank began securitizing residential mortgage loans in 2005 to take
advantage of the rapidly expanding market for residential mortgage-backed securities. It securitized large volumes of mortgage loans acquired from various lenders in an effort to boost its fee revenue. In 2005, HSBC issued over half a billion dollars of subprime, residential mortgage-backed securities. By 2006, that number increased more than ten-fold to over $9.6 billion. HSBCs issuance of subprime, residential mortgage-backed securities remained high in 2007: over $6.7 billion. 63. Defendants had enormous financial incentives to complete as many offerings as
quickly as possible without regard to ensuring the accuracy or completeness of the Registration Statements, or conducting adequate and reasonable due diligence. For example, HSI Asset, as the depositor, was paid a percentage of the total dollar amount of the offerings upon completion of the Securitizations, and HSBC Securities, as the underwriter, was paid a commission based on the amount it received from the sale of the Certificates to the public. 64. The push to securitize large volumes of mortgage loans contributed to the absence
of controls needed to prevent the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. In particular, Defendants failed to conduct adequate diligence or to otherwise ensure the accuracy of the statements in the Registrations Statements pertaining to the Securitizations. 65. For instance, HSBC retained third-parties, including Clayton Holdings, Inc.
(Clayton), to analyze the loans it was considering placing in its securitizations, but waived a 21
significant number of loans into the Securitizations that these firms had recommended for exclusion, and did so without taking adequate steps to ensure that these loans had in fact been underwritten in accordance with applicable guidelines or had compensating factors that excused the loans non-compliance with those guidelines. On January 27, 2008, Clayton revealed that it had entered into an agreement with the New York Attorney General (the NYAG) to provide documents and testimony regarding its due diligence reports, including copies of the actual reports provided to its clients. According to The New York Times, as reported on January 27, 2008, Clayton told the NYAG that starting in 2005, it saw a significant deterioration of lending standards and a parallel jump in lending expectations and some investment banks directed Clayton to halve the sample of loans it evaluated in each portfolio. 66. HSBC was negligent in allowing into the Securitizations a substantial number of
mortgage loans that, as reported to HSBC by third-party due diligence firms, did not conform to the underwriting standards stated in the Registration Statements, including the Prospectuses and Prospectus Supplements. Even upon learning from the third-party due diligence firms that there were high percentages of defective or at least questionable loans in the sample of loans reviewed by the third-party due diligence firms, HSBC failed to take any additional steps to verify that the population of loans in the Securitizations did not include a similar percentage of defective and/or questionable loans. 67. Claytons trending reports revealed that in the period from the first quarter of
2006 to the second quarter of 2007, 27 percent of the mortgage loans HSBC submitted to Clayton to review in residential mortgage-backed securities groups were rejected by Clayton as falling outside the applicable underwriting guidelines. Of the mortgage loans that Clayton found defective, 62 percent of the loans were subsequently waived in by HSBC, without proper
22
consideration and analysis of compensating factors, and included in securitizations such as the ones in which Fannie Mae and Freddie Mac invested here. See Clayton Trending Reports, available at http://fcic.law.stanford.edu/hearings/testimony/the-impact-of-the-financial-crisissacramento#documents. 68. HSBC has also come under the scrutiny of the SEC. As reported in HSBC USAs
Form 10-Q for the period ending March 31, 2011, HSBC USA has received three subpoenas from the SEC seeking production of documents and information relating to [its] involvement, and the involvement of [its] affiliates, in specified private-label residential mortgage-backed securitiestransactions as an issuer, sponsor, underwriter, depositor, trustee or custodian as well as [its] involvement as a servicer. The first subpoena was received in December 2010, the second was received in February 2011 and the third was received in April 2011. III. THE REGISTRATION STATEMENTS AND THE PROSPECTUS SUPPLEMENTS A. 69. Compliance With Underwriting Guidelines The Prospectus Supplement for each Securitization describe the mortgage loan
part of the Registration Statement for each Securitization, were material to a reasonable investors decision to purchase and invest in the Certificates because the failure to originate a mortgage loan in accordance with the applicable guidelines creates a higher risk of delinquency
23
statements with respect to the underwriting standards of the entities that originated the loans in the Securitizations. For example, the Prospectus Supplement for the HASC 2006-OPT1 Securitization, for which Option One was the originator, HSBC Securities was the underwriter, and HSI Asset was the depositor, stated that the loans in the Securitization will have been originated generally in accordance with Option Ones Guidelines, and that [t]he Option One Underwriting Guidelines are primarily intended to assess the value of the mortgaged property, to evaluate the adequacy of such property as collateral for the mortgage loan and to assess the applicants ability to repay the mortgage loan. 72. The HASC 2006-OPT1 Prospectus Supplement stated that exceptions to the
Option One Underwriting Guidelines (including a debt-to-income ratio exception, a pricing exception, a loan-to-value exception, a credit score exception or an exception from certain requirements of a particular risk category) are made on a case-by-case basis, but emphasized that exceptions are made where compensating factors exist. 73. With respect to the information evaluated by Option One, the Prospectus
Supplement stated that [e]ach mortgage loan applicant completes an application that includes information with respect to the applicants liabilities, income, credit history, employment history and personal information. The Option One Underwriting Guidelines require a credit report and, if available, a credit score on each applicant from a credit-reporting agency. The credit report typically contains information relating to such matters as credit history with local and national
24
merchants and lenders, installment debt payments and any record of defaults, bankruptcies, repossessions or judgments. 74. Additionally, the Prospectus Supplement stated that the Option One
Underwriting Guidelines require that mortgage loans be underwritten in a standardized procedure which complies with applicable federal and state laws and regulations and require Option Ones underwriters to be satisfied that the value of the property being financed, as indicated by an appraisal, supports the loan balance. 75. The Prospectus and Prospectus Supplement for each of the Securitizations had
similar representations to those quoted above. The relevant representations in the Prospectus and Prospectus Supplement pertaining to originating entity underwriting standards for each Securitization are set forth in Appendix A to this Complaint. As discussed infra at paragraphs 103 through 126, in fact, the originators of the mortgage loans in the Supporting Loan Group for the Securitizations did not adhere to their stated underwriting guidelines, thus rendering the description of those guidelines in the Prospectuses and Prospectus Supplements false and misleading. 76. Further, for the vast majority of the Securitizations, the Prospectuses and
Prospectus Supplements described additional representations and warranties in the PSA concerning the mortgage loans backing the Securitizations, which were made by the originator. Such representations and warranties, which are described more fully for each Securitization in Appendix A, included: (i) the mortgage loans were underwritten in accordance with the originators underwriting guidelines in effect at the time of origination, subject to only limited exceptions; and (ii) any and all requirements of any federal, state or local law applicable to the origination and servicing of the mortgage loans had been complied with.
25
77.
the occupancy status of the borrowers of the loans in the Securitizations. Occupancy status refers to whether the property securing a mortgage is to be the primary residence of the borrower, a second home, or an investment property. The Prospectus Supplement for each of the Securitizations presented this information in tabular form, usually in a table entitled Occupancy Status of the Mortgage Loans. This table divided all the loans in each collateral group by occupancy status, generally into the following categories: (i) Primary, or Owner Occupied; (ii) Second Home, or Secondary; and (iii) Investment or Non-Owner. For each category, the table stated the number of loans in that category. Occupancy statistics for the Supporting Loan Groups for each Securitization were reported in the Prospectus Supplements as follows:4
Each Prospectus Supplement provides the total number of loans and the number of loans in the following categories: owner occupied, second home, and investor. These numbers have been converted to percentages. 26
Table 4
Transaction

Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group II Group I Group I Group I Group I Group I

91.47 94.06 95.08 93.61 98.29 94.47 95.51 95.68 94.05 88.88 92.19 98.51 87.17 96.49 90.27 95.76 92.47 92.31
0.82 1.02 0.74 0.84 0.23 3.93 1.64 1.91 5.79 2.18 1.46 0.00 2.15 1.03 1.24 0.89 0.76 1.79
Investor
7.71 4.92 4.17 5.56 1.48 1.60 2.85 2.41 0.16 8.94 6.35 1.49 10.68 2.48 8.49 3.35 6.77 5.90
79.
decision to invest in the Certificates. Information about occupancy status is an important factor in determining the credit risk associated with a mortgage loan and, therefore, the securitization that it collateralizes. Because borrowers who reside in mortgaged properties are less likely to default than borrowers who purchase homes as second homes or investments and live elsewhere, and are more likely to care for their primary residence, the percentage of loans in the collateral group of a securitization that are secured by mortgage loans on owner-occupied residences is an important measure of the risk of the certificates sold in that securitization. As stated in most of the Registration Statements, Mortgage Loans secured by properties acquired by investors for the purposes of rental income or capital appreciation, or properties acquired as second homes, 27
tend to have higher severities of default than properties that are regularly occupied by the related borrowers. See, e.g., FFML 2006-FF5 Prospectus Supplement, filed May 8, 2006. 81. Other things being equal, the higher the percentage of loans not secured by
owner-occupied residences, the greater the risk of loss to the certificateholders. Even small differences in the percentages of primary/owner-occupied, second home/secondary, and investment properties in the collateral group of a securitization can have a significant effect on the risk of each certificate sold in that securitization, and, thus, are important to the decision of a reasonable investor whether to purchase any such certificate. As discussed infra at paragraphs 93 through 96, the Registration Statement for each Securitization materially overstated the percentage of loans in the Supporting Loan Groups that were owner occupied, thereby misrepresenting the degree of risk of the GSE Certificates. C. 82. Statements Regarding Loan-to-Value Ratios The loan-to-value ratio of a mortgage loan, or LTV ratio, is the ratio of the
information about the LTV ratio for the underlying group of loans as a whole. The percentage of loans with an LTV ratio at or less than 80 percent and the percentage of loans with an LTV ratio
28
greater than 100 percent as reported in the Prospectus Supplements for the Supporting Loan Groups are set forth in Table 5 below.5 Table 5
Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I HASC 2006-OPT3 Group II HASC 2006-OPT4 HASC 2007-HE1 HASC 2007-HE2 HASC 2007-OPT1 HASC 2007-WF1 Group I Group I Group I Group I Group I 57.90 66.04 38.90 25.03 45.00 30.20 0.00 0.00 0.00 0.00 0.00 0.00
Transaction
FFML 2006-FF1 FFML 2006-FF5 FFML 2006-FF7 FFML 2006-FF9 FFML 2006-FF11 HASC 2005-I1 HASC 2006-HE1 HASC 2006-HE2 HASC 2006-NC1 HASC 2006-OPT1 HASC 2006-OPT2
72.46 60.92 70.80 62.94 66.13 51.16 31.56 72.49 56.86 49.30 52.56 67.53
0.00 0.10 0.00 0.15 0.04 0.00 0.00 0.00 0.00 0.00 0.00 0.00
85.
As Table 5 makes clear, the Prospectus Supplements for most Securitizations
reported that the majority of mortgage loans in the Supporting Loan Groups had an LTV ratio of
80 percent or less,6 and the Prospectus Supplements for nearly all of the Securitizations reported that zero mortgage loans in the Supporting Loan Group had an LTV ratio over 100 percent. 86. The LTV ratio is among the most important measures of the risk of a mortgage
loan, and, thus, it is one of the most important indicators of the default risk of the mortgage loans underlying the Certificates. The lower the ratio, the less likely that a decline in the value of the property will wipe out an owners equity, and thereby give an owner an incentive to stop making mortgage payments and abandon the property. This ratio also predicts the severity of loss in the event of default. The lower the LTV ratio, the greater the equity cushion, so the greater the likelihood that the proceeds of foreclosure will cover the unpaid balance of the mortgage loan. 87. Thus, LTV ratio is a material consideration to a reasonable investor in deciding
whether to purchase a certificate in a securitization of mortgage loans. Even small differences in the LTV ratios of the mortgage loans in the collateral group of a securitization have a significant effect on the likelihood that the collateral groups will generate sufficient funds to pay certificateholders in that securitization, and thus are material to the decision of a reasonable investor whether to purchase any such certificate. As discussed infra at paragraphs 97 through 102, the Registration Statements for the Securitizations materially overstated the percentage of loans in the Supporting Loan Groups with an LTV ratio at or less than 80 percent, and materially understated the percentage of loans in the Supporting Loan Groups with an LTV ratio over 100 percent, thereby misrepresenting the degree of risk of the GSE Certificates.
The exceptions are HASC 2006-HE1, HASC 2006-OPT1, HASC 2007-HE1, HASC 2007-HE2, HASC 2007-OPT1, and HASC 2007-WF1, for which more than half of the mortgage loans by aggregate balance were reported as having an LTV ratio greater than 80 percent and below 100 percent. 30
D. 88.
Statements Regarding Credit Ratings Credit ratings are assigned to the tranches of mortgage-backed securitizations by
the credit rating agencies, including Moodys Investors Service, Standard & Poors, and Fitch Ratings. Each credit rating agency uses its own scale with letter designations to describe various levels of risk. In general, AAA or its equivalent ratings are at the top of the credit rating scale and are intended to designate the safest investments. C and D ratings are at the bottom of the scale and refer to investments that are currently in default and exhibit little or no prospect for recovery. At the time the GSEs purchased the GSE Certificates, investments with AAA or its equivalent ratings historically experienced a loss rate of less than .05 percent. Investments with a BBB rating, or its equivalent, historically experienced a loss rate of less than one percent. As a result, securities with credit ratings between AAA through BBB- or their equivalents were generally referred to as investment grade. 89. Rating agencies determine the credit rating for each tranche of a mortgage-backed
securitization by comparing the likelihood of contractual principal and interest repayment to the credit enhancements available to protect investors. Rating agencies determine the likelihood of repayment by estimating cashflows based on the quality of the underlying mortgages by using sponsor-provided loan level data. Credit enhancements, such as subordination, represent the amount of cushion or protection from loss incorporated into a given securitization.7 This cushion is intended to improve the likelihood that holders of highly rated certificates receive the interest and principal to which they are contractually entitled. The level of credit enhancement
offered is based on the make-up of the loans in the underlying collateral group and entire securitization. Riskier loans underlying the securitization necessitate higher levels of credit enhancement to insure payment to senior certificate holders. If the collateral within the deal is of a higher quality, then rating agencies require less credit enhancement for AAA or its equivalent rating. 90. Credit ratings have been an important tool to gauge risk when making investment
decisions. For almost a hundred years, investors like pension funds, municipalities, insurance companies, and university endowments have relied heavily on credit ratings to assist them in distinguishing between safe and risky investments. Fannie Maes and Freddie Macs respective internal policies limited their purchases of private label residential mortgage-backed securities to those rated AAA (or its equivalent), and in very limited instances, AA or A bonds (or their equivalent). 91. Each tranche of the Securitizations received a credit rating upon issuance, which
purported to describe the riskiness of that tranche. The Defendants reported the credit ratings for each tranche in the Prospectus Supplements. The credit rating provided for each of the GSE Certificates was investment grade, almost always AAA or its equivalent. The accuracy of these ratings was material to a reasonable investors decision to purchase the GSE Certificates. As set forth in Table 8, infra at paragraph 123, the ratings for the Securitizations were inflated as a result of Defendants provision of incorrect data concerning the attributes of the underlying mortgage collateral to the ratings agencies, and, as a result, Defendants sold and marketed the GSE Certificates as AAA (or its equivalent) when, in fact, they were not.
32
IV.
FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS A. 92. The Statistical Data Provided in the Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False A review of loan-level data was conducted in order to assess whether the
statistical information provided in the Prospectus Supplements was true and accurate. For each Securitization, the sample consisted of 1,000 randomly selected loans per Supporting Loan Group, or all of the loans in the group if there were fewer than 1,000 loans in the Supporting Loan Group. The sample data confirms, on a statistically significant basis, material misrepresentations of underwriting standards and of certain key characteristics of the mortgage loans across the Securitizations. The data review demonstrates that the data concerning owner occupancy and LTV ratios was materially false and misleading. 1. 93. Owner Occupancy Data Was Materially False
claimed, a number of tests were conducted, including, inter alia, whether, months after the loan closed, the borrowers tax bill was being mailed to the property or to a different address; whether the borrower had claimed a tax exemption on the property; and whether the mailing address of the property was reflected in the borrowers credit reports, tax records, or lien records. Failing two or more of these tests is a strong indication that the borrower did not live at the mortgaged property and instead used it as a second home or an investment property, both of which make it much more likely that a borrower will not repay the loan. 33
95.
A significant number of the loans failed two or more of these tests, indicating that
the owner occupancy statistics provided to Fannie Mae and Freddie Mac were materially false and misleading. For example, for Supporting Loan Group I in the HASC 2006-OPT3 Securitization, which was sponsored by HSBC Bank and underwritten by HSBC Securities, the Prospectus Supplement stated that 1.49 percent of the underlying properties by loan count in the Supporting Loan Group were not owner-occupied. But the data review revealed that, for 9.74 percent of the properties represented as owner-occupied, the owners lived elsewhere, indicating that the true percentage of non-owner occupied properties was 11.09 percent, more than seven times the percentage reported in the Prospectus Supplement.8 96. The data review revealed that, for each Securitization, the Prospectus Supplement
misrepresented the percentage of non-owner occupied properties. The true percentage of nonowner occupied properties, as determined by the data review, versus the percentage stated in the Prospectus Supplement for each Securitization is reflected in Table 6 below. Table 6 demonstrates that the Prospectus Supplements for each Securitization understated the percentage of non-owner occupied properties by at least 8 percent, and for many Securitizations by 10 percent or more.
Table 6
Percentage of Properties Reported as OwnerOccupied With Strong Indication of Non-Owner Occupancy9
12.02 10.51 10.77 12.49 10.25 13.75 11.58 10.97 14.10 10.77 9.24 9.74 11.63 11.03 10.53 11.41 9.43 11.73
Transaction
Reported Percentage of NonOwner Occupied Properties

8.53 5.94 4.92 6.39 1.71 5.53 4.49 4.32 5.95 11.12 7.81 1.49 12.83 3.51 9.73 4.24 7.53 7.69

19.53 15.83 15.15 18.08 11.79 18.52 15.55 14.81 19.21 20.69 16.33 11.09 22.96 14.16 19.23 15.17 16.26 18.52
Prospectus Percentage Understatement of Non-Owner Occupied Properties

11.00 9.89 10.23 11.69 10.08 12.99 11.06 10.49 13.26 9.57 8.52 9.60 10.13 10.65 9.50 10.93 8.73 10.83
2. 97.
Prospectus Supplements were materially false and understated, as more specifically set out below. For each of the sampled loans, an industry standard automated valuation model (AVM) was used to calculate the value of the underlying property at the time the mortgage loan was originated. AVMs are routinely used in the industry as a way of valuing properties during prequalification, origination, portfolio review and servicing. AVMs rely upon similar data as appraisersprimarily county assessor records, tax rolls, and data on comparable
As described more fully in paragraph 94, failing two or more tests of owner-occupancy is a strong indication that the borrower did not live at the mortgaged property and instead used it as a second home or an investment property. 35
properties. AVMs produce independent, statistically-derived valuation estimates by applying modeling techniques to this data. 98. Applying the AVM to the available data for the properties securing the sampled
loans shows that the appraised value given to such properties was significantly higher than the actual value of such properties. The result of this overstatement of property values is a material understatement of LTV. That is, if a propertys true value is significantly less than the value used in the loan underwriting, then the loan represents a significantly higher percentage of the propertys value. This, of course, increases the risk a borrower will not repay the loan and the risk of greater losses in the event of a default. As stated in the Prospectus Supplement for HASC 2006-OPT1: Mortgage loans with higher loan-to-value ratios may present a greater risk of loss than mortgage loans with loan-to-value ratios of 80% or below. 99. For example, for the FFML 2006-FF7 Securitization, which was sponsored by
HSBC Bank and underwritten by HSBC Securities, the Prospectus Supplement stated that no LTV ratios for the Supporting Loan Group were above 100 percent. In fact, 16.57 percent of the sample of loans included in the data review had LTV ratios above 100 percent. In addition, the Prospectus Supplement stated that 70.80 percent of the loans had LTV ratios at or below 80 percent. The data review indicated that only 39.50 percent of the loans had LTV ratios at or below 80 percent. 100. The data review revealed that, for each Securitization, the Prospectus Supplement
misrepresented the percentage of loans with an LTV ratio above 100 percent, as well the percentage of loans that had an LTV ratio at or below 80 percent. Table 7 reflects (i) the true percentage of mortgages in each Supporting Loan Group with LTV ratios above 100 percent, versus the percentage reported in the Prospectus Supplement; and (ii) the true percentage of
36
mortgages in each Supporting Loan Group with LTV ratios at or below 80 percent, versus the percentage reported in the Prospectus Supplement. The percentages listed in Table 7 were calculated by aggregated principal balance. Table 7
PROSPECTUS Percentage of Loans Reported to Have LTV Ratio At or Less Than 80%
72.46 60.92 70.80 62.94 66.13 51.16 31.56 72.49 56.86 49.30 52.56 67.53 57.90 66.04 38.90 25.03 45.00 30.20
Transaction
DATA REVIEW True Percentage of Loans With LTV Ratio At or Less Than 80%
48.64 40.55 39.50 44.05 42.42 33.58 26.61 42.57 35.37 40.63 42.14 53.44 42.05 46.49 25.37 15.17 32.77 23.31
PROSPECTUS
9.41 14.91 16.57 14.87 14.45 17.53 30.32 14.95 18.12 17.05 18.46 11.66 17.13 16.08 28.18 39.51 23.54 24.73
Percentage of Loans Reported to Have LTV Ratio Over 100%

0.00 0.10 0.00 0.15 0.04 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
101.
As Table 7 demonstrates, the Prospectus Supplements for all but three of the
Securitizations reported that none of the mortgage loans in the Supporting Loan Groups had an LTV ratio over 100. With respect to those three exceptions, the percentage of mortgage loans with a reported LTV ratio over 100 percent was extremely smallunder 0.15 percent in all instances. In contrast, the data review revealed that for all of the Supporting Loan Groups in the Securitizations, at least 9.41 percent of the mortgage loans had an actual LTV ratio over 100 percent, and for most Securitizations this figure was much larger. Indeed, for 16 of the
37
Securitizations, the data review revealed that more than 10 percent of the mortgages in the Supporting Loan Group had a true LTV ratio over 100 percent. For five of the Securitizations, the data review revealed that more than 20 percent of the mortgages in the Supporting Loan Group had a true LTV ratio over 100 percent. 102. These inaccuracies with respect to reported LTV ratios also indicate that the
representations in the Registration Statements relating to appraisal practices were false, and that the appraisers themselves, in many instances, furnished appraisals that they understood were inaccurate and that they knew bore no reasonable relationship to the actual value of the underlying properties. Indeed, independent appraisers following proper practices, and providing genuine estimates as to valuation, would not systematically generate appraisals that deviate so significantly (and so consistently upward) from the true values of the appraised properties. This conclusion is further confirmed by the findings of the Financial Crisis Inquiry Commission (the FCIC), which identified inflated appraisals as a pervasive problem during the period of the Securitizations, and determined through its investigation that appraisers were often pressured by mortgage originators, among others, to produce inflated results. See FCIC, Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (January 2011) (FCIC Report) at 91-92. B. 103. The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines The Registration Statements contained material misstatements and omissions
regarding compliance with underwriting guidelines. Indeed, the originators for the loans underlying the Securitizations systematically disregarded their respective underwriting guidelines in order to increase production and profits derived from their mortgage lending businesses. This is confirmed by the systematically misreported owner occupancy and LTV 38
statistics, discussed supra, and by (1) government investigations into originators underwriting practices, which have revealed widespread abandonment of originators reported underwriting guidelines during the relevant period; (2) the collapse of the Certificates credit ratings; and (3) the surge in delinquency and default in the mortgage loans in the Securitizations. 1. Government Investigations Have Confirmed That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines
104.
reports and investigations that have described rampant underwriting failures throughout the period of the Securitizations and, more specifically, underwriting failures by the very originators whose loans were included by the Defendants in the Securitizations. 105. For instance, in November 2008, the Office of the Comptroller of the Currency
(OCC), an office within the United States Department of the Treasury, issued a report identifying the Worst Ten mortgage originators in the Worst Ten metropolitan areas. The worst originators were defined as those with the largest number of non-prime mortgage foreclosures for 2005-2007 originations. Option One, Countrywide, WMC, and New Century, which originated many of the loans for the Securitizations at issue here, were all on that list. See Office of the Comptroller of the Currency Press Release, Worst Ten in the Worst Ten, Nov. 13, 2008. 106. Option One originated all of the mortgage loans in the Supporting Loan Groups in
the HASC 2005-I1, HASC 2006-OPT1, HASC 2006-OPT2, HASC 2006-OPT3, HASC 2006OPT4, HASC 2007-OPT1, and HASC 2007-WF1 Securitizations. On June 3, 2008, the Attorney General for the Commonwealth of Massachusetts filed an action against Option One (the Option One Complaint), and its past and present parent companies, for their unfair and deceptive origination and servicing of mortgage loans. See Complaint, Commonwealth v. H&R 39
Block, Inc., CV NO. 08-2474-BLS (Mass. Super. Ct. June 3, 2008). According to the Massachusetts Attorney General, since 2004, Option One had increasingly disregarded underwriting standards and originated thousands of loans that [Option One] knew or should have known the borrowers would be unable to pay, all in an effort to increase loan origination volume so as to profit from the practice of packaging and selling the vast majority of [Option Ones] residential subprime loans to the secondary market. See Option One Complaint. The Massachusetts Attorney General alleged that Option Ones agents and brokers frequently overstated an applicants income and/or ability to pay, and inflated the appraised value of the applicants home, and that Option One avoided implementing reasonable measures that would have prevented or limited these fraudulent practices. Option Ones origination policies employed from 2004 through 2007 have resulted in an explosion of foreclosures. Id. at 1. On November 24, 2008, the Superior Court of Massachusetts granted a preliminary injunction that prevented Option One from foreclosing on thousands of its loans issued to Massachusetts residents. Commonwealth v. H&R Block, Inc., No. 08-2474-BLS1, 2008 WL 5970550 (Mass. Super. Ct. Nov. 24, 2008). On October 29, 2009, the Appeals Court of Massachusetts affirmed the preliminary injunction. See Commonwealth v. Option One Mortgage Co., No. 09-P-134, 2009 WL 3460373 (Mass. App. Ct. Oct. 29, 2009). 107. On August 9, 2011, the Massachusetts Attorney General announced that H&R
Block, Inc., Option Ones parent company, had agreed to settle the suit for approximately $125 million. See Massachusetts Attorney General Press Release, H&R Block Mortgage Company Will Provide $125 Million in Loan Modifications and Restitutions, Aug. 9, 2011. Media reports noted that the suit was being settled amidst ongoing discussions among multiple states attorneys general, federal authorities, and five major mortgage servicers, aimed at resolving
40
investigations of the lenders foreclosure and mortgage-servicing practices. The Massachusetts Attorney General released a statement saying that no settlement should include a release for conduct relating to the lenders packaging of mortgages into securitizations. See, e.g., Bloomberg.com, H&R Block, Massachusetts Reach $125 Million Accord in State Mortgage Suit, Aug. 9, 2011. 108. Countrywide originated 40.68 percent and 29.48 percent of the loans in the
Supporting Loan Groups in the HASC 2006-HE1 and HASC 2006-HE2 Securitizations, respectively. In January 2011, the FCIC issued its final report, which detailed, among other things, the collapse of mortgage underwriting standards and subsequent collapse of the mortgage market and wider economy. The FCIC Report singled out Countrywide for its role: Lenders made loans that they knew borrowers could not afford and that could cause massive losses to investors in mortgage securities. As early as September 2004, Countrywide executives recognized that many of the loans they were originating could result in catastrophic consequences. Less than a year later, they noted that certain high-risk loans they were making could result not only in foreclosures but also in financial and reputational catastrophe for the firm. But they did not stop. FCIC Report at xxii. 109. Countrywide has also been the subject of several investigations and actions
concerning its lax and deficient underwriting practices. In June 2009, for instance, the SEC initiated a civil action against Countrywide executives Angelo Mozilo (founder and Chief Executive Officer), David Sambol (Chief Operating Officer), and Eric Sieracki (Chief Financial Officer) for securities fraud and insider trading. In a September 16, 2010 opinion denying these defendants motions for summary judgment, the United States District Court for the Central District of California found that the SEC raised genuine issues of fact as to, among other things, whether the defendants had misrepresented the quality of Countrywides underwriting processes.
41
The court noted that the SEC presented evidence that Countrywide routinely ignored its official underwriting to such an extent that Countrywide would underwrite any loan it could sell into the secondary mortgage market, and that a significant portion (typically in excess of 20%) of Countrywides loans were issued as exceptions to its official underwriting guidelines . The court concluded that a reasonable jury could conclude that Countrywide all but abandoned managing credit risk through its underwriting guidelines . S.E.C. v. Mozilo, No. CV 09-3994, 2010 WL 3656068, at *10 (C.D. Cal. Sept. 16, 2010). Mozilo, Sambol, and Sieracki subsequently settled with the SEC. 110. The testimony and documents only recently made available to the GSEs by way
of the SECs investigation confirm that Countrywide was systematically abusing exceptions and low-documentation processes in order to circumvent its own underwriting standards. For example, in an April 13, 2006 e-mail, Mozilo wrote to Sieracki and others that he was concerned that certain subprime loans had been originated with serious disregard for process [and] compliance with guidelines, resulting in the delivery of loans with deficient documentation. Mozilo further stated that I have personally observed a serious lack of compliance within our origination system as it relates to documentation and generally a deterioration in the quality of loans originated versus the pricing of those loan[s]. 111. WMC originated 58.74 percent, 58.29 percent, and 26.05 percent of the loans in
the Supporting Loan Groups in the HASC 2006-HE1, HASC 2006-HE2, and HASC 2007-HE2 Securitizations, respectively. WMC employed reckless underwriting standards and practices, as described more fully below, that resulted in a huge number of foreclosures, ranking WMC fourth in the report presented to the FCIC in April 2010 identifying the Worst Ten mortgage originators in the Worst Ten metropolitan areas. See OCC Press Release, Worst Ten in the
42
Worst Ten. General Electric, which had purchased WMC in 2004, closed down operations at WMC in late 2007 and took a $1.4 billion charge in the third quarter of that year. See, e.g., Diane Brady, Adventures of a Subprime Survivor, Bloomberg Businessweek, Oct. 29, 2007 (available at http://www.businessweek.com/magazine/ content/07_44/b4056074.htm). 112. WMCs reckless loan originating practices were noticed by regulatory authorities.
In June 2008, the Washington State Department of Financial Institutions, Division of Consumer Services filed a Statement of Charges and Notice of Intention to Enter an Order to Revoke License, Prohibit From Industry, Impose Fine, Order Restitution and Collect Investigation Fees (the Statement of Charges) against WMC Mortgage and its principal owners individually. See Statement of Charges, No. C-07-557-08-SC01, Jun. 4, 2008. The Statement of Charges included 86 loan files, which revealed that at least 76 loans were defective or otherwise in violation of Washington state law. Id. Among other things, the investigation uncovered that WMC had originated loans with unlicensed or unregistered mortgage brokers, understated amounts of finance charges on loans, understated amounts of payments made to escrow companies, understated annual percentage rates to borrowers and committed many other violations of Washington State deceptive and unfair practices laws. Id. 113. New Century originated 34.51 percent and 100 percent of the loans in the
Supporting Loan Groups in the HASC 2005-I1 and HASC 2006-NC1 Securitizations, respectively. As stated in the Prospectus Supplement for the HASC 2006-NC1 Securitization, [f]or the quarter ending September 30, 2005, New Century Financial Corporation originated $40.4 billion in mortgage loans. And before its collapse in the first half of 2007, New Century was one of the largest subprime lenders in the country.
43
114.
In 2010, the OCC identified New Century as the worst subprime lender in the
country based on the delinquency rates of the mortgages it originated in the ten metropolitan areas between 2005 and 2007 with the highest rates of delinquency. See OCC Press Release, Worst Ten in the Worst Ten: Update, Mar. 22, 2010. Further, in January 2011, the FCIC issued its final report and, as it did with Countrywide, singled out New Century for its role: New Centuryonce the nations second-largest subprime lenderignored early warnings that its own loan quality was deteriorating and stripped power from two risk-control departments that had noted the evidence. In a June 2004 presentation, the Quality Assurance staff reported they had found severe underwriting errors, including evidence of predatory lending, federal and state violations, and credit issues, in 25% of the loans they audited in November and December 2003. In 2004, Chief Operating Officer and later CEO Brad Morrice recommended these results be removed from the statistical tools used to track loan performance, and in 2005, the department was dissolved and its personnel terminated. The same year, the Internal Audit department identified numerous deficiencies in loan files; out of nine reviews it conducted in 2005, it gave the companys loan production department unsatisfactory ratings seven times. Patrick Flanagan, president of New Centurys mortgage-originating subsidiary, cut the departments budget, saying in a memo that the group was out of control and tries to dictate business practices instead of audit. FCIC Report at 157. 115. On February 29, 2008, after an extensive document review and conducting over
100 interviews, Michael J. Missal, the Bankruptcy Court Examiner for New Century, issued a detailed report on the various deficiencies at New Century, including lax mortgage standards and a failure to follow its own underwriting guidelines. Among his findings, the Examiner reported: New Century had a brazen obsession with increasing loan originations, without due regard to the risks associated with that business strategy. Although a primary goal of any mortgage banking company is to make more loans, New Century did so in an aggressive manner that elevated the risks to dangerous and ultimately fatal levels. New Century also made frequent exceptions to its underwriting guidelines for borrowers who might not otherwise qualify for a particular loan. A senior officer of New Century warned in 2004 that the number one issue is
44
exceptions to the guidelines. Moreover, many of the appraisals used to value the homes that secured the mortgages had deficiencies. New Century layered the risks of loan products upon the risks of loose underwriting standards in its loan originations to high risk borrowers.
Final Report of Michael J. Missal, Bankruptcy Examiner, In re New Century TRS Holdings, Inc., No. 07-10416 (KJC) (Bankr. Del. Feb. 29, 2008), available at http://graphics8.nytimes.com/packages/pdf/business/Final_Report_New_Century.pdf. 116. On December 9, 2009, the SEC charged three of New Centurys top officers with
testified before the FCIC in April 2010 that, beginning in 2004, underwriting guidelines had been all but abandoned at New Century. Ms. Lindsay further testified that New Century systematically approved loans with 100 percent financing to borrowers with extremely low credit scores and no supporting proof of income. See Written Testimony of Patricia Lindsay for the FCIC Hearing, April 7, 2010 (Lindsay Testimony), http://fcic-static.law.stanford.edu/cdnmedia/fcic.testimony/2010-0407-Lindsay.pdf, at 3. 118. The originators of the mortgage loans underlying the Securitizations went beyond
the systematic disregard of their own underwriting guidelines. As the FCIC has confirmed, mortgage loan originators throughout the industry pressured appraisers, during the period of the Securitizations, to issue inflated appraisals that met or exceeded the amount needed for the 45
subject loans to be approved, regardless of the accuracy of such appraisals, and especially when the originators aimed at putting the mortgages into a package of mortgages that would be sold for securitization. This resulted in lower LTV ratios, discussed supra, which in turn made the loans appear to the investors less risky than they were. 119. As described by Patricia Lindsay, appraisers fear[ed] for their livelihoods,
and therefore cherry-picked data that would help support the needed value rather than finding the best comparables to come up with the most accurate value. See Lindsay Test. at 5. Likewise, Jim Amorin, President of the Appraisal Institute, confirmed in his testimony that [i]n many cases, appraisers are ordered or severely pressured to doctor their reports and to convey a particular, higher value for a property, or else never see work from those parties again . [T]oo often state licensed and certified appraisers are forced into making a Hobsons Choice. See Testimony of Jim Amorin to the FCIC, available at www.appraisalinstitute.org/newsadvocacy/downloads/ltrs_tstmny/2009/AI-ASA-ASFMRANAIFATestimonyonMortgageReform042309final.pdf. Faced with this choice, appraisers systematically abandoned applicable guidelines and over-valued properties in order to facilitate the issuance of mortgages that could then be collateralized into mortgage-backed securitizations. 2. The Collapse of the Certificates Credit Ratings Further Indicates That the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines
120.
AAA or its equivalent to non-investment speculative grade, is further evidence of the originators systematic disregard of underwriting guidelines, indicating that the GSE Certificates were impaired from the start. 121. The GSE Certificates that Fannie Mae and Freddie Mac purchased were originally
assigned credit ratings of AAA or its equivalent, which purportedly reflected the description of 46
the mortgage loan collateral and underwriting practices set forth in the Registration Statements. These ratings were artificially inflated, however, as a result of the very same misrepresentations that the Defendants made to investors in the Prospectus Supplements. 122. HSBC provided or caused to be provided loan-level information to the rating
agencies that they relied upon in order to calculate the Certificates assigned ratings, including the borrowers LTV ratio, debt-to-income ratio, owner occupancy status, and other loan-level information described in aggregation reports in the Prospectus Supplements. Because the information that HSBC provided or caused to be provided was false, the ratings were inflated and the level of subordination that the rating agencies required for the sale of AAA (or its equivalent) certificates was inadequate to provide investors with the level of protection that those ratings signified. As a result, the GSEs paid Defendants inflated prices for purported AAA (or its equivalent) Certificates, unaware that those Certificates actually carried a severe risk of loss and carried inadequate credit enhancement. 123. Since the issuance of the Certificates, the ratings agencies have dramatically
Transaction
FFML 2006-FF1 FFML 2006-FF5 FFML 2006-FF7 FFML 2006-FF9 FFML 2006-FF11
Tranche
IA IA IA IA IA1 IA2

Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA

B3/AAA/B Caa1/BB-/CC Caa1/CCC/CC Caa3/B-/CC B3/CCC/CC Ca/CCC/C
10
Transaction
HASC 2005-I1 HASC 2006-HE1 HASC 2006-HE2 HASC 2006-NC1 HASC 2006-OPT1 HASC 2006-OPT2 HASC 2006-OPT3 HASC 2006-OPT4 HASC 2007-HE1 HASC 2007-HE2 HASC 2007-OPT1 HASC 2007-WF1
Tranche
IA IA IA IA IA IA IA IIA IA IA IA IA IA

Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/--

Caa1/CCC/CC Ca/CCC/C Caa3/CCC/C B3/BB+/-A2/AAA/B Aa1/AAA/A Aa2/AAA/BB Baa2/AAA/CCC Ba1/A/CCC Caa3/CCC/C Caa3/CCC/C Caa3/BBB-/CC Caa2/B-/--
3.
The Surge in Mortgage Delinquency and Default Further Demonstrates That the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines
124.
Transaction
FFML 2006-FF1 FFML 2006-FF5 FFML 2006-FF7
Tranche
IA IA IA

54.3 52.4 48.6
48
Transaction
FFML 2006-FF9 FFML 2006-FF11
Tranche
IA IA1 IA2

49.6 42.3 42.3 67.4 56.9 58.7 53.0 38.4 37.7 32.2 38.7 40.5 60.7 66.5 45.5 39.9
HASC 2005-I1 HASC 2006-HE1 HASC 2006-HE2 HASC 2006-NC1 HASC 2006-OPT1 HASC 2006-OPT2 HASC 2006-OPT3
IA IA IA IA IA IA IA IIA
HASC 2006-OPT4 HASC 2007-HE1 HASC 2007-HE2 HASC 2007-OPT1 HASC 2007-WF1
IA IA IA IA IA
126.
confirmed, systematic underwriting failures by the originators responsible for the mortgage loans across the Securitizations, and the extraordinary drop in credit rating and rise in delinquencies across those Securitizations, all confirm that the mortgage loans in the Supporting Loan Groups, contrary to the representations in the Registration Statements, were not originated in accordance with the stated underwriting guidelines. V. FANNIE MAES AND FREDDIE MACS PURCHASES OF THE GSE CERTIFICATES AND THE RESULTING DAMAGES 127. In total, between December 20, 2005 and July 3, 2007, Fannie Mae and Freddie
Mac purchased over $6.2 billion in residential mortgage-backed securities issued in connection with the Securitizations. Table 10 reflects each of Freddie Macs purchases of the Certificates.11
11
Table 10
1/27/2006 5/5/2006 7/7/2006 12/20/2005 11/3/2006 3/7/2006 2/3/2006 2/28/2006 4/5/2006 3/8/2007 5/4/2007 1/30/2007 7/3/2007
Transaction
Tranche
CUSIP

266,292,000.00 401,180,000.00 712,134,000.00 132,963,000.00 591,377,000.00 119,285,000.00 265,088,000.00 368,076,000.00 230,449,000.00 371,150,000.00 326,874,000.00 438,787,000.00 195,515,000.00

100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
FFML 2006-FF1 FFML 2006-FF5 FFML 2006-FF9 HASC 2005-I1 HASC 2006-HE1 HASC 2006-NC1 HASC 2006-OPT1 HASC 2006-OPT2 HASC 2006-OPT3 HASC 2007-HE1 HASC 2007-HE2 HASC 2007-OPT1 HASC 2007-WF1
IA IA IA IA IA IA IA IA IIA IA IA IA IA
32027NYL9 32027EAB7 320276AB4 40430HCV8 44328AAA8 40430HEQ7 40430HCZ9 40430HDV7 40430HFH6 40430FAA0 40430RAA4 40431JAA1 40431RAA3
HSBC Securities HSBC Securities HSBC Securities HSBC Securities HSBC Securities HSBC Securities HSBC Securities HSBC Securities HSBC Securities HSBC Securities HSBC Securities HSBC Securities HSBC Securities
128.
Table 11 below reflects each of Fannie Maes purchases of the Certificates:
Table 11
5/31/2006 9/6/2006 9/6/2006 12/5/2006 4/5/2006 4/28/2006
Transaction
Tranche
CUSIP

336,603,000.00 538,016,000.00 134,504,000.00 384,335,000.00 141,005,000.00 284,847,000.00

100.00 100.00 100.00 100.00 100.00 100.00

HSBC Securities HSBC Securities HSBC Securities HSBC Securities HSBC Securities HSBC Securities
FFML 2006-FF7
IA IA1
320277AB2 32028PAA3 32028PAB1 44328BAB4 40430HFG8 40430KAB7
FFML 2006-FF11 IA2 HASC 2006-HE2 HASC 2006-OPT3 HASC 2006-OPT4 IA IA IA
50
129.
Registration Statements, including the Prospectuses and Prospectus Supplements, directly caused Fannie Mae and Freddie Mac to suffer hundreds of millions of dollars in damages, including without limitation depreciation in the value of the securities. The mortgage loans underlying the GSE Certificates experienced defaults and delinquencies at a much higher rate than they would have had the loan originators adhered to the underwriting guidelines set forth in the Registration Statements, and the payments to the trusts were therefore much lower than they would have been had the loans been underwritten as described in the Registration Statements. 131. Fannie Maes and Freddie Macs losses have been much greater than they would
have been if the mortgage loans had the credit quality represented in the Registration Statements. 132. HSBCs misstatements and omissions in the Registration Statements regarding
the true characteristics of the loans were the proximate cause of Fannie Maes and Freddie Macs losses relating to their purchase of the GSE Certificates. Based upon sales of the Certificates or similar certificates in the secondary market, HSBC proximately caused hundreds of millions of dollars in damages to Fannie Mae and Freddie Mac in an amount to be determined at trial.
51
FIRST CAUSE OF ACTION Violation of Section 11 of the Securities Act of 1933 (Against Defendants HSBC Securities, HSI Asset, Neal Leonard, Gerard Mattia, Todd White, and Jon Voigtman) 133. Plaintiff realleges each allegation above as if fully set forth herein, except to the
1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements. This claim is brought against Defendant HSBC Securities with respect to each of the Registration Statements. This claim is brought against (i) Defendant HSI Asset and (ii) Defendants Neal Leonard, Gerard Mattia, Todd White, and Jon Voigtman (the foregoing Individual Defendants collectively referred to as the Section 11 Individual Defendants), each with respect to the Registration Statements filed by HSI Asset that registered securities that were bona fide offered to the public on or after September 6, 2005. 135. This claim is predicated upon the strict liability of Defendant HSBC Securities for
making false and materially misleading statements in the Registration Statements for the Securitizations and for omitting facts necessary to make the facts stated therein not misleading. Defendant HSI Asset and the Section 11 Individual Defendants are strictly liable for making false and materially misleading statements in the Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005, which are applicable to 12 of the 17 Securitizations (as specified in Tables 1 and 2 above), and for omitting facts necessary to make the facts stated therein not misleading.
52
136.
Defendant HSBC Securities served as underwriter of each of the Securitizations,
and as such, is liable for the misstatements and omissions in the Registration Statements under Section 11 of the Securities Act. 137. Defendant HSI Asset is the registrant for the Securitizations and filed the Shelf
Registration Statements. As depositor, Defendant HSI is the issuer of the GSE Certificates issued pursuant to the Registration Statements it filed within the meaning of Section 2(a)(4) of the Securities Act, 15 U.S.C. 77b(a)(4), and in accordance with Section 11(a), 15 U.S.C. 77k(a). As such, HSI Asset is liable under Section 11 of the Securities Act for the misstatements and omissions in those Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005. 138. The Section 11 Individual Defendants were officers and/or directors of Defendant
HSI Asset at the time the Registration Statements were filed in connection with the Securitizations. In addition, they signed the Registration Statements and either signed or authorized another to sign on their behalf the amendments to those Registration Statements. As such, the Section 11 Individual Defendants are liable under Section 11 of the Securities Act for the misstatements and omissions in those Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005. 139. At the time that they became effective, each of the Registration Statements
contained material misstatements of fact and omitted information necessary to make the facts stated therein not misleading, as set forth above. The facts misstated or omitted were material to a reasonable investor reviewing the Registration Statements.
53
140.
Certificates pursuant to the false and misleading Registration Statements. Fannie Mae and Freddie Mac made these purchases in the primary market. At the time they purchased the GSE Certificates, Fannie Mae and Freddie Mac did not know of the facts concerning the false and misleading statements and omissions alleged herein, and if the GSEs would have known those facts, they would not have purchased the GSE Certificates. 142. HSBC Securities owed to Fannie Mae, Freddie Mac, and other investors a duty to
make a reasonable and diligent investigation of the statements contained in the Registration Statements at the time they became effective to ensure that such statements were true and correct and that there were no omissions of material facts required to be stated in order to make the statements contained therein not misleading. The Section 11 Individual Defendants owed the same duty with respect to the Registration Statements that they signed that registered securities that were bona fide offered to the public on or after September 6, 2005, which are applicable to 12 of the Securitizations. 143. HSBC Securities and the Section 11 Individual Defendants did not exercise such
due diligence and failed to conduct a reasonable investigation. In the exercise of reasonable care, these Defendants should have known of the false statements and omissions contained in or omitted from the Registration Statements filed in connection with the Securitizations, as set forth herein. In addition, HSI Asset, though subject to strict liability without regard to whether it
54
performed diligence, also failed to take reasonable steps to ensure the accuracy of the representations. 144. Fannie Mae and Freddie Mac sustained substantial damages as a result of the
misstatements and omissions in the Registration Statements. 145. This action is brought within three years of the date that the FHFA was appointed
as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). 146. By reason of the conduct herein alleged, HSBC Securities, HSI Asset, and the
Section 11 Individual Defendants are jointly and severally liable for their wrongdoing. SECOND CAUSE OF ACTION Violation of Section 12(a)(2) of the Securities Act of 1933 (Against HSI Asset and HSBC Securities) 147. Plaintiff realleges each allegation above as if fully set forth herein, except to the
Act of 1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements in the Securitizations listed in paragraph 2. 149. This claim is predicated upon HSBC Securities and HSI Assets negligence for
making false and materially misleading statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as Prospectuses) for the Securitizations listed in paragraph 2. 150. HSBC Securities and HSI Asset are prominently identified in the Prospectuses,
the primary documents that they used to sell the GSE Certificates. HSBC Securities and HSI
55
Asset offered the Certificates publicly, including selling to Fannie Mae and Freddie Mac their GSE Certificates, as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. 151. HSBC Securities and HSI Asset offered and sold the GSE Certificates to Fannie
Mae and Freddie Mac by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. HSBC Securities and HSI Asset reviewed and participated in drafting the Prospectuses. 152. HSBC Securities and HSI Asset successfully solicited Fannie Maes and Freddie
Macs purchases of the GSE Certificates. As underwriter, HSBC Securities also obtained substantial commissions based upon the amount received from the sale of the Certificates to the public. 153. HSBC Securities and HSI Asset offered the GSE Certificates for sale, sold them,
and distributed them by the use of means or instruments of transportation and communication in interstate commerce. 154. Each of HSBC Securities and HSI Asset actively participated in the solicitation of
the GSEs purchase of the GSE Certificates, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates. 155. Each of the Prospectuses contained material misstatements of fact and omitted
56
156.
Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, and loan-to-value ratios. 157. HSBC Securities and HSI Asset offered and sold the GSE Certificates offered
pursuant to the Registration Statements directly to Fannie Mae and Freddie Mac, pursuant to the false and misleading Prospectuses. 158. HSBC Securities and HSI Asset owed to Fannie Mae and Freddie Mac, as well as
to other investors in these trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. 159. HSBC Securities and HSI Asset failed to exercise such reasonable care. These
defendants in the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above. 160. In contrast, Fannie Mae and Freddie Mac did not know of the untruths and
pursuant to the Prospectuses.
57
162.
Fannie Mae and Freddie Mac sustained substantial damages in connection with
as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). THIRD CAUSE OF ACTION Violation of Section 15 of the Securities Act of 1933 (Against HSBC North America, HSBC USA, HSBC Markets, HSBC Bank, and the Individual Defendants) 164. Plaintiff realleges each allegation above as if fully set forth herein, except to the
77o (Section 15), against HSBC North America, HSBC USA, HSBC Markets, HSBC Bank, and the Individual Defendants for controlling-person liability with regard to the Section 11 and Section 12(a)(2) causes of action set forth above. 166. The Individual Defendants at all relevant times participated in the operation and
management of HSI Asset, and conducted and participated, directly and indirectly, in the conduct of HSI Assets business affairs. Defendant Neal Leonard was Chairman, Principal Executive Officer, and a Director of HSI Asset. Defendant Gerard Mattia was Treasurer, Principal Financial Officer, Principal Accounting Officer, and a Director of HSI Asset. Defendant Todd White was a Director of HSI Asset. Defendant Norman Chaleff was a Director of HSI Asset. Defendant Jon Voigtman was a Managing Director at both HSBC Securities and HSI Asset. 167. Defendant HSBC Bank was the sponsor for all of the Securitizations and culpably
participated in the violations of Sections 11 and 12(a)(2) set forth above with respect to the 58
offering of the GSE Certificates by initiating the Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting HSI Asset as the special purpose vehicle, and selecting HSBC Securities as underwriter for the Securitizations. In its role as sponsor, HSBC Bank knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 168. Defendant HSBC Bank also acted as the seller of the mortgage loans for the
Securitizations in that it conveyed such mortgage loans to Defendant HSI Asset pursuant to a Mortgage Loan Purchase Agreement. 169. Defendant HSBC Bank also controlled all aspects of the business of HSI Asset, as
HSI Asset was merely a special purpose entity created for the purpose of acting as a pass-through for the issuance of the Certificates. Upon information and belief, the officers and directors of HSBC Bank overlapped with the officers and directors of HSI Asset. In addition, because of its position as sponsor, HSBC Bank was able to, and did in fact, control the contents of the Registration Statements, including the Prospectuses and Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 170. Defendant HSBC USA controlled the business operations of HSBC Bank, and
Defendant HSBC Markets controlled the business operations of HSI Asset and HSBC Securities. As the corporate parents of HSBC Bank, HSI Asset, and HSBC Securities, HSBC USA and HSBC Markets had the practical ability to direct and control the actions of HSBC Bank, HSI Asset, and HSBC Securities in issuing and selling the Certificates, and in fact exercised such
59
direction and control over the activities of these Defendants in connection with the issuance and sale of the Certificates. 171. HSBC USA and HSBC Markets expanded their share of the residential mortgage-
backed securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 172. HSBC USA and HSBC Markets culpably participated in the violations of
Section 11 and 12(a)(2) set forth above. They oversaw the actions of their subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as HSI Asset and the issuing trusts to serve as conduits for the mortgage loans. 173. Defendant HSBC North America wholly owns HSBC USA and HSBC Markets
and is the ultimate US-based parent of HSBC Bank, HSI Asset, and HSBC Securities. HSBC North America culpably participated in the violations of Sections 11 and 12(a)(2) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as HSI Asset and the issuing trusts to serve as conduits for the mortgage loans. 174. HSBC North America, HSBC USA, HSBC Markets, HSBC Bank, and the
Individual Defendants are controlling persons within the meaning of Section 15 by virtue of their actual power over, control of, ownership of, and/or directorship of HSBC Securities and HSI Asset at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements.
60
175.
Fannie Mae and Freddie Mac purchased in the primary market Certificates issued
misstatements and omissions in the Registration Statements, for which they are entitled to compensation. 178. This action is brought within three years of the date that the FHFA was appointed
as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12). FOURTH CAUSE OF ACTION Violation of Section 13.1-552(A)(ii) of the Virginia Code (Against HSI Asset and HSBC Securities) 179. Plaintiff realleges each allegation above as if fully set forth herein, except to the
Virginia Code and is asserted on behalf of Freddie Mac. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 10 above that were purchased by Freddie Mac on or after September 6, 2006.
61
181.
This claim is predicated upon HSBC Securities and HSI Assets negligence for
making false and materially misleading statements in the Prospectuses for the Securitizations listed in paragraph 2. 182. HSBC Securities and HSI Asset are prominently identified in the Prospectuses,
the primary documents that they used to sell the GSE Certificates. HSBC Securities and HSI Asset offered the Certificates publicly, including selling to Freddie Mac the GSE Certificates, as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. 183. HSBC Securities and HSI Asset offered and sold the GSE Certificates to Freddie
Mac by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. HSBC Securities and HSI Asset reviewed and participated in drafting the Prospectuses. 184. HSBC Securities and HSI Asset successfully solicited Freddie Macs purchases of
the GSE Certificates. As underwriter, HSBC Securities also obtained substantial commissions based upon the amount received from the sale of the Certificates to the public. 185. HSBC Securities offered the GSE Certificates for sale, sold them, and distributed
them to Freddie Mac in the State of Virginia. 186. Each of HSBC Securities and HSI Asset actively participated in the solicitation of
Freddie Macs purchase of the GSE Certificates, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates.
62
187.
pursuant to the Registration Statements directly to Freddie Mac, pursuant to the false and misleading Prospectuses. 190. HSBC Securities and HSI Asset owed to Freddie Mac, as well as to other
investors in these trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. 191. HSBC Securities and HSI Asset failed to exercise such reasonable care. These
Defendants in the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above. 192. In contrast, Freddie Mac did not know of the untruths and omissions contained in
the Prospectuses at the time it purchased the GSE Certificates. If Freddie Mac would have known of those untruths and omissions, it would not have purchased the GSE Certificates.
63
193.
Freddie Mac sustained substantial damages in connection with its investments in
as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). FIFTH CAUSE OF ACTION Violation of Section 13.1-552(C) of the Virginia Code (Against HSBC North America, HSBC USA, HSBC Markets, HSBC Bank, and the Individual Defendants) 195. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 196. This claim is brought under Section 13.1-552(C) of the Virginia Code and is
asserted on behalf of Freddie Mac. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 10 above that were purchased by Freddie Mac on or after September 6, 2006. This claim is brought against HSBC North America, HSBC USA, HSBC Markets, HSBC Bank, and the Individual Defendants for controlling-person liability with regard to the Fourth Cause of Action set forth above. 197. The Individual Defendants at all relevant times participated in the operation and
management of HSI Asset, and conducted and participated, directly and indirectly, in the conduct of HSI Assets business affairs. Defendant Neal Leonard was Chairman, Principal Executive Officer, and a Director of HSI Asset. Defendant Gerard Mattia was Treasurer, Principal Financial Officer, Principal Accounting Officer, and a Director of HSI Asset. Defendant Todd White was a Director of HSI Asset. Defendant Norman Chaleff was a Director of HSI Asset. Defendant Jon Voigtman was a Managing Director at both HSBC Securities and HSI Asset. 64
198.
Defendant HSBC Bank was the sponsor for all of the Securitizations and culpably
participated in the violation of Section 13.1-552(A)(ii) of the Virginia Code set forth above with respect to the offering of the GSE Certificates by initiating the Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting HSI Asset as the special purpose vehicle, and selecting HSBC Securities as underwriter for the Securitizations. In its role as sponsor, HSBC Bank knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 199. Defendant HSBC Bank also acted as the seller of the mortgage loans for the
Defendant HSBC Markets controlled the business operations of HSI Asset and HSBC Securities. As the corporate parents of HSBC Bank, HSI Asset, and HSBC Securities, HSBC USA and
65
HSBC Markets had the practical ability to direct and control the actions of HSBC Bank, HSI Asset, and HSBC Securities in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of these Defendants in connection with the issuance and sale of the Certificates. 202. HSBC USA and HSBC Markets expanded their share of the residential mortgage-
backed securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 203. HSBC USA and HSBC Markets culpably participated in the violation of Section
13.1-552(A)(ii) of the Virginia Code set forth above. They oversaw the actions of their subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as HSI Asset and the issuing trusts to serve as conduits for the mortgage loans. 204. Defendant HSBC North America wholly owns HSBC USA and HSBC Markets
and is the ultimate US-based parent of HSBC Bank, HSI Asset, and HSBC Securities. HSBC North America culpably participated in the violation of Section 13.1-552(A)(ii) of the Virginia Code set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established specialpurpose financial entities such as HSI Asset and the issuing trusts to serve as conduits for the mortgage loans. 205. HSBC North America, HSBC USA, HSBC Markets, HSBC Bank, and the
Individual Defendants are controlling persons within the meaning of Section 13.1-522(C) of the Virginia Code by virtue of their actual power over, control of, ownership of, and/or directorship
66
of HSBC Securities and HSI Asset at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 206. Freddie Mac purchased Certificates issued pursuant to the Registration
omissions in the Registration Statements, for which it is entitled to compensation. 209. This action is brought within three years of the date that the FHFA was appointed
as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12). SIXTH CAUSE OF ACTION Violation of Section 31.5606.05(a)(1)(B) of the District of Columbia Code (Against HSI Asset and HSBC Securities) 210. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 211. This claim is brought by Plaintiff pursuant to Section 31-5606.05(a)(1)(B) of the
67
212.
This claim is predicated upon HSBC Securities and HSI Assets negligence for
making false and materially misleading statements in the Prospectuses for the Securitizations listed in paragraph 2. 213. HSBC Securities and HSI Asset are prominently identified in the Prospectuses,
the primary documents that they used to sell the GSE Certificates. HSBC Securities and HSI Asset offered the Certificates publicly, including selling to Fannie Mae its GSE Certificates, as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. 214. HSBC Securities and HSI Asset offered and sold the GSE Certificates to Fannie
Mae by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. HSBC Securities and HSI Asset reviewed and participated in drafting the Prospectuses. 215. HSBC Securities and HSI Asset successfully solicited Fannie Maes purchases of
the GSE Certificates. As underwriter, HSBC Securities also obtained substantial commissions based upon the amount received from the sale of the Certificates to the public. 216. HSBC Securities offered the GSE Certificates for sale, sold them, and distributed
them to Fannie Mae in the District of Columbia. 217. Each of HSBC Securities and HSI Asset actively participated in the solicitation of
Fannie Maes purchase of the GSE Certificates, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates.
68
218.
pursuant to the Registration Statements directly to Fannie Mae, pursuant to the false and misleading Prospectuses. 221. HSBC Securities and HSI Asset owed to Fannie Mae, as well as to other investors
in these trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. 222. HSBC Securities and HSI Asset failed to exercise such reasonable care. These
Defendants in the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above. 223. In contrast, Fannie Mae did not know of the untruths and omissions contained in
the Prospectuses at the time it purchased the GSE Certificates. If Fannie Mae would have known of those untruths and omissions, it would not have purchased the GSE Certificates.
69
224.
as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). SEVENTH CAUSE OF ACTION Violation of Section 31-5606.05(c) of the District of Columbia Code (Against HSBC North America, HSBC USA, HSBC Markets, HSBC Bank, and the Individual Defendants) 226. Plaintiff realleges each allegation above as if fully set forth herein, except to the
Code and is asserted on behalf of Fannie Mae. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 11 above that were purchased by Fannie Mae. This claim is brought against HSBC North America, HSBC USA, HSBC Markets, HSBC Bank, and the Individual Defendants for controlling-person liability with regard to the Sixth Cause of Action set forth above. 228. The Individual Defendants at all relevant times participated in the operation and
management of HSI Asset, and conducted and participated, directly and indirectly, in the conduct of HSI Assets business affairs. Defendant Neal Leonard was Chairman, Principal Executive Officer, and a Director of HSI Asset. Defendant Gerard Mattia was Treasurer, Principal Financial Officer, Principal Accounting Officer, and a Director of HSI Asset. Defendant Todd White was a Director of HSI Asset. Defendant Norman Chaleff was a Director of HSI Asset. Defendant Jon Voigtman was a Managing Director at both HSBC Securities and HSI Asset. 70
229.
Defendant HSBC Bank was the sponsor for all of the Securitizations and culpably
participated in the violation of Section 31-5606.05(a)(1)(B) of the District of Columbia Code set forth above with respect to the offering of the GSE Certificates by initiating the Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting HSI Asset as the special purpose vehicle, and selecting HSBC Securities as underwriter for the Securitizations. In its role as sponsor, HSBC Bank knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 230. Defendant HSBC Bank also acted as the seller of the mortgage loans for the
Defendant HSBC Markets controlled the business operations of HSI Asset and HSBC Securities. As the corporate parents of HSBC Bank, HSI Asset, and HSBC Securities, HSBC USA and
71
HSBC Markets had the practical ability to direct and control the actions of HSBC Bank, HSI Asset, and HSBC Securities in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of these Defendants in connection with the issuance and sale of the Certificates. 233. HSBC USA and HSBC Markets expanded their share of the residential mortgage-
backed securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 234. HSBC USA and HSBC Markets culpably participated in the violation of Section
31-5606.05(a)(1)(B) of the District of Columbia Code set forth above. They oversaw the actions of their subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as HSI Asset and the issuing trusts to serve as conduits for the mortgage loans. 235. Defendant HSBC North America wholly owns HSBC USA and HSBC Markets
and is the ultimate US-based parent of HSBC Bank, HSI Asset, and HSBC Securities. HSBC North America culpably participated in the violation of Section 31-5606.05(a)(1)(B) of the District of Columbia Code set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as HSI Asset and the issuing trusts to serve as conduits for the mortgage loans. 236. HSBC North America, HSBC USA, HSBC Markets, HSBC Bank, and the
Individual Defendants are controlling persons within the meaning of Section 31-5606.05(c) of the District of Columbia Code by virtue of their actual power over, control of, ownership of,
72
and/or directorship of HSBC Securities and HSI Asset at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 237. Fannie Mae purchased Certificates issued pursuant to the Registration Statements,
including the Prospectuses and Prospectus Supplements, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements. 238. Fannie Mae did not know of the misstatements and omissions in the Registration
in the Registration Statements, for which it is entitled to compensation. 240. This action is brought within three years of the date that the FHFA was appointed
as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12). EIGHTH CAUSE OF ACTION Common Law Negligent Misrepresentation (Against HSI Asset and HSBC Securities) 241. Plaintiff realleges each allegation above as if fully set forth herein, except to the
HSI Asset and HSBC Securities. 243. Between December 20, 2005 and July 3, 2007, HSI Asset and HSBC Securities
sold the GSE Certificates to the GSEs as described above. Because HSI Asset owned and then
73
conveyed the underlying mortgage loans that collateralized the Securitizations for which it served as depositor, HSI Asset had unique, exclusive, and special knowledge about the mortgage loans in the Securitizations through its possession of the loan files and other documentation. 244. Likewise, as underwriter for all of the Securitizations, HSBC Securities was
obligated toand had the opportunity toperform sufficient due diligence to ensure that the Registration Statements, including without limitation the corresponding Prospectus Supplements, did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. As a result of this privileged position as underwriterwhich gave it access to loan file information and obligated it to perform adequate due diligence to ensure the accuracy of the Registration StatementsHSBC Securities had unique, exclusive, and special knowledge about the underlying mortgage loans in the Securitizations. 245. HSBC Securities also had unique, exclusive, and special knowledge of the work
of third-party due diligence providers, such as Clayton, who identified significant failures of originators to adhere to the underwriting standards represented in the Registration Statements. The GSEs, like other investors, had no access to borrower loan files prior to the closing of the Securitizations and their purchase of the Certificates. Accordingly, when determining whether to purchase the GSE Certificates, the GSEs could not evaluate the underwriting quality or the servicing practices of the mortgage loans in the Securitizations on a loan-by-loan basis. The GSEs therefore reasonably relied on HSBC Securities knowledge and its express representations made prior to the closing of the Securitizations regarding the underlying mortgage loans. 246. HSI Asset and HSBC Securities were aware that the GSEs reasonably relied on
HSI Assets and HSBC Securities reputations and unique, exclusive, and special expertise and
74
experience, as well as their express representations made prior to the closing of the Securitizations, and that the GSEs depended upon these Defendants for complete, accurate, and timely information. The standards under which the underlying mortgage loans were actually originated were known to these Defendants and were not known, and could not be determined, by the GSEs prior to the closing of the Securitizations. 247. Based upon their unique, exclusive, and special knowledge and expertise about
the loans held by the trusts in the Securitizations, HSI Asset and HSBC Securities had a duty to provide the GSEs complete, accurate, and timely information regarding the mortgage loans and the Securitizations. HSI Asset and HSBC Securities negligently breached their duty to provide such information to the GSEs by instead making to the GSEs untrue statements of material facts in the Securitizations, or otherwise misrepresenting to the GSEs material facts about the Securitizations. The misrepresentations are set forth in Section IV above, and include misrepresentations as to the accuracy of the represented credit ratings, compliance with underwriting guidelines for the mortgage loans, and the accuracy of the owner-occupancy statistics and the loan-to-value ratios applicable to the Securitizations, as disclosed in the term sheets and Prospectus Supplements. 248. In addition, having made actual representations about the underlying collateral in
the Securitizations and the facts bearing on the riskiness of the Certificates, HSI Asset and HSBC Securities had a duty to correct misimpressions left by their statements, including with respect to any half truths. The GSEs were entitled to rely upon HSI Assets and HSBC Securities representations about the Securitizations, and these Defendants failed to correct in a timely manner any of their misstatements or half truths, including misrepresentations as to compliance with underwriting guidelines for the mortgage loans.
75
249.
Fannie Mae and Freddie Mac purchased the GSE Certificates based upon the
representations by HSBC as the sponsor, depositor, and lead and selling underwriter in all 17 of the Securitizations. HSBC provided term sheets to the GSEs that contained critical data as to the Securitizations, including with respect to anticipated credit ratings by the credit rating agencies, loan-to-value and combined loan-to-value ratios for the underlying collateral, and owner occupancy statistics. This data was subsequently incorporated into Prospectus Supplements that were received by the GSEs upon the close of each Securitization. 250. The GSEs relied upon the accuracy of the data transmitted to them and
subsequently reflected in the Prospectus Supplements. In particular, the GSEs relied upon the credit ratings that the credit rating agencies indicated they would bestow on the Certificates based on the information provided by HSBC relating to the collateral quality of the underlying loans and the structure of the Securitization. These credit ratings represented a determination by the credit rating agencies that the GSE Certificates were AAA quality (or its equivalent) meaning the Certificates had an extremely strong capacity to meet the payment obligations described in the respective PSAs. 251. HSBC, as sponsor, depositor, and lead and selling underwriter in all 17 of the
Securitizations, provided detailed information about the underlying collateral and structure of each Securitization it sponsored to the credit rating agencies. The credit rating agencies based their ratings on the information provided to them by HSBC, and the agencies anticipated ratings of the Certificates were dependent on the accuracy of that information. The GSEs relied on the accuracy of the anticipated credit ratings and the actual credit ratings assigned to the Certificates by the credit rating agencies, and upon the accuracy of HSBCs representations in the term sheets and Prospectus Supplements.
76
252.
In addition, the GSEs relied on the fact that the originators of the mortgage loans
in the Securitizations had acted in conformity with their underwriting guidelines, which were described in the Prospectus Supplements. Compliance with underwriting guidelines was a precondition to the GSEs purchase of the GSE Certificates in that the GSEs decision to purchase the Certificates was directly premised on their reasonable belief that the originators complied with applicable underwriting guidelines and standards. 253. In purchasing the GSE Certificates, the GSEs justifiably relied on HSBCs false
proximate, and foreseeable result of HSI Assets and HSBC Securities misrepresentations, including any half truths. 256. This action is brought within three years of the date that the FHFA was appointed
as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12). PRAYER FOR RELIEF WHEREFORE Plaintiff prays for relief as follows: 257. An award in favor of Plaintiff against all Defendants, jointly and severally, for all
damages sustained as a result of Defendants wrongdoing, in an amount to be proven at trial, but including: 77
a.
Rescission and recovery of the consideration paid for the GSE
GSE Certificates, as well as lost principal and lost interest payments thereon; c. d. e. Attorneys fees and costs; Prejudgment interest at the maximum legal rate; and Such other and further relief as the Court may deem just and proper.
78
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK FEDERAL HOUSING FINANCE AGENCY, AS CONSERVATOR FOR THE FEDERAL NATIONAL MORTGAGE ASSOCIATION AND THE FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff, -againstJPMORGAN CHASE & CO.; JPMORGAN CHASE BANK, N.A.; J.P. MORGAN MORTGAGE ACQUISITION CORPORATION; J.P. MORGAN SECURITIES LLC (f/k/a J.P. MORGAN SECURITIES INC.); J.P. MORGAN ACCEPTANCE CORPORATION I; EMC MORTGAGE LLC (f/k/a EMC MORTGAGE CORPORATION); BEAR STEARNS & CO., INC.; STRUCTURED ASSET MORTGAGE INVESTMENTS II INC.; BEAR STEARNS ASSET BACKED SECURITIES I LLC; WAMU ASSET ACCEPTANCE CORPORATION; WAMU CAPITAL CORPORATION; WASHINGTON MUTUAL MORTGAGE SECURITIES CORPORATION; LONG BEACH SECURITIES CORPORATION; CITIGROUP GLOBAL MARKETS, INC.; CREDIT SUISSE SECURITIES (USA) LLC; GOLDMAN, SACHS & CO.; RBS SECURITIES, INC.; DAVID M. DUZYK; LOUIS SCHIOPPO, JR.; CHRISTINE E. COLE; EDWIN F. MCMICHAEL; WILLIAM A. KING; BRIAN BERNARD; MATTHEW E. PERKINS; JOSEPH T. JURKOWSKI, JR.; SAMUEL L. MOLINARO, JR.; THOMAS F. MARANO; KIM LUTTHANS; KATHERINE GARNIEWSKI; JEFFREY MAYER; JEFFREY L. VERSCHLEISER; MICHAEL B. NIERENBERG; RICHARD CAREAGA; DAVID BECK; DIANE NOVAK; THOMAS
___ CIV. ___ (___)
GREEN; ROLLAND JURGENS; THOMAS G. LEHMANN; STEPHEN FORTUNATO; DONALD WILHELM; MICHAEL J. KULA; CRAIG S. DAVIS; MARC K. MALONE; MICHAEL L. PARKER; MEGAN M. DAVIDSON; DAVID H. ZIELKE; THOMAS W. CASEY; JOHN F. ROBINSON; KEITH JOHNSON; SUZANNE KRAHLING; LARRY BREITBARTH; MARANGAL I. DOMINGO; TROY A. GOTSCHALL; ART DEN HEYER; AND STEPHEN LOBO Defendants.
TABLE OF CONTENTS Page NATURE OF ACTION ...................................................................................................................2 PARTIES .......................................................................................................................................12 The Plaintiffs and the GSEs ...............................................................................................12 The JPMorgan Entities ......................................................................................................13 The WaMu Entities.............................................................................................................19 The Long Beach Entities ....................................................................................................23 The Other Underwriter Defendants ...................................................................................27 The Non-Party Originators ................................................................................................29 JURISDICTION AND VENUE ....................................................................................................29 FACTUAL ALLEGATIONS ........................................................................................................30 I. The Securitizations.............................................................................................................30 A. B. C. Residential Mortgage-Backed Securitizations In General .....................................30 The Securitizations At Issue In This Case .............................................................32 The Securitization Process .....................................................................................37 1. J.P. Morgan Acquisition, EMC, WaMu Bank, WaMu Securities, and Long Beach Mortgage Transfer The Mortgage Loans To Special Purpose Trusts ...............................................................................37 The Trusts Issue Securities Backed by the Loans ......................................40
2. II.
The Defendants Participation in the Securitization Process .............................................48 A. The Role of Each of the JPMorgan Defendants.....................................................48 1. 2. 3. 4. J.P. Morgan Acquisition ............................................................................49 J.P. Morgan Acceptance ............................................................................49 J.P. Morgan Securities ...............................................................................50 JPMorgan Chase and JPMorgan Bank .......................................................50 i
5. B.
The JPMorgan Individual Defendants .......................................................51
The Role of Each of the Bear Stearns Entities .......................................................53 1. 2. 3. 4. 5. EMC ...........................................................................................................54 SAMI and BSABS .....................................................................................55 BSC and J.P. Morgan Securities as Successor to BSC ..............................56 JPMorgan Chase as Successor to BSI........................................................56 The Bear Stearns Individual Defendants ...................................................57
C.
The Role of Each of the WaMu Entities ................................................................60 1. 2. 3. 4. 5. JPMorgan Bank as Successor to WaMu Bank ...........................................61 WaMu Securities ........................................................................................62 WaMu Acceptance .....................................................................................64 WaMu Capital ............................................................................................64 The WaMu Individual Defendants.............................................................65
D.
The Role of Each of the Long Beach Entities........................................................68 1. 2. 3. JPMorgan Bank as Successor to WaMu Bank and Long Beach Mortgage ....................................................................................................69 Long Beach Securities ...............................................................................71 The Long Beach Individual Defendants ....................................................71
E. F.
The Other Underwriter Defendants .......................................................................74 Defendants Failure To Conduct Proper Due Diligence ........................................75 1. 2. 3. 4. The JPMorgan Defendants .........................................................................77 The Bear Stearns Entities ...........................................................................80 The WaMu Entities ....................................................................................81 The Long Beach Entities ............................................................................86
G.
Liability of JPMorgan Chase and JPMorgan Bank as Successors in Interest........90
ii
1. 2. III.
Liability of the JPMorgan Defendants as Successors in Interest to the Bear Stearns Entities ............................................................................90 Liability of the JPMorgan Defendants as Successors in Interest to the WaMu and Long Beach Entities ..........................................................92
The Registration Statements and the Prospectus Supplements.........................................98 A. Compliance With Underwriting Guidelines ..........................................................98 1. 2. 3. 4. 5. B. C. D. JPMorgans Statements Regarding Compliance With Underwriting Guidelines ..................................................................................................98 Bear Stearnss Statements Regarding Compliance With Underwriting Guidelines..........................................................................101 WaMus Statements Regarding Compliance With Underwriting Guidelines ................................................................................................103 Long Beachs Statements Regarding Compliance With Underwriting Guidelines..........................................................................105 Statements Regarding Representations Made by the Originator and Seller ........................................................................................................108
Statements Regarding Occupancy Status of Borrower ........................................109 Statements Regarding Loan to Value Ratios .......................................................114 Statements Regarding Credit Ratings ..................................................................119
IV.
Falsity Of Statements in the Registration Statements and Prospectus Supplements ......122 A. The Statistical Data Provided in the Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False ..................................122 1. 2. B. Owner Occupancy Data Was Materially False ........................................122 Loan-to-Value Data Was Materially False ..............................................128
The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines .......................................................134 1. Government Investigations and Private Actions Have Confirmed That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines .......135
iii
2.
The Collapse of the Certificates Credit Ratings Further Indicates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines ...............................................................142 The Surge in Mortgage Delinquency and Default Further Demonstrates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines ..................................146
3.
V.
Defendants JPMorgan, Bear Stearns, WaMu, and Long Beach Knew Their Representations Were False .............................................................................................150 A. B. C. D. JPMorgan, Bear Stearns, WaMu, and Long Beach Had Actual Knowledge From Their Due Diligence That They Were Securitizing Defective Loans ........150 JPMorgan Knew Its Representations Were False And Was Willing to Capitalize On Its Unique Knowledge At The Expense of Investors ...................156 Bear Stearns Knew Its Representations Were False And Was Willing to Capitalize On Its Unique Knowledge At The Expense of Investors ...................160 WaMu and Long Beach Knew Their Representations Were False And Were Willing to Capitalize On Their Unique Knowledge At The Expense of Investors...........................................................................................................169
VI. VII.
The GSEs Justifiably Relied on the Representations of JPMorgan, Bear Stearns, WaMu, and Long Beach ..................................................................................................184 Fannie Maes and Freddie Macs Purchases of the GSE Certificates and the Resulting Damages ..........................................................................................................186
FIRST CAUSE OF ACTION ......................................................................................................192 Violation of Section 11 of the Securities Act of 1933 .................................................................192 SECOND CAUSE OF ACTION .................................................................................................200 Violation of Section 12(a)(2) of the Securities Act of 1933 ........................................................200 THIRD CAUSE OF ACTION .....................................................................................................205 Violation of Section 15 of the Securities Act of 1933 .................................................................205 FOURTH CAUSE OF ACTION .................................................................................................218 Violation of Section 13.1-522(A)(ii) of the Virginia Code .........................................................218 FIFTH CAUSE OF ACTION ......................................................................................................223 Violation of Section 13.1-522(C) of the Virginia Code ..............................................................223 iv
SIXTH CAUSE OF ACTION .....................................................................................................236 Violation of Section 31-5606.05(a)(1)(B) of the District of Columbia Code..............................236 SEVENTH CAUSE OF ACTION ...............................................................................................241 Violation of Section 31-5606.05(c) of the District of Columbia Code........................................241 EIGHTH CAUSE OF ACTION ..................................................................................................254 Common Law Negligent Misrepresentation ................................................................................254 NINTH CAUSE OF ACTION .....................................................................................................259 Common Law Fraud ....................................................................................................................259 TENTH CAUSE OF ACTION ....................................................................................................263 Aiding and Abetting Fraud ..........................................................................................................263 ELEVENTH CAUSE OF ACTION ............................................................................................267 Successor and Vicarious Liability ...............................................................................................267 PRAYER FOR RELIEF ..............................................................................................................268 JURY TRIAL DEMANDED .......................................................................................................269
Plaintiff Federal Housing Finance Agency (FHFA), as conservator of The Federal National Mortgage Association (Fannie Mae) and The Federal Home Loan Mortgage Corporation (Freddie Mac), by its attorneys, Quinn Emanuel Urquhart & Sullivan, LLP, for its Complaint herein against JPMorgan Chase & Co. (JPMorgan Chase); JPMorgan Chase Bank, N.A. (JPMorgan Bank); J.P. Morgan Mortgage Acquisition Corporation (J.P. Morgan Acquisition); J.P. Morgan Securities LLC (f/k/a J.P. Morgan Securities Inc.) (J.P. Morgan Securities); J.P. Morgan Acceptance Corporation I (J.P. Morgan Acceptance) (collectively, the JPMorgan Defendants); Bear Stearns & Co. Inc. (BSC); EMC Mortgage LLC (f/k/a EMC Mortgage Corporation) (EMC); Structured Asset Mortgage Investments II Inc. (SAMI); Bear Stearns Asset Backed Securities LLC (BSABS) (collectively, the Bear Stearns Defendants); WaMu Asset Acceptance Corporation (WaMu Acceptance); WaMu Capital Corporation (WaMu Capital); Washington Mutual Mortgage Securities Corporation (WaMu Securities) (collectively, the WaMu Defendants); Long Beach Securities Corporation (Long Beach Securities); Citigroup Global Markets, Inc. (Citigroup), Credit Suisse Securities (USA) LLC (Credit Suisse), Goldman, Sachs & Co. (Goldman Sachs), and RBS Securities, Inc. f/k/a Greenwich Capital Markets, Inc. (RBS Greenwich) (collectively, the Other Underwriter Defendants); David M. Duzyk, Louis Schioppo, Jr., Christine E. Cole, Edwin F. McMichael, William A. King, Brian Bernard, Matthew E. Perkins, Joseph T. Jurkowski, Jr., Samuel L. Molinaro, Jr., Thomas F. Marano, Kim Lutthans, Katherine Garniewski, Jeffrey Mayer, Jeffrey L. Verschleiser, Michael B. Nierenberg, Richard Careaga, David Beck, Diane Novak, Thomas Green, Rolland Jurgens, Thomas G. Lehmann, Stephen Fortunato, Donald Wilhelm, Michael J. Kula, Craig S. Davis, Marc K. Malone, Michael L. Parker, Megan M. Davidson, David H. Zielke, Thomas W. Casey, John F. Robinson, Keith
Johnson, Suzanne Krahling, Larry Breitbarth, Marangal I. Domingo, Troy A. Gotschall, Art Den Heyer, and Stephen Lobo (the Individual Defendants) (together with the JPMorgan Defendants, the Bear Stearns Defendants, the WaMu Defendants, Long Beach Securities, and the Other Underwriter Defendants, the Defendants) alleges as follows: NATURE OF ACTION 1. This action arises out of Defendants actionable conduct in connection with the
offer and sale of certain residential mortgage-backed securities to Fannie Mae and Freddie Mac (collectively, the Government Sponsored Enterprises or GSEs). These securities were sold pursuant to registration statements, including prospectuses and prospectus supplements that formed part of those registration statements, which contained materially false or misleading statements and omissions. Defendants falsely represented that the underlying mortgage loans complied with certain underwriting guidelines and standards, including representations that significantly overstated the ability of the borrowers to repay their mortgage loans. These representations were material to the GSEs, as reasonable investors, and their falsity violates Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77a, et seq., Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, Sections 31-5606.05(a)(1)(B) and 315606.05(c) of the District of Columbia Code, and constitutes negligent misrepresentation, common law fraud, and aiding and abetting fraud. 2. Between September 7, 2005 and September 19, 2007, Fannie Mae and Freddie
Mac purchased over $33 billion in residential mortgage-backed securities (the GSE Certificates) issued in connection with 103 securitizations sponsored by J.P. Morgan Acquisition, EMC, Washington Mutual Bank (WaMu Bank), WaMu Securities, and Long Beach Mortgage Company (Long Beach Mortgage) and/or underwritten by J.P. Morgan
Securities, BSC, and WaMu Capital.1 The GSE Certificates purchased by Fannie Mae and Freddie Mac, along with date and amount of purchases, are listed below in Tables 11 and 12. The 103 securitizations at issue (collectively, the Securitizations) are listed in Table 1: Table 1
Full Name Aegis Asset Backed Securities Trust Mortgage Pass-Through Certificates, Series 2005-5 American Home Mortgage Investment Trust 2005-1, Mortgage-Backed Notes, Series 2005-1 American Home Mortgage Investment Trust 2005-4, Mortgage-Backed Grantor Trust Certificates, Series 2005-4 Argent Securities Trust 2006-M2, Asset-Backed Pass-Through Certificates, Series 2006-M2 Bear Stearns ALT-A Trust, Mortgage Pass-Through Certificates, Series 2005-10 Bear Stearns ALT-A Trust, Mortgage Pass-Through Certificates, Series 2006-1 Bear Stearns ALT-A Trust, Mortgage Pass-Through Certificates, Series 2006-2 Bear Stearns ALT-A Trust, Mortgage Pass-Through Certificates, Series 2006-3 Bear Stearns ALT-A Trust, Mortgage Pass-Through Certificates, Series 2006-4 Bear Stearns Asset Backed Securities I Trust 2005-HE12, Asset-Backed Certificates, Series 2005-HE12 Bear Stearns Asset Backed Securities I Trust 2006-AQ1, Asset-Backed Certificates, Series 2006-AQ1 Bear Stearns Asset Backed Securities I Trust 2006-HE2, Asset-Backed Certificates, Series 2006-HE2 Bear Stearns Asset Backed Securities I Trust 2006-HE4, Asset-Backed Certificates, Series 2006-HE4 Bear Stearns Asset Backed Securities I Trust 2006-HE5, Asset-Backed Certificates, Series 2006-HE5 Bear Stearns Asset Backed Securities I Trust 2006-HE7, Asset-Backed Certificates, Series 2006-HE7 Bear Stearns Asset Backed Securities I Trust 2006-HE8, Asset-Backed Certificates, Series 2006-HE8 Bear Stearns Asset Backed Securities I Trust 2006-HE9, Asset-Backed Certificates, Series 2006-HE9
1
Abbreviation AABST 2005-5 AHM 2005-1 AHM 2005-4 ARSI 2006-M2 BALTA 2005-10 BALTA 2006-1 BALTA 2006-2 BALTA 2006-3 BALTA 2006-4 BSABS 2005-HE12 BSABS 2006-AQ1 BSABS 2006-HE2 BSABS 2006-HE4 BSABS 2006-HE5 BSABS 2006-HE7 BSABS 2006-HE8 BSABS 2006-HE9
Full Name Bear Stearns Asset Backed Securities I Trust 2006-HE10, Asset-Backed Certificates, Series 2006-HE10 Bear Stearns Asset Backed Securities I Trust 2007-FS1, Asset-Backed Certificates, Series 2007-FS1 Bear Stearns Asset Backed Securities I Trust 2007-HE1, Asset-Backed Certificates, Series 2007-HE1 Bear Stearns Asset Backed Securities I Trust 2007-HE2, Asset-Backed Certificates, Series 2007-HE2 Bear Stearns Asset Backed Securities I Trust 2007-HE3, Asset-Backed Certificates, Series 2007-HE3 Bear Stearns Asset Backed Securities I Trust 2007-HE4, Asset-Backed Certificates, Series 2007-HE4 Bear Stearns Asset Backed Securities I Trust 2007-HE5, Asset-Backed Certificates, Series 2007-HE5 Bear Stearns Asset Backed Securities I Trust 2007-HE6, Asset-Backed Certificates, Series 2007-HE6 Bear Stearns Asset Backed Securities I Trust 2007-HE7, Asset-Backed Certificates, Series 2007-HE7 Bear Stearns Mortgage Funding Trust 2006-SL5, Mortgage-Backed Certificates, Series 2006-SL5 Bear Stearns Mortgage Funding Trust 2006-SL6, Mortgage-Backed Certificates, Series 2006-SL6 Bear Stearns Mortgage Funding Trust 2007-AR3, Mortgage Pass-Through Certificates, Series 2007-AR3 Bear Stearns Mortgage Funding Trust 2007-SL1, Mortgage-Backed Certificates, Series 2007-SL1 Bear Stearns Mortgage Funding Trust 2007-SL2,Mortgage-Backed Certificates, Series 2007-SL2 C-BASS 2006-CB2 Trust, C-BASS Mortgage Loan Asset-Backed Certificates, Series 2006-CB2 C-BASS 2006-CB7 Trust, C-BASS Mortgage Loan Asset-Backed Certificates, Series 2006-CB7 GreenPoint Mortgage Funding Trust 2005-AR5, Mortgage Pass-Through Certificates, Series 2005-AR5 GreenPoint Mortgage Funding Trust 2006-AR3, Mortgage Pass-Through Certificates, Series 2006-AR3 J.P. Morgan Alternative Loan Trust 2005-A2, Mortgage Pass-Through Certificates, Series 2005-A2 J.P. Morgan Alternative Loan Trust 2007-A2, Mortgage Pass-Through Certificates, Series 2007-A2 J.P. Morgan Mortgage Acquisition Corp. 2005-FRE1, Asset-Backed PassThrough Certificates, Series 2005-FRE1 J.P. Morgan Mortgage Acquisition Corp. 2005-OPT2, Asset-Backed PassThrough Certificates, Series 2005-OPT2 J.P. Morgan Mortgage Acquisition Corp. 2005-WMC1, Asset-Backed PassThrough Certificates, Series 2005-WMC1 J.P. Morgan Mortgage Acquisition Trust 2006-ACC1, Asset-Backed PassThrough Certificates, Series 2006-ACC1
Abbreviation BSABS 2006-HE10 BSABS 2007-FS1 BSABS 2007-HE1 BSABS 2007-HE2 BSABS 2007-HE3 BSABS 2007-HE4 BSABS 2007-HE5 BSABS 2007-HE6 BSABS 2007-HE7 BSMF 2006-SL5 BSMF 2006-SL6 BSMF 2007-AR3 BSMF 2007-SL1 BSMF 2007-SL2 CBASS 2006-CB2 CBASS 2006-CB7 GPMF 2005-AR5 GPMF 2006-AR3 JPALT 2005-A2 JPALT 2007-A2 JPMAC 2005-FRE1 JPMAC 2005-OPT2 JPMAC 2005-WMC1 JPMAC 2006-ACC1
Full Name J.P. Morgan Mortgage Acquisition Trust 2006-CH1, Asset-Backed PassThrough Certificates, Series 2006-CH1 J.P. Morgan Mortgage Acquisition Trust 2006-CH2, Asset-Backed PassThrough Certificates, Series 2006-CH2 J.P. Morgan Mortgage Acquisition Trust 2006-CW1, Asset-Backed PassThrough Certificates, Series 2006-CW1 J.P. Morgan Mortgage Acquisition Trust 2006-CW2, Asset-Backed PassThrough Certificates, Series 2006-CW2 J.P. Morgan Mortgage Acquisition Corp. 2006-FRE1, Asset-Backed PassThrough Certificates, Series 2006-FRE1 J.P. Morgan Mortgage Acquisition Corp. 2006-FRE2, Asset-Backed PassThrough Certificates, Series 2006-FRE2 J.P. Morgan Mortgage Acquisition Corp. 2006-HE1, Asset-Backed PassThrough Certificates, Series 2006-HE1 J.P. Morgan Mortgage Acquisition Trust 2006-HE2, Asset-Backed Pass Through Certificates, Series 2006-HE2 J.P. Morgan Mortgage Acquisition Trust 2006-HE3, Asset-Backed Pass Through Certificates, Series 2006-HE3 J.P. Morgan Mortgage Acquisition Trust 2006-NC1, Asset-Backed Pass Through Certificates, Series 2006-NC1 J.P. Morgan Mortgage Acquisition Trust 2006-NC2, Asset-Backed Pass Through Certificates, Series 2006-NC2 J.P. Morgan Mortgage Acquisition Trust 2006-RM1, Asset-Backed Pass Through Certificates, Series 2006-RM1 J.P. Morgan Mortgage Acquisition Corp. 2006-WMC1, Asset-Backed PassThrough Certificates, Series 2006-WMC1 J.P. Morgan Mortgage Acquisition Trust 2006-WMC2, Asset-Backed Pass Through Certificates, Series 2006-WMC2 J.P. Morgan Mortgage Acquisition Trust 2006-WMC3, Asset-Backed Pass Through Certificates, Series 2006-WMC3 J.P. Morgan Mortgage Acquisition Trust 2006-WMC4, Asset-Backed Pass Through Certificates, Series 2006-WMC4 J.P. Morgan Mortgage Acquisition Trust 2007-CH2, Asset-Backed Pass Through Certificates, Series 2007-CH2 J.P. Morgan Mortgage Acquisition Trust 2007-CH3, Asset-Backed Pass Through Certificates, Series 2007-CH3 J.P. Morgan Mortgage Acquisition Trust 2007-CH4, Asset-Backed Pass Through Certificates, Series 2007-CH4 J.P. Morgan Mortgage Acquisition Trust 2007-CH5, Asset-Backed Pass Through Certificates, Series 2007-CH5 J.P. Morgan Mortgage Trust 2006-A3, Mortgage Pass-Through Certificates, Series 2006-A3 Long Beach Mortgage Loan Trust 2005-3, Asset-Backed Certificates, Series 2005-3 Long Beach Mortgage Loan Trust 2006-1, Asset-Backed Certificates, Series 2006-1 Long Beach Mortgage Loan Trust 2006-2, Asset-Backed Certificates, Series 2006-2
Abbreviation JPMAC 2006-CH1 JPMAC 2006-CH2 JPMAC 2006-CW1 JPMAC 2006-CW2 JPMAC 2006-FRE1 JPMAC 2006-FRE2 JPMAC 2006-HE1 JPMAC 2006-HE2 JPMAC 2006-HE3 JPMAC 2006-NC1 JPMAC 2006-NC2 JPMAC 2006-RM1 JPMAC 2006-WMC1 JPMAC 2006-WMC2 JPMAC 2006-WMC3 JPMAC 2006-WMC4 JPMAC 2007-CH2 JPMAC 2007-CH3 JPMAC 2007-CH4 JPMAC 2007-CH5 JPMMT 2006-A3 LBMLT 2005-3 LBMLT 2006-1 LBMLT 2006-2
Full Name Long Beach Mortgage Loan Trust 2006-3, Asset-Backed Certificates, Series 2006-3 Long Beach Mortgage Loan Trust 2006-4, Asset-Backed Certificates, Series 2006-4 Long Beach Mortgage Loan Trust 2006-5, Asset-Backed Certificates, Series 2006-5 Long Beach Mortgage Loan Trust 2006-6, Asset-Backed Certificates, Series 2006-6 Long Beach Mortgage Loan Trust 2006-7, Asset-Backed Certificates, Series 2006-7 Long Beach Mortgage Loan Trust 2006-8, Asset-Backed Certificates, Series 2006-8 Long Beach Mortgage Loan Trust 2006-9, Asset-Backed Certificates, Series 2006-9 Long Beach Mortgage Loan Trust 2006-10, Asset-Backed Certificates, Series 2006-10 Long Beach Mortgage Loan Trust 2006-11, Asset-Backed Certificates, Series 2006-11 Long Beach Mortgage Loan Trust 2006-WL1, Asset-Backed Certificates, Series 2006-WL1 Long Beach Mortgage Loan Trust 2006-WL2, Asset-Backed Certificates, Series 2006-WL2 Long Beach Mortgage Loan Trust 2006-WL3, Asset-Backed Certificates, Series 2006-WL3 Luminent Mortgage Trust 2006-3, Mortgage Pass-Through Certificates, Series 2006-3 Newcastle Mortgage Securities Trust 2007-1, Asset-Backed Notes, Series 2007-1 Peoples Choice Home Loan Securities Trust Series 2005-4, MortgageBacked Notes Series 2005-4 SACO I Trust 2007-1, Mortgage-Backed Certificates, Series 2007-1 SACO I Trust 2007-2, Mortgage-Backed Certificates, Series 2007-2 Structured Asset Mortgage Investments II Trust 2006-AR4, Mortgage PassThrough Certificates, Series 2006-AR4 WaMu Mortgage Pass-Through Certificates Series 2007-OA3 Trust, WaMu Mortgage Pass-Through Certificates, Series 2007-OA3 Washington Mutual Asset-Backed Certificates WMABS Series 2006-HE1 Trust Washington Mutual Asset-Backed Certificates WMABS Series 2006-HE3 Trust Washington Mutual Asset-Backed Certificates WMABS Series 2006-HE4 Trust Washington Mutual Asset-Backed Certificates WMABS Series 2006-HE5 Trust Washington Mutual Asset-Backed Certificates, WMABS Series 2007-HE1 Trust
Abbreviation LBMLT 2006-3 LBMLT 2006-4 LBMLT 2006-5 LBMLT 2006-6 LBMLT 2006-7 LBMLT 2006-8 LBMLT 2006-9 LBMLT 2006-10 LBMLT 2006-11 LBMLT 2006-WL1 LBMLT 2006-WL2 LBMLT 2006-WL3 LUM 2006-3 NCMT 2007-1 PCHLT 2005-4 SACO 2007-1 SACO 2007-2 SAMI 2006-AR4 WAMU 2007-OA3 WMABS 2006-HE1 WMABS 2006-HE3 WMABS 2006-HE4 WMABS 2006-HE5 WMABS 2007-HE1
Full Name Washington Mutual Asset-Backed Certificates WMABS Series 2007-HE2 Trust Washington Mutual Mortgage Pass-Through Certificates, WMALT Series 2005-9 Trust Washington Mutual Mortgage Pass-Through Certificates, WMALT Series 2005-10 Trust Washington Mutual Mortgage Pass-Through Certificates, WMALT Series 2006-AR4 Trust Washington Mutual Mortgage Pass-Through Certificates, WMALT Series 2006-AR5 Trust Washington Mutual Mortgage Pass-Through Certificates, WMALT Series 2006-AR8 Trust Washington Mutual Mortgage Pass-Through Certificates, WMALT Series 2006- AR9 Trust Washington Mutual Mortgage Pass-Through Certificates, WMALT Series 2007-OA1 Trust Washington Mutual Mortgage Pass-Through Certificates, WMALT Series 2007- OA2 Trust Washington Mutual Mortgage Pass- Through Certificates, WMALT Series 2007-OA3 Trust WaMu Asset-Backed Certificates, WaMu Series 2007-HE1 Trust WaMu Asset-Backed Certificates WaMu Series 2007-HE2 Trust WaMu Asset-Backed Certificates WaMu Series 2007-HE3 Trust WaMu Asset-Backed Certificates WaMu Series 2007-HE4 Trust
Abbreviation WMABS 2007-HE2 WMALT 2005-9 WMALT 2005-10 WMALT 2006-AR4 WMALT 2006-AR5 WMALT 2006-AR8 WMALT 2006-AR9 WMALT 2007-OA1 WMALT 2007-OA2 WMALT 2007-OA3 WMHE 2007-HE1 WMHE 2007-HE2 WMHE 2007-HE3 WMHE 2007-HE4
3.
The Certificates were offered for sale pursuant to one of 19 shelf registration
statements (the Registration Statements) filed with the Securities and Exchange Commission (the SEC). Defendants J.P. Morgan Acceptance, BSABS, SAMI, WaMu Securities, WaMu Acceptance, and Long Beach Securities filed 13 Shelf Registration Statements that pertained to 97 of the Securitizations at issue in this action. The Individual Defendants signed one or more of those 13 Shelf Registration Statements, and the amendments thereto. Aegis Asset Backed Securities Corp., American Home Mortgage Securities LLC, Argent Securities Inc., Bond Securitization, LLC, and Peoples Choice Home Loan Securities Corp. filed the six remaining Shelf Registration Statements. With respect to all but four of the Securitizations, J.P. Morgan Securities, BSC, or WaMu Capital was the lead underwriter, and, with respect to all but seven of 7
the Securitizations, J.P. Morgan Securities, BSC, or WaMu Capital was the underwriter who sold the Certificates to the GSEs. 4. For each Securitization, a prospectus (Prospectus) and prospectus supplement
(Prospectus Supplement) were filed with the SEC as part of the Registration Statement for that Securitization.2 The GSE Certificates were marketed and sold to Fannie Mae and Freddie Mac pursuant to the Registration Statements, including the Shelf Registration Statements and the corresponding Prospectuses and Prospectus Supplements. 5. The Registration Statements contained statements about the origination and
underwriting practices used to make and approve the loans. Such statements were material to a reasonable investors decision to invest in mortgage-backed securities by purchasing the Certificates. Unbeknownst to Fannie Mae and Freddie Mac, these statements were materially false, as significant percentages of the underlying mortgage loans were not originated in accordance with the represented underwriting standards and origination practices, and had materially poorer credit quality than was represented in the Registration Statements. 6. The Registration Statements also contained statistical summaries of the collateral
groups and entire portfolio of mortgage loans in each Securitization, such as the percentage of loans secured by owner-occupied properties and the percentage of the loan groups aggregate principal balance with loan-to-value ratios within specified ranges. This information was material to reasonable investors. However, a loan level analysis of a sample of loans for each Securitization a review that encompassed thousands of mortgages across all of the Securitizations has revealed that these statistics were false and omitted material facts due to
widespread falsification of occupancy status, property values, and other key characteristics of the mortgage loans. 7. For example, the percentage of owner-occupied properties is a material risk factor
to the purchasers of the Certificates, such as Fannie Mae and Freddie Mac, since a borrower who lives in a mortgaged property is generally less likely to stop paying his or her mortgage and more likely to take better care of the property. The loan level analysis reveals that the true percentage of owner-occupied properties for the loans supporting the GSE Certificates was materially lower than what was stated in the Prospectus Supplements. Likewise, the Prospectus Supplements misrepresented other material factors, including the true value of the mortgaged properties relative to the amount of the underlying loans and the actual ability of the individual mortgage holders to satisfy their debts. 8. Defendants J.P. Morgan Securities, BSC, WaMu Capital, Citigroup, Credit
Suisse, Goldman Sachs, and RBS Greenwich (which lead underwrote and then sold the GSE Certificates to the GSEs); and Defendants J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, and Long Beach Securities (which acted as the depositors in 97 of the Securitizations); and the Individual Defendants (who signed the Registration Statements with respect to 97 of the Securitizations) are directly responsible for the misstatements and omissions of material fact contained in the Registration Statements because they prepared, signed, filed and/or used these documents to market and sell the Certificates to Fannie Mae and Freddie Mac. 9. Defendants J.P. Morgan Acquisition, JPMorgan Bank, and JPMorgan Chase are
likewise responsible for the misstatements and omissions of material fact contained in the
Registration Statements by virtue of their direction and control over Defendants J.P. Morgan Acceptance and J.P. Morgan Securities. 10. J.P. Morgan Acceptance was a wholly-owned subsidiary of J.P. Morgan
Securities Holdings LLC and JPMorgan Chase. J.P. Morgan Securities was likewise a whollyowned subsidiary of JPMorgan Chase. 11. J.P. Morgan Acquisition and JPMorgan Chase directly participated in and
exercised dominion and control over the business operations of Defendant J.P. Morgan Acceptance. JPMorgan Chase directly participated in and exercised dominion and control over the business operations of Defendant J.P. Morgan Securities. 12. Defendants EMC, J.P. Morgan Securities, and JPMorgan Chase (as successor to
non-party The Bear Stearns Companies, Inc. (BSI)), are likewise responsible, either directly or as successors-in-interest, for the misstatements and omissions of material fact contained in the Registration Statements by virtue of their direction and control over Defendants SAMI, BSABS, and BSC. J.P. Morgan Securities is the successor-in-interest to BSC and JPMorgan Chase is the successor-in-interest to BSI. 13. SAMI and BSABS were wholly-owned subsidiaries of BSI, which was acquired
by JPMorgan Chase, making SAMI and BSABS wholly-owned subsidiaries of JPMorgan Chase. BSC was likewise a wholly-owned subsidiary of BSI, which was acquired by JPMorgan Chase, making BSC a wholly-owned subsidiary of JPMorgan Chase. BSC also merged into J.P. Morgan Securities, a wholly-owned subsidiary of JPMorgan Chase. 14. EMC and BSI directly participated in and exercised dominion and control over
the business operations of Defendants SAMI and BSABS. BSI directly participated in and exercised dominion and control over the business operations of Defendant BSC. JPMorgan
10
Chase is the successor-in-interest to BSI as a result of the acquisition of BSI by JPMorgan Chase, and J.P. Morgan Securities is the successor-in-interest to BSC as a result of a merger between BSC and J.P. Morgan Securities. 15. Non-party WaMu Bank and Defendant JPMorgan Bank are likewise responsible,
either directly or as successor-in-interest, for the misstatements and omissions of material fact contained in the Registration Statements by virtue of their direction and control over Defendants WaMu Securities, WaMu Acceptance, and WaMu Capital. JPMorgan Bank is the successor-ininterest to WaMu Bank. 16. WaMu Securities and WaMu Acceptance were wholly-owned subsidiaries of
WaMu Bank, the assets, subsidiaries, and liabilities of which were acquired by JPMorgan Bank, making WaMu Securities and WaMu Acceptance wholly-owned subsidiaries of JPMorgan Bank. WaMu Capital was likewise a wholly-owned subsidiary of WaMu Bank, the assets, subsidiaries, and liabilities of which were acquired by JPMorgan Bank, making WaMu Capital a whollyowned subsidiary of JPMorgan Bank. 17. WaMu Bank directly participated in and exercised dominion and control over the
business operations of Defendants WaMu Securities and WaMu Acceptance. WaMu Bank directly participated in and exercised dominion and control over the business operations of Defendant WaMu Capital. JPMorgan Bank is the successor-in-interest to WaMu Bank as a result of the acquisition of WaMu Banks assets, subsidiaries, and liabilities by JPMorgan Bank. 18. Non-parties WaMu Bank and Long Beach Mortgage and Defendant JPMorgan
Bank are likewise responsible, either directly or as successor-in-interest, for the misstatements and omissions of material fact contained in the Registration Statements by virtue of their
11
direction and control over Defendant Long Beach Securities. JPMorgan Bank is the successorin-interest to WaMu Bank and Long Beach Mortgage. 19. Long Beach Securities was a wholly-owned subsidiary of WaMu Bank, the assets,
subsidiaries, and liabilities of which were acquired by JPMorgan Bank, making Long Beach Securities a wholly-owned subsidiary of JPMorgan Bank. 20. WaMu Bank and Long Beach Mortgage directly participated in and exercised
dominion and control over the business operations of Defendant Long Beach Securities. JPMorgan Bank is the successor-in-interest to WaMu Bank and Long Beach Mortgage as a result of the acquisition of WaMu Banks assets, subsidiaries, and liabilities by JPMorgan Bank. 21. Fannie Mae and Freddie Mac purchased over $33 billion of the Certificates
pursuant to the Registration Statements filed with the SEC. These documents contained misstatements and omissions of material fact concerning the quality of the underlying mortgage loans, the creditworthiness of the borrowers, and the practices used to originate such loans. As a result of Defendants misstatements and omissions of material fact, Fannie Mae and Freddie Mac have suffered substantial losses as the value of their holdings has significantly deteriorated. 22. FHFA, as Conservator of Fannie Mae and Freddie Mac, brings this action against
the Defendants for violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77k, 77l(a)(2), 77o, Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, Sections 31-5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, and for negligent misrepresentation, common law fraud, and aiding and abetting fraud. PARTIES The Plaintiffs and the GSEs 23. The Federal Housing Finance Agency is a federal agency located at 1700 G
Street, NW in Washington, D.C. FHFA was created on July 30, 2008 pursuant to the Housing 12
and Economic Recovery Act of 2008 (HERA), Pub. L. No. 110-289, 122 Stat. 2654 (2008) (codified at 12 U.S.C. 4617), to oversee Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. On September 6, 2008, under HERA, the Director of FHFA placed Fannie Mae and Freddie Mac into conservatorship and appointed FHFA as conservator. In that capacity, FHFA has the authority to exercise all rights and remedies of the GSEs, including but not limited to, the authority to bring suits on behalf of and/or for the benefit of Fannie Mae and Freddie Mac. 12 U.S.C. 4617(b)(2). 24. Fannie Mae and Freddie Mac are government-sponsored enterprises chartered by
Congress with a mission to provide liquidity, stability and affordability to the United States housing and mortgage markets. As part of this mission, Fannie Mae and Freddie Mac invested in residential mortgage-backed securities. Fannie Mae is located at 3900 Wisconsin Avenue, NW in Washington, D.C. Freddie Mac is located at 8200 Jones Branch Drive in McLean, Virginia. The JPMorgan Entities 25. Defendant JPMorgan Chase is a Delaware financial holding company with its
principal place of business in New York, New York. JPMorgan Chase is a global financial services firm and one of the largest banking institutions in the United States. JPMorgan Chase is the sole owner of Defendants JPMorgan Bank and J.P. Morgan Securities and is the ultimate owner of Defendants J.P. Morgan Acquisition and J.P. Morgan Acceptance. JPMorgan Chase is also the successor-in-interest to BSI. 26. Defendant JPMorgan Bank is a national banking association, a wholly-owned
bank subsidiary of JPMorgan Chase, a Delaware corporation, and the sole owner of J.P. Morgan Acquisition. Its main office is located in Columbus, Ohio. JPMorgan Bank is a commercial bank that is chartered, and its business is subject to examination and regulation by, the Office of the Comptroller of Currency (OCC). It is a member of the Federal Reserve System and its 13
deposits are insured by the Federal Deposit Insurance Corporation (FDIC). JPMorgan Bank is also the successor-in-interest to Washington Mutual Bank. 27. Defendant J.P. Morgan Securities is a Delaware corporation with its principal
place of business at 277 Park Avenue, New York, New York 10017. J.P. Morgan Securities was formerly known as J.P. Morgan Securities, Inc. On or about September 1, 2010, JP Morgan Securities Inc. was converted into a limited liability company, namely, J.P. Morgan Securities, LLC. J.P. Morgan Securities, a SEC-registered broker-dealer, engages in investment banking activities in the United States and is the primary nonbank subsidiary of JPMorgan Chase. J.P. Morgan Securities was the lead underwriter for 30 of the Securitizations, and was intimately involved in the offerings. Fannie Mae and Freddie Mac purchased the GSE Certificates for 30 of the 103 Securitizations from J.P. Morgan Securities in its capacity as underwriter of the Securitizations. 28. Defendant J.P. Morgan Acquisition is a Delaware corporation with its principal
place of business at 270 Park Avenue, New York, New York 10017. J.P. Morgan Acquisition is a direct, wholly-owned subsidiary of JPMorgan Bank. J.P. Morgan Acquisition was the sponsor of 27 of the Securitizations. 29. Defendant J.P. Morgan Acceptance is a Delaware corporation with its principal
executive offices at 270 Park Avenue, New York, New York 10017. J.P. Morgan Acceptance is a direct, wholly-owned subsidiary of J.P. Morgan Securities Holdings LLC which, in turn, is a direct, wholly-owned subsidiary of JPMorgan Chase. J.P. Morgan Acceptance was the depositor for 27 of the Securitizations. J.P. Morgan Acceptance, as depositor, was also responsible for preparing and filing reports required under the Securities Exchange Act of 1934.
14
30.
JPMorgan Chase, JPMorgan Bank, J.P. Morgan Acquisition, J.P. Morgan
Securities, and J.P. Morgan Acceptance are collectively referred to herein as JPMorgan. An organizational chart of JPMorgan is set forth below. An organizational chart of the JPMorgan Defendants is set forth below.
Defendant JPMorgan Chase
Non-Party J.P. Morgan Securities Holdings LLC
Defendant JPMorgan Bank
Defendant J.P. Morgan Securities (underwriter)
Defendant J.P. Morgan Acceptance (depositor)
Defendant J.P. Morgan Acquisition (sponsor/seller)
31.
Defendant David M. Duzyk served as President of J.P. Morgan Acceptance at the
time of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto and did so in New York. 32. Defendant Louis Schioppo, Jr. served as Controller and Chief Financial Officer of
J.P. Morgan Acceptance at the time of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto and did so in New York. 15
33.
Defendant Christine E. Cole served as a Director of J.P. Morgan Acceptance at
the time of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto and did so in New York. 34. Defendant Edwin F. McMichael served as a Director of J.P. Morgan Acceptance
at the time of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto and did so in New York. 35. Defendant William A. King served as President and Director of J.P. Morgan
Acceptance at the time of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto and did so in New York. 36. Defendant Brian Bernard served as President of J.P. Morgan Acceptance at the
time of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto and did so in New York. The Bear Stearns Entities 37. Non-party BSI was, at all relevant times, a holding company that provided
investment banking, securities, and derivative trading services to its clients through its brokerdealer and banking subsidiaries. BSI was the sole owner, at the time of the Securitizations, of BSC, EMC, SAMI, and BSABS. On March 16, 2008, BSI entered into an Agreement and Plan of Merger (the Merger) with JPMorgan Chase to merge with Bear Stearns Merger Corporation (BSMC), a wholly-owned subsidiary of JPMorgan Chase, making BSI a wholly-owned subsidiary of JPMorgan Chase. Therefore, this action is brought against JPMorgan Chase as the successor to BSI. BSI is not a defendant in this action. 38. Defendant BSC was, at all relevant times, an SEC-registered broker-dealer with
its principal place of business at 383 Madison Avenue, New York, New York 10179. BSC was a wholly-owned subsidiary of BSI. BSC directed the activities of its affiliates EMC, SAMI, and 16
BSABS. BSC was the lead underwriter for 38 of the Securitizations, and was intimately involved in the offerings. Fannie Mae and Freddie Mac purchased the GSE Certificates for 37 of the 103 Securitizations from BSC in its capacity as underwriter of the Securitizations. On or about October 1, 2008, following the Merger effective May 30, 2008, BSC merged with a subsidiary of JPMorgan Chase, Defendant J.P. Morgan Securities, and is now doing business as J.P. Morgan Securities. All allegations against BSC are thus made against its successor-ininterest, J.P. Morgan Securities, as well. 39. Defendant EMC is incorporated in the State of Delaware and was, at all relevant
times, a wholly-owned subsidiary of BSI. EMC was formerly known as EMC Mortgage Corporation. On or about March 31, 2011, it was concerted to a limited liability company and became known as EMC Mortgage LLC. EMC was organized for the purpose of acquiring, holding, servicing, and securitizing mortgage loans and mortgage securities. EMC was the sponsor of 32 of the Securitizations. As a result of the Merger between BSI and JPMorgan Chase, EMC became a wholly-owned subsidiary of JPMorgan Chase. 40. Defendant SAMI was, at all relevant times, a Delaware corporation with its
principal place of business at 383 Madison Avenue, New York, New York 10179. SAMI was a wholly-owned subsidiary of BSI. SAMI was the depositor for nine of the Securitizations. SAMI, as depositor, was also responsible for preparing and filing reports required under the Securities Exchange Act of 1934. As a result of the Merger between BSI and JPMorgan Chase, SAMI became a wholly-owned subsidiary of JPMorgan Chase. 41. Defendant BSABS was, at all relevant times, a Delaware limited liability
company with its principal place of business at 383 Madison Avenue, New York, New York 10179. BSABS was a wholly-owned subsidiary of BSI. BSABS was the depositor for 26 of the
17
Securitizations. BSABS, as depositor, was also responsible for preparing and filing reports required under the Securities Exchange Act of 1934. As a result of the Merger between BSI and JPMorgan Chase, BSABS became a wholly-owned subsidiary of JPMorgan Chase. 42. BSC, EMC, SAMI, BSABS, J.P. Morgan Securities (as successor-in-interest to
BSC), and JPMorgan Chase (as successor-in-interest to BSI), are collectively referred to herein as Bear Stearns. An organizational chart of Bear Stearns is set forth below.
Defendant JPMorgan Chase
Non-Party BSI (acquired by JPMorgan Chase in merger with BSMC subsidiary)
Defendant SAMI (depositor)
Defendant BSC (underwriter; merged with J.P. Morgan Securities)
Defendant BSABS (depositor)
Defendant EMC (sponsor/seller)
43.
Defendant Matthew E. Perkins served as President and Director of BSABS at the
time of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto and did so in New York. 44. Defendant Joseph T. Jurkowski, Jr. served as Vice President of BSABS at the
time of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto and did so in New York.
18
45.
Defendant Samuel L. Molinaro, Jr. served as Treasurer and Director of BSABS at
the time of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto and did so in New York. 46. Defendant Thomas F. Marano served as a Director of BSABS and as a Director of
SAMI at the time of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto and did so in New York. 47. Defendant Kim Lutthans served as an Independent Director of BSABS at the time
of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto and did so in New York. 48. Defendant Katherine Garniewski served as an Independent Director of BSABS at
the time of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto and did so in New York. 49. Defendant Jeffrey Mayer served as a Director of BSABS and as a Director of
SAMI at the time of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto and did so in New York. 50. Defendant Jeffrey L. Verschleiser served as President of SAMI at the time of the
Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto and did so in New York. 51. Defendant Michael B. Nierenberg served as Treasurer of SAMI at the time of the
Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto and did so in New York. The WaMu Entities 52. At all relevant times, WaMu Bank was a federal savings (or thrift) association that
provided financial services to consumer and commercial clients. WaMu Bank was the sole 19
owner, at the time of the Securitizations, of WaMu Capital, WaMu Acceptance, and WaMu Securities. WaMu Bank was also the sponsor or co-sponsor of 12 of the Securitizations. On September 25, 2008, JPMorgan Bank entered into a Purchase and Assumption Agreement (the PAA) with the FDIC, under which JPMorgan Bank agreed to assume substantially all of WaMu Banks liabilities and purchase substantially all of WaMu Banks assets, including WaMu Capital, WaMu Acceptance, and WaMu Securities. Therefore, this action is brought against JPMorgan Bank as the successor to WaMu Bank. WaMu Bank is not a defendant in this action. 53. Defendant WaMu Capital was, at all relevant times, an SEC-registered broker-
dealer principally located at 1301 Second Avenue, WMC 3501A, Seattle, Washington 98101. WaMu Capital was a wholly-owned subsidiary of WaMu Bank. WaMu Capital was the lead underwriter for 31 of the Securitizations, and was intimately involved in the offerings. Fannie Mae and Freddie Mac purchased the GSE Certificates for 29 of the 103 Securitizations from WaMu Capital in its capacity as underwriter of the Securitizations. WaMu Capital is not currently affiliated with WaMu Bank and is now a wholly-owned subsidiary of JPMorgan Bank, successor-in-interest to WaMu Bank. 54. Defendant WaMu Acceptance was, at all relevant times, a wholly-owned
subsidiary of WaMu Bank and was principally located at 1301 Second Avenue, WMC 3501A, Seattle, Washington 98101. WaMu Acceptance was the depositor for 18 of the Securitizations. WaMu Acceptance, as depositor, was also responsible for preparing and filing reports required under the Securities Exchange Act of 1934. WaMu Acceptance is not currently affiliated with WaMu Bank and is now a wholly-owned subsidiary of JPMorgan Bank, successor-in-interest to WaMu Bank.
20
55.
Defendant WaMu Securities is a Delaware corporation and was, at all relevant
times, a wholly-owned, special-purpose subsidiary of WaMu Bank with its principal offices located in Vernon Hills, Illinois. WaMu Securities was the sponsor of 15 of the Securitizations. WaMu Securities was also the depositor for two of the Securitizations. WaMu Securities, as depositor, was responsible for preparing and filing reports required under the Securities Exchange Act of 1934. WaMu Securities is not currently affiliated with WaMu Bank and is now a wholly-owned subsidiary of JPMorgan Bank, successor-in-interest to WaMu Bank. 56. WaMu Capital, WaMu Acceptance, WaMu Securities, and JPMorgan Bank (as
successor-in-interest to WaMu Bank) are collectively referred to herein as WaMu. An organizational chart of WaMu is set forth below.
Non-Party WaMu Bank (assets, subsidiaries, and liabilities acquired by JPMorgan Bank)
Defendant WaMu Acceptance (depositor)
Defendant WaMu Securities (sponsor/seller/depositor)
Defendant WaMu Capital (underwriter)
21
57.
Defendant Richard Careaga served as First Vice President of WaMu Acceptance
at the time of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto. 58. Defendant David Beck served as President and Director of WaMu Acceptance at
the time of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto. 59. Defendant Diane Novak served as a Director of WaMu Acceptance at the time of
the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto. 60. Defendant Thomas Green served as Chief Financial Officer of WaMu Acceptance
at the time of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto. 61. Defendant Rolland Jurgens served as Controller of WaMu Acceptance at the time
of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto. 62. Defendant Thomas G. Lehmann served as Director and President of WaMu
Acceptance and as First Vice President, Director and Senior Counsel of WaMu Securities at the time of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto. 63. Defendant Stephen Fortunato served as Chief Financial Officer of WaMu
Acceptance at the time of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto.
22
64.
Defendant Donald Wilhelm served as Controller of WaMu Acceptance at the time
of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto. 65. Defendant Michael J. Kula served as Senior Vice President, Chief Financial
Officer, and Director of WaMu Securities at the time of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto. 66. Defendant Craig S. Davis served as Director of WaMu Securities at the time of
the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto. 67. Defendant Marc K. Malone served as First Vice President and Controller of
WaMu Securities at the time of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto. 68. Defendant Michael L. Parker served as President and Director of WaMu
Securities at the time of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto. 69. Defendant Megan M. Davidson served as Senior Vice President and Director of
WaMu Securities at the time of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto. 70. Defendant Marangal I. Domingo served as a Director of WaMu Securities at the
time of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto. The Long Beach Entities 71. At all relevant times, WaMu Bank was a federal savings (or thrift) association that
provided financial services to consumer and commercial clients. WaMu Bank was the sole 23
owner, at the time of the Securitizations, of Long Beach Mortgage and Long Beach Securities. On September 25, 2008, JPMorgan Bank entered into the PAA with the FDIC, under which JPMorgan Bank agreed to assume substantially all of WaMu Banks liabilities and purchase all of WaMu Banks assets, including Long Beach Mortgage and Long Beach Securities. Therefore, this action is brought against JPMorgan Bank as the successor to WaMu Bank. WaMu Bank is not a defendant in this action. 72. Long Beach Mortgage was one of the largest subprime originators in the country.
Long Beach Mortgage was acquired by Washington Mutual, Inc. (WMI) in 1999. At all relevant times, WMI was a savings and loan holding company incorporated in Washington State, subject to regulation by the Office of Thrift Supervision (OTS), and was the parent company of WaMu Bank. From December 2000 to March 2006, Long Beach Mortgage operated as a subsidiary of WMI. In March 2006, Long Beach Mortgage became a wholly-owned subsidiary of WaMu Bank. From March 2006 to July 2006, Long Beach Mortgage operated as a subsidiary of WaMu Bank and was WaMu Banks primary subprime originator. In July 2006, Long Beach Mortgage was wholly integrated into its parent company and became a division of WaMu Bank, operating as its Specialty Wholesale Lending channel. Long Beach Mortgage was the sponsor for nine of the Securitizations. WaMu Bank shut down Long Beach Mortgage in 2007. The liabilities associated with Long Beach Mortgages securitization activities were assumed by JPMorgan Bank, successor-in-interest to WaMu Bank and Long Beach Mortgage. Therefore, this action is brought against JPMorgan Bank as the successor to WaMu Bank and Long Beach Mortgage. WMI, WaMu Bank, and Long Beach Mortgage are not defendants in this action. 73. Defendant Long Beach Securities is a Delaware corporation and was, at all
relevant times, a wholly-owned subsidiary of WaMu Bank with a principal place of business at
24
1100 Town & Country Road, Orange, California 92868. Long Beach Securities was the depositor for 15 of the Securitizations. Long Beach Securities, as depositor, was also responsible for preparing and filing reports required under the Securities Exchange Act of 1934. Long Beach Securities is not currently affiliated with WaMu Bank and is now a wholly-owned subsidiary of JPMorgan Bank, successor-in-interest to WaMu Bank. 74. Long Beach Securities and JPMorgan Bank (as successor to WaMu Bank and
Long Beach Mortgage) are collectively referred to herein as the Long Beach. An organizational chart of Long Beach is set forth below.
Non-Party WaMu Bank (assets, subsidiaries, and liabilities acquired by JPMorgan Bank)
Defendant Long Beach Securities (depositor)
Non-Party Long Beach Mortgage (sponsor/seller)
25
75.
Defendant David H. Zielke served as First Vice President and Assistant General
Counsel of WaMu Bank at the time of the Securitizations and signed certain of the amendments to the Shelf Registration Statements. 76. Defendant Thomas W. Casey served as a Director of Long Beach Securities at the
time of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto. 77. Defendant John F. Robinson served as a Director of Long Beach Securities at the
time of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto. 78. Defendant Keith Johnson served as President and Director of Long Beach
Securities at the time of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto. 79. Defendant Suzanne Krahling served as Chief Financial Officer and Senior Vice
President of Long Beach Securities at the time of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto. 80. Defendant Larry Breitbarth served as Controller and Senior Vice President of
Long Beach Securities at the time of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto. 81. Defendant Craig S. Davis served as President and Director of Long Beach
Securities at the time of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto.
26
82.
Defendant Marangal I. Domingo served as Chief Executive Officer and Director
of Long Beach Securities at the time of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto. 83. Defendant Troy A. Gotschall served as Chief Operations Officer and Executive
Vice President of Long Beach Securities at the time of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto. 84. Defendant Art Den Heyer served as Controller and Assistant Vice President of
Long Beach Securities at the time of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto. 85. Defendant Stephen Lobo served as Treasurer and Senior Vice President of Long
Beach Securities at the time of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto. 86. Defendant Stephen Fortunato served as Chief Financial Officer of Long Beach
Securities at the time of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto. 87. Defendant Rolland Jurgens served as Controller of Long Beach Securities at the
time of the Securitizations and signed certain of the Shelf Registration Statements and the amendments thereto. 88. receivership. The Other Underwriter Defendants 89. Defendant CitiGroup Global Markets, Inc., formerly known as Salomon Smith No recovery is sought in this action against any bankrupt entity or any entity in
Barney or Smith Barney, is a New York corporation with its principal place of business at 388 Greenwich St. in New York, New York. Citigroup is a registered broker-dealer with the SEC, 27
and is a wholly owned subsidiary of Citigroup, Inc. Citigroup served as the selling underwriter for the LUM 2006-3 Securitization and was intimately involved in the offering and sale of the LUM 2006-3 Certificates to Fannie Mae. 90. Defendant Credit Suisse Securities (USA) LLC is an investment bank, and was, at
all relevant times, a registered broker/dealer and one of the leading underwriters of mortgage and other asset-backed securities in the United States. Credit Suisse served as the selling underwriter for the LBMLT 2006-1 Securitization and was intimately involved in the offering and sale of the LBMLT 2006-1 Certificates to Fannie Mae and Freddie Mac. 91. Defendant Goldman, Sachs & Co. is incorporated in New York and has its
principal executive offices at 200 West Street in New York, New York. Goldman Sachs is a wholly owned subsidiary of The Goldman Sachs Group, Inc. and is its principal U.S. brokerdealer. Goldman Sachs served as the selling underwriter for the LBMLT 2006-WL1 Securitization and was intimately involved in the offering and sale of the LBMLT 2006-WL1 Certificates to Fannie Mae and Freddie Mac. 92. Defendant RBS Securities, Inc. f/k/a Greenwich Capital Markets, Inc. was
founded in 1981 and acquired by RBS Group in 2000. RBS Greenwich is an investment bank, and was, at all relevant times, a registered broker/dealer and one of the largest underwriters of mortgage and other asset-backed securities in the United States. RBS Greenwich served as the selling underwriter for the LBMLT 2006-2 Securitization and was intimately involved in the offering and sale of the LBMLT 2006-WL1 Certificates to Freddie Mac.
28
The Non-Party Originators 93. In addition, many of the loans underlying the Certificates were acquired by the
sponsor for each Securitization from unaffiliated non-party mortgage originators.3 The unaffiliated originators principally responsible for the loans underlying the Certificates include WMC Mortgage Corp. (WMC); Fremont Investment & Loan (Fremont); Countrywide Home Loans, Inc. (Countrywide); and GreenPoint Mortgage Funding, Inc. (GreenPoint), among others. 94. The Certificates were issued by a trust established by the depositor. The issuing
trusts for each Securitization are listed in paragraph 2. JURISDICTION AND VENUE 95. Jurisdiction of this Court is founded upon 28 U.S.C. 1345, which gives federal
13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code and Sections 31-5606.05(a)(1)(B) and 315606.05(c) of the District of Columbia Code, pursuant to this Courts supplemental jurisdiction J.P. Morgan Acquisition, EMC, WaMu Bank, WaMu Securities, and Long Beach Mortgage were the sponsors for 94 of the Securitizations. The remaining nine Securitizations were sponsored by non-parties. In particular, Aegis Mortgage Corporation; American Home Mortgage Acceptance, Inc.; Newcastle Investment Corporation; Luminent Mortgage Capital, Inc.; Peoples Choice Funding, Inc.; Credit-Based Asset Servicing and Securitization LLC; and Ameriquest Mortgage Company each sponsored one or more of those nine Securitizations. 29
3
under 28 U.S.C. 1367(a). This Court also has jurisdiction over the common law claims of negligent misrepresentation, fraud, and aiding and abetting fraud, pursuant to this Courts supplemental jurisdiction under 28 U.S.C. 1367(a). 98. Venue is proper in this district pursuant to Section 22 of the Securities Act of
1933, 15 U.S.C. 77v, and 28 U.S.C. 1391(b). Several of the Defendants are principally located in this district, several of the Individual Defendants reside in this district, and many of the acts and transactions alleged herein, including the preparation and dissemination of the Registration Statements occurred in substantial part within this District. Defendants are also subject to personal jurisdiction in this District. FACTUAL ALLEGATIONS I. The Securitizations A. 99. Residential Mortgage-Backed Securitizations In General
Asset-backed securitization distributes risk by pooling cash-producing financial
seller the entity that acquires or originates the mortgage loans and initiates the securitization and the creation of a trust, to which the sponsor directly or indirectly transfers a portfolio of mortgage loans. The trust is established pursuant to a pooling and servicing agreement entered into by, among others, the depositor for that securitization. In many instances, the transfer of assets to a trust is a two-step process: the financial assets are transferred by the sponsor first to an intermediate entity, often a limited purpose entity created by the sponsor . . . and commonly called a depositor, and then the depositor will transfer the assets to the [trust] for the particular
30
asset-backed transactions. Asset-Backed Securities, Securities Act Release No. 33-8518, Exchange Act Release No. 34-50905, 84 SEC Docket 1624 (Dec. 22, 2004). 101. Residential mortgage-backed securities are backed by the underlying mortgage
loans. Some residential mortgage-backed securitizations are created from more than one cohort of loans called collateral groups, in which case the trust issues securities backed by different groups of mortgage loans. For example, a securitization may involve two groups of mortgages, with some securities backed primarily by the first group, and others primarily by the second group. Purchasers of the securities acquire an ownership interest in the assets of the trust, which in turn owns the loans. Within this framework, the purchasers of the securities acquire rights to the cash-flows from the designated mortgage group, such as homeowners payments of principal and interest on the mortgage loans held by the related trust. 102. Residential mortgage-backed securities are issued pursuant to registration
mortgage loans. The servicer is responsible for collecting homeowners mortgage loan payments, which the servicer remits to the trustee after deducting a monthly servicing fee. The servicers duties include making collection efforts on delinquent loans, initiating foreclosure proceedings, and determining when to charge off a loan by writing down its balance. The servicer is required to report key information about the loans to the trustee. The trustee (or trust
31
administrator) administers the trusts funds and delivers payments due each month on the certificates to the investors. B. 104. The Securitizations At Issue In This Case
This case involves the 103 Securitizations listed in paragraph 2 above. JPMorgan
served as the lead underwriter for 30 of the Securitizations; in 27 of the Securitizations, JPMorgan also served as sponsor and, in 27 of the Securitizations, JPMorgan was also the depositor and therefore the issuer and offeror of the Certificates. Bear Stearns served as the lead underwriter for 38 of the Securitizations; in 32 of the Securitizations, Bear Stearns also served as sponsor and, in 35 of the Securitizations, Bear Stearns was also the depositor and therefore the issuer and offeror of the Certificates. WaMu served as the lead underwriter for 31 of the Securitizations; in 35 of the Securitizations, WaMu or Long Beach also served as sponsor and, in 35 of the Securitizations, WaMu or Long Beach was also the depositor and therefore the issuer and offeror of the Certificates. The GSE Certificates correlate to 127 tranches4 of the 103 Securitizations.5 For each of the 103 Securitizations, Table 2 identifies the: (1) the sponsor; (2) the depositor; (3) the lead underwriter; (4) the principal amount issued for the tranches purchased by the GSEs; (5) the date of issuance; and (6) the loan group or groups backing the GSE Certificate for that Securitization (referred to as the Supporting Loan Groups).
A tranche is one of a series of certificates or interests created and issued as part of the same transaction. For example, the GSEs purchased Certificates issued pursuant to both the A1A and A1B tranches of the JPMAC 2006-RM1 Securitization. 32
5
Table 2
Transaction Tranche Sponsor Aegis Mortgage Corp. American Home Mortgage Acceptance, Inc. American Home Mortgage Acceptance, Inc. Ameriquest Mortgage Company EMC EMC EMC EMC EMC EMC EMC EMC EMC EMC EMC EMC EMC EMC EMC EMC EMC EMC EMC EMC EMC EMC EMC EMC EMC EMC Depositor Aegis Asset Backed Securities Corp. American Home Mortgage Securities LLC Lead Underwriter Principal Amount Issued $500,000,000 Date of Issuance Supporti ng Loan Group Pool 2
AABST 2005-5
IIA
BSC
10/28/2005
AHM 2005-1
VIA
BSC
$337,000,000
4/25/2006
Group VI
AHM 2005-4
IVA
BSABS
BSC
$556,435,000
10/7/2005
Group IV
ARSI 2006-M2 BALTA 2005-10 BALTA 2005-10 BALTA 2006-1 BALTA 2006-2 BALTA 2006-3 BALTA 2006-4 BALTA 2006-4 BSABS 2005-HE12 BSABS 2006-AQ1 BSABS 2006-HE2 BSABS 2006-HE4 BSABS 2006-HE5 BSABS 2006-HE7 BSABS 2006-HE8 BSABS 2006-HE9 BSABS 2006-HE9 BSABS 2006-HE10 BSABS 2006-HE10 BSABS 2007-FS1 BSABS 2007-HE1 BSABS 2007-HE1 BSABS 2007-HE2 BSABS 2007-HE2 BSABS 2007-HE3 BSABS 2007-HE3 BSABS 2007-HE4
A1 II2A1 II3A1 II1A1 II2A1 II1A1 I2A1 III1A1 IIA I2A IIA IIA IIA II2A II2A IIA IIIA II2A II3A IIA II2A II3A II2A II3A IIA IIIA IIA
Argent Securities Inc. SAMI SAMI BSABS SAMI SAMI SAMI SAMI BSABS BSABS BSABS BSABS BSABS BSABS BSABS BSABS BSABS BSABS BSABS BSABS BSABS BSABS BSABS BSABS BSABS BSABS BSABS
J.P. Morgan Securities (co-lead with Citigroup) BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC
$717,382,000 $407,783,000 $569,686,000 $300,000,000 $431,361,000 $276,267,000 $807,809,000 $132,532,000 $302,737,000 $192,142,000 $241,697,000 $264,889,000 $162,020,000 $100,275,000 $51,306,000 $218,304,000 $236,045,000 $201,892,000 $132,221,000 $70,635,000 $118,512,000 $92,100,000 $75,162,000 $77,349,000 $131,715,000 $90,354,000 $210,625,000
8/29/2006 12/30/2005 12/30/2005 1/31/2006 3/31/2006 4/28/2006 6/30/2006 6/30/2006 12/30/2005 11/30/2006 2/28/2006 4/28/2006 5/30/2006 8/30/2006 10/30/2006 11/30/2006 11/30/2006 12/29/2006 12/29/2006 2/28/2006 1/30/2007 1/30/2007 2/28/2007 2/28/2007 3/30/2007 3/30/2007 4/30/2007
Group I Group II-2 Group II-3 Group II-1 Group II-2 Group II-1 Group I-2 Group III1 Group II Group I-2 Group II Group II Group II Group II-2 Group II-2 Group II Group III Group II-2 Group II-3 Group II Group II-2 Group II-3 Group II-2 Group II-3 Group II Group III Group II
33
Transaction BSABS 2007-HE5 BSABS 2007-HE5 BSABS 2007-HE6 BSABS 2007-HE7 BSABS 2007-HE7 BSMF 2006-SL5 BSMF 2006-SL6 BSMF 2007-AR3 BSMF 2007-SL1 BSMF 2007-SL2
Tranche IIA IIIA IIA IIA1 IIIA1 IIA IIA II2A1 IIA IIA
Sponsor EMC EMC EMC EMC EMC EMC EMC EMC EMC EMC Credit-Based Asset Servicing and Securitization LLC Credit-Based Asset Servicing and Securitization LLC EMC EMC EMC J.P. Morgan Acquisition J.P. Morgan Acquisition J.P. Morgan Acquisition J.P. Morgan Acquisition J.P. Morgan Acquisition J.P. Morgan Acquisition J.P. Morgan Acquisition J.P. Morgan Acquisition J.P. Morgan Acquisition J.P. Morgan Acquisition J.P. Morgan Acquisition J.P. Morgan Acquisition J.P. Morgan Acquisition J.P. Morgan Acquisition
Depositor BSABS BSABS BSABS BSABS BSABS BSABS BSABS SAMI BSABS BSABS Bond Securitization, LLC
Lead Underwriter BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC J.P. Morgan Securities
Principal Amount Issued $99,922,000 $122,752,000 $291,210,000 $137,892,000 $69,504,000 $23,706,000 $20,279,000 $241,679,000 $24,050,000 $21,671,000
Date of Issuance 5/30/2007 5/30/2007 8/30/2007 9/19/2007 9/19/2007 11/30/2006 12/29/2006 3/30/2007 1/30/2007 2/28/2007
Supporti ng Loan Group Group II Group III Group II Group II Group III Group II Group II Group II-2 Group II Group II
CBASS 2006-CB2
AV
$347,712,000
2/28/2006
Group 1
CBASS 2006-CB7
A1
Bond Securitization, LLC SAMI SAMI SAMI J.P. Morgan Acceptance J.P. Morgan Acceptance J.P. Morgan Acceptance J.P. Morgan Acceptance J.P. Morgan Acceptance J.P. Morgan Acceptance J.P. Morgan Acceptance J.P. Morgan Acceptance J.P. Morgan Acceptance J.P. Morgan Acceptance J.P. Morgan Acceptance J.P. Morgan Acceptance J.P. Morgan Acceptance J.P. Morgan Acceptance
J.P. Morgan Securities BSC BSC BSC J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities
$385,237,000
10/5/2006
Group I
GPMF 2005-AR5 GPMF 2006-AR3 GPMF 2006-AR3 JPALT 2005-A2 JPALT 2007-A2 JPMAC 2005-FRE1 JPMAC 2005-OPT2 JPMAC 2005WMC1 JPMAC 2006-ACC1 JPMAC 2006-CH1 JPMAC 2006-CH2 JPMAC 2006-CW1 JPMAC 2006-CW2 JPMAC 2006-FRE1 JPMAC 2006-FRE2 JPMAC 2006-HE1 JPMAC 2006-HE2
IIA1 IIA1 IIA2 2A1 11A1 AI A1A A1 A1 A1 AV1 A1A AV1 A1 A1 A1 A1
$470,923,000 $492,223,000 $259,690,000 $68,406,000 $369,061,000 $274,516,000 $311,578,000 $404,000,000 $266,700,000 $149,925,000 $900,296,000 $213,081,000 $410,588,000 $279,696,000 $267,476,000 $166,827,000 $171,430,000
10/31/2005 4/28/2006 4/28/2006 12/29/2005 5/31/2007 11/29/2005 12/21/2005 10/27/2005 6/2/2006 11/14/2006 12/14/2006 5/31/2006 8/8/2006 1/27/2006 3/29/2006 2/28/2006 6/30/2006
Group II Group II Group II Pool 2 Pool 1A Group I Group 1 Group 1 Group 1 Group 1 Group 2A Group 1 Group 2 Group 1 Group 1 Group 1 Group 1
34
Transaction JPMAC 2006-HE3 JPMAC 2006-NC1 JPMAC 2006-NC2 JPMAC 2006-RM1 JPMAC 2006-RM1 JPMAC 2006WMC1 JPMAC 2006WMC2 JPMAC 2006WMC3 JPMAC 2006WMC3 JPMAC 2006WMC4 JPMAC 2006WMC4 JPMAC 2007-CH2 JPMAC 2007-CH3 JPMAC 2007-CH3 JPMAC 2007-CH4 JPMAC 2007-CH5 JPMMT 2006-A3
Tranche A1 A1 A1A A1A A1B A1 A1 A1SS A1MZ A1A A1B AV1 A1A A1B A1 A1 1A1
Sponsor J.P. Morgan Acquisition J.P. Morgan Acquisition J.P. Morgan Acquisition J.P. Morgan Acquisition J.P. Morgan Acquisition J.P. Morgan Acquisition J.P. Morgan Acquisition J.P. Morgan Acquisition J.P. Morgan Acquisition J.P. Morgan Acquisition J.P. Morgan Acquisition J.P. Morgan Acquisition J.P. Morgan Acquisition J.P. Morgan Acquisition J.P. Morgan Acquisition J.P. Morgan Acquisition J.P. Morgan Acquisition Long Beach Mortgage Long Beach Mortgage Long Beach Mortgage Long Beach Mortgage Long Beach Mortgage Long Beach Mortgage WaMu Bank WaMu Bank WaMu Bank
Depositor J.P. Morgan Acceptance J.P. Morgan Acceptance J.P. Morgan Acceptance J.P. Morgan Acceptance J.P. Morgan Acceptance J.P. Morgan Acceptance J.P. Morgan Acceptance J.P. Morgan Acceptance J.P. Morgan Acceptance J.P. Morgan Acceptance J.P. Morgan Acceptance J.P. Morgan Acceptance J.P. Morgan Acceptance J.P. Morgan Acceptance J.P. Morgan Acceptance J.P. Morgan Acceptance J.P. Morgan Acceptance Long Beach Securities Long Beach Securities Long Beach Securities Long Beach Securities Long Beach Securities Long Beach Securities Long Beach Securities Long Beach Securities Long Beach Securities
Lead Underwriter J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities WaMu Capital (co-lead with Lehman Brothers Inc.) Credit Suisse WaMu Capital (co-lead with RBS Greenwich) WaMu Capital WaMu Capital (co-lead with Lehman Brothers Inc.) WaMu Capital WaMu Capital WaMu Capital WaMu Capital
Principal Amount Issued $189,800,000 $345,251,000 $223,083,000 $230,853,000 $57,713,000 $161,500,000 $324,255,000 $175,270,000 $43,817,000 $376,675,000 $41,853,000 $234,600,000 $374,118,000 $41,569,000 $435,000,000 $304,336,000 $174,568,800
Date of Issuance 11/10/2006 4/27/2006 8/23/2006 9/27/2006 9/27/2006 3/30/2006 6/28/2006 9/14/2006 9/14/2006 12/20/2006 12/20/2006 3/15/2007 5/15/2007 5/15/2007 6/15/2007 7/12/2007 7/12/2007
Supporti ng Loan Group Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 2A Group 1 Group 1 Group 1 Group 1 Pool 1
LBMLT 2005-3
IA
$604,830,000
9/7/2005
Group I
LBMLT 2006-1
IA
$870,736,000
2/7/2006
Group I
LBMLT 2006-2
IA
$1,101,891,000
3/7/2006
Group I
LBMLT 2006-3
IA
$513,901,000
4/6/2006
Group I
LBMLT 2006-4
IA
$787,668,000
5/9/2006
Group I
LBMLT 2006-5 LBMLT 2006-6 LBMLT 2006-7 LBMLT 2006-8
IA IA IA IA
$631,423,000 $415,891,000 $360,139,000 $366,091,000
6/15/2006 7/26/2006 8/30/2006 9/21/2006
Group I Group I Group I Group I
35
Transaction LBMLT 2006-9 LBMLT 2006-10 LBMLT 2006-11 LBMLT 2006-WL1 LBMLT 2006-WL1 LBMLT 2006-WL2 LBMLT 2006-WL3 LUM 2006-3
Tranche IA IA IA IA1 IA2 IA IA II2A1
Sponsor WaMu Bank WaMu Bank WaMu Bank Long Beach Mortgage Long Beach Mortgage Long Beach Mortgage Long Beach Mortgage Luminent Mortgage Capital, Inc. Newcastle Investment Corp. Peoples Choice Funding, Inc. EMC EMC EMC WaMu Bank WaMu Securities WaMu Securities WaMu Securities WaMu Securities WaMu Securities WaMu Securities WaMu Securities WaMu Securities WaMu Securities WaMu Securities WaMu Securities WaMu Securities WaMu Securities
Depositor Long Beach Securities Long Beach Securities Long Beach Securities Long Beach Securities Long Beach Securities Long Beach Securities Long Beach Securities SAMI
Lead Underwriter WaMu Capital WaMu Capital WaMu Capital Goldman Sachs Goldman Sachs Lehman Brothers Inc. Lehman Brothers Inc. BSC
Principal Amount Issued $420,396,000 $288,380,000 $408,047,000 $284,678,000 $256,210,000 $462,263,000 $440,218,000 $147,795,000
Date of Issuance 10/12/2006 11/9/2006 12/14/2006 2/8/2006 2/8/2006 10/12/2006 1/30/2006 4/28/2006
Supporti ng Loan Group Group I Group I Group I Group I Group I Group I Group I Group II-2
NCMT 2007-1
1A1
BSABS Peoples Choice Home Loan Securities Corp. BSABS BSABS SAMI WaMu Acceptance WaMu Acceptance WaMu Acceptance WaMu Acceptance WaMu Acceptance WaMu Acceptance WaMu Acceptance WaMu Securities WaMu Securities WaMu Acceptance WaMu Acceptance WaMu Acceptance WaMu Acceptance WaMu Acceptance
BSC
$370,224,000
7/12/2007
Group 1
PCHLT 2005-4
2A1
BSC
$433,582,000
10/26/2005
Group 2
SACO 2007-1 SACO 2007-2 SAMI 2006-AR4 WAMU 2007-OA3 WMABS 2006-HE1 WMABS 2006-HE3 WMABS 2006-HE4 WMABS 2006-HE5 WMABS 2007-HE1 WMABS 2007-HE2 WMALT 2005-9 WMALT 2005-10 WMALT 2006-AR4 WMALT 2006-AR4 WMALT 2006-AR4 WMALT 2006-AR5 WMALT 2006-AR5
IIA IIA IA1 1A IA IA IA IA IA IA 1CB 1CB 1A 2A 3A 1A 2A
BSC BSC BSC WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital
$50,429,000 $20,226,000 $316,180,000 $140,139,000 $53,578,000 $175,828,000 $117,798,000 $269,063,000 $115,217,000 $286,276,000 $69,400,400 $62,532,200 $76,071,000 $69,518,000 $251,313,000 $74,766,000 $57,966,000
1/16/2007 2/28/2007 6/30/2006 3/27/2007 4/20/2006 9/27/2006 10/27/2006 12/7/2006 1/16/2007 3/13/2007 10/31/2005 11/30/2005 5/30/2006 5/30/2006 5/30/2006 6/28/2006 6/28/2006
Group II Group II Group I Group 1 Group 1 Group I Group I Group I Group I Group I Group 1 Group 1 Group 1 Group 2 Group 3 Group 1 Group 2
36
Transaction WMALT 2006-AR8 WMALT 2006-AR9 WMALT 2007-OA1 WMALT 2007-OA2 WMALT 2007-OA3
Tranche 1A 1A 1A 1A 1A
Sponsor WaMu Securities WaMu Securities WaMu Securities WaMu Securities WaMu Securities & WaMu Bank WaMu Securities & WaMu Bank WaMu Bank WaMu Bank WaMu Bank WaMu Bank
Depositor WaMu Acceptance WaMu Acceptance WaMu Acceptance WaMu Acceptance WaMu Acceptance WaMu Acceptance WaMu Acceptance WaMu Acceptance WaMu Acceptance WaMu Acceptance
Lead Underwriter WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital
Principal Amount Issued $211,150,000 $270,142,000 $255,047,000 $222,967,000 $230,966,000
Date of Issuance 9/28/2006 10/26/2006 1/26/2007 2/26/2007 3/28/2007
Supporti ng Loan Group Group 1 Group 1 Group 1 Group 1 Group 1
WMALT 2007-OA3 WMHE 2007-HE1 WMHE 2007-HE2 WMHE 2007-HE3 WMHE 2007-HE4
3A IA IA IA IA
WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital
$195,998,000 $368,226,000 $491,550,000 $372,475,000 $249,921,000
3/28/2007 1/16/2007 4/10/2007 5/10/2007 6/13/2007
Group 3 Group I Group I Group I Group I
C.
The Securitization Process 1. J.P. Morgan Acquisition, EMC, WaMu Bank, WaMu Securities, and Long Beach Mortgage Transfer The Mortgage Loans To Special Purpose Trusts
105.
As the sponsor for 27 of the 103 Securitizations (the JPMorgan Securitizations),
J.P. Morgan Acquisition purchased the mortgage loans underlying the Certificates for those 27 Securitizations after they were originated, either directly from the originators or through affiliates of the originators. 106. As the sponsor for 32 of the 103 Securitizations (the Bear Stearns
Securitizations), EMC purchased the mortgage loans underlying the Certificates for those 32 Securitizations after they were originated, either directly from the originators or through affiliates of the originators. 107. As the sponsors or co-sponsors for 26 of the 103 Securitizations (the WaMu
Securitizations), WaMu Bank and WaMu Securities purchased the mortgage loans underlying
37
the Certificates for those 26 Securitizations after they were originated, either directly from the originators or through affiliates of the originators. 108. As the sponsor for nine of the 103 Securitizations (the Long Beach
Securitizations), Long Beach Mortgage purchased the mortgage loans underlying the Certificates for those nine Securitizations after they were originated, either directly from the originators or through affiliates of the originators. 109. Non-party sponsors Aegis Mortgage Corporation, American Home Mortgage
Acceptance, Inc., Newcastle Investment Corporation, Luminent Mortgage Capital, Inc., Peoples Choice Funding, Inc., Credit-Based Asset Servicing and Securitization LLC, and Ameriquest Mortgage Company were each a sponsor of one or more of the remaining nine Securitizations. The sponsor for each Securitization is included above in Table 2. 110. J.P. Morgan Acquisition then sold the mortgage loans for the 27 Securitizations
that it sponsored to the depositor, J.P. Morgan Acceptance, which is a JPMorgan-affiliated entity. EMC then sold the mortgage loans for the 32 Securitizations that it sponsored to one of two depositors, SAMI and BSABS, both of which are Bear Stearns-affiliated entities. WaMu Bank then sold the mortgage loans for the 12 Securitizations that it sponsored or co-sponsored to one of two depositors, WaMu Acceptance or Long Beach Securities, one of which is a WaMuaffiliated entity and one of which is a Long Beach-affiliated entity. WaMu Securities then sold the mortgage loans for 13 of the 15 Securitizations that it sponsored or co-sponsored to WaMu Acceptance, which is a WaMu-affiliated entity. WaMu Securities itself acted as the depositor for the remaining two Securitizations that it sponsored. Long Beach Mortgage then sold the mortgage loans for the nine Securitizations that it sponsored to the depositor, Long Beach Securities, which is a Long Beach-affiliated entity.
38
111.
With respect to three of the remaining nine Securitizations, non-parties American
Home Mortgage Acceptance, Inc. and Newcastle Investment Corp. sold the mortgage loans to Defendant BSABS for the AHM 2005-4 and NCMT 2007-1 Securitizations, respectively, and Luminent Mortgage Capital, Inc. sold the mortgage loans to Defendant SAMI for the LUM 2006-3 Securitization. With respect to the remaining six Securitizations, non-party sponsors sold the mortgage loans to non-party depositors, as reflected above in Table 2; Defendant J.P. Morgan Securities was the lead or co-lead underwriter and selling underwriter for the ARSI 2006-M2, CBASS 2006-CB2, and CBASS 2006-CB7 Securitizations; Defendant BSC was the lead or colead underwriter and selling underwriter for the AABST 2005-5, AHM 2005-1, and PCHLT 2005-4 Securitizations. 112. Both J.P. Morgan Acquisition (sponsor) and J.P. Morgan Acceptance (depositor)
were controlled by their ultimate parent, JPMorgan Chase. Both EMC (sponsor) and SAMI and BSABS (depositors) were controlled by their ultimate parent, BSI. Both WaMu Securities (sponsor and depositor) and WaMu Acceptance (depositor) were controlled by their ultimate parent, WaMu Bank, who also was a sponsor. Both Long Beach Mortgage (sponsor) and Long Beach Securities (depositor) were controlled by their ultimate parent, WaMu Bank, who also was a sponsor. The sole purpose of the depositor, and the common law trusts created through this process, was to act as a conduit through which loans acquired by the sponsor could be securitized and sold to investors. 113. The transfer of the mortgage loans to the trust was generally effected by means of
either a Pooling and Servicing Agreement or other agreement of substantially similar effect6 (a
In AHM 2005-1 and AHM 2005-4, the trustee executed a Trust Agreement; in JPMAC 2006-CW1, the trustee executed a Pooling Agreement; and in PCHLT 2005-4, the trustee executed a Sale and Servicing Agreement. 39
PSA) executed among the depositor and the parties responsible for monitoring and servicing the mortgage loans in that Securitization. The trust, administered by the trustee, held the mortgage loans pursuant to the related PSA and issued certificates, including the GSE Certificates, backed by such loans. The GSEs purchased the GSE Certificates, through which they obtained an ownership interest in the assets of the trust, including the mortgage loans. 2. 114. The Trusts Issue Securities Backed by the Loans
PSAs, each trust issued Certificates backed by the underlying mortgage loans. The Certificates were then sold to investors like Fannie Mae and Freddie Mac, which thereby acquired an ownership interest in the cash flow from the assets held by the corresponding trust. Each Certificate entitles its holder to a specified portion of the cashflows from the underlying mortgages in the Supporting Loan Group. The level of risk inherent in the Certificates was a function of the capital structure of the related transaction and the credit quality of the underlying mortgages. 115. The Certificates were issued pursuant to one of 19 Shelf Registration Statements
filed with the SEC on Form S-3. The Shelf Registration Statements were amended by one or more Forms S-3/A filed with the SEC. The depositor affiliates of JPMorgan, Bear Stearns, WaMu, and Long Beach collectively filed 13 of the 19 Shelf Registration Statements. Each Individual Defendant signed one or more of the 13 Shelf Registration Statements or amendments thereto which were filed by the depositor affiliates of JPMorgan, Bear Stearns, WaMu, and Long Beach. The SEC filing number, registrants, signatories and filing dates for the 19 Shelf Registration Statements and amendments thereto, as well as the Certificates covered by the Shelf Registration Statements, are reflected in Table 3 below.
40
Table 3
Date(s) Amended Registration Statements Filed
SEC File Number
Registrant(s)
Related Certificates
333141607
3/27/2007
4/23/2007
J.P. Morgan Acceptance
JPMAC 2007-CH4, JPMAC 2007-CH3, JPMAC 2007-CH5
Brian Bernard Louis Schioppo, Jr. Christine E. Cole David M. Duzyk William A. King Edwin F. McMichael
Brian Bernard Louis Schioppo, Jr. Christine E. Cole David M. Duzyk William A. King Edwin F. McMichael
333141255
3/13/2007
4/9/2007
WaMu Acceptance
WMHE 2007-HE4, WMHE 2007-HE3
Thomas G. Lehmann David Beck Diane Novak Stephen Fortunato Donald Wilhelm
Thomas G. Lehmann David Beck Diane Novak Stephen Fortunato Donald Wilhelm
333140247
1/26/2007
2/23/2007, 2/09/2007
SAMI
BSMF 2007-AR3
Jeffrey L. Verschleiser Michael B. Nierenberg Jeffrey Mayer Thomas F. Marano
333130192
12/7/2005
8/2/2006, 4/3/2006, 3/13/2006
JPALT 2007-A2, JPMMT 2006-A3, JPMAC 2006-CW1, JPMAC 2006-ACC1, JPMAC 2006WMC2, JPMAC 2006-CW2, JPMAC 2006-NC2, JPMAC 2006-WMC3, JPMAC 2006-RM1, JPMAC 2006-CH2, JPMAC 2006-CH1, JPMAC 2006-HE3, JPMAC 2006WMC4, JPMAC 2006-HE2, JPMAC 2006-NC1, JPMAC 2007-CH2
David M. Duzyk Louis Schioppo, Jr. Christine E. Cole Edwin F. McMichael
41
SEC File Number
Registrant(s)
333131374
1/30/2006
3/31/2006, 3/28/2006, 3/27/2006, 3/6/2006, 3/3/2006
BSABS
333131252
1/24/2006
3/31/2006, 3/21/2006
Long Beach Securities
BSABS 2007-HE3, BSABS 2007-FS1, BSABS 2007-HE5, BSABS 2007-HE4, BSABS 2007-HE7, BSABS 2007-HE6, BSABS 2006-HE4, BSABS 2006-HE5, BSABS 2006-HE7, BSABS 2006-HE8, BSABS 2006-HE9, BSABS 2006-AQ1, BSABS 2006-HE10, BSABS 2007-HE1, BSABS 2007-HE2, BSMF 2006-SL6, BSMF 2006-SL5, BSMF 2007-SL1, BSMF 2007-SL2, NCMT 2007-1, SACO 2007-1, SACO 2007-2 LBMLT 2006-11, LBMLT 2006-4, LBMLT 2006-5, LBMLT 2006-6, LBMLT 2006-7, LBMLT 2006-8, LBMLT 2006-9, LBMLT 2006-10 LUM 2006-3, SAMI 2006-AR4, BALTA 2006-2, BALTA 2006-3, BALTA 2006-4, GPMF 2006AR3 WMABS 2006-HE1, WMHE 2007-HE2, WMHE 2007-HE1, WAMU 2007-OA3, WMALT 2006-AR4, WMALT 2006-AR9, WMABS 2006-HE3, WMABS 2006-HE4, WMABS 2007-HE2, WMABS 2006-HE5, WMALT 2007-OA3, WMALT 2006-AR5, WMABS 2007-HE1, WMALT 2006-AR8, WMALT 2007-OA1, WMALT 2007-OA2
Matthew E. Perkins Samuel L. Molinaro, Jr. Thomas F. Marano Kim Lutthans Katherine Garniewski
Joseph T. Jurkowski, Jr. Matthew E. Perkins Samuel L. Molinaro, Jr. Thomas F. Marano Kim Lutthans Katherine Garniewski
Thomas W. Casey John F. Robinson Keith Johnson Suzanne Krahling Larry Breitbarth
Thomas W. Casey John F. Robinson Michael J. Giampaolo Stephen Fortunato Rolland Jurgens David H. Zielke
333132232
3/6/2006
3/10/2006
SAMI
333130795
12/30/2005
1/3/2006
WaMu Acceptance
Richard Careaga David Beck Diane Novak Thomas Green Rolland Jurgens
Richard Careaga David Beck Diane Novak Thomas Green Rolland Jurgens
42
SEC File Number
Registrant(s)
333127020
7/29/2005
8/15/2005
JPMAC 2006-HE1, JPMAC 2006-FRE1, JPMAC 2006-FRE2, JPMAC 2006WMC1, JPMAC 2005-WMC1, JPMAC 2005-FRE1, JPALT 2005-A2, JPMAC 2005-OPT2
David M. Duzyk Louis Schioppo, Jr. Christine E. Cole William A. King Edwin F. McMichael
333125422
6/1/2005
6/14/2005
BSABS
AHM 2005-4, BALTA 2006-1, BSABS 2006-HE2, BSABS 2005-HE12
Matthew E. Perkins Samuel L. Molinaro, Jr. Thomas F. Marano Kim Lutthans Katherine Garniewski
Joseph T. Jurkowski, Jr. Matthew E. Perkins Samuel L. Molinaro, Jr. Thomas F. Marano Kim Lutthans Katherine Garniewski
333120916
12/1/2004
12/14/2004
SAMI
GPMF 2005-AR5, BALTA 2005-10
333109318
9/30/2003
2/10/2004
Long Beach Securities
LBMLT 2005-3, LBMLT 2006-WL1, LBMLT 2006-1, LBMLT 2006-WL2, LBMLT 2006-WL3, LBMLT 2006-2, LBMLT 2006-3
Craig S. Davis Marangal I. Domingo Troy A. Gotschall Art Den Heyer Stephen Lobo
David H. Zielke Craig S. Davis Marangal I. Domingo Troy A. Gotschall Art Den Heyer Stephen Lobo
333103345
2/20/2003
3/7/2003
WaMu Securities
WMALT 2005-9, WMALT 2005-10
Michael J. Kula Craig S. Davis Marangal I. Domingo Marc K. Malone Michael L. Parker Thomas G. Lehmann Megan M. Davidson
Michael J. Kula Craig S. Davis Marangal I. Domingo Marc K. Malone Michael L. Parker Thomas G. Lehmann Megan M. Davidson
333124934
5/13/2005
5/31/2005
333121581
12/31/2004
Not applicable
Aegis Asset Backed Securities Corp. American Home Mortgage Securities LLC Argent Securities Inc. Bond Securitization, LLC
AABST 2005-5
D. Richard Thompson Pat Walden Orlando Figueroa Michael Strauss Stephen Hozie Thomas McDonagh Alan Horn Adam J. Bass John P. Grazer Andrew L. Stidd James R. Pomposelli Christine E. Cole Dean Christianson Benjamin B. Abedine
D. Richard Thompson Pat Walden Orlando Figueroa
AHM 2005-1
Not applicable
333131895 33387146
2/16/2006
3/17/2006
ARSI 2006-M2
4/29/2002
6/6/2002
CBASS 2006-CB2
Adam J. Bass John P. Grazer Andrew L. Stidd James R. Pomposelli Christine E. Cole Dean Christianson Benjamin B. Abedine
43
SEC File Number
Registrant(s)
333136741
8/18/2006
9/18/2006
Bond Securitization, LLC Peoples Choice Home Loan Securities Corp.
CBASS 2006-CB7
David M. Duzyk Christian Greco Benjamin B. Abedine Christine E. Cole Orlando Figueroa Neil Kornswiet Brad Plantiko
David M. Duzyk Christian Greco Benjamin B. Abedine Christine E. Cole Orlando Figueroa Neil Kornswiet Brad Plantiko
333125734
6/10/2005
6/22/2005
PCHLT 2005-4
116.
guidelines that purportedly were used in connection with the origination of the underlying mortgage loans. In addition, the Prospectus Supplements purport to provide accurate statistics regarding the mortgage loans in the collateral group and the entire securitization, including the ranges of and weighted average FICO credit scores of the borrowers, the ranges of and weighted average loan-to-value ratios of the loans, the ranges of and weighted average outstanding principal balances of the loans, the geographic distribution of the loans, the extent to which the loans were for purchase or refinance purposes, information concerning whether the loans were secured by a property to be used as a primary residence, second home, or investment property, and information concerning whether the loans were delinquent. 117. The Prospectus Supplements associated with each Securitization were filed with
the SEC as part of the Registration Statements. The Forms 8-K attaching the PSAs for each Securitization were also filed with the SEC. The date on which the Prospectus Supplement and Form 8-K were filed for each Securitization, as well as the filing number of the Shelf Registration Statement related to each, are set forth in Table 4 below.
44
Table 4 Date Prospectus Supplement Filed 11/1/2005 4/3/2006 10/11/2005 8/29/2006 12/29/2005 2/1/2006 3/30/2006 5/2/2006 7/18/2006 12/27/2005 12/1/2006 2/24/2006 4/27/2006 5/25/2006 8/30/2006 10/30/2006 12/1/2006 1/3/2007 3/1/2007 1/31/2007 2/28/2007 4/2/2007 4/27/2007 5/30/2007 8/30/2007 9/19/2007 11/30/2006 12/29/2006 4/2/2007 1/26/2007 3/1/2007 3/2/2006 10/10/2006 10/31/2005 4/28/2006 12/28/2005 45 Date Form 8-K Attaching PSA Filed 11/10/2005 4/7/2005 10/24/2005 9/13/2006 1/17/2006 2/15/2006 10/13/2006 10/11/2006 7/17/2006 1/13/2006 12/19/2006 3/15/2006 5/15/2006 6/15/2006 9/25/2006 11/14/2006 12/20/2006 1/17/2007 3/27/2007 2/15/2007 3/15/2007 4/20/2007 5/24/2007 6/15/2007 9/19/2007 10/5/2007 12/20/2006 1/17/2007 4/16/2007 2/20/2007 8/7/2007 3/16/2006 10/20/2006 11/15/2005 5/15/2006 1/13/2006 Filing Number of Related Registration Statement 333-124934 333-121581 333-125422 333-131895 333-120916 333-125422 333-132232 333-132232 333-132232 333-125422 333-131374 333-125422 333-131374 333-131374 333-131374 333-131374 333-131374 333-131374 333-131374 333-131374 333-131374 333-131374 333-131374 333-131374 333-131374 333-131374 333-131374 333-131374 333-140247 333-131374 333-131374 333-87146 333-136741 333-120916 333-132232 333-127020
Transaction AABST 2005-5 AHM 2005-1 AHM 2005-4 ARSI 2006-M2 BALTA 2005-10 BALTA 2006-1 BALTA 2006-2 BALTA 2006-3 BALTA 2006-4 BSABS 2005-HE12 BSABS 2006-AQ1 BSABS 2006-HE2 BSABS 2006-HE4 BSABS 2006-HE5 BSABS 2006-HE7 BSABS 2006-HE8 BSABS 2006-HE9 BSABS 2006-HE10 BSABS 2007-FS1 BSABS 2007-HE1 BSABS 2007-HE2 BSABS 2007-HE3 BSABS 2007-HE4 BSABS 2007-HE5 BSABS 2007-HE6 BSABS 2007-HE7 BSMF 2006-SL5 BSMF 2006-SL6 BSMF 2007-AR3 BSMF 2007-SL1 BSMF 2007-SL2 CBASS 2006-CB2 CBASS 2006-CB7 GPMF 2005-AR5 GPMF 2006-AR3 JPALT 2005-A2
Transaction JPALT 2007-A2 JPMAC 2005-FRE1 JPMAC 2005-OPT2 JPMAC 2005-WMC1 JPMAC 2006-ACC1 JPMAC 2006-CH1 JPMAC 2006-CH2 JPMAC 2006-CW1 JPMAC 2006-CW2 JPMAC 2006-FRE1 JPMAC 2006-FRE2 JPMAC 2006-HE1 JPMAC 2006-HE2 JPMAC 2006-HE3 JPMAC 2006-NC1 JPMAC 2006-NC2 JPMAC 2006-RM1 JPMAC 2006-WMC1 JPMAC 2006-WMC2 JPMAC 2006-WMC3 JPMAC 2006-WMC4 JPMAC 2007-CH2 JPMAC 2007-CH3 JPMAC 2007-CH4 JPMAC 2007-CH5 JPMMT 2006-A3 LBMLT 2005-3 LBMLT 2006-1 LBMLT 2006-2 LBMLT 2006-3 LBMLT 2006-4 LBMLT 2006-5 LBMLT 2006-6 LBMLT 2006-7 LBMLT 2006-8
7
Date Prospectus Supplement Filed 6/1/2007 11/29/2005 12/22/2005 10/25/2005 6/5/2006 11/13/2006 12/13/2006 5/31/2006 8/9/2006 1/27/2006 3/30/2006 3/1/2006 6/30/2006 11/13/2006 4/17/2006 8/21/2006 9/28/2006 3/31/2006 6/22/2006 9/13/2006 12/20/2006 3/16/2007 5/11/2007 6/15/2007 7/10/2007 4/28/2006 9/6/2005 2/2/2006 3/2/2006 4/5/2006 5/5/2006 6/14/2006 7/25/2006 8/28/2006 9/18/2006
Date Form 8-K Attaching PSA Filed 6/15/2007 1/4/20067 1/4/2006 11/7/2005 6/19/2006 11/29/2006 12/29/2006 6/15/2006 8/23/2006 2/14/2006 4/13/2006 3/10/2006 7/17/2006 11/27/2006 5/12/2006 9/7/2006 10/12/2006 4/14/2006 7/13/2006 9/29/2006 1/4/2007 4/3/2007 5/30/2007 7/2/2007 7/27/2007 5/12/2006 9/22/2005 2/22/2006 3/22/2006 4/21/2006 5/24/2006 6/30/2006 8/8/2006 9/13/2006 10/6/2006
Filing Number of Related Registration Statement 333-130192 333-127020 333-127020 333-127020 333-130192 333-130192 333-130192 333-130192 333-130192 333-127020 333-127020 333-127020 333-130192 333-130192 333-130192 333-130192 333-130192 333-127020 333-130192 333-130192 333-130192 333-130192 333-141607 333-141607 333-141607 333-130192 333-109318 333-109318 333-109318 333-109318 333-131252 333-131252 333-131252 333-131252 333-131252
No PSA filed for the JPMAC 2005-FRE1 Securitization. On this date, an 8-K referencing an existing PSA dated November 1, 2005 was filed with the SEC. 46
Transaction LBMLT 2006-9 LBMLT 2006-10 LBMLT 2006-11 LBMLT 2006-WL1 LBMLT 2006-WL2 LBMLT 2006-WL3 LUM 2006-3 NCMT 2007-1 PCHLT 2005-4 SACO 2007-1 SACO 2007-2 SAMI 2006-AR4 WAMU 2007-OA3 WMABS 2006-HE1 WMABS 2006-HE3 WMABS 2006-HE4 WMABS 2006-HE5 WMABS 2007-HE1 WMABS 2007-HE2 WMALT 2005-9 WMALT 2005-10 WMALT 2006-AR4 WMALT 2006-AR5 WMALT 2006-AR8 WMALT 2006-AR9 WMALT 2007-OA1 WMALT 2007-OA2 WMALT 2007-OA3 WMHE 2007-HE1 WMHE 2007-HE2 WMHE 2007-HE3 WMHE 2007-HE4
Date Prospectus Supplement Filed 10/10/2006 11/7/2006 12/13/2006 1/26/2006 1/30/2006 1/30/2006 5/1/2006 7/13/2007 10/25/2005 1/16/2007 3/1/2007 7/5/2006 3/26/2007 4/19/2006 9/26/2006 10/26/2006 12/5/2006 1/16/2007 3/9/2007 10/26/2005 11/28/2005 5/26/2006 6/27/2006 9/28/2006 10/25/2006 1/25/2007 2/23/2007 3/27/2007 1/16/2007 4/6/2007 5/9/2007 6/12/2007
Date Form 8-K Attaching PSA Filed 10/27/2006 11/22/2006 12/29/2006 2/23/2006 2/14/2006 2/14/2006 8/24/2006 8/1/2007 11/10/2005 2/2/2007 3/29/2007 7/18/20068 4/11/2007 5/5/2006 10/12/2006 11/13/2006 12/22/2006 1/31/2007 3/28/2007 11/10/2005 12/14/2005 6/14/2006 7/13/2006 10/13/2006 11/13/2006 2/12/2007 3/13/2007 4/12/2007 1/31/2007 4/25/2007 5/25/2007 6/28/2007
Filing Number of Related Registration Statement 333-131252 333-131252 333-131252 333-109318 333-109318 333-109318 333-132232 333-131374 333-125734 333-131374 333-131374 333-132232 333-130795 333-130795 333-130795 333-130795 333-130795 333-130795 333-130795 333-103345 333-103345 333-130795 333-130795 333-130795 333-130795 333-130795 333-130795 333-130795 333-130795 333-130795 333-141255 333-141255
No PSA was filed for the SAMI 2006-AR4 Securitization. On this date, an 8-K referencing an existing PSA dated June 1, 2006 was filed with the SEC. 47
118.
The Certificates were issued pursuant to the PSAs, and Defendants J.P. Morgan
Securities, BSC, WaMu Capital, Citigroup, Credit Suisse, Goldman Sachs, and RBS Greenwich offered and sold the GSE Certificates to Fannie Mae and Freddie Mac pursuant to the Registration Statements, which, as noted previously, included the Prospectuses and Prospectus Supplements.9 II. The Defendants Participation in the Securitization Process A. 119. The Role of Each of the JPMorgan Defendants
Each of the JPMorgan Defendants, including the JPMorgan Individual
Defendants, had a role in the securitization process and the marketing for most or all of the Certificates issued in connection with the JPMorgan Securitizations, which included purchasing the mortgage loans from the originators, structuring the Securitizations, selling the mortgage loans to the depositor, transferring the mortgage loans to the trustee on behalf of the Certificateholders, underwriting the public offering of the Certificates, issuing the Certificates, and marketing and selling the Certificates to investors such as Fannie Mae and Freddie Mac. 120. With respect to each JPMorgan Securitization, the depositor, underwriters, and
Individual Defendants who signed the Registration Statement, as well as the JPMorgan Defendants who exercised control over their activities, are liable, jointly and severally, as participants in the registration, issuance and offering of the Certificates, including issuing, causing, or making materially misleading statements in the Registration Statement, and omitting material facts required to be stated therein or necessary to make the statements contained therein not misleading. J.P. Morgan Securities, BSC, and WaMu Capital were the selling underwriters for 96 of the Securitizations; for the remaining seven Securitizations, the selling underwriter was a nonparty underwriter. The selling underwriter for each Securitization is reflected below in Table 11 and Table 12. 48
9
1. 121.
J.P. Morgan Acquisition
J.P. Morgan Acquisition has been involved in the securitization of a variety of
assets since its incorporation. During the 2003, 2004, 2005 and 2006 fiscal years, J.P. Morgan Acquisition securitized approximately $545 million, $4.5 billion, $24.1 billion, and $40.6 billion of residential mortgage loans, respectively. 122. Defendant J.P. Morgan Acquisition was the sponsor of 27 of the 103
Securitizations. In that capacity, J.P. Morgan Acquisition determined the structure of the Securitizations, initiated the Securitizations, purchased the mortgage loans to be securitized, determined distribution of principal and interest, and provided data to the credit rating agencies to secure investment grade ratings for the GSE Certificates. J.P. Morgan Acquisition also selected the depositor that would be used to transfer the mortgage loans from J.P. Morgan Acquisition to the trusts, and selected the underwriter for the Securitizations. In its role as sponsor, J.P. Morgan Acquisition knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing such loans would be issued by the relevant trusts. 123. For the 27 Securitizations that it sponsored, J.P. Morgan Acquisition also
conveyed the mortgage loans to the depositor for each Securitization pursuant to an Assignment Agreement or Assignment, Assumption and Recognition Agreement. In these agreements, J.P. Morgan Acquisition made certain representations and warranties to the depositor regarding the groups of loans collateralizing the Certificates. These representations and warranties were assigned by the depositor to the trustee for the benefit of the Certificateholders. 2. 124. J.P. Morgan Acceptance
Defendant J.P. Morgan Acceptance has been engaged in the securitization of
mortgage loans as a depositor since its incorporation in 1988. It is a special purpose entity 49
formed solely for the purpose of purchasing mortgage loans, filing registration statements with the SEC, forming issuing trusts, assigning mortgage loans and all of its rights and interests in such mortgage loans to the trustee for the benefit of the certificateholders, and depositing the underlying mortgage loans into the issuing trusts. 125. J.P. Morgan Acceptance was the depositor for 27 of the 103 Securitizations. In its
capacity as depositor, J.P. Morgan Acceptance purchased the mortgage loans from the sponsor pursuant to an Assignment Agreement or Assignment, Assumption and Recognition Agreement, as applicable. J.P. Morgan Acceptance then sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trusts. J.P. Morgan Acceptance, together with the other JPMorgan Defendants, was also responsible for preparing and filing the Registration Statements pursuant to which the Certificates were offered for sale. The trusts in turn held the mortgage loans for the benefit of the Certificateholders, and issued the Certificates in public offerings for sale to investors such as Fannie Mae and Freddie Mac. 3. 126. J.P. Morgan Securities
Defendant J.P. Morgan Securities was the lead underwriter for 30 of the
Securitizations. In that role, it was responsible for underwriting and managing the offer and sale of Certificates to Fannie Mae and Freddie Mac and other investors. J.P. Morgan Securities was also obligated to conduct meaningful due diligence to ensure that the Registration Statements did not contain any material misstatements or omissions, including the manner in which the underlying mortgage loans were originated, transferred, and underwritten. 4. 127. JPMorgan Chase and JPMorgan Bank
JPMorgan Chase and JPMorgan Bank employed their wholly-owned subsidiaries,
J.P. Morgan Acquisition (direct subsidiary of JPMorgan Bank), J.P. Morgan Securities (direct subsidiary of JPMorgan Chase), and J.P. Morgan Acceptance (direct subsidiary of J.P. Morgan 50
Securities Holdings LLC, which is, in turn, a direct subsidiary of JPMorgan Chase), in key steps of the securitization process. Unlike typical arms length securitizations, the JPMorgan Securitizations involved various J.P. Morgan subsidiaries and affiliates at virtually each step in the chain. With respect to all 27 of the JPMorgan Securitizations, the sponsor was J.P. Morgan Acquisition, the depositor was J.P. Morgan Acceptance, and the lead underwriter was J.P. Morgan Securities. 128. As the sole owner of J.P. Morgan Securities and J.P. Morgan Acceptance,
JPMorgan Chase had the practical ability to direct and control the actions of J.P. Morgan Securities and J.P. Morgan Acceptance related to the Securitizations, and in fact exercised such direction and control over the activities of J.P. Morgan Securities and J.P. Morgan Acceptance related to the issuance and sale of the Certificates. 129. As the sole owner of J.P. Morgan Acquisition, JPMorgan Bank had the practical
ability to direct and control the actions of J.P. Morgan Acquisition related to the Securitizations, and in fact exercised such direction and control over the activities of J.P. Morgan Acquisition related to the issuance and sale of the Certificates. 130. JPMorgan Chase and JPMorgan Bank expanded their share of the residential
mortgage-backed securitization market to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 5. 131. The JPMorgan Individual Defendants
Defendant David M. Duzyk served as a President (Principal Executive Officer) of
Defendant J.P. Morgan Acceptance Corporation I at the time of the Securitizations and upon information and belief worked in New York, NY. Mr. Duzyk signed the Shelf Registration Statements under file numbers 333-130192, 333-127020, and 333-141607 filed with the SEC on 51
December 7, 2005, July 29, 2005, and March 27, 2007, respectively, and the related pre-effective amendments on Form S-3/A filed with the SEC on or about the dates noted in Table 3 below, and on information and belief, did so in New York. These Shelf Registration Statements were filed on behalf of the Securitizations noted in Table 3 below. 132. Defendant Louis Schioppo, Jr. served as a Controller and Chief Financial Officer
(Principal Financial and Accounting Officer) of Defendant J.P. Morgan Acceptance Corporation I at the time of the Securitizations and upon information and belief worked in New York, NY. Mr. Schioppo, Jr. signed the Shelf Registration Statements under file numbers 333-130192, 333127020 and 333-141607 filed with the SEC on December 7, 2005, July 29, 2005 and March 27, 2007, respectively, and the related pre-effective amendments on Form S-3/A filed with the SEC on or about the dates noted in Table 3 below, and on information and belief, did so in New York. These Shelf Registration Statements were filed on behalf of the Securitizations noted in Table 3 below. 133. Defendant Christine E. Cole served as a Director of Defendant J.P. Morgan
Acceptance Corporation I at the time of the Securitizations and upon information and belief worked in New York, NY. Ms. Cole signed the Shelf Registration Statements under file numbers 333-130192, 333-127020, and 333-141607 filed with the SEC on December 7, 2005, July 29, 2005, and March 27, 2007, respectively, and the related pre-effective amendments on Form S-3/A filed with the SEC on or about the dates noted in Table 3 below, and on information and belief, did so in New York. These Shelf Registration Statements were filed on behalf of the Securitizations noted in Table 3 below. 134. Defendant Edwin F. McMichael served as a Director of Defendant J.P. Morgan
Acceptance Corporation I at the time of the Securitizations and upon information and belief
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worked in New York, NY. Mr. McMichael signed the Shelf Registration Statements under file numbers 333-130192, 333-127020, and 333-141607 filed with the SEC on December 7, 2005, July 29, 2005, and March 27, 2007, respectively, and the related pre-effective amendments on Form S-3/A filed with the SEC on or about the dates noted in Table 3 below, and on information and belief, did so in New York. These Shelf Registration Statements were filed on behalf of the Securitizations noted in Table 3 below. 135. Defendant William A. King served as a President (Principal Executive Officer)
and Director of Defendant J.P. Morgan Acceptance Corporation I at the time of the Securitizations and upon information and belief worked in New York, NY. Mr. King signed the Shelf Registration Statement under file number 333-141607 filed with the SEC on March 27, 2007 and the related pre-effective amendment to the Shelf Registration Statements filed under numbers 333-141607 and 333-127020 on Form S-3/A filed with the SEC on or about the date noted in Table 3 below, and on information and belief, did so in New York. These Shelf Registration Statements were filed on behalf of the Securitizations noted in Table 3 below. 136. Defendant Brian Bernard served as a President of Defendant J.P. Morgan
Acceptance Corporation I at the time of the Securitizations and upon information and belief worked in New York, NY. Mr. Bernard signed the Shelf Registration Statement under file number 333-141607 filed with the SEC on March 27, 2007 and the related pre-effective amendment on Form S-3/A filed with the SEC on or about the date noted in Table 3 below, and on information and belief, did so in New York. These Shelf Registration Statements were filed on behalf of the Securitizations noted in Table 3 below. B. 137. The Role of Each of the Bear Stearns Entities
Each of the Bear Stearns Entities, including the Bear Stearns Individual
Defendants, had a role in the securitization process and the marketing for most or all of the 53
Certificates issued in connection with the Bear Stearns Securitizations, which included purchasing the mortgage loans from the originators, structuring the Securitizations, selling the mortgage loans to the depositor, transferring the mortgage loans to the trustee on behalf of the Certificateholders, underwriting the public offering of the Certificates, issuing the Certificates, and marketing and selling the Certificates to investors such as Fannie Mae and Freddie Mac. 138. With respect to each Bear Stearns Securitization, the depositor, underwriters, and
Individual Defendants who signed the Registration Statement, as well as the Bear Stearns Defendants who exercised control over their activities, are liable, jointly and severally, as participants in the registration, issuance and offering of the Certificates, including issuing, causing, or making materially misleading statements in the Registration Statement, and omitting material facts required to be stated therein or necessary to make the statements contained therein not misleading. 1. 139. EMC
EMC has been involved in the securitization of a variety of assets since its
incorporation. During the 2003, 2004, 2005 and 2006 fiscal years, EMC securitized approximately $20.9 billion, $48.4 billion, $74.5 billion, and $69.1 billion of residential mortgage loans, respectively. 140. Defendant EMC was the sponsor of 32 of the 103 Securitizations. In that
capacity, EMC determined the structure of the Securitizations, initiated the Securitizations, purchased the mortgage loans to be securitized, determined distribution of principal and interest, and provided data to the credit rating agencies to secure investment grade ratings for the GSE Certificates. EMC also selected the depositor that would be used to transfer the mortgage loans from EMC to the trusts, and selected the underwriter for the Securitizations. In its role as sponsor, EMC knew and intended that the mortgage loans it purchased would be sold in 54
connection with the securitization process, and that certificates representing such loans would be issued by the relevant trusts. 141. For the 32 Securitizations that it sponsored, EMC also conveyed the mortgage
loans to the depositor for each Securitization pursuant to a Mortgage Loan Purchase Agreement, Stock and Mortgage Loan Purchase Agreement, or Assignment Agreement. In these agreements, EMC made certain representations and warranties to the depositors regarding the groups of loans collateralizing the Certificates. These representations and warranties were assigned by the depositor to the trustee for the benefit of the Certificateholders. 2. 142. SAMI and BSABS
Defendants SAMI and BSABS have been engaged in the securitization of
mortgage loans as depositors since their incorporations in 2003 and 2004, respectively. They are special purpose entities formed for the solely for the purpose of purchasing mortgage loans, filing registration statements with the SEC, forming issuing trusts, assigning mortgage loans and all of its rights and interests in such mortgage loans to the trustee for the benefit of the certificateholders, and depositing the underlying mortgage loans into the issuing trusts. 143. Defendants SAMI and BSABS were the depositors for 9 and 26 of the 103
Securitizations, respectively. In their capacity as depositors, SAMI and BSABS purchased the mortgage loans from the sponsor pursuant to a Mortgage Loan Purchase Agreement, Stock and Mortgage Loan Purchase Agreement, or Assignment Agreement, as applicable. SAMI and BSABS then sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trusts. SAMI and BSABS, together with the other Bear Stearns Defendants, were also responsible for preparing and filing the Registration Statements pursuant to which the Certificates were offered for sale. The trusts in turn held the mortgage loans for the benefit of
55
the Certificateholders, and issued the Certificates in public offerings for sale to investors such as Fannie Mae and Freddie Mac. 3. 144. the Merger. 145. Defendant BSC was the lead underwriter for 38 of the Securitizations. In that BSC and J.P. Morgan Securities as Successor to BSC
Defendant J.P. Morgan Securities is the successor-in-interest to BSC pursuant to
role, it was responsible for underwriting and managing the offer and sale of Certificates to Fannie Mae and Freddie Mac and other investors. BSC was also obligated to conduct meaningful due diligence to ensure that the Registration Statements did not contain any material misstatements or omissions, including the manner in which the underlying mortgage loans were originated, transferred, and underwritten. 4. 146. Merger. 147. BSI employed its wholly-owned subsidiaries, EMC, SAMI, BSABS, and BSC, in JPMorgan Chase as Successor to BSI
Defendant JPMorgan Chase is the successor-in-interest to BSI pursuant to the
key steps of the securitization process. Unlike typical arms length securitizations, many of the Bear Stearns Securitizations involved various Bear Stearns subsidiaries and affiliates at virtually each step in the chain. With respect to all 32 of the Bear Stearns Securitizations, the sponsor was EMC, the depositor was SAMI or BSABS, and the lead underwriter was BSC. 148. As the sole owner of EMC, SAMI, BSABS, and BSC, BSI had the practical
ability to direct and control the actions of EMC, SAMI, BSABS, and BSC related to the Securitizations, and in fact exercised such direction and control over the activities of EMC, SAMI, BSABS, and BSC related to the issuance and sale of the Certificates.
56
149.
BSI expanded its share of the residential mortgage-backed securitization market
to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 5. 150. The Bear Stearns Individual Defendants
Defendant Matthew E. Perkins served as a President (Principal Executive Officer)
and Director of Defendant Bear Stearns Asset Backed Securities I LLC at the time of the Securitizations and upon information and belief worked in New York, NY. Mr. Perkins signed the Shelf Registration Statements under file numbers 333-125422 and 333-131374, filed with the SEC on June 1, 2005 and January 30, 2006, respectively, and the related pre-effective amendments on Form S-3/A filed with the SEC on or about the dates noted in Table 3 below, and on information and belief, did so in New York. These Shelf Registration Statements were filed on behalf of the Securitizations noted in Table 3 below. 151. Defendant Joseph T. Jurkowski, Jr. served as a Vice President of Defendant Bear
Stearns Asset Backed Securities I LLC at the time of the Securitizations and upon information and belief worked in New York, NY. Mr. Jurkowski signed the pre-effective amendments on Form S-3/A filed with the SEC to the Securitizations registered pursuant to the Shelf Registration Statements under file numbers 333-125422 and 333-131374 with the SEC on or about the dates noted in Table 3 below, and on information and belief, did so in New York. These pre-effective amendments to the Shelf Registration Statements were filed on behalf of the Securitizations noted in Table 3 below. 152. Defendant Samuel L. Molinaro, Jr. served as a Treasurer (Principal Financial and
Accounting Officer) and Director of Defendant Bear Stearns Asset Backed Securities I LLC at the time of the Securitizations and upon information and belief worked in New York, NY. Mr. 57
Molinaro, Jr. signed the Shelf Registration Statements under file numbers 333-125422 and 333131374, filed with the SEC on June 1, 2005 and January 30, 2006, respectively, and the related pre-effective amendments on Form S-3/A filed with the SEC on or about the dates noted in Table 3 below, and on information and belief, did so in New York. These Shelf Registration Statements were filed on behalf of the Securitizations noted in Table 3 below. 153. Defendant Thomas F. Marano served as a Director of both Defendants Bear
Stearns Asset Backed Securities I LLC and Structured Asset Mortgage Investments II Inc. at the time of the Securitizations and upon information and belief worked in New York, NY. Mr. Marano signed the Shelf Registration Statements under file numbers 333-140247, 333-125422, 333-132232, 333-120916, and 333-131374 filed with the SEC on January 26, 2007, June 1, 2005, March 6, 2006, December 1, 2004, and January 30, 2006, respectively, and the related preeffective amendments on Form S-3/A filed with the SEC on or about the dates noted in Table 3 below, and on information and belief, did so in New York. These Shelf Registration Statements were filed on behalf of the Securitizations noted in Table 3 below. 154. Defendant Kim Lutthans served as an Independent Director of Defendant Bear
Stearns Asset Backed Securities I LLC at the time of the Securitizations and upon information and belief worked in New York, NY. Ms. Lutthans signed the Shelf Registration Statements under file numbers 333-125422 and 333-131374 filed with the SEC on June 1, 2005 and January 30, 2006, respectively, and the related pre-effective amendments on Form S-3/A filed with the SEC on or about the dates noted in Table 3 below, and on information and belief, did so in New York. These Shelf Registration Statements were filed on behalf of the Securitizations noted in Table 3 below.
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155.
Defendant Katherine Garniewski served as an Independent Director of Defendant
Bear Sterns Asset-Backed Securities I LLC at the time of the Securitizations and upon information and belief worked in New York, NY. Ms. Garniewski signed the Shelf Registration Statements under file numbers 333-125422 and 333-131374 filed with the SEC on June 1, 2005 and January 30, 2006, respectively, and the related pre-effective amendments on Form S-3/A filed with the SEC on or about the dates noted in Table 3 below, and on information and belief, did so in New York. These Shelf Registration Statements were filed on behalf of the Securitizations noted in Table 3 below. 156. Defendant Jeffrey Mayer served as a Director of Defendants Bear Sterns Asset-
Backed Securities I LLC and Structured Asset Mortgage Investments II Inc. at the time of the Securitizations and upon information and belief worked in New York, NY. Mr. Mayer signed the Shelf Registration Statements under file numbers 333-140247, 333-132232, and 333-120916, filed with the SEC on January 26, 2007, March 6, 2006, and December 1, 2004, respectively, and the related pre-effective amendments on Form S-3/A filed with the SEC on or about the dates noted in Table 3 below, and on information and belief, did so in New York. These Shelf Registration Statements were filed on behalf of the Securitizations noted in Table 3 below. 157. Defendant Jeffrey L. Verschleiser served as President (Principal Executive
Officer) of Defendant Structured Asset Management II Inc. at the time of the Securitizations and upon information and belief worked in New York, NY. Mr. Verschleiser signed the Shelf Registration Statements under file numbers 333-140247, 333-132232, and 333-120916 filed with the SEC on January 26, 2007, March 6, 2006, and December 1, 2004, respectively, and the related pre-effective amendments on Form S-3/A filed with the SEC on or about the dates noted
59
in Table 3 below, and on information and belief, did so in New York. These Shelf Registration Statements were filed on behalf of the Securitizations noted in Table 3 below. 158. Defendant Michael B. Nierenberg served as a Treasurer (Principal Accounting
and Financial Officer) of Defendant Structured Asset Management II Inc. at the time of the Securitizations and upon information and belief worked in New York, NY. Mr. Nierenberg signed the Shelf Registration Statements under file numbers 333-140247, 333-132232, and 333120916 filed with the SEC on January 26, 2007, March 6, 2006, and December 1, 2004, respectively, and the related pre-effective amendments on Form S-3/A filed with the SEC on or about the dates noted in Table 3 below, and on information and belief, did so in New York. These Shelf Registration Statements were filed on behalf of the Securitizations noted in Table 3 below. C. 159. The Role of Each of the WaMu Entities
Each of the WaMu Entities, including the WaMu Individual Defendants, had a
role in the securitization process and the marketing for most or all of the Certificates issued in connection with the WaMu Securitizations, which included purchasing the mortgage loans from the originators, structuring the Securitizations, selling the mortgage loans to the depositor, transferring the mortgage loans to the trustee on behalf of the Certificateholders, underwriting the public offering of the Certificates, issuing the Certificates, and marketing and selling the Certificates to investors such as Fannie Mae and Freddie Mac. 160. With respect to each WaMu Securitization, the depositor, underwriters, and
Individual Defendants who signed the Registration Statement, as well as the WaMu Defendants who exercised control over their activities, are liable, jointly and severally, as participants in the registration, issuance and offering of the Certificates, including issuing, causing, or making materially misleading statements in the Registration Statement, and omitting material facts 60
required to be stated therein or necessary to make the statements contained therein not misleading. 1. 161. the PAA. 162. WaMu Bank has been involved in the securitization of a variety of assets since its JPMorgan Bank as Successor to WaMu Bank
Defendant JPMorgan Bank is the successor-in-interest to WaMu Bank pursuant to
incorporation. During the 2004, 2005 and 2006 fiscal years, WaMu Bank securitized approximately $34.7 billion, $71.6 billion, and $70.8 billion of residential mortgage loans, respectively. 163. WaMu Bank was the sponsor or co-sponsor of 12 of the 103 Securitizations. In
that capacity, WaMu Bank determined the structure of the Securitizations, initiated the Securitizations, purchased the mortgage loans to be securitized, determined distribution of principal and interest, and provided data to the credit rating agencies to secure investment grade ratings for the GSE Certificates. WaMu Bank also selected the depositor that would be used to transfer the mortgage loans from WaMu Bank to the trusts, and selected the underwriter for the Securitizations. In its role as sponsor, WaMu Bank knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing such loans would be issued by the relevant trusts. 164. For the 12 Securitizations that it sponsored or co-sponsored, WaMu Bank also
conveyed the mortgage loans to the depositor for each Securitization pursuant to a Mortgage Loan Purchase Agreement or Mortgage Loan Sale Agreement. In these agreements, WaMu Bank made certain representations and warranties to the depositors regarding the groups of loans collateralizing the Certificates. These representations and warranties were assigned by the depositor to the trustee for the benefit of the Certificateholders. 61
165.
Further, WaMu Bank employed its wholly-owned subsidiaries, WaMu Securities,
WaMu Acceptance, and WaMu Capital in key steps of the securitization process. Unlike typical arms length securitizations, many of the WaMu Securitizations involved various WaMu subsidiaries and affiliates at virtually each step in the chain. With respect to 20 of the 26 WaMu Securitizations, the sponsor was WaMu Bank or WaMu Securities, the depositor was WaMu Securities or WaMu Acceptance, and the lead underwriter was WaMu Capital. 166. As the sole owner of WaMu Securities, WaMu Acceptance, and WaMu Capital,
WaMu Bank had the practical ability to direct and control the actions of WaMu Securities, WaMu Acceptance, and WaMu Capital related to the Securitizations, and in fact exercised such direction and control over the activities of WaMu Securities, WaMu Acceptance, and WaMu Capital related to the issuance and sale of the Certificates. 167. WaMu Bank expanded its share of the residential mortgage-backed securitization
market to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 2. 168. WaMu Securities
WaMu Securities has been involved in the securitization of a variety of assets
since its incorporation. During the 2003, 2004, 2005 and 2006 fiscal years, WaMu Securities purchased approximately $26.1 billion, $10.8 billion, $11.3 billion, and $24.9 billion of residential mortgage loans, respectively, and securitized approximately $8.5 billion, $1.0 billion, $7.1 billion, and $17.1 billion of residential mortgage loans, respectively. 169. Defendant WaMu Securities was the sponsor or co-sponsor of 15 of the 103
Securitizations. In that capacity, WaMu Securities determined the structure of the Securitizations, initiated the Securitizations, purchased the mortgage loans to be securitized, 62
determined distribution of principal and interest, and provided data to the credit rating agencies to secure investment grade ratings for the GSE Certificates. WaMu Securities also selected the depositor that would be used to transfer the mortgage loans from WaMu Securities to the trusts, and selected the underwriter for the Securitizations. In its role as sponsor, WaMu Securities knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing such loans would be issued by the relevant trusts. 170. For the 15 Securitizations that it sponsored or co-sponsored, WaMu Securities
also conveyed the mortgage loans to the depositor for each Securitization pursuant to a Mortgage Loan Purchase Agreement or Mortgage Loan Sale Agreement. In these agreements, WaMu Securities made certain representations and warranties to the depositors regarding the groups of loans collateralizing the Certificates. These representations and warranties were assigned by the depositor to the trustee for the benefit of the Certificateholders. 171. Defendant WaMu Securities also acted as its own depositor from 1979 until 2005.
In this role, it engaged in purchasing mortgage loans, filing registration statements with the SEC, forming issuing trusts, assigning mortgage loans and all of its rights and interests in such mortgage loans to the trustee for the benefit of the certificateholders, and depositing the underlying mortgage loans into the issuing trusts. 172. WaMu Securities was the depositor for two of the 103 Securitizations. In its
capacity as depositor, WaMu Securities sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trusts. WaMu Securities, together with the other WaMu Defendants, was also responsible for preparing and filing the Registration Statements pursuant to which the Certificates were offered for sale. The trusts in turn held the mortgage loans for the
63
benefit of the Certificateholders, and issued the Certificates in public offerings for sale to investors such as Fannie Mae and Freddie Mac. 3. 173. WaMu Acceptance
Defendant WaMu Acceptance has been engaged in the securitization of mortgage
loans as a depositor since its incorporation. It is a special purpose entity formed solely for the purpose of purchasing mortgage loans, filing registration statements with the SEC, forming issuing trusts, assigning mortgage loans and all of its rights and interests in such mortgage loans to the trustee for the benefit of the certificateholders, and depositing the underlying mortgage loans into the issuing trusts. 174. Defendant WaMu Acceptance was the depositor for 18 of the 103 Securitizations.
In its capacity as depositor, WaMu Acceptance purchased the mortgage loans from the sponsor pursuant to a Mortgage Loan Purchase Agreement or Mortgage Loan Sale Agreement, as applicable. WaMu Acceptance then sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trusts. WaMu Acceptance, together with the other WaMu Defendants, was also responsible for preparing and filing the Registration Statements pursuant to which the Certificates were offered for sale. The trusts in turn held the mortgage loans for the benefit of the Certificateholders, and issued the Certificates in public offerings for sale to investors such as Fannie Mae and Freddie Mac. 4. 175. WaMu Capital
Defendant WaMu Capital was the lead underwriter for 31 of the Securitizations.
In that role, it was responsible for underwriting and managing the offer and sale of Certificates to Fannie Mae and Freddie Mac and other investors. WaMu Capital was also obligated to conduct meaningful due diligence to ensure that the Registration Statements did not contain any material
64
misstatements or omissions, including the manner in which the underlying mortgage loans were originated, transferred, and underwritten. 5. 176. The WaMu Individual Defendants
Defendant Richard Careaga served as a First Vice President of WaMu Asset
Acceptance Corporation at the time of the Securitizations. Mr. Careaga signed the Shelf Registration Statement under file number 333-130795 filed with the SEC on December 30, 2005 and the related pre-effective amendment on Form S-3/A filed with the SEC on or about the dates noted in Table 3 below. These Shelf Registration Statements were filed on behalf of the Securitizations noted in Table 3 below. 177. Defendant David Beck served as a Director and President (Principal Executive
Officer) of Defendant WaMu Asset Acceptance Corporation at the time of the Securitizations. Mr. Beck signed the Shelf Registration Statements under file numbers 333-130795 and 333141255 filed with the SEC on December 30, 2005 and March 13 2007, respectively, and the related pre-effective amendments on Form S-3/A filed with the SEC on or about the dates noted in Table 3 below. These Shelf Registration Statements were filed on behalf of the Securitizations noted in Table 3 below. 178. Defendant Diane Novak served as a Director of Defendant WaMu Asset
Acceptance Corporation at the time of the Securitizations. Ms. Novak signed the Shelf Registration Statements under file numbers 333-130795 and 333-141255 filed with the SEC on December 30, 2005 and March 13 2007, respectively, and the related pre-effective amendments on Form S-3/A filed with the SEC on or about the dates noted in Table 3 below. These Shelf Registration Statements were filed on behalf of the Securitizations noted in Table 3 below. 179. Defendant Thomas Green served as a Chief Financial Officer (Principal Financial
Officer) of Defendant WaMu Asset Acceptance Corporation at the time of the Securitizations. 65
Mr. Green signed the Shelf Registration Statement under file numbers 333-130795 filed with the SEC on December 30, 2005 and the related pre-effective amendment on Form S-3/A filed with the SEC on or about the dates noted in Table 3 below. These Shelf Registration Statements were filed on behalf of the Securitization noted in Table 3 below. 180. Defendant Rolland Jurgens served as a Controller of Defendants Long Beach
Securities Corporation and WaMu Asset Acceptance Corporation at the time of the Securitizations. Mr. Jurgens signed the Shelf Registration Statement under file numbers 333130795 filed with the SEC on December 30, 2005 and the related pre-effective amendments on Form S-3/A filed with the SEC on or about the dates noted in Table 3 below. Mr. Jurgens also signed the pre-effective amendment filed with the SEC on March 21, 2006 for the Shelf Registration Statement under file number 333-131252. These Shelf Registration Statements were filed on behalf of the Securitizations noted in Table 3 below. 181. Defendant Thomas G. Lehmann served as Director and President of Defendant
WaMu Asset Acceptance Corporation and as First Vice President, Director and Senior Counsel of Defendant Washington Mutual Mortgage Securities Corporation at the time of the Securitizations. Mr. Lehmann signed the Shelf Registration Statements under file numbers 333141255 and 333-103345 filed with the SEC on March 13, 2007 and February 20, 2003, respectively, and the related pre-effective amendments on Form S-3/A filed with the SEC on or about the dates noted in Table 3 below. These Shelf Registration Statements were filed on behalf of the Securitizations noted in Table 3 below. 182. Defendant Stephen Fortunato served as Chief Financial Officer of Defendants
Long Beach Securities Corporation and WaMu Asset Acceptance Corporation at the time of the Securitizations. Mr. Fortunato signed the Shelf Registration Statement under file number 333-
66
141255 filed with the SEC on March 13, 2007, and the related pre-effective amendment on Form S-3/A filed with the SEC on or about the dates noted in Table 3 below. Mr. Fortunato also signed the pre-effective amendments filed with the SEC on March 21, 2006 and March 31, 2006 for the Shelf Registration Statement under file number 333-131252. These Shelf Registration Statements were filed on behalf of the Securitizations noted in Table 3 below. 183. Defendant Donald Wilhelm served as Controller of Defendant WaMu Asset
Acceptance Corporation at the time of the Securitizations. Mr. Wilhelm signed the Shelf Registration Statement under file number 333-141255 filed with the SEC on March 13, 2007, and the related pre-effective amendment on Form S-3/A filed with the SEC on or about the dates noted in Table 3 below. These Shelf Registration Statements were filed on behalf of the Securitization noted in Table 3 below. 184. Defendant Michael J. Kula served as Director, Senior Vice President and Chief
Financial Officer of Defendant Washington Mutual Mortgage Securities Corporation at the time of the Securitizations. Mr. Kula signed the Shelf Registration Statement under file number 333103345 filed with the SEC on February 20, 2003, and the related pre-effective amendment on Form S-3/A filed with the SEC on or about the dates noted in Table 3 below. These Shelf Registration Statements were filed on behalf of the Securitization noted in Table 3 below. 185. Defendant Craig S. Davis served as Director of Washington Mutual Mortgage
Securities Corporation at the time of the Securitizations. Mr. Davis signed the Shelf Registration Statements under file number 333-103345 filed with the SEC on February 20, 2003, and the related pre-effective amendments on Form S-3/A filed with the SEC on or about the dates noted in Table 3 below. These Shelf Registration Statements were filed on behalf of the Securitizations noted in Table 3 below.
67
186.
Defendant Marc K. Malone served as a First Vice President and Controller
(Principal Accounting Officer) of Defendant Washington Mutual Mortgage Securities Corporation at the time of the Securitizations. Mr. Malone signed the Shelf Registration Statement under file number 333-103345 filed with the SEC on February 20, 2003, and the related pre-effective amendments on Form S-3/A filed with the SEC on or about the date noted in Table 3 below. These Shelf Registration Statements were filed on behalf of the Securitizations noted in Table 3 below. 187. Defendant Michael L. Parker served as a Director and President of Defendant
Washington Mutual Mortgage Securities Corporation at the time of the Securitizations. Mr. Parker signed the Shelf Registration Statement under file number 333-103345 filed with the SEC on February 20, 2003, and the related pre-effective amendments on Form S-3/A filed with the SEC on or about the date noted in Table 3 below. These Shelf Registration Statements were filed on behalf of the Securitizations noted in Table 3 below. 188. Defendant Megan M. Davidson served as a Director and Senior Vice President of
Defendant Washington Mutual Mortgage Securities Corporation at the time of the Securitizations. Ms. Davidson signed the Shelf Registration Statement under file number 333103345 filed with the SEC on February 20, 2003, and the related pre-effective amendments on Form S-3/A filed with the SEC on or about the date noted in Table 3 below. These Shelf Registration Statements were filed on behalf of the Securitizations noted in Table 3 below. D. 189. The Role of Each of the Long Beach Entities
Each of the Long Beach Entities, including the Long Beach Individual
Defendants, had a role in the securitization process and the marketing for most or all of the Certificates issued in connection with the Long Beach Securitizations, which included purchasing the mortgage loans from the originators, structuring the Securitizations, selling the 68
mortgage loans to the depositor, transferring the mortgage loans to the trustee on behalf of the Certificateholders, underwriting the public offering of the Certificates, issuing the Certificates, and marketing and selling the Certificates to investors such as Fannie Mae and Freddie Mac. 190. With respect to each Long Beach Securitization, the depositor, underwriters, and
Individual Defendants who signed the Registration Statement, as well as the Long Beach Defendants who exercised control over their activities, are liable, jointly and severally, as participants in the registration, issuance and offering of the Certificates, including issuing, causing, or making materially misleading statements in the Registration Statement, and omitting material facts required to be stated therein or necessary to make the statements contained therein not misleading. 1. 191. JPMorgan Bank as Successor to WaMu Bank and Long Beach Mortgage
Defendant JPMorgan Bank is the successor-in-interest to WaMu Bank pursuant to
the PAA. WMI and then WaMu Bank operated Long Beach Mortgage as a wholly-owned subsidiary until closing it down in 2007. 192. Long Beach Mortgage had been involved in the securitization of a variety of
assets since its incorporation. During the 2003, 2004, and 2005 fiscal years, Long Beach Mortgage securitized approximately $6.0 billion, $13.3 billion, and $15.4 billion of residential mortgage loans, respectively. 193. Long Beach Mortgage was the sponsor of nine of the 103 Securitizations. In that
capacity, Long Beach Mortgage determined the structure of the Securitizations, initiated the Securitizations, purchased the mortgage loans to be securitized, determined distribution of principal and interest, and provided data to the credit rating agencies to secure investment grade ratings for the GSE Certificates. Long Beach Mortgage also selected the depositor that would be 69
used to transfer the mortgage loans from Long Beach Mortgage to the trusts, and selected the underwriter for the Securitizations. In its role as sponsor, Long Beach Mortgage knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing such loans would be issued by the relevant trusts. 194. For the nine Securitizations that it sponsored, Long Beach Mortgage also
conveyed the mortgage loans to the depositor for each Securitization pursuant to a Mortgage Loan Purchase Agreement. In these agreements, Long Beach Mortgage made certain representations and warranties to the depositors regarding the groups of loans collateralizing the Certificates. These representations and warranties were assigned by the depositor to the trustee for the benefit of the Certificateholders. 195. Further, WaMu Bank employed its wholly-owned subsidiary, Long Beach
Securities, in key steps of the securitization process. Unlike typical arms length securitizations, the Long Beach Securitizations involved various Long Beach subsidiaries and affiliates at virtually each step in the chain. With respect to 11 of the Securitizations, the sponsor was WaMu Bank or Long Beach Mortgage, the depositor was Long Beach Securities, and the lead underwriter was WaMu Capital. 196. As the sole owner of Long Beach Securities, WaMu Bank had the practical ability
to direct and control the actions of Long Beach Securities related to the Securitizations, and in fact exercised such direction and control over the activities of Long Beach Securities related to the issuance and sale of the Certificates. 197. Long Beach Mortgage expanded its share of the residential mortgage-backed
securitization market to increase revenue and profits. The push to securitize large volumes of
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mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 2. 198. Long Beach Securities
Defendant Long Beach Securities has been engaged in the securitization of
mortgage loans as a depositor since its incorporation. It is a special purpose entity formed solely for the purpose of purchasing mortgage loans, filing registration statements with the SEC, forming issuing trusts, assigning mortgage loans and all of its rights and interests in such mortgage loans to the trustee for the benefit of the certificateholders, and depositing the underlying mortgage loans into the issuing trusts. 199. Defendant Long Beach Securities was the depositor for 15 of the 103
Securitizations. In its capacity as depositor, Long Beach Securities purchased the mortgage loans from the sponsor pursuant to a Mortgage Loan Purchase Agreement, as applicable. Long Beach Securities then sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trusts. Long Beach Securities, together with the other Long Beach Defendants, was also responsible for preparing and filing the Registration Statements pursuant to which the Certificates were offered for sale. The trusts in turn held the mortgage loans for the benefit of the Certificateholders, and issued the Certificates in public offerings for sale to investors such as Fannie Mae and Freddie Mac. 3. 200. The Long Beach Individual Defendants
Defendant Craig S. Davis served as Director and President of Defendant Long
Beach Securities at the time of the Securitizations. Mr. Davis signed the Shelf Registration Statements under file number 333-109318 filed with the SEC on September 30, 2003 and the related pre-effective amendments on Form S-3/A filed with the SEC on or about the dates noted
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in Table 3 below. These Shelf Registration Statements were filed on behalf of the Securitizations noted in Table 3 below. 201. Defendant David H. Zielke served as First Vice President and Assistant General
Counsel of WaMu Bank at the time of the Securitizations. Mr. Zielke signed the pre-effective amendments on Form S-3/A filed with the SEC to the Securitizations registered pursuant to the Shelf Registration Statements under file numbers 333-131252 and 333-109318 with the SEC on or about the dates noted in Table 3 below, and on information and belief, did so in New York. These pre-effective amendments to the Shelf Registration Statements were filed on behalf of the Securitizations noted in Table 3 below. 202. Defendant Thomas W. Casey served as a Director of Defendant Long Beach
Securities Corporation at the time of the Securitizations. Mr. Casey signed the Shelf Registration Statement under file number 333-131252 filed with the SEC on January 24, 2006, and the related pre-effective amendments on Form S-3/A filed with the SEC on or about the dates noted in Table 3 below. These Shelf Registration Statements were filed on behalf of the Securitizations noted in Table 3 below. 203. Defendant John F. Robinson served as a Director of Defendant Long Beach
Securities Corporation at the time of the Securitizations. Mr. Robinson signed the Shelf Registration Statement under file number 333-131252 filed with the SEC on January 24, 2006, and the related pre-effective amendments on Form S-3/A filed with the SEC on or about the dates noted in Table 3 below. These Registration Statements were filed on behalf of the Securitizations noted in Table 3 below. 204. Defendant Keith Johnson served as a Director and President of Defendant Long
Beach Securities Corporation at the time of the Securitizations. Mr. Johnson signed the Shelf
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Registration Statement under file number 333-131252 filed with the SEC on January 24, 2006, filed with the SEC. This Shelf Registration Statement was filed on behalf of the Securitizations noted in Table 3 below. 205. Defendant Suzanne Krahling served as a Chief Financial Officer and Senior Vice
President of Defendant Long Beach Securities Corporation at the time of the Securitizations. Ms. Krahling signed the Shelf Registration Statement under file number 333-131252 filed with the SEC on January 24, 2006, filed with the SEC. This Shelf Registration Statement was filed on behalf of the Securitizations noted in Table 3 below. 206. Defendant Larry Breitbarth served as a Controller and Senior Vice President of
Defendant Long Beach Securities Corporation at the time of the Securitizations. Mr. Breitbarth signed the Shelf Registration Statement under file number 333-131252 filed with the SEC on January 24, 2006, filed with the SEC. This Registration Statement was filed on behalf of the Securitizations noted in Table 3 below. 207. Defendant Marangal I. Domingo served as a Director and Chief Executive Officer
(Principal Executive Officer) of Defendant Long Beach Securities Corporation and as a Director of Washington Mutual Mortgage Securities Corporation at the time of the Securitizations. Mr. Domingo signed the Shelf Registration Statements under file numbers 333-109318 and 333103345 filed with the SEC on September 30, 2003 and February 20, 2003, respectively, and the related pre-effective amendments on Form S-3/A filed with the SEC on or about the dates noted in Table 3 below. These Shelf Registration Statements were filed on behalf of the Securitizations noted in Table 3 below. 208. Defendant Troy A. Gotschall served as a Chief Operations Officer and Executive
Vice President of Defendant Long Beach Securities Corporation at the time of the
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Securitizations. Mr. Gotschall signed the Shelf Registration Statement under file number 333109318 filed with the SEC on September 30, 2003 and the related pre-effective amendments on Form S-3/A filed with the SEC on or about the dates noted in Table 3 below. These Shelf Registration Statements were filed on behalf of the Securitizations noted in Table 3 below. 209. Defendant Art Den Heyer served as a Controller and Assistant Vice President of
Defendant Long Beach Securities Corporation at the time of the Securitizations. Mr. Heyer signed the Shelf Registration Statement under file number 333-109318 filed with the SEC on September 30, 2003, and the related pre-effective amendments on Form S-3/A filed with the SEC on or about the dates noted in Table 3 below. These Shelf Registration Statements were filed on behalf of the Securitizations noted in Table 3 below. 210. Defendant Stephen Lobo served as a Treasurer and Senior Vice President of
Defendant Long Beach Securities Corporation at the time of the Securitizations. Mr. Lobo signed the Shelf Registration Statement under file number 333-109318 filed with the SEC on September 30, 2003, and the related pre-effective amendments on Form S-3/A filed with the SEC on or about the dates noted in Table 3 below. These Registration Statements were filed on behalf of the Securitizations noted in Table 3 below. E. 211. The Other Underwriter Defendants
Defendants Citigroup, Credit Suisse, Goldman Sachs, and RBS Greenwich were
the seller underwriters for one of the 103 Securitizations each. In that role, each was responsible for selling the Certificates to Fannie Mae and Freddie Mac and other investors. 212. The Other Underwriter Defendants were also obligated to conduct meaningful due
diligence to ensure that the Registration Statements did not contain any material misstatements or omissions, including the manner in which the underlying mortgage loans were originated, transferred, and underwritten. 74
F. 213.
Defendants Failure To Conduct Proper Due Diligence
The Defendants failed to conduct adequate and sufficient due diligence to ensure
that the mortgage loans underlying the Securitizations complied with the representations in the Registration Statements. 214. Defendants had enormous financial incentives to complete as many offerings as
quickly as possible without regard to ensuring the accuracy or completeness of the Registration Statements, or conducting adequate and reasonable due diligence. For example, J.P. Morgan Acceptance, BSABS, SAMI, WaMu Securities, WaMu Acceptance, and Long Beach Securities, as the depositors, were paid a percentage of the total dollar amount of the offerings upon completion of the Securitizations, and J.P. Morgan Securities, BSC, and WaMu Capital, as the underwriters, were paid a commission based on the amount they received from the sale of the Certificates to the public. Moreover, because none of the Defendants assumed the credit risk of the underlying mortgage loans becoming delinquent or otherwise defaulting, there was little incentive to conduct full, complete, and meaningful due diligence of the statements in the Registration Statements relating to the underlying mortgage loans. 215. The push to securitize large volumes of mortgage loans contributed to the absence
of controls needed to prevent the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. In particular, Defendants failed to conduct adequate due diligence or otherwise to ensure the accuracy of the statements in the Registration Statements pertaining to the Securitizations. 216. For instance, Defendants retained third-parties, including Clayton Holdings, Inc.
(Clayton) and The Bohan Group, Inc. (Bohan), to analyze the loans they were considering placing in their securitizations, but waived a significant number of loans into the Securitizations that these firms had recommended for exclusion, and did so without taking adequate steps to 75
ensure that these loans had in fact been underwritten in accordance with applicable guidelines or had compensating factors that excused the loans non-compliance with those guidelines. On January 27, 2008, Clayton revealed that it had entered into an agreement with the New York Attorney General (the NYAG) to provide documents and testimony regarding its due diligence reports, including copies of the actual reports provided to its clients. According to The New York Times, as reported on January 27, 2008, Clayton told the NYAG that starting in 2005, it saw a significant deterioration of lending standards and a parallel jump in lending expectations and some investment banks directed Clayton to halve the sample of loans it evaluated in each portfolio. 217. JPMorgan, Bear Stearns, WaMu, and Long Beach were negligent in allowing into
the Securitizations a substantial number of mortgage loans that, as reported to them by thirdparty due diligence firms, did not conform to the underwriting standards stated in the Registration Statements, including the Prospectuses and Prospectus Supplements. Even upon learning from the third-party due diligence firms that there were high percentages of defective or at least questionable loans in the sample of loans reviewed by the third-party due diligence firms, JPMorgan, Bear Stearns, WaMu, and Long Beach failed to take any additional steps to verify that the population of loans in the Securitizations did not include a similar percentage of defective and/or questionable loans. 218. The Financial Crisis Inquiry Commission (the FCIC)10 found that in the period
from the first quarter of 2006 to the second quarter of 2007, 27 percent, 16 percent, 27 percent, and 9 percent of the mortgage loans JPMorgan, Bear Stearns/EMC, WaMu Bank, and WaMu
The Financial Crisis Inquiry Commission was created by the Fraud Enforcement and Recovery Act of 2009, and was established to examine the causes, domestic and global, of the current financial and economic crisis in the United States. 76
10
Securities submitted, respectively, to Clayton to review in RMBS loan pools were rejected by Clayton as falling outside the applicable underwriting guidelines. Of the mortgage loans that Clayton found defective, 51 percent, 42 percent, 29 percent, and 50 percent of the loans were subsequently waived in by JPMorgan, Bear Stearns/EMC, WaMu Bank, and WaMu Securities without proper consideration and analysis of compensating factors and included in securitizations such as the ones in which Fannie Mae and Freddie Mac invested here. See The Financial Crisis Inquiry Report, at 167, Jan. 2011, available at http://fcicstatic.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_full.pdf. 219. As disclosed in a report as part of the NYAGs ongoing investigation of
investment banking misconduct in underwriting mortgage-backed securities, Clayton routinely provided investment banks with detailed reports of loans that were not compliant with underwriting guidelines, but the investment banks, including JPMorgan, Bear Stearns, and WaMu, routinely overrode the exclusion of a significant percentage of rejected loans from purchase and securitization. 1. 220. The JPMorgan Defendants
Many of the mortgage loans underlying the J.P. Morgan-sponsored and -deposited
Securitizations were originated by non-party Chase Home Finance LLC (CHF), the home mortgage division of Defendant JPMorgan Bank. CHF originated far more of the mortgage loans underlying the JPMorgan Securitizations than any other originator. For six trusts, CHF was responsible for as many as 100 percent of the underlying mortgage loans. Specifically, JPMorgan Bank, through CHF, originated all the loans in the following Securitizations: JPMAC 2006-CH1, JPMAC 2006-CH2, JPMAC 2007-CH2, JPMAC 2007-CH3, JPMAC 2007-CH4, and JPMAC 2007-CH5.
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221.
By 2007, CHF was one of top overall mortgage originators by volume in the
United States with an 8.6 percent market share. CHF was also one of the top overall subprime mortgage originators by volume in the United States in 2007 with a 6.0 percent market share. 222. J.P. Morgan Securities was, in turn, one of the largest issuers of private mortgage-
backed securities in 2007 with a 5.7 market share. From 2000 to 2007, JPMorgan increased its volume of subprime RMBS issuances from negligible to $11.4 billion, with a total issuance of $22.8 billion from 2005-2007, or the eleventh largest in the United States. 223. CHFs departure from industry standards was confirmed by James Dimon, CEO
of JPMorgan Chase. On January 13, 2010, Mr. Dimon testified under oath to the Financial Crisis Inquiry Commission (FCIC) that the underwriting standards of our mortgage business should have been higher. We have substantially enhanced our mortgage underwriting standards, essentially returning to traditional 80 percent loan to value ratios and requiring borrowers to document their income. 224. On September 15, 2010, William Collins Buell VI, formerly of J.P. Morgan
Securities, told the FCIC: [T]here was a very competitive process to offer a wider and wider array of products to borrowers . . . there was a tremendous amount of competition to try to make products that people could actually get . . . and that investors and lenders would be interested in buying. This competition led to a reduction in diligence and oversight on the part of JPMorgan. Buell stated that from 2005 to 2007, JPMorgans underwriting guidelines and origination standards were deteriorating. 225. On September 1, 2010, JPMorgans Chief Risk Officer Barry Zubrow told the
FCIC that there was a tradeoff between certain financial covenants and protections versus a desire to maintain market share.
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226.
The Federal Reserve of New York concluded in an April 15, 2008 report that
JPMorgan needed to strengthen [its] exposure measurement and limit framework around leveraged lending. The report held that JPMorgans deterioration in the quality of the firms consumer portfolios resulted from loosened underwriting standards and shortcomings in oversight and controls governing third party mortgage loan origination activities, as well as breakdowns in the originate to distribute model, namely weak underwriting standards and investor concentration risk in collateralized loans obligations. 227. In his January 13, 2010 testimony, Mr. Dimon confirmed CHFs overreliance on
third parties to originate loans, testifying that these broker-loans performed markedly worse: Weve also closed down mostalmost all of the business originated by mortgage brokers where credit losses have generally been over two times worse than the business we originate ourselves, admitting that there were some unscrupulous mortgage salesmen and mortgage brokers. And, you know, some people missold. 228. When asked whether JPMorgan conducted stress tests in order to prevent its
exposure to these systemic risks and what risk management procedures were in place, Mr. Dimon replied: [i]n mortgage underwriting, somehow we just missed, you know, that home prices dont go up forever and that its not sufficient to have stated income in home [loans]. Mr. Dimon further confirmed this failure of basic due diligence when he was later quoted as saying,[t]here was a large failure of common sense because [v]ery complex securities shouldnt have been rated as if they were easy-to-value bonds. 229. Furthermore, Reuters reported on May 13, 2010 that the SEC and U.S.
prosecutors were conducting a broad investigation of JPMorgan and five other major Wall Street
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banks about whether they mislead investors about mortgage securities deals. Criminal Probe Targets 6 Wall Street Firms: Source, Reuters (May 13, 2010). 2. 230. The Bear Stearns Entities
Bear Stearns also sacrificed due diligence and process controls in order to both
increase its volume of mortgage originations and hasten its delivery of mortgage loans to the RMBS market. By 2007, EMC was one of the top overall subprime mortgage originators by volume in the United States with a 4.1 percent market share. BSC was, in turn, one of the largest issuers of private mortgage-backed securities in 2007 with a 6.8 percent market share. From 2005-2007, Bear Stearns total volume of subprime RMBS issuances was $37.4 billion, or the sixth largest in the United States. 231. In 2005, BSC quietly changed its internal protocols to allow EMC to securitize
loans before the expiration of the 30- to 90-day early payment default period following the acquisition of a loan by EMC. This change allowed EMC to enhance earnings by increasing the volume of its Securitizations. 232. BSCs prior policy had been to keep loans in inventory until the early payment
default period was over. Seasoning loans during this period prevented EMC from securitizing loans that, according to its internal guidelines, were likely to contain some form of misrepresentations and should not have been made. Securitizing these loans as quickly as possible allowed EMC to avoid the possibility of a default or delinquency rendering them unsecuritizable. 233. BSC executives, such as Defendant Jeffrey Verschleiser, forcefully advocated
packaging loans purchased by EMC into securities as quickly as possible. In a recently published June 13, 2006 email, Mr. Verschleiser asserted that his office needed to be certain we can securitize the loans with 1 month [early payment default] before the [early payment default] 80
period expires. Similarly, recently published documents show that, in or about December 2005, Mr. Verschleiser ordered Bear Stearns deal managers and traders to start securitizing all the subprime loans closed in December for the conduit by January. 234. Internal communications confirm that EMC was securitizing large numbers of
defective loans amid a break-down in its due diligence processes. In a recently published March 2006 email, BSC Vice President Robert Durden admitted that many loans purchased by EMC were securitized without any due diligence clearance: I agree the flow loans were not flagged appropriately and we securitized many of them which are still to this day not cleared. I think the ball was dropped big time on the flow processes involved in the post close [due diligence], from start to finish. 3. 235. The WaMu Entities
WaMu Bank also let the demands of the market dictate its adherence to sound
underwriting guidelines and securitization procedures. By 2007, WaMu Bank was one of the top overall mortgage originators by volume in the United States, with a 4.1 percent market share. WaMu Capital, in turn, was one of the largest issuers of mortgage-backed securities in 2007 with a 5.7 market share. From 2005-2007, WaMu Capitals total volume of subprime RMBS issuances was $11.3 billion. 236. In 2005, with the market for conventional, fixed-rate loans drying up, WaMu
Bank formalized a strategy to move away from low risk to high risk home loan origination. On April 13, 2010, James G. Vanasek, WaMu Banks former Chief Credit Officer/Chief Risk Officer, testified to the Senate Permanent Subcommittee on Investigations (PSI) that WaMu Banks focus had shifted to becoming more of a higher risk, sub-prime lender . . . This effort was characterized by statements advocating that the company become either via acquisition or internal growth a dominant sub-prime lender. 81
237.
Documents released in April 2010 by the PSI show that, in April 2006, the
President of WaMu Banks Home Loans Division gave a presentation to the WaMu Board of Directors entitled Shift to Higher Margin Products. The presentation showed that the least profitable loans were government-backed and fixed loans; the most profitable were Option ARM, Home Equity, and Subprime Loans. Subprime loans, at 150 basis points, were eight times more profitable than a fixed loan at 19 basis points. 238. In its push to generate more risky loan products, WaMu Bank pressed its sales
agents to pump out a greater volume of loans with loose adherence to its own underwriting guidelines. WaMu Bank gave mortgage brokers handsome commissions for selling the riskiest loans, which carried higher fees, bolstering profits and, ultimately, the compensation of the banks executives. In a New York Times article published December 27, 2008, Steven M. Knobel, the founder of an appraisal company, Mitchell, Maxwell & Jackson, that did business with WaMu Bank until 2007, stated that [i]t was the Wild West . . . If you were alive, they would give you a loan. Actually, I think if you were dead, they would still give you a loan. 239. WaMu Bank pushed its Option ARM loans on borrowers regardless of their
sophistication, income level, or financial stability. An Option ARM loan is typically a 30-year Adjustable Rate Mortgage (ARM) that initially offers the borrower four monthly payment options: (i) a specified minimum payment (which was typically lower than the interest payment and therefore caused the loan to grow, referred to as negative amortization), (ii) an interest-only payment, (iii) a 15-year fully amortizing payment, and (iv) a 30-year fully amortizing payment. The rate of an ARM loan also adjusts monthly and if the loan rate was higher than the required interest in the payment, the balance of the loan would increase (called negative amortization). Fay Chapman, WaMu Banks former Chief Legal Officer, candidly admitted to the Seattle Times
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in an article published on October 26, 2009, that [m]ortgage brokers put people into the product who shouldnt have been. In 2003, WaMu originated $32.3 billion of Option ARM loans. By 2005, that number almost had doubled to $64.1 billion. 240. WaMu Banks employee compensation structure favored these types of high-risk
home loans. In a document entitled 2007 Product Strategy, WaMu Bank noted that it must maintain a compensation structure that supports the high margin product strategy. A compensation grid from 2007 shows the company paid the highest commissions on Option ARMs, subprime loans and home-equity loans: A $300,000 Option ARM, for example, would earn a $1,200 commission, versus $960 for a fixed-rate loan of the same amount. The rates increased as a consultant made more loans; some regularly pulled down six-figure incomes. Likewise, a WaMu Bank Retail Loan Consultant 2007 Incentive Plan explained that [i]ncentive tiers reward high margin products . . . such as the Option ARM, Non-prime referrals and Home Equity Loans . . . WaMu also provides a 15 bps kicker for selling 3 year prepayment penalties. 241. WaMu Bank could originate so many high-risk loans because its underwriting
guidelines had become so loose that they were rendered meaningless. In a recently-surfaced internal newsletter dated October 31, 2005, risk managers were told they needed to shift (their) ways of thinking away from acting as a regulatory burden on the companys lending operations and toward being a customer service that supported WaMus five-year growth plan. 242. On September 28, 2007, WaMu Banks Corporate Credit Review (CCR) Team
circulated an internal report on first payment defaults in Wholesale Specialty Lending. The report determined that [c]redit weakness and underwriting deficiencies is a repeat finding with CCR. It additionally concluded that fraud detection tools are not being utilized effectively by
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the Underwriters and Loan Coordinator, and the credit infrastructure is not adhering to the established process and controls. 243. In early 2008, Radian Guaranty Inc., one of WaMu Banks mortgage insurers,
issued a similar report to WaMu Bank with the results of its review conducted from August 13, 2007 to September 28, 2007. The objectives of the review were, inter alia, to determine WaMu Banks compliance with Radians underwriting guidelines and eligible loan criteria, and to assess the quality of the lenders underwriting decisions. Radian gave WaMu Bank an overall rating of Unacceptable. Of 133 loans reviewed, it found 11 loans or 8 percent had insufficient documents to support the income used to qualify the borrower and exceptions to approved guidelines. Half of the delinquent loans reviewed had questionable property values, occupancy and possible strawbuyers [sic]. 244. Likewise, in a February 20, 2008 e-mail to Mr. Rotella and Mr. Killinger, WaMu
Banks Chief Enterprise Risk Officer admitted to poor underwriting which in some cases causes our origination data to be suspect particularly with respect to DTI [Debt To Income ratio]. 245. In a Seattle Times article published October 25, 2009, Tom Golon, a former senior
home loan consultant for WaMu in Seattle, stated that Countrywide was held up as the competitor, because they would do anything low-doc, no-doc, subprime, no money down. The WaMu staff was subjected to total blanketing e-mails, memos, meetings set up so people understood that this was what the company wanted them to do. 246. Various witnesses with direct experience in WaMu Banks underwriting
operations also testified before the FCIC that, during the relevant period, exceptions to WaMus already loose underwriting guidelines were the rule. For example, in testimony before the PSI, Mr. Vanasek admitted that adherence to policy was a continual problem at Washington Mutual
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where line managers particularly in the mortgage area not only authorized but encouraged policy exceptions. Similarly, Fay Chapman, WaMus Chief Legal Officer from 1997 to 2007, relayed that, on one occasion, [s]omeone in Florida made a second-mortgage loan to O.J. Simpson, and I just about blew my top, because there was this huge judgment against him from his wifes parents. When she asked how they could possibly close it, they said there was a letter in the file from O.J. Simpson saying the judgment is no good, because I didnt do it. 247. WaMu Banks appetite for volume kept it from diligently investigating the
rampant disregard of underwriting guidelines that infected its origination business. Perhaps the most compelling evidence involves two top loan producers at two different WaMu Bank origination offices, called Montebello and Downey, in Southern California. Each of those loan officers made hundreds of millions of dollars in home loans each year and consistently won recognition for their efforts. Recently disclosed documents revealed that a 2005 internal WaMu Bank review found that loans from those two offices had an extremely high incidence of confirmed fraud (58% for [Downey], 83% for [Montebello]). The review found that an extensive level of loan fraud exists in the Emerging Markets CFCs [Customer Fulfillment Centers], virtually all of it stemming from employees in these areas circumventing bank policy surrounding loan verification and review. The review went on: Based on the consistent and pervasive pattern of activity among these employees, we are recommending firm action be taken to address these particular willful behaviors on the part of the employees named. But virtually none of the proposed recommendations were implemented. 248. Recently published WaMu internal documents show that, toward the end of 2006
and the beginning of 2007, WaMu Bank started to see rising delinquency and default rates in its
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mortgage loans, particularly among Option ARM loans. WaMu thus made a deliberate decision at the highest levels to off-load these loans through securitization and sale to investors. 249. Not only did WaMu decide to sell defective loans to unsuspecting investors, but
they also sold fraudulent loans. A September 2008 internal review found that controls intended to prevent the sale of fraudulent loans to investors were not currently effective and there was no systematic process to prevent a loan. . . confirmed to contain suspicious activity from being sold to an investor. In other words, even where a loan was marked with a red flag indicating fraud, that did not stop the loan from being sold to investors. The 2008 review found that, of 25 loans tested, 11 reflected a sale date after the completion of the investigation which confirmed fraud. There is evidence that this control weakness has existed for some time. 4. 250. The Long Beach Entities
Long Beach Mortgage was acquired by WMI in 1999. Long Beach Mortgage
served as WaMu Banks subprime loan origination division until January 1, 2006, and thereafter was known as WaMu Banks specialty mortgage lending channel. Some of the programs at Long Beach Mortgage included stated income document programs for W-2 wage earners, a program that started in 2005. Long Beach Mortgage would also approve 100 percent financing for stated-income borrowers with FICO scores as low as 500. 251. There was also a three letters of reference program for self-employed
borrowers, where a borrower only had to submit three letters of reference from anyone for whom they supposedly worked. No attempt was made to verify the information in the letters of reference. Some of the letters of reference that were considered acceptable included statements such as: So-and-so cuts my lawn and does a good job. At Long Beach Mortgage, FICO scores ranged from 500-620, but Long Beach Mortgage salespeople considered a borrower with a 620 FICO score to have good credit. 86
252.
Borrowers could get a loan with no established FICO score merely by providing
three alternative trade lines. An alternative trade line was anything that did not appear on the borrowers credit report, including documentation of car insurance payments, verification of rent payment, or a note from a person claiming the borrower had repaid a personal debt. Long Beach Mortgage originated a significant amount of these types of problematic loans. These loans made up the majority of first payment defaults i.e., loans on which the borrower failed to make even the first payment during the end of 2006. 253. As a result of these and other practices, in January 2004, the FDIC and the State
of Washington sent a report to WaMus Board concerning, inter alia, unsatisfactory underwriting practices at affiliate Long Beach Mortgage Company. The recently released report noted an internal report dated July 31, 2003, which found that 40% (109 of 271) of loans reviewed were considered unacceptable due to one or more critical errors. This raised concerns over [Long Beach Mortgage Companys] ability to meet the representations and warrantys [sic] made to facilitate sales of loan securitizations. FDIC/Washington State Joint Visitation Report of Washington Mutual Bank, January 13, 2004. It further noted that a second report in August 2003 had reached similar conclusions and disclosed that [Long Beach Mortgage Companys] credit management and portfolio oversight practices were unsatisfactory. Id. The FDICWashington examiners found that, out of 4,000 loans reviewed, approximately, 950 were deemed saleable, 800 were deemed unsalable, and the remainder contained deficiencies requiring remediation prior to sale. Id. The examiners concluded that [t]he culture, practices, and systems at Long Beach Mortgage Company are inconsistent with the lending activity of the bank. Id.
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254.
In a recently published November 1, 2005 internal report entitled LBMC Post
Mortem, the authors concluded that Long Beach Mortgage Companys [u]nderwriting guidelines are not consistently followed and conditions are not consistently or effectively met. What is more, [u]nderwriters are not consistently recognizing non-arms length transactions and/or underwriting associated risk effectively. 255. Another recently surfaced April 17, 2006 report from WaMus General Auditor,
Randy Melby, to the Audit Committee of WaMus Board of Directors, discussed Long Beach Mortgage Companys relaxed credit guidelines, breakdowns in manual underwriting processes, and inexperienced subprime personnel. Mr. Melby concluded that [t]hese factors, coupled with a push to increase loan volume and the lack of an automated fraud monitoring tool, exacerbated the deterioration in loan quality. 256. Ten days later, on April 27, 2006, Steve Rotella, WaMus COO, informed
WaMus Chairman and CEO, Kerry Killinger, that Long Beach Mortgage delinquencies are up 140% and foreclosures close to 70% . . . First payment defaults are way up and the 2005 vintage is way up relative to previous years. It is ugly. In another recently uncovered e-mail, Mr. Rotella commented two weeks later that LBMC is terrible due, among other things to, repurchases, EPDs, manual underwriting, very weak servicing/collections practices and a weak staff. 257. In a recently disclosed December 11, 2006 e-mail from Cynthia Abercrombie,
Senior Vice President/Senior Risk Officer to Ron Cathcart, WaMus Chief Enterprise Risk Officer, Ms. Abercrombie noted that post-funding reviews of Long Beach Mortgage loans identified the following issues: Appraisal deficiencies that could impact value and were not addressed;
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258.
Material misrepresentations relating to credit evaluation; Legal documents were missing or contained errors or discrepancies; Credit evaluation or loan decision errors; and Required credit documentation was insufficient or missing from the file.
The conclusion of the reviews was a lack of proper execution of the credit
guidelines and weakness in controls around clearing conditions. In response, Mr. Cathcart admitted that Long Beach represents a real problem for WaMu. 259. Long Beach employees were incentivized to disregard underwriting guidelines in
favor of volume. The Long Beach 2006 Incentive Plan, for example, outlined four compensation tiers that were based on loan volume. The largest producers of loans made the most money because compensation was linked to volume and also earned a higher rate of commission. 260. On August 20, 2007, WaMu Audit Services issued a report (recently made public)
entitled Long Beach Mortgage Loan Origination & Underwriting. The report was sent to WaMus most senior executives, including Mr. Killinger, Mr. Rotella, Mr. Melby, Mr. Schneider and Mr. Cathcart. Among its conclusions were: Underwriting guidelines established to mitigate the risk of unsound underwriting are not always followed and decision-making methodology is not always fully documented. [F]ocused areas of improvement for LMB are appraisal deficiencies, credit evaluation or loan decision errors, unaddressed fraud alerts, missing legal documents, material misrepresentations relating to credit evaluations, debt capacity or debt ratio error, missing title report, insufficient credit documentation, invalid or insufficient signing authority, misrepresentation in appraisal information, missing Final HUD 1 statements that when obtained had unaddressed issues. Policies and procedures defined [sic] to allow and monitor reasonable and appropriate exceptions to underwriting guidelines are not consistently followed.
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261.
In a December 21, 2009 interview with the Huffington Post Investigative Fund,
Diane Kosch, a former member of Long Beach Mortgages quality control team, stated that [m]ost of the time everything that we wanted to stop the loan for went above our heads to upper management. Quality team members became so suspicious, she said, that they started making copies of problem files to protect themselves. Karen Weaver, a former underwriter in Long Beach Mortgages Atlanta office, attested that a lot of brokers were making up pay stubs and presenting that. A former Long Beach Mortgage account executive for Colorado sales, Pam Tellinger, admitted she knew brokers who were doing fraudulent documents all day long. Antoinette Hendry, a former underwriter and team manager at Long Beach in California, described how account executives would offer kickbacks of money to underwriters to get questionable loans approved. Long Beach did not have the appropriate due diligence systems in place to monitor and prevent these events from occurring. G. 1. 262. Liability of JPMorgan Chase and JPMorgan Bank as Successors in Interest Liability of the JPMorgan Defendants as Successors in Interest to the Bear Stearns Entities
On March 16, 2008, BSI entered into the Agreement and Plan of Merger with
JPMorgan Chase for the purpose of consummating a strategic business combination transaction between the two entities. 263. Pursuant to the Merger, BSI merged with Bear Stearns Merger Corporation, a
wholly-owned subsidiary of JPMorgan Chase, making BSI a wholly-owned subsidiary of JPMorgan Chase. As such, upon the May 30, 2008 effective date of the Merger, JPMorgan Chase became the ultimate corporate parent of BSIs subsidiaries BSC, EMC, SAMI and BSABS.
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264.
JPMorgan took immediate control of Bear Stearns business and personnel
decisions, according to The New York Times in an article published April 6, 2008. The article cited an internal JPMorgan memo revealing that JPMorgan Chase, which is taking over the rival investment bank Bear Stearns, will dominate the management ranks of the combined investment banking and trading businesses. Of the 26 executive positions in the new merged investment banking and trading division, only five would come from Bear Stearns. 265. In a June 30, 2008 press release describing internal restructuring to be undertaken
pursuant to the Merger, JPMorgan stated its intent to assume Bear Stearns and its debts, liabilities, and obligations as follows: Following completion of this transaction, Bear Stearns plans to transfer its brokerdealer subsidiary Bear, Stearns & Co. Inc. to JPMorgan Chase, resulting in a transfer of substantially all of Bear Stearns assets to JPMorgan Chase. In connection with such transfer, JPMorgan Chase will assume (1) all of Bear Stearns then-outstanding registered U.S. debt securities; (2) Bear Stearns obligations relating to trust preferred securities; (3) Bear Stearns thenoutstanding foreign debt securities; and (4) Bear Stearns guarantees of thenoutstanding foreign debt securities issued by subsidiaries of Bear Stearns, in each case, in accordance with the agreements and indentures governing these securities. 266. BSC subsequently merged with J.P. Morgan Securities and is now doing business
as J.P. Morgan Securities. JPMorgans 2008 Annual Report described the transaction as a merger, stating that [o]n October 1, 2008, J.P. Morgan Securities Inc. merged with and into Bear, Stearns & Co. Inc., and the surviving entity changed its name to J.P. Morgan Securities Inc. 267. Further, the former Bear Stearns website, www.bearstearns.com, redirects Bear
visitors to J.P. Morgan Securities website, and the EMC website, www.emcmortgagecorp.com, now identifies EMC as a brand of JPMorgan Bank.
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268.
J.P. Morgan Securities was fully aware of the pending claims and potential claims
against Bear Stearns when it consummated the merger. J.P. Morgan Securities has further evinced its intent to assume Bear Stearns liabilities by paying to defend and settle lawsuits brought against Bear Stearns. 269. As a result of BSIs acquisition, JPMorgan Chases transfer of substantially all
of Bear Stearns assets to JPMorgan Chase, and explicit assumption of Bear Stearns debt, JPMorgan Chase is the successor-in-interest to BSI and is jointly and severally liable for the misstatements and omissions of material fact alleged herein of BSI. 270. As a result of its merger with BSC, J.P. Morgan Securities is the successor-in-
interest to BSC and is jointly and severally liable for the misstatements and omissions of material fact alleged herein of BSC. 271. Therefore, this action is brought against JPMorgan Chase as the successor to BSI
and J.P. Morgan Securities as successor to BSC. BSI is not a defendant in this action. 2. 272. Liability of the JPMorgan Defendants as Successors in Interest to the WaMu and Long Beach Entities
On September 25, 2008, the Office of Thrift Supervision closed WaMu Bank and
named the FDIC as receiver. Shortly thereafter, the FDIC, in its corporate and receivership capacities, and JPMorgan Bank entered into a Purchase and Assumption Agreement for JPMorgan Bank to purchase substantially all of the assets and assume all deposit and substantially all other liabilities of WaMu Bank. See PAA. 273. The PAA described the assets purchased by JPMorgan Bank as:
3.1 Assets Purchased by Assuming Bank. Subject to Sections 3.5, 3.6 and 4.8, the Assuming Bank hereby purchases from the Receiver, and the Receiver hereby sells, assigns, transfers, conveys, and delivers to the Assuming Bank, all right, title, and interest of the Receiver in and to all of the assets (real, personal and mixed, wherever located and however acquired) including all subsidiaries, joint ventures, partnerships, and any and all other business combinations or 92
arrangements, whether active, inactive, dissolved or terminated, of the Failed Bank whether or not reflected on the books of the Failed Bank as of Bank Closing. Assets are purchased hereunder by the Assuming Bank subject to all liabilities for indebtedness collateralized by Liens affecting such Assets to the extent provided in Section 2.1. The subsidiaries, joint ventures, partnerships, and any and all other business combinations or arrangements, whether active, inactive, dissolved or terminated being purchased by the Assuming Bank includes, but is not limited to, the entities listed on Schedule 3.1a. Notwithstanding Section 4.8, the Assuming Bank specifically purchases all mortgage servicing rights and obligations of the Failed Bank. PAA 3.1 (emphasis added). 274. Pursuant to the PAA, JPMorgan Bank purchased all subsidiaries of WaMu
Bank, including WaMu Capital, WaMu Acceptance, WaMu Securities, and Long Beach Securities. As such, WaMu Capital, WaMu Acceptance, WaMu Securities, and Long Beach Securities became wholly-owned subsidiaries of JPMorgan Bank. 275. JPMorgan Bank also assumed nearly all the liabilities of WaMu Bank:
2.1 Liabilities Assumed by Assuming Bank. Subject to Sections 2.5 [Borrower Claims] and 4.8 [Agreement with Respect to Certain Existing Agreements], the Assuming Bank expressly assumes at Book Value (subject to adjustment pursuant to Article VIII) and agrees to pay, perform, and discharge, all of the liabilities of the Failed Bank which are reflected on the Books and Records of the Failed Bank as of Bank Closing, including the Assumed Deposits and all liabilities associated with any and all employee benefit plans, except as listed on the attached Schedule 2.1, and as otherwise provided in this Agreement (such liabilities referred to as Liabilities Assumed). Notwithstanding Section 4.8, the Assuming Bank specifically assumes all mortgage servicing rights and obligations of the Failed Bank. PAA 2.1 (emphasis added). 276. The only liabilities expressly disclaimed by JPMorgan Bank were any liability
associated with borrower claims for payment of or liability to any borrower for monetary relief, or that provide for any other form of relief to any borrower . . . related in any way to any loan or commitment to lend made by the Failed Bank prior to failure, or to any loan made by a third
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party in connection with a loan which is or was held by the Failed Bank, or otherwise arising in connection with the Failed Banks lending or loan purchase activities. PAA 2.5. 277. JPMorgan Bank thus assumed all liabilities relating to the WaMu Securitizations,
as the WaMu Securitizations were reflected on the Books and Records of WaMu Bank as of the date of its closing, and were not expressly disclaimed by JPMorgan Bank in the PAA. 278. The FDIC itself asserts that JPMorgan Bank assumed the liabilities associated
with the securitization activities of WaMu Bank. In a Reply Memorandum filed on February 11, 2011, in Deutsche Bank Natl Trust Co. v. FDIC (as receiver for WaMu Bank) and JPMorgan Chase Bank, N.A., D.C. District Court, No. 09-1656 RMC, concerning whether WaMu Bank or the FDIC retained the trust-related liabilities for WaMu Banks securitization activities, the FDIC asserted that the liabilities and obligations at issue were assumed in their entirety by [JPMorgan Bank] under the P&A Agreement, thereby extinguishing any potential liability by FDIC Receiver. Deutsche Docket #58 at 1. 279. The FDIC also stated, in a November 22, 2010 filing, that FDIC Receivers
exercise of the transfer provision11 in this case is consistent with the general principle that when an entity purchases the assets of an ongoing business and expressly or impliedly assumes the related liabilities, the acquiring entity succeeds to the pre-sale debts and obligations of the business, thereby extinguishing the liability of the seller. Deutsche Docket #54 at 38. Moreover, [i]n connection with that purchase, FDIC Receiver transferred to [JPMorgan Bank],
A liability is held by either FDIC Receiver or the assuming institution, not both, and FDIC Receivers liability ends when the transferees liability begins. Here, [JPMorgan Bank] purchased substantially all of [WaMu Banks] assets in a whole bank transaction, including its ongoing banking operations and nationwide mortgage banking activities. Ex. 9, JPMorgan Bank 2009 Form 10-K (2/24/10) at 58, see [PAA] at 1. Deutsche Docket #54 at 39. 94
11
and [JPMorgan Bank] expressly agreed to assume and to pay, perform and discharge, substantially all of [WaMu Banks] liabilities. Id. citing PAA 2.1. 280. The Final Report of the Examiner (Examiners Report), submitted by the court-
appointed Examiner on November 1, 2010 during Washington Mutual, Inc.s bankruptcy, further supports FHFAs and the FDICs assertion that all liabilities associated with the WaMu Securitizations were transferred to JPMorgan Bank as a result of the PAA. In re Washington Mutual, Inc., No. 08-12229 MFW (Bankr. D. Del. Nov. 1, 2010) (filed publicly with exhibits on Nov. 22, 2010). 281. Per the exhibits to the Examiners Report, the FDIC offered five different
transaction structures to prospective bidders for the assets of WaMu Bank. JPMorgan Bank elected to bid on what was described as Transaction #3: C. Transaction #3 Whole Bank, All Deposits. Under this transaction, the Purchase and Assumption (Whole Bank), the Potential Acquirer whose Bid is accepted by the Corporation assumes the Assumed Deposits of the Bank and all other liabilities but specifically excluding the preferred stock, non-asset related defensive litigation, subordinated debt and senior debt, and purchases all of the assets of the Bank, excluding those assets identified as excluded assets in the Legal Documents and subject to the provisions thereof. Exam. Report Ex. JPMCD 000001550.00009 (description); JPMCD_000002773.0001 (JPMorgan Bank Bid Form). This is in contrast with Transactions #4 and #5, which offered JPMorgan Bank the option of assuming only certain other liabilities. Id. 282. Additionally, during the drafting process, the FDIC posted a FAQ for potential
acquirers with respect to the WaMu Bank transaction. The FDICs unequivocal position was that the mortgage securitization obligations passed to the acquirer: 9. Are the off-balance sheet credit card portfolio and mortgage securitizations included in the transaction? Do you expect the acquirer to assume the servicing obligations? If there are pricing issues associated with the contracts (e.g., the pricing is disadvantageous to the assuming institution), can we take advantage of the FDICs repudiation powers to effect a repricing? 95
Answer: The banks interests and obligations associated with the off-balance sheet credit card portfolio and mortgage securitizations pass to the acquirer. Only contracts and obligations remaining in the receivership are subject to repudiation powers. Examiners Report Ex. JPMCD 000001550.00212 JPMCD 000001550.00213. 283. In fact, JPMorgan Bank knew and expressed concern that the PAA and Section
2.1, as drafted, included the transfer of liabilities relating to the WaMu securitizations from WaMu Bank to JPMorgan Bank. On September 23, JPMorgan Bank wrote in an e-mail to the FDIC that Lets say there is a contract between the thrift and the Parent and that is included in the Books and Records (not something like accrued for on the books of the Failed Bank, which probably would fix the problem) of the thrift at the time of closing. Any liability under that contract is then arguably a liability reflected in the Books and Records. Therefore one would most likely conclude that liabilities under that contract are assumed under 2.1 . . . So the way that [indemnification provision] 12.1 reads is we are indemnified for a claim by Wamu (shareholder of Failed Bank) with respect to that contract only to the extent the liability was not assumed -- indeed they are free to sue us for a breach by the Failed Bank that occurred before the closing. In a normal P&A between commercial parties this is not something a buyer would ever assume and it really doesnt make sense (nor frankly is it fair) here. Examiners Report Ex. JPM_EX00034958, e-mail from Dan Cooney of JPMorgan Bank to David Gearin of the FDIC. The language at issue was not altered, despite JPMorgan Banks protests. 284. The above-quoted passageindeed they are free to sue us for a breach by the
Failed Bank that occurred before the closingalso demonstrates that, under the language of the PAA, JPMorgan Bank knew that it would be the appropriate successor for all liabilities and obligations not disclaimed in the PAA. Id. 285. Further, JPMorgan Chases SEC filings following its purchase and assumption of
WaMu Bank accounted for the additional liability associated with the WaMu Securitizations. For instance, in a 424(b)(5) prospectus supplement, filed on December 12, 2009, JPMorgan 96
Chase cautions that repurchase and/or indemnity obligations arising in connection with the sale and securitization of loans . . . by us and certain of our subsidiaries, as well as entities acquired by us as part of the Bear Stearns, Washington Mutual and other transactions, could materially increase our costs and lower our profitability, and could materially and adversely impact our results of operations and financial condition. 286. JPMorgan Bank was fully aware of the pending claims and potential claims
against WaMu Bank when it purchased and assumed WaMu Banks assets and liabilities. JPMorgan Bank has further evinced its intent to assume WaMu Banks liabilities by paying to defend and settle lawsuits brought against WaMu Bank and its subsidiaries. 287. Moreover, the former WaMu Bank website, www.wamu.com, redirects visitors to
a JPMorgan Chase website proposing that visitors update [their] favorites to include www.chase.com. 288. Similarly, the former WaMu Securities website, www.wamusecurities.com,
redirects visitors to a JPMorgan Chase-branded website with the text Washington Mutual Mortgage Securities Corp. (WMMSC), a wholly owned subsidiary of JPMorgan Chase Bank, National Association. 289. As a result of the purchase and assumption of substantially all of the assets and .
. . all deposit and substantially all other liabilities of WaMu Bank, JPMorgan Bank is the successor-in-interest to WaMu Bank and is jointly and severally liable for the misstatements and omissions of material fact alleged herein of WaMu Bank. 290. Therefore, this action is brought against JPMorgan Bank as the successor to
WaMu Bank. WaMu Bank is not a defendant in this action.
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III.
The Registration Statements and the Prospectus Supplements A. Compliance With Underwriting Guidelines
291.
The Prospectus Supplements for each Securitization describe the mortgage loan
underwriting guidelines pursuant to which the mortgage loans underlying the related Securitizations were supposed to have been originated. These guidelines were intended to assess the creditworthiness of the borrower, the ability of the borrower to repay the loan, and the adequacy of the mortgaged property as security for the loan. 292. The statements made in the Prospectus Supplements, which, as discussed, formed
statements with respect to the underwriting standards of the entities that originated the loans in the Securitizations. 1. 294. JPMorgans Statements Regarding Compliance With Underwriting Guidelines
For example, the Prospectus Supplement for the JPMAC 2006-WMC1
Securitization, for which WMC Mortgage Corp. was the originator, J.P. Morgan Acquisition was the sponsor, J.P. Morgan Acceptance was the depositor, and J.P. Morgan Securities was the underwriter, stated that: The mortgage loans have been either (i) originated generally in accordance with the underwriting guidelines established by WMC Mortgage Corp. (collectively, the Underwriting Guidelines) or (ii) purchased by WMC Mortgage Corp. after re-underwriting
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the mortgage loans generally in accordance with the Underwriting Guidelines. The Prospectus Supplement further stated that The Underwriting Guidelines are primarily intended to (a) determine that the borrower has the ability to repay the mortgage loan in accordance with its terms and (b) determine that the related mortgaged property will provide sufficient value to recover the investment if the borrower defaults. 295. The JPMAC 2006-WMC1 Prospectus Supplement stated that WMC Mortgage
Corp. may determine that, based upon compensating factors, a prospective mortgagor not strictly qualifying under the underwriting risk category or other guidelines described below warrants an underwriting exception. However, it also stated that such exceptions would be made [o]n a case-by-case basis and only upon compensating factors such as low debt-to-income ratio (Debt Ratio), good mortgage payment history, an abundance of cash reserves, excess disposable income, stable employment and time in residence at the applicants current address. 296. With respect to the information evaluated by the originator, the Prospectus
Supplement stated that: Under the Underwriting Guidelines, WMC Mortgage Corp. verifies the loan applicants eligible sources of income for all products, calculates the amount of income from eligible sources indicated on the loan application, reviews the credit and mortgage payment history of the applicant and calculates the Debt Ratio to determine the applicants ability to repay the loan, and reviews the mortgaged property for compliance with the Underwriting Guidelines. 297. The Prospectus Supplement further stated that: various risk categories are used
to grade the likelihood that the mortgagor will satisfy the repayment conditions of the mortgage loan. These risk categories establish the maximum permitted LTV, maximum loan amount and the allowed use of loan proceeds given the borrowers mortgage payment history, the borrowers consumer credit history, the borrowers liens/charge-offs/bankruptcy history, the borrowers
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Debt Ratio, the borrowers use of proceeds (purchase or refinance), the documentation type and other factors. In general, higher credit risk mortgage loans are graded in categories that require lower Debt Ratios and permit more (or more recent) major derogatory credit items such as outstanding judgments or prior bankruptcies. 298. Additionally, the Prospectus Supplement claimed that: The Underwriting
Guidelines are applied in accordance with a procedure which complies with applicable federal and state laws and regulations and requires, among other things, (1) an appraisal of the mortgaged property which conforms to Uniform Standards of Professional Appraisal Practice and (2) an audit of such appraisal by a WMC Mortgage Corp.-approved appraiser or by WMC Mortgage Corp.s in-house collateral auditors (who may be licensed appraisers) and such audit may in certain circumstances consist of a second appraisal, a field review, a desk review or an automated valuation model. 299. Moreover, the Prospectus Supplement stated that that WMC verified employment
for every loan applicant before approving a mortgage loan. Indeed, the Prospectus Supplement stated that even for loan applications accepted under its Stated Income and Stated Income Verified Assets programs, WMC obtained telephonic verification of employment. 300. The Prospectus and Prospectus Supplement for each of the JPMorgan
Securitizations had similar representations to those quoted above. The relevant representations in the Prospectus and Prospectus Supplement pertaining to originating entity underwriting standards for each JPMorgan Securitization are reflected in Appendix A to this Complaint. As discussed in Section IV.B, below, in fact, the originators of the mortgage loans in the Supporting Loan Group for the JPMorgan Securitizations did not adhere to their stated underwriting
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guidelines, thus rendering the description of those guidelines in the Prospectuses and Prospectus Supplements false and misleading. 2. 301. Bear Stearnss Statements Regarding Compliance With Underwriting Guidelines
The Prospectus Supplements for the Bear Stearns Securitizations also contained
several key statements with respect to the underwriting standards of the banks that originated the loans in the Securitizations. For example, the Prospectus Supplement for the BSABS 2007-HE7 Securitization, for which the Encore Credit division of Bear Stearns Residential Mortgage Corporation (BSRM) was the originator, EMC was the sponsor, BSABS was the depositor, and BSC was the underwriter, stated that: The mortgage loans originated by BSRM were originated generally in accordance with guidelines (the BSRM Underwriting Guidelines) established by BSRM and that [t]he BSRM Underwriting Guidelines are intended to make sure that (i) the loan terms relate to the borrowers ability to repay and (ii) the value and marketability of the property are acceptable. 302. The BSABS 2007-HE7 Prospectus Supplement stated that [e]xceptions to the
BSRM Underwriting Guidelines are considered on a case-by-case basis but only upon reasonable compensating factors such as validated or sourced/seasoned liquid reserves in excess of the program requirements, borrowers demonstrated ability to accumulate savings or devote a greater portion of income to housing expense and borrowers potential for increased earnings based on education, job training, etc. Additionally, [w]hen exception loans are reviewed, all loan elements are examined as a whole to determine the level of risk associated with approving the loan, including appraisal, credit report, employment, compensating factors and borrowers willingness and ability to repay the loan.
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303.
With respect to the information evaluated by the originator, the Prospectus
Supplement stated that: Each loan application package has an application completed by the applicant that includes information with respect to the applicants liabilities, income, credit history and employment history, as well as certain other personal information. The mortgage loan file also contains a credit report on each applicant from an approved credit reporting company. 304. The Prospectus Supplement further stated that: Under the BSRM Underwriting
Guidelines, there are various risk categories used to grade the likelihood that the mortgagor will satisfy the repayment conditions of the mortgage loan. These risk categories establish the maximum permitted loan-to-value ratio and loan amount, given the occupancy status of the mortgaged property and the mortgagors credit history and debt ratio. In general, higher credit risk mortgage loans are graded in risk categories that permit higher debt ratios and more (or more recent) major derogatory credit items such as outstanding judgments, liens that do not impair the lien position, or prior bankruptcies. 305. Additionally, the Prospectus Supplement claimed that: The BSRM Underwriting
Guidelines are applied in accordance with a procedure that complies with applicable federal and state laws and regulations and requires (i) an appraisal of the mortgaged property that conforms to the Uniform Standards of Professional Appraisal Practice and are generally on forms similar to those acceptable to Fannie Mae and Freddie Mac and (ii) a review of such appraisal, which review may be conducted by a representative of BSRM. The maximum allowable loan-to-value ratio varies based upon the income documentation, property type, creditworthiness, debt serviceto-income ratio of the applicant and the overall risks associated with the loan decision.
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306.
The Prospectus and Prospectus Supplement for each of the Bear Stearns
Securitizations had similar representations to those quoted above. The relevant representations in the Prospectus and Prospectus Supplement pertaining to originating entity underwriting standards for each Bear Stearns Securitization are reflected in Appendix A to this Complaint. As discussed in Section IV.B, below, in fact, the originators of the mortgage loans in the Supporting Loan Group for the Bear Stearns Securitizations did not adhere to their stated underwriting guidelines, thus rendering the description of those guidelines in the Prospectuses and Prospectus Supplements false and misleading. 3. 307. WaMus Statements Regarding Compliance With Underwriting Guidelines
The Prospectus Supplement for the WaMu Securitizations also contained several
key statements with respect to the underwriting standards of the banks that originated the loans in the Securitizations. For example, the Prospectus Supplement for the WAMU 2007-OA3 Securitization, for which WaMu Bank was both the originator and sponsor, WaMu Acceptance was the depositor, and WaMu Capital was the underwriter, stated that: All of the mortgage loans owned by the Trust have been originated in accordance with the underwriting guidelines of the sponsor as described in this section and that [t]he sponsors underwriting guidelines generally are intended to evaluate the prospective borrowers credit standing and repayment ability and the value and adequacy of the mortgaged property as collateral. 308. The WAMU 2007-OA3 Prospectus Supplement stated that [e]xceptions to the
sponsors loan program parameters may be made, however, it also stated that such exceptions would be made on a case-by-case basis and only upon compensating factors such as low loan-to-value ratio, low debt-to-income ratio, good credit standing, the availability of other liquid assets, stable employment and time in residence at the prospective borrowers current address, 103
and furthermore, it stated that the basis for the exception is documented, and in some cases the approval of a senior underwriter is required. 309. With respect to the information evaluated by the originator, the Prospectus
Supplement stated that: Prospective borrowers are required to complete a standard loan application in which they provide financial information regarding such factors as their assets, liabilities and related monthly payments, income, employment history and credit history. Each borrower also provides an authorization to access a credit report that summarizes the borrowers credit history and that [t]o evaluate a prospective borrowers credit history, the loan underwriter obtains a credit report relating to the borrower. 310. The Prospectus Supplement further stated that: In evaluating a prospective
borrowers ability to repay a mortgage loan, the loan underwriter considers the ratio of the borrowers mortgage payments, real property taxes and other monthly housing expenses to the borrowers gross income (referred to as the housing-to-income ratio or front end ratio), and the ratio of the borrowers total monthly debt (including non-housing expenses) to the borrowers gross income (referred to as the debt-to-income ratio or back end ratio). 311. The Prospectus and Prospectus Supplements for each of the WaMu
Securitizations had similar representations to those quoted above. The relevant representations in the Prospectus and Prospectus Supplement pertaining to originating entity underwriting standards for each WaMu Securitization are reflected in Appendix A to this Complaint. As discussed in Section IV.B, below, in fact, the originators of the mortgage loans in the Supporting Loan Group for the WaMu Securitizations did not adhere to their stated underwriting guidelines, thus rendering the description of those guidelines in the Prospectuses and Prospectus Supplements false and misleading.
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4. 312.
Long Beachs Statements Regarding Compliance With Underwriting Guidelines
The Prospectus Supplements for the Long Beach Securitizations also contained
several key statements with respect to the underwriting standards of the banks that originated the loans in the Securitizations. For example, the Prospectus Supplement for the LBMLT 2006-11 Securitization, for which Long Beach Mortgage was the originator and sponsor, Long Beach Securities was the depositor, and WaMu Capital was the underwriter, stated that: All of the mortgage loans owned by the trust have been, or will be, originated by [Long Beach Mortgage] through wholesale brokers or re-underwritten upon acquisition from correspondents by the sponsor generally in accordance with the Long Beach underwriting guidelines described in this section and that The Long Beach underwriting guidelines are primarily intended to evaluate the prospective borrowers credit standing and repayment ability as well as the value and adequacy of the mortgaged property as collateral. 313. The LBMLT 2006-11 Prospectus Supplement stated that Long Beach may
determine that, based upon compensating factors, a prospective borrower not strictly qualifying under the Long Beach underwriting risk category guidelines warrants an underwriting exception. and that [i]t is expected that some of the mortgage loans owned by the trust will be underwriting exceptions, however, it also stated that such exceptions would be made [o]n a case-by-case basis and only with the approval of an employee with appropriate risk level authority, and only upon compensating factors such as low loan-to-value ratio, low debt-to income ratio, good credit history, stable employment and time in residence at the prospective borrowers current address. 314. With respect to the information evaluated by the originator, the Prospectus
Supplement stated that: During the underwriting or re-underwriting process, [Long Beach] 105
reviews and verifies the prospective borrowers sources of income (only under the full documentation residential loan program), calculates the amount of income from all such sources indicated on the loan application, reviews the credit history and credit score(s) of the prospective borrower and calculates the debt-to-income ratio to determine the prospective borrowers ability to repay the loan, and determines whether the mortgaged property complies with the Long Beach underwriting guidelines. 315. The Prospectus Supplement further stated that: Under the Long Beach
underwriting programs, various risk categories are used to grade the likelihood that the prospective borrower will satisfy the repayment conditions of the mortgage loan. These risk categories establish the maximum permitted loan-to-value ratio and loan amount, given the occupancy status of the mortgaged property and the prospective borrowers credit history and debt ratioIn general, higher credit risk mortgage loans are graded in categories which permit higher debt ratios and more (or more recent) major derogatory credit items such as outstanding judgments or prior bankruptcies; however, the Long Beach underwriting programs establish lower maximum loan-to-value ratios and maximum loan amounts for loans graded in such categories. 316. Additionally, the Prospectus Supplement claimed that: The adequacy of the
mortgaged property as collateral is generally determined by an appraisal of the mortgaged property that generally conforms to Fannie Mae and Freddie Mac appraisal standards and a review of that appraisal. The mortgaged properties are appraised by licensed independent appraisers who have satisfied the servicers appraiser screening process. In most cases, properties in below average condition, including properties requiring major deferred maintenance, are not acceptable under the Long Beach underwriting programs. Each appraisal includes a market data
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analysis based on recent sales of comparable homes in the area and, where deemed appropriate, replacement cost analysis based on the current cost of constructing a similar home. Every independent appraisal is reviewed by an underwriter of the sponsor or its affiliate and is reviewed by one or more third party vendors which may refer the appraisal to the sponsor or one of its affiliates for additional further review before the loan is funded or re-underwritten. Depending upon the original principal balance and loan-to-value ratio of the mortgaged property, the appraisal review may include an administrative review, technical review, desk review or field review of the original appraisal. 317. Moreover, the Prospectus Supplement stated that for Long Beach verification of
employment is required for salaried prospective borrowers. Indeed the Prospectus Supplement states that Long Beach re-verifies the income of each prospective borrower or, for a selfemployed prospective borrower, reviews the income documentation obtained under the full documentation and limited documentation residential loan programs. 318. The Prospectus and Prospectus Supplements for each of the Long Beach
Securitizations had similar representations to those quoted above. The relevant representations in the Prospectus and Prospectus Supplement pertaining to originating entity underwriting standards for each Long Beach Securitization are reflected in Appendix A to this Complaint. As discussed in Section IV.B, below, in fact, the originators of the mortgage loans in the Supporting Loan Group for the Long Beach Securitizations did not adhere to their stated underwriting guidelines, thus rendering the description of those guidelines in the Prospectuses and Prospectus Supplements false and misleading.
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5. 319.
Statements Regarding Representations Made by the Originator and Seller
Further, for the vast majority of the Securitizations, the Prospectuses and
Prospectus Supplements described or referenced additional representations and warranties in the PSA or Mortgage Loan Purchase Agreement by the originator and sponsor concerning the mortgage loans underlying the Securitizations. Such representations and warranties, which are described more fully for each Securitization in Appendix A, included: (i) the origination complied in all material respects with applicable local, state and federal laws, including, without limitation, predatory and abusive lending usury, equal credit opportunity, real estate settlement procedures, truth-in-lending and disclosure laws and (ii) none of the mortgage loans exhibited a history of delinquency or were in default. 320. Additionally, the JPMorgan, WaMu12, and Long Beach-sponsored Securitizations,
and the AABST 2005-5, ARSI 2006-M2, and CBASS 2006-CB7 Securitizations, contained bringdown language, which is described more fully for each of the above securitizations in Appendix A. In each of these securitizations, the depositor brought down the representations and warranties of the originator and seller at the date of issuance, incorporating those representations into the depositors representations to prospective investors. 321. The JPMorgan and Long Beach-sponsored Securitizations, plus the AABST
2005-5, ARSI 2006-M2, and CBASS 2006-CB7 Securitizations, contained the following or substantially similar language that brought down the originator or seller representations: The depositor will not include any loan in the trust fund for any series of securities if anything has come to the depositors attention that would cause it to believe that the representations and warranties of a seller or originator will not be accurate and complete in all material respects in respect of the loan as of the date of initial issuance of the related series of securities.
12
Except for WMALT 2005-9 and WMALT 2005-10. 108
322.
The WaMu-sponsored Securitizations contained the following language that
brought down the originator or seller representations: The depositor will not transfer any mortgage loan to a trust if anything has come to the depositors attention that would cause it to believe that the representations and warranties made in respect of a mortgage loan will not be accurate and complete in all material respects as of the Closing Date. 323. The inclusion of these representations and the bringdown language in the
Prospectuses and Prospectus Supplements had provided additional representations and assurances to investors regarding the quality of the mortgage collateral underlying the Securitizations and the compliance of that collateral with the underwriting guidelines described in the Prospectuses and Prospectus Supplements. These representations were material to a reasonable investors decision to purchase the Certificates. B. 324. Statements Regarding Occupancy Status of Borrower
The Prospectus Supplements contained collateral group-level information about
the occupancy status of the borrowers of the loans in the Securitizations. Occupancy status refers to whether the property securing a mortgage is to be the primary residence of the borrower, a second home, or an investment property. The Prospectus Supplements for each of the Securitizations presented this information in tabular form, usually in a table entitled Occupancy Status of the Mortgage Loans. This table divided all the loans in the collateral group by occupancy status, e.g., into the following categories: (i) Primary, or Owner Occupied; (ii) Second Home, or Secondary; and (iii) Investment or Non-Owner. For each category, the table stated the number of loans in that category. Occupancy statistics for the
109
Supporting Loan Groups for each Securitization were reported in the Prospectus Supplements as follows:13 Table 5
Transaction AABST 2005-5 AHM 2005-1 AHM 2005-4 ARSI 2006-M2 BALTA 2005-10 BALTA 2005-10 BALTA 2006-1 BALTA 2006-2 BALTA 2006-3 BALTA 2006-4 BALTA 2006-4 BSABS 2005-HE12 BSABS 2006-AQ1 BSABS 2006-HE2 BSABS 2006-HE4 BSABS 2006-HE5 BSABS 2006-HE7 BSABS 2006-HE8 BSABS 2006-HE9 BSABS 2006-HE9 BSABS 2006-HE10 BSABS 2006-HE10 BSABS 2007-FS1 BSABS 2007-HE1 BSABS 2007-HE1 BSABS 2007-HE2 BSABS 2007-HE2 BSABS 2007-HE3 BSABS 2007-HE3 BSABS 2007-HE4
13
Tranche IIA VIA IVA A1 II2A1 II3A1 II1A1 II2A1 II1A1 I2A1 III1A1 IIA I2A IIA IIA IIA II2A II2A IIA IIIA II2A II3A IIA II2A II3A II2A II3A IIA IIIA IIA
Supporting Loan Group Pool 2 Group VI Group IV Group I Group II-2 Group II-3 Group II-1 Group II-2 Group II-1 Group I-2 Group III-1 Group II Group I-2 Group II Group II Group II Group II-2 Group II-2 Group II Group III Group II-2 Group II-3 Group II Group II-2 Group II-3 Group II-2 Group II-3 Group II Group III Group II
Primary or Owner Occupied (%) 94.34 70.17 67.42 85.97 44.53 65.56 52.92 68.82 27.93 34.09 88.56 88.00 82.78 76.11 89.10 86.90 92.02 94.75 96.00 91.13 94.25 91.15 98.80 94.75 89.24 93.73 88.94 92.93 94.59 89.99
Second Home/Secondary (%) 0.68 3.63 4.37 0.78 13.96 3.50 8.95 8.91 16.20 7.02 6.58 0.82 1.35 1.08 0.96 0.91 0.43 0.22 0.32 0.81 0.40 1.23 0.00 0.80 1.18 0.74 1.33 0.62 1.05 1.08
Investor (%) 4.97 26.20 28.21 13.25 41.51 30.94 38.13 22.27 55.87 58.89 4.86 11.18 15.87 22.81 9.93 12.19 7.55 5.03 3.68 8.06 5.35 7.62 1.20 4.45 9.58 5.54 9.73 6.44 4.36 8.92
Each Prospectus Supplement provides the total number of loans and the number of loans in the following categories: owner occupied, investor, and second home. These numbers have been converted to percentages. 110
Transaction BSABS 2007-HE5 BSABS 2007-HE5 BSABS 2007-HE6 BSABS 2007-HE7 BSABS 2007-HE7 BSMF 2006-SL5 BSMF 2006-SL6 BSMF 2007-AR3 BSMF 2007-SL1 BSMF 2007-SL2 CBASS 2006-CB2 CBASS 2006-CB7 GPMF 2005-AR5 GPMF 2006-AR3 GPMF 2006-AR3 JPALT 2005-A2 JPALT 2007-A2 JPMAC 2005-FRE1 JPMAC 2005-OPT2 JPMAC 2005-WMC1 JPMAC 2006-ACC1 JPMAC 2006-CH1 JPMAC 2006-CH2 JPMAC 2006-CW1 JPMAC 2006-CW2 JPMAC 2006-FRE1 JPMAC 2006-FRE2 JPMAC 2006-HE1 JPMAC 2006-HE2 JPMAC 2006-HE3 JPMAC 2006-NC1 JPMAC 2006-NC2 JPMAC 2006-RM1 JPMAC 2006-RM1 JPMAC 2006-WMC1 JPMAC 2006-WMC2 JPMAC 2006-WMC3 JPMAC 2006-WMC3 JPMAC 2006-WMC4
Tranche IIA IIIA IIA IIA1 IIIA1 IIA IIA II2A1 IIA IIA AV A1 IIA1 IIA1 IIA2 2A1 11A1 AI A1A A1 A1 A1 AV1 A1A AV1 A1 A1 A1 A1 A1 A1 A1A A1A A1B A1 A1 A1SS A1MZ A1A
Supporting Loan Group Group II Group III Group II Group II Group III Group II Group II Group II-2 Group II Group II Group 1 Group I Group II Group II Group II Pool 2 Pool 1A Group I Group 1 Group 1 Group 1 Group 1 Group 2-A Group 1 Group 2 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1
Primary or Owner Occupied (%) 91.35 100.00 100.00 91.96 94.63 100.00 100.00 83.01 100.00 100.00 87.34 85.79 43.72 46.09 46.09 84.02 59.03 85.92 92.70 90.27 87.87 88.44 94.58 97.69 95.10 85.44 83.13 86.74 92.69 91.96 80.21 94.36 96.08 96.08 98.34 97.43 97.79 97.79 98.04
Second Home/Secondary (%) 2.02 0.00 0.00 1.26 1.02 0.00 0.00 4.75 0.00 0.00 2.94 2.29 5.04 5.85 5.85 6.34 7.48 1.71 1.43 5.39 1.35 0.89 0.59 0.28 0.63 0.86 1.19 1.66 0.39 1.38 4.49 0.83 0.23 0.23 0.32 1.26 0.95 0.95 0.62
Investor (%) 6.63 0.00 0.00 6.77 4.35 0.00 0.00 12.23 0.00 0.00 9.72 11.93 51.24 48.06 48.06 9.64 33.49 12.37 5.87 4.35 10.78 10.67 4.83 2.04 4.27 13.70 15.68 11.60 6.92 6.67 15.30 4.81 3.69 3.69 1.34 1.30 1.25 1.25 1.34
111
Transaction JPMAC 2006-WMC4 JPMAC 2007-CH2 JPMAC 2007-CH3 JPMAC 2007-CH3 JPMAC 2007-CH4 JPMAC 2007-CH5 JPMMT 2006-A3 LBMLT 2005-3 LBMLT 2006-1 LBMLT 2006-2 LBMLT 2006-3 LBMLT 2006-4 LBMLT 2006-5 LBMLT 2006-6 LBMLT 2006-7 LBMLT 2006-8 LBMLT 2006-9 LBMLT 2006-10 LBMLT 2006-11 LBMLT 2006-WL1 LBMLT 2006-WL1 LBMLT 2006-WL2 LBMLT 2006-WL3 LUM 2006-3 NCMT 2007-1 PCHLT 2005-4 SACO 2007-1 SACO 2007-2 SAMI 2006-AR4 WAMU 2007-OA3 WMABS 2006-HE1 WMABS 2006-HE3 WMABS 2006-HE4 WMABS 2006-HE5 WMABS 2007-HE1 WMABS 2007-HE2 WMALT 2005-9 WMALT 2005-10 WMALT 2006-AR4
Tranche A1B AV1 A1A A1B A1 A1 1A1 IA IA IA IA IA IA IA IA IA IA IA IA IA2 IA1 IA IA II2A1 1A1 2A1 IIA IIA IA1 1A IA IA IA IA IA IA 1CB 1CB 1A
Supporting Loan Group Group 1 Group 2-A Group 1 Group 1 Group 1 Group 1 Pool 1 Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group II-2 Group 1 Group 2 Group II Group II Group I Group 1 Group 1 Group I Group I Group I Group I Group I Group 1 Group 1 Group 1
Primary or Owner Occupied (%) 98.04 95.50 90.97 90.97 92.19 88.25 94.25 96.90 76.58 77.52 92.79 95.06 93.94 96.73 95.77 94.14 91.79 92.45 93.94 81.38 81.38 82.02 83.71 73.56 100.00 83.15 100.00 100.00 72.69 51.00 89.73 90.13 91.03 91.57 90.50 91.68 0.00 0.00 76.33
Investor (%) 1.34 0.52 7.57 7.57 1.54 10.56 0.51 2.84 21.85 20.88 6.46 4.68 5.48 2.87 3.60 5.24 7.19 6.99 5.26 17.37 17.37 16.97 15.29 23.12 0.00 14.56 0.00 0.00 17.07 36.98 9.78 9.34 8.30 7.47 9.32 7.18 100.00 88.61 17.40
112
Transaction WMALT 2006-AR4 WMALT 2006-AR4 WMALT 2006-AR5 WMALT 2006-AR5 WMALT 2006-AR8 WMALT 2006-AR9 WMALT 2007-OA1 WMALT 2007-OA2 WMALT 2007-OA3 WMALT 2007-OA3 WMHE 2007-HE1 WMHE 2007-HE2 WMHE 2007-HE3 WMHE 2007-HE4
Tranche 2A 3A 1A 2A 1A 1A 1A 1A 1A 3A IA IA IA IA
Supporting Loan Group Group 2 Group 3 Group 1 Group 2 Group 1 Group 1 Group 1 Group 1 Group 1 Group 3 Group I Group I Group I Group I
Primary or Owner Occupied (%) 75.30 78.93 81.36 68.33 80.55 78.49 79.22 79.33 82.89 60.04 93.53 91.79 94.16 92.96
Second Home/Secondary (%) 6.63 2.60 7.87 9.25 4.40 10.50 9.06 5.59 3.90 8.23 1.03 1.23 1.24 1.84
Investor (%) 18.07 18.47 10.76 22.42 15.05 11.01 11.72 15.08 13.21 31.73 5.44 6.98 4.59 5.20
325.
As Table 5 makes clear, the Prospectus Supplement for over 93 percent of the
Securitizations reported that more than 50 percent of the mortgage loans in the Supporting Loan Groups were owner occupied, while a small percentage were reported to be non-owner occupied (i.e. a second home or investment property). 326. The statements about occupancy status were material to a reasonable investors
decision to invest in the Certificates. Information about the occupancy status is an important factor in determining the credit risk associated with a mortgage loan and, therefore, the securitization that it collateralizes. Because borrowers who reside in mortgaged properties are less likely to default and are more likely to care for their primary residence than borrowers who purchase homes as second homes or investments and live elsewhere, the percentage of loans in the collateral group of a securitization that are secured by mortgage loans on owner-occupied residences is an important measure of the risk of the certificates sold in that securitization. 327. Other things being equal, the higher the percentage of loans not secured by
owner-occupied residences, the greater the risk of loss to the certificateholders. Even small 113
differences in the percentages of primary/owner-occupied, second home/secondary, and investment properties in the collateral group of a securitization can have a significant effect on the risk of each certificate sold in that securitization, and thus, are important to the decision of a reasonable investor whether to purchase any such certificate. As discussed below in Section IV.A.1, the Registration Statement for each Securitization materially overstated the percentage of loans in the Supporting Loan Groups that were owner occupied, thereby misrepresenting the degree of risk of the GSE Certificates. C. 328. Statements Regarding Loan to Value Ratios
information about the LTV ratio for the underlying group of loans as a whole. The percentage of loans with an LTV ratio at or less than 80 percent and the percentage of loans with an LTV ratio greater than 100 percent as reported in the Prospectus Supplements for the Supporting Loan Groups for each Securitization are reflected in Table 6 below.14
As used in this Complaint, LTV refers to the loan-to-value ratio for first lien mortgages and for properties with second liens that are subordinate to the lien that was included in the securitization (i.e., only the securitized lien is included in the numerator of the LTV 114
14
Table 6
Supporting Loan Group Pool 2 Group VI Group IV Group I Group II-2 Group II-3 Group II-1 Group II-2 Group II-1 Group I-2 Group III-1 Group II Group I-2 Group II Group II Group II Group II-2 Group II-2 Group II Group III Group II-2 Group II-3 Group II Group II-2 Group II-3 Group II-2 Group II-3 Group II Group III Group II Group II Group III Group II Percentage of loans, by aggregate principal balance, with LTV less than or equal to 80% 63.41 92.90 94.45 45.87 98.22 98.52 97.74 99.19 97.70 98.52 83.43 58.04 50.91 50.24 66.09 52.23 58.48 59.19 48.60 50.00 55.06 51.39 36.55 54.46 52.89 39.16 35.32 44.19 49.54 53.46 61.17 48.36 54.31 Percentage of loans, by aggregate principal balance, with LTV greater than 100% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Transaction AABST 2005-5 AHM 2005-1 AHM 2005-4 ARSI 2006-M2 BALTA 2005-10 BALTA 2005-10 BALTA 2006-1 BALTA 2006-2 BALTA 2006-3 BALTA 2006-4 BALTA 2006-4 BSABS 2005-HE12 BSABS 2006-AQ1 BSABS 2006-HE2 BSABS 2006-HE4 BSABS 2006-HE5 BSABS 2006-HE7 BSABS 2006-HE8 BSABS 2006-HE9 BSABS 2006-HE9 BSABS 2006-HE10 BSABS 2006-HE10 BSABS 2007-FS1 BSABS 2007-HE1 BSABS 2007-HE1 BSABS 2007-HE2 BSABS 2007-HE2 BSABS 2007-HE3 BSABS 2007-HE3 BSABS 2007-HE4 BSABS 2007-HE5 BSABS 2007-HE5 BSABS 2007-HE6
Tranche IIA VIA IVA A1 II2A1 II3A1 II1A1 II2A1 II1A1 I2A1 III1A1 IIA I2A IIA IIA IIA II2A II2A IIA IIIA II2A II3A IIA II2A II3A II2A II3A IIA IIIA IIA IIA IIIA IIA
calculation). Where the securitized lien is junior to another loan, the more senior lien has been added to the securitized one to determine the numerator in the LTV calculation (this latter calculation is sometimes referred to as the combined loan-to-value ratio, or CLTV). 115
Transaction BSABS 2007-HE7 BSABS 2007-HE7 BSMF 2006-SL5 BSMF 2006-SL6 BSMF 2007-AR3 BSMF 2007-SL1 BSMF 2007-SL2 CBASS 2006-CB2 CBASS 2006-CB7 GPMF 2005-AR5 GPMF 2006-AR3 GPMF 2006-AR3 JPALT 2005-A2 JPALT 2007-A2 JPMAC 2005-FRE1 JPMAC 2005-OPT2 JPMAC 2005-WMC1 JPMAC 2006-ACC1 JPMAC 2006-CH1 JPMAC 2006-CH2 JPMAC 2006-CW1 JPMAC 2006-CW2 JPMAC 2006-FRE1 JPMAC 2006-FRE2 JPMAC 2006-HE1 JPMAC 2006-HE2 JPMAC 2006-HE3 JPMAC 2006-NC1 JPMAC 2006-NC2 JPMAC 2006-RM1 JPMAC 2006-RM1 JPMAC 2006-WMC1 JPMAC 2006-WMC2 JPMAC 2006-WMC3 JPMAC 2006-WMC3 JPMAC 2006-WMC4 JPMAC 2006-WMC4 JPMAC 2007-CH2
Tranche IIA1 IIIA1 IIA IIA II2A1 IIA IIA AV A1 IIA1 IIA1 IIA2 2A1 11A1 AI A1A A1 A1 A1 AV1 A1A AV1 A1 A1 A1 A1 A1 A1 A1A A1A A1B A1 A1 A1SS A1MZ A1A A1B AV1
Supporting Loan Group Group II Group III Group II Group II Group II-2 Group II Group II Group 1 Group I Group II Group II Group II Pool 2 Pool 1A Group I Group 1 Group 1 Group 1 Group 1 Group 2-A Group 1 Group 2 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 2-A
116
Transaction JPMAC 2007-CH3 JPMAC 2007-CH3 JPMAC 2007-CH4 JPMAC 2007-CH5 JPMMT 2006-A3 LBMLT 2005-3 LBMLT 2006-1 LBMLT 2006-2 LBMLT 2006-3 LBMLT 2006-4 LBMLT 2006-5 LBMLT 2006-6 LBMLT 2006-7 LBMLT 2006-8 LBMLT 2006-9 LBMLT 2006-10 LBMLT 2006-11 LBMLT 2006-WL1 LBMLT 2006-WL1 LBMLT 2006-WL2 LBMLT 2006-WL3 LUM 2006-3 NCMT 2007-1 PCHLT 2005-4 SACO 2007-1 SACO 2007-2 SAMI 2006-AR4 WAMU 2007-OA3 WMABS 2006-HE1 WMABS 2006-HE3 WMABS 2006-HE4 WMABS 2006-HE5 WMABS 2007-HE1 WMABS 2007-HE2 WMALT 2005-9 WMALT 2005-10 WMALT 2006-AR4 WMALT 2006-AR4
Tranche A1A A1B A1 A1 1A1 IA IA IA IA IA IA IA IA IA IA IA IA IA1 IA2 IA IA II2A1 1A1 2A1 IIA IIA IA1 1A IA IA IA IA IA IA 1CB 1CB 1A 2A
Supporting Loan Group Group 1 Group 1 Group 1 Group 1 Pool 1 Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group II-2 Group 1 Group 2 Group II Group II Group I Group 1 Group 1 Group I Group I Group I Group I Group I Group 1 Group 1 Group 1 Group 2
117
Transaction WMALT 2006-AR4 WMALT 2006-AR5 WMALT 2006-AR5 WMALT 2006-AR8 WMALT 2006-AR9 WMALT 2007-OA1 WMALT 2007-OA2 WMALT 2007-OA3 WMALT 2007-OA3 WMHE 2007-HE1 WMHE 2007-HE2 WMHE 2007-HE3 WMHE 2007-HE4
Tranche 3A 1A 2A 1A 1A 1A 1A 1A 3A IA IA IA IA
Supporting Loan Group Group 3 Group 1 Group 2 Group 1 Group 1 Group 1 Group 1 Group 1 Group 3 Group I Group I Group I Group I
Percentage of loans, by aggregate principal balance, with LTV less than or equal to 80% 76.36 70.75 76.48 77.21 76.47 45.17 46.97 49.34 90.37 60.41 58.78 59.11 57.07
Percentage of loans, by aggregate principal balance, with LTV greater than 100% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
331.
As Table 6 makes clear, the Prospectus Supplements for over 77 percent of the
Securitizations reported that 50 percent or more of the mortgage loans in the Supporting Loan Groups had an LTV ratio of 80 percent or less, and the Prospectus Supplement for nearly all of the Securitizations reported that zero mortgage loans in the Supporting Loan Groups had an LTV ratio over 100 percent, with the lone exception (CBASS 2006-CB2) reporting that 0.04 percent of the mortgage loans in the Supporting Loan Group had an LTV ratio over 100 percent. 332. The LTV ratio is among the most important measures of the risk of a mortgage
loan, and thus, it is one of the most important indicators of the default risk of the mortgage loans underlying the Certificates. The lower the ratio, the less likely that a decline in the value of the property will wipe out an owners equity, and thereby give an owner an incentive to stop making mortgage payments and abandon the property. This ratio also predicts the severity of loss in the event of default. The lower the LTV ratio, the greater the equity cushion, so the greater the likelihood that the proceeds of foreclosure will cover the unpaid balance of the mortgage loan.
118
333.
Thus, LTV ratio is a material consideration to a reasonable investor in deciding
whether to purchase a certificate in a securitization of mortgage loans. Even small differences in the LTV ratios of the mortgage loans in the collateral group of a securitization have a significant effect on the likelihood that the collateral groups will generate sufficient funds to pay certificateholders in that securitization, and thus are material to the decision of a reasonable investor whether to purchase any such certificate. As discussed below in Section IV.A.2, the Registration Statements for the Securitizations materially overstated the percentage of loans in the Supporting Loan Groups with an LTV ratio at or less than 80 percent, and materially understated the percentage of loans in the Supporting Loan Groups with an LTV ratio over 100 percent, thereby misrepresenting the degree of risk of the GSE Certificates.15 D. 334. Statements Regarding Credit Ratings
Credit ratings are assigned to the tranches of securities issued in mortgage-backed
securitizations by the credit rating agencies, including Moodys Investors Service, Standard & Poors, and Fitch Ratings. Each credit rating agency uses its own scale with letter designations to describe the various levels of risk. In general, AAA or its equivalent ratings are at the top of the credit rating scale and are intended to designate the safest investments. C and D ratings are at the bottom of the scale and refer to investments that are currently in default and exhibit little or no prospect for recovery. At the time the GSEs purchased the GSE Certificates, investments with AAA or its equivalent ratings historically experienced a loss rate of less than .05 percent.
The eleven exceptions are BSMF 2006-SL5, BSMF 2007-SL1, LBMLT 2006-6, LBMLT 2006-7, LBMLT 2006-WL2, LBMLT 2006-WL3, SACO 2007-1, SACO 2007-2, WMABS 2006-HE4, WMALT 2007-OA1, and WMALT 2007-OA2 for which the Registration Statement understated the percentage of loans with an LTV ratio above 100 percent by 51.87 percent, 60.70 percent, 14.00 percent, 14.38 percent, 9.40 percent, 10.39 percent, 57.82 percent, 54.37 percent, 13.52 percent, 13.31 percent, and 11.93 percent, respectively, but did not overstate the percentage of loans with an LTV ratio at or less than 80 percent. 119
15
Investments with a BBB rating, or its equivalent, historically experienced a loss rate of less than one percent. As a result, securities with credit ratings between AAA or its equivalent through BBB- or its equivalent were generally referred to as investment grade. 335. Rating agencies determine the credit rating for each tranche of securities issued in
a mortgage backed securitization by comparing the likelihood of contractual principal and interest repayment to the credit enhancements available to protect investors. Rating agencies determine the likelihood of repayment by estimating cashflows based on the quality of the underlying mortgages by using sponsor provided loan level data. Credit enhancements, such as subordination, represent the amount of cushion or protection from loss incorporated into a given securitization.16 This cushion is intended to improve the likelihood that holders of highly rated certificates receive the interest and principal to which they are contractually entitled. The level of credit enhancement offered is based on the make-up of the loans in the underlying collateral group and entire securitization. Riskier loans underlying the securitization necessitate higher levels of credit enhancement to insure payment to senior certificateholders. If the collateral within the securitization is of a higher quality, then rating agencies require less credit enhancement for AAA or its equivalent rating. 336. Credit ratings have been an important tool to gauge risk when making investment
decisions. In testimony before the Senate PSI, Susan Barnes, the North American Practice Leader for residential mortgage-backed securities at S&P from 2005 to 2008, confirmed that the
16
rating agencies relied upon investment banks to provide accurate information about the loan pools: The securitization process relies on the quality of the data generated about the loans going into the securitizations. S&P relies on the data produced by others and reported to both S&P and investors about those loans. . . .S&P does not receive the original loan files for the loans in the pool. Those files are reviewed by the arranger or sponsor of the transaction, who is also responsible for reporting accurate information about the loans in the deal documents and offering documents to potential investors. Senate Homeland Security and Governmental Affairs Subcommittee on Investigations, Hearing on Wall Street and the Financial Crisis: The Role of Credit Rating Agencies, Apr. 23, 2010 (emphasis added). 337. For almost a hundred years, investors like pension funds, municipalities,
insurance companies, and university endowments have relied heavily on credit ratings to assist them in distinguishing between safe and risky investments. Fannie Mae and Freddie Macs respective internal policies limited their purchases of private label residential mortgage-backed securities to those rated AAA (or its equivalent), and in very limited instances, AA or A bonds (or their equivalent). 338. Each tranche of Securities in the Securitizations received a credit rating upon
issuance, which purported to describe the riskiness of that tranche. The Defendants reported the credit ratings for each tranche in the Prospectus Supplements. The credit rating provided for each of the GSE Certificates was investment grade, almost always AAA or its equivalent. The accuracy of these ratings was material to a reasonable investors decision to purchase the Certificates. As set forth in Table 9 below, the ratings for the Securitizations were inflated as a result of Defendants provision of incorrect data concerning the attributes of the underlying mortgage collateral to the ratings agencies, and, as a result, Defendants sold and marketed the GSE Certificates as AAA (or its equivalent) when, in fact, they were not. 121
IV.
Falsity Of Statements in the Registration Statements and Prospectus Supplements A. The Statistical Data Provided in the Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False
339.
An analysis of loan-level data was conducted in order to assess whether the
statistical information provided in the Prospectus Supplements was true and accurate. For each Securitization, the sample consisted of 1,000 randomly selected loans per Supporting Loan Group, or all of the loans in the group if there were fewer than 1,000 loans in the Supporting Loan Group. The sample data confirms, on a statistically-significant basis, material misrepresentations of underwriting standards and of certain key characteristics of the mortgage loans across the Securitizations. The data analysis demonstrates that the data concerning owner occupancy and LTV ratios was materially false and misleading. 1. 340. Owner Occupancy Data Was Materially False
The data analysis has revealed that the owner-occupancy statistics reported in the
claimed, a number of tests were conducted, including, inter alia, (i) whether, months after the loan closed, the borrowers tax bill was being mailed to the property securing the mortgage loan or to a different address; (ii) whether the borrower had claimed a tax exemption on the property; and (iii) whether the mailing address of the property was reflected in the borrowers credit reports, tax records, or lien records. Failing two or more of these tests is a strong indication that the borrower did not live at the mortgaged property and instead used it as a second home or an
122
investment property, both of which make it much more likely that a borrower will not repay the loan 342. A significant number of the loans failed two or more of these tests, indicating that
the owner occupancy statistics provided to Fannie Mae and Freddie Mac were materially false and misleading. For example, for the JPMAC 2006-WMC2 Securitization, for which J.P. Morgan Acquisition was the sponsor and J.P. Morgan Securities was the underwriter, the Prospectus Supplement stated that 2.57 percent of the underlying properties by loan count in the Supporting Loan Group were not owner-occupied. But the data analysis revealed that for 12.43 percent of the properties represented as owner-occupied, the owners lived elsewhere, indicating that the true percentage of non-owner occupied properties was 14.68 percent, more than five times the percentage reported in the Prospectus Supplement.17 343. The data analysis revealed that for each Securitization, the Prospectus Supplement
misrepresented the percentage of non-owner occupied properties. The true percentage of nonowner occupied properties, as determined by the data analysis, versus the percentage stated in the Prospectus Supplement for each Securitization is reflected in Table 7 below. Table 7 demonstrates that the Prospectus Supplements for the Securitizations understated the percentage of non-owner occupied properties by at least 2.77 percent,18 and for many Securitizations by 10 percent or more.
This conclusion is arrived at by summing (a) the stated non-owner-occupied percentage in the Prospectus Supplement (here, 2.57 percent) and (b) the product of (i) the stated owner-occupied percentage (here, 97.43 percent) and (ii) the percentage of the properties represented as owner-occupied in the sample that showed strong indications that their owners in fact lived elsewhere (here, 12.43 percent).
18
17
The two exceptions are the WMALT 2005-9 and WMALT 2005-10 securitizations. 123
344.
Specifically, the data analysis revealed that the Prospectus Supplements for the
JPMorgan Securitizations understated the percentage of non-owner occupied properties for the Supporting Loan Groups by an average of 11.14 percent. 345. Likewise, the data analysis revealed that the Prospectus Supplements for the Bear
Stearns Securitizations understated the percentage of non-owner occupied properties for the Supporting Loan Groups by an average of 9.77 percent. 346. The data analysis also revealed that the Prospectus Supplements for the WaMu
Securitizations understated the percentage of non-owner occupied properties for the Supporting Loan Groups by an average of 11.95 percent.19 347. The data analysis also revealed that the Prospectus Supplements for the Long
Beach Securitizations understated the percentage of non-owner occupied properties for the Supporting Loan Groups by an average of 10.22 percent.
This calculation excludes the WMALT 2005-9 and WMALT 2005-10 Securitizations, for which none of the properties were reported by the prospectus supplements as being owner occupied. 124
19
Table 7
Percentage of NonOwner Occupied Properties Reported in Prospectus 5.66 29.83 32.58 14.03 55.47 34.44 47.08 31.18 72.07 65.91 11.44 12.00 17.22 23.89 10.90 13.10 7.98 5.25 4.00 8.87 5.75 8.85 1.20 5.25 10.76 6.27 11.06 7.07 5.41 10.01 Percentage of Properties Reported as Owner Occupied With Strong Indication of Non-Owner Occupancy20 12.31 12.91 12.37 7.98 14.34 12.18 13.61 15.43 9.92 19.70 12.72 12.48 10.00 11.84 13.82 11.89 13.66 10.93 10.86 11.42 11.56 12.47 7.17 11.28 9.89 7.02 7.14 10.81 9.07 9.86
Transaction
Tranche
Prospectus Percentage Understatement of Non-Owner Occupied Properties 11.61 9.06 8.34 6.86 6.39 7.98 7.20 10.62 2.77 6.72 11.27 10.98 8.28 9.01 12.31 10.33 12.57 10.36 10.43 10.41 10.89 11.37 7.08 10.68 8.83 6.58 6.35 10.05 8.58 8.87
AABST 2005-5 AHM 2005-1 AHM 2005-4 ARSI 2006-M2 BALTA 2005-10 BALTA 2005-10 BALTA 2006-1 BALTA 2006-2 BALTA 2006-3 BALTA 2006-4 BALTA 2006-4 BSABS 2005-HE12 BSABS 2006-AQ1 BSABS 2006-HE2 BSABS 2006-HE4 BSABS 2006-HE5 BSABS 2006-HE7 BSABS 2006-HE8 BSABS 2006-HE9 BSABS 2006-HE9 BSABS 2006-HE10 BSABS 2006-HE10 BSABS 2007-FS1 BSABS 2007-HE1 BSABS 2007-HE1 BSABS 2007-HE2 BSABS 2007-HE2 BSABS 2007-HE3 BSABS 2007-HE3 BSABS 2007-HE4
20
IIA VIA IVA A1 II2A1 II3A1 II1A1 II2A1 II1A1 I2A1 III1A1 IIA I2A IIA IIA IIA II2A II2A IIA IIIA II2A II3A IIA II2A II3A II2A II3A IIA IIIA IIA
Pool 2 Group VI Group IV Group I Group II-2 Group II-3 Group II-1 Group II-2 Group II-1 Group I-2 Group III-1 Group II Group I-2 Group II Group II Group II Group II-2 Group II-2 Group II Group III Group II-2 Group II-3 Group II Group II-2 Group II-3 Group II-2 Group II-3 Group II Group III Group II
17.27 38.89 40.92 20.89 61.86 42.42 54.28 41.80 74.84 72.63 22.71 22.98 25.50 32.90 23.21 23.43 20.55 15.61 14.43 19.28 16.65 20.22 8.28 15.94 19.59 12.85 17.41 17.12 13.99 18.88
Strong indication is defined for purposes of this Complaint as failing two or more owner occupancy tests, as explained in paragraph 341. 125
Transaction
Tranche
Percentage of NonOwner Occupied Properties Reported in Prospectus 8.65 0.00 0.00 8.04 5.37 0.00 0.00 16.99 0.00 0.00 12.66 14.21 56.28 53.91 53.91 15.98 40.97 14.08 7.30 9.73 12.13 11.56 5.42 2.31 4.90 14.56 16.87 13.26 7.31 8.04 19.79 5.64 3.92 3.92 1.66
BSABS 2007-HE5 BSABS 2007-HE5 BSABS 2007-HE6 BSABS 2007-HE7 BSABS 2007-HE7 BSMF 2006-SL5 BSMF 2006-SL6 BSMF 2007-AR3 BSMF 2007-SL1 BSMF 2007-SL2 CBASS 2006-CB2 CBASS 2006-CB7 GPMF 2005-AR5 GPMF 2006-AR3 GPMF 2006-AR3 JPALT 2005-A2 JPALT 2007-A2 JPMAC 2005-FRE1 JPMAC 2005-OPT2 JPMAC 2005-WMC1 JPMAC 2006-ACC1 JPMAC 2006-CH1 JPMAC 2006-CH2 JPMAC 2006-CW1 JPMAC 2006-CW2 JPMAC 2006-FRE1 JPMAC 2006-FRE2 JPMAC 2006-HE1 JPMAC 2006-HE2 JPMAC 2006-HE3 JPMAC 2006-NC1 JPMAC 2006-NC2 JPMAC 2006-RM1 JPMAC 2006-RM1 JPMAC 2006-WMC1
IIA IIIA IIA IIA1 IIIA1 IIA IIA II2A1 IIA IIA AV A1 IIA1 IIA1 IIA2 2A1 11A1 AI A1A A1 A1 A1 AV1 A1A AV1 A1 A1 A1 A1 A1 A1 A1A A1A A1B A1
Group II Group III Group II Group II Group III Group II Group II Group II-2 Group II Group II Group 1 Group I Group II Group II Group II Pool 2 Pool 1A Group I Group 1 Group 1 Group 1 Group 1 Group 2-A Group 1 Group 2 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1
Percentage of Properties Reported as Owner Occupied With Strong Indication of Non-Owner Occupancy20 9.60 9.29 10.91 10.82 10.39 14.15 13.86 13.41 12.08 10.74 12.01 8.59 15.55 19.05 19.05 12.96 12.85 13.63 9.61 14.14 13.33 11.37 11.87 10.11 12.94 15.13 13.18 12.47 10.22 14.78 12.19 10.18 12.03 12.03 11.41
Prospectus Percentage Understatement of Non-Owner Occupied Properties 8.76 9.29 10.91 9.95 9.83 14.15 13.86 11.13 12.08 10.74 10.49 7.37 6.80 8.78 8.78 10.88 7.59 11.71 8.91 12.76 11.71 10.06 11.23 9.88 12.31 12.93 10.96 10.82 9.47 13.59 9.78 9.61 11.55 11.55 11.22
17.41 9.29 10.91 17.99 15.20 14.15 13.86 28.12 12.08 10.74 23.15 21.58 63.08 62.69 62.69 26.86 48.56 25.79 16.21 22.49 23.84 21.62 16.65 12.19 17.21 27.49 27.83 24.08 16.78 21.63 29.57 15.25 15.47 15.47 12.88
126
Transaction
Tranche
Percentage of NonOwner Occupied Properties Reported in Prospectus 2.57 2.21 2.21 1.96 1.96 4.50 9.03 9.03 7.81 11.75 5.75 3.10 23.42 22.48 7.21 4.94 6.06 3.27 4.23 5.86 8.21 7.55 6.06 18.62 18.62 17.98 16.29 26.44 0.00 16.85 0.00 0.00 27.31 49.00 10.27
JPMAC 2006-WMC2 JPMAC 2006-WMC3 JPMAC 2006-WMC3 JPMAC 2006-WMC4 JPMAC 2006-WMC4 JPMAC 2007-CH2 JPMAC 2007-CH3 JPMAC 2007-CH3 JPMAC 2007-CH4 JPMAC 2007-CH5 JPMMT 2006-A3 LBMLT 2005-3 LBMLT 2006-1 LBMLT 2006-2 LBMLT 2006-3 LBMLT 2006-4 LBMLT 2006-5 LBMLT 2006-6 LBMLT 2006-7 LBMLT 2006-8 LBMLT 2006-9 LBMLT 2006-10 LBMLT 2006-11 LBMLT 2006-WL1 LBMLT 2006-WL1 LBMLT 2006-WL2 LBMLT 2006-WL3 LUM 2006-3 NCMT 2007-1 PCHLT 2005-4 SACO 2007-1 SACO 2007-2 SAMI 2006-AR4 WAMU 2007-OA3 WMABS 2006-HE1
A1 A1SS A1MZ A1A A1B AV1 A1A A1B A1 A1 1A1 IA IA IA IA IA IA IA IA IA IA IA IA IA1 IA2 IA IA II2A1 1A1 2A1 IIA IIA IA1 1A IA
Group 1 Group 1 Group 1 Group 1 Group 1 Group 2-A Group 1 Group 1 Group 1 Group 1 Pool 1 Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group II-2 Group 1 Group 2 Group II Group II Group I Group 1 Group 1
Percentage of Properties Reported as Owner Occupied With Strong Indication of Non-Owner Occupancy20 12.43 13.66 13.66 10.78 10.78 11.17 10.62 10.62 12.66 9.68 17.56 11.41 10.34 11.98 12.50 13.05 11.57 12.94 13.82 14.42 12.90 14.52 14.37 11.33 11.33 13.41 11.48 13.97 11.15 15.81 11.19 12.86 19.81 13.04 9.79
Prospectus Percentage Understatement of Non-Owner Occupied Properties 12.11 13.36 13.36 10.57 10.57 10.67 9.67 9.67 11.67 8.55 16.55 11.06 7.92 9.29 11.60 12.41 10.87 12.51 13.24 13.57 11.84 13.42 13.50 9.22 9.22 11.00 9.61 10.28 11.15 13.15 11.19 12.86 14.40 6.65 8.78
14.68 15.57 15.57 12.53 12.53 15.17 18.70 18.70 19.48 20.30 22.30 14.16 31.34 31.77 18.81 17.35 16.93 15.78 17.47 19.43 20.05 20.97 19.56 27.84 27.84 28.98 25.90 36.72 11.15 30.00 11.19 12.86 41.71 55.65 19.05
127
Transaction
Tranche
Percentage of NonOwner Occupied Properties Reported in Prospectus 9.87 8.97 8.43 9.50 8.32 100.00 100.00 23.67 24.70 21.07 18.64 31.67 19.45 21.51 20.78 20.67 17.11 39.96 6.47 8.21 5.84 7.04
WMABS 2006-HE3 WMABS 2006-HE4 WMABS 2006-HE5 WMABS 2007-HE1 WMABS 2007-HE2 WMALT 2005-9 WMALT 2005-10 WMALT 2006-AR4 WMALT 2006-AR4 WMALT 2006-AR4 WMALT 2006-AR5 WMALT 2006-AR5 WMALT 2006-AR8 WMALT 2006-AR9 WMALT 2007-OA1 WMALT 2007-OA2 WMALT 2007-OA3 WMALT 2007-OA3 WMHE 2007-HE1 WMHE 2007-HE2 WMHE 2007-HE3 WMHE 2007-HE4
IA IA IA IA IA 1CB 1CB 1A 2A 3A 1A 2A 1A 1A 1A 1A 1A 3A IA IA IA IA
Group I Group I Group I Group I Group I Group 1 Group 1 Group 1 Group 2 Group 3 Group 1 Group 2 Group 1 Group 1 Group 1 Group 1 Group 1 Group 3 Group I Group I Group I Group I
Percentage of Properties Reported as Owner Occupied With Strong Indication of Non-Owner Occupancy20 10.75 10.62 10.59 11.92 11.85 n/a n/a 18.91 18.78 13.44 22.95 17.20 13.27 15.64 14.67 13.98 14.14 17.57 15.68 14.71 13.14 13.19
Prospectus Percentage Understatement of Non-Owner Occupied Properties 9.69 9.67 9.70 10.79 10.86 n/a n/a 14.43 14.14 10.61 18.67 11.75 10.69 12.28 11.62 11.09 11.72 10.55 14.67 13.50 12.37 12.26
19.56 18.64 18.13 20.29 19.18 n/a n/a 38.10 38.84 31.68 37.31 43.42 30.14 33.79 32.40 31.76 28.83 50.51 21.14 21.71 18.21 19.30
2. 348.
The data analysis has further revealed that the LTV ratios disclosed in the
Prospectus Supplements were materially false and understated, as more specifically set out below. For each of the sampled loans, an industry standard automated valuation model (AVM) was used to calculate the value of the underlying property at the time the mortgage loan was originated. Retroactive AVMs are routinely used in the industry as a way of valuing properties during prequalification, origination, portfolio review, and servicing. Such AVMs rely 128
upon similar data as appraisersprimarily county assessor records, tax rolls, and data on comparable properties. AVMs produce independent, statistically-derived valuation estimates by applying modeling techniques to this data. 349. Applying the AVM to the available data for the properties securing the sampled
loans shows that the retroactive appraised value given to such properties was significantly higher than the actual value of such properties. The result of this overstatement of property values is a material understatement of LTV. That is, if a propertys true value is significantly less than the value used in the loan underwriting, then the loan represents a significantly higher percentage of the propertys value. This, of course, increases the risk a borrower will not repay the loan and the risk of greater losses in the event of a default 350. For example, for the JPMAC 2006-WMC2 Securitization, which was sponsored
by J.P. Morgan Acquisition and underwritten by J.P. Morgan Securities, the Prospectus Supplement stated that no LTV ratios for the Supporting Loan Group were above 100 percent. In fact, 16.36 percent of the sample of loans included in the data analysis had LTV ratios above 100 percent. In addition, the Prospectus Supplement stated that 68.40 percent of the loans had LTV ratios at or below 80 percent. The data analysis indicated that only 39.78 percent of the loans had LTV ratios at or below 80 percent. 351. The data analysis revealed that for each Securitization, the Prospectus Supplement
misrepresented both the percentage of loans with an LTV ratio that were above 100 percent and the percentage of loans that had an LTV ratio at or below 80 percent. Table 7 reflects (i) the true percentage of mortgages in the Supporting Loan Group with LTV ratios above 100 percent, versus the percentage reported in the Prospectus Supplement; and (ii) the true percentage of mortgages in the Supporting Loan Group with LTV ratios at or below 80 percent, versus the
129
percentage reported in the Prospectus Supplement. The percentages listed in Table 8 were calculated by aggregated principal balance. Table 8
True Percentage of Loans in Sample With LTV Ratios At Or Less Than 80% Based on Data Analysis 43.07 66.10 59.16 34.51 56.28 52.84 50.60 50.12 57.00 48.73 46.04 43.54 35.48 41.35 45.72 40.68 37.56 38.94 33.89 33.13 33.65 31.48 27.16 33.98 31.21 18.82 19.49 27.66 True Percentage of Loans in Sample With LTV Ratios Greater Than 100% Based on Data Analysis 14.00 7.24 6.79 20.46 8.44 9.15 8.70 6.34 5.89 10.99 9.54 14.63 22.58 11.53 16.29 16.95 18.92 14.60 17.58 20.19 24.09 21.97 21.34 23.71 21.71 27.06 32.78 30.00
Transaction
Tranche
Percentage of Loans Reported to Have LTV Ratios At Or Less Than 80% 63.41 92.90 94.45 45.87 98.22 98.52 97.74 99.19 97.70 98.52 83.43 58.04 50.91 50.24 66.09 52.23 58.48 59.19 48.60 50.00 55.06 51.39 36.55 54.46 52.89 39.16 35.32 44.19
Percentage of Loans Reported to Have LTV Ratios Greater Than 100% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
AABST 2005-5 AHM 2005-1 AHM 2005-4 ARSI 2006-M2 BALTA 2005-10 BALTA 2005-10 BALTA 2006-1 BALTA 2006-2 BALTA 2006-3 BALTA 2006-4 BALTA 2006-4 BSABS 2005-HE12 BSABS 2006-AQ1 BSABS 2006-HE2 BSABS 2006-HE4 BSABS 2006-HE5 BSABS 2006-HE7 BSABS 2006-HE8 BSABS 2006-HE9 BSABS 2006-HE9 BSABS 2006-HE10 BSABS 2006-HE10 BSABS 2007-FS1 BSABS 2007-HE1 BSABS 2007-HE1 BSABS 2007-HE2 BSABS 2007-HE2 BSABS 2007-HE3
IIA VIA IVA A1 II2A1 II3A1 II1A1 II2A1 II1A1 I2A1 III1A1 IIA I2A IIA IIA IIA II2A II2A IIA IIIA II2A II3A IIA II2A II3A II2A II3A IIA
Pool 2 Group VI Group IV Group I Group II-2 Group II-3 Group II-1 Group II-2 Group II-1 Group I-2 Group III-1 Group II Group I-2 Group II Group II Group II Group II-2 Group II-2 Group II Group III Group II-2 Group II-3 Group II Group II-2 Group II-3 Group II-2 Group II-3 Group II
130
Transaction
Tranche
Percentage of Loans Reported to Have LTV Ratios At Or Less Than 80% 49.54 53.46 61.17 48.36 54.31 66.83 74.70 1.93 3.62 100.00 0.47 1.77 64.44 45.11 96.48 97.93 97.93 94.54 92.37 52.82 70.09 63.36 52.46 53.08 67.63 71.17 66.24 59.44 52.73 64.92 76.16 43.50 56.25 57.98
BSABS 2007-HE3 BSABS 2007-HE4 BSABS 2007-HE5 BSABS 2007-HE5 BSABS 2007-HE6 BSABS 2007-HE7 BSABS 2007-HE7 BSMF 2006-SL5 BSMF 2006-SL6 BSMF 2007-AR3 BSMF 2007-SL1 BSMF 2007-SL2 CBASS 2006-CB2 CBASS 2006-CB7 GPMF 2005-AR5 GPMF 2006-AR3 GPMF 2006-AR3 JPALT 2005-A2 JPALT 2007-A2 JPMAC 2005-FRE1 JPMAC 2005-OPT2 JPMAC 2005-WMC1 JPMAC 2006-ACC1 JPMAC 2006-CH1 JPMAC 2006-CH2 JPMAC 2006-CW1 JPMAC 2006-CW2 JPMAC 2006-FRE1 JPMAC 2006-FRE2 JPMAC 2006-HE1 JPMAC 2006-HE2 JPMAC 2006-HE3 JPMAC 2006-NC1 JPMAC 2006-NC2
IIIA IIA IIA IIIA IIA IIA1 IIIA1 IIA IIA II2A1 IIA IIA AV A1 IIA1 IIA1 IIA2 2A1 11A1 AI A1A A1 A1 A1 AV1 A1A AV1 A1 A1 A1 A1 A1 A1 A1A
Group III Group II Group II Group III Group II Group II Group III Group II Group II Group II-2 Group II Group II Group 1 Group I Group II Group II Group II Pool 2 Pool 1A Group I Group 1 Group 1 Group 1 Group 1 Group 2-A Group 1 Group 2 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1
True Percentage of Loans in Sample With LTV Ratios At Or Less Than 80% Based on Data Analysis 31.46 32.64 39.46 33.12 31.62 37.42 46.92 3.10 3.52 44.98 1.12 1.72 45.98 32.70 57.02 52.84 52.84 55.96 47.58 32.47 40.37 45.43 35.01 37.64 41.03 52.52 46.93 39.00 34.03 41.62 45.54 25.93 41.84 43.74
Percentage of Loans Reported to Have LTV Ratios Greater Than 100% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.04 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
True Percentage of Loans in Sample With LTV Ratios Greater Than 100% Based on Data Analysis 23.38 25.94 19.43 26.96 26.95 23.78 17.14 51.87 57.15 13.10 60.70 57.28 12.59 26.28 7.00 6.57 6.57 6.76 12.11 15.74 12.83 12.48 16.89 17.82 15.05 6.70 10.50 15.43 16.16 13.48 13.57 21.82 13.96 16.63
131
Transaction
Tranche
Percentage of Loans Reported to Have LTV Ratios At Or Less Than 80% 56.97 56.97 62.34 68.40 66.96 66.96 64.62 64.62 57.39 63.36 63.36 56.35 50.85 96.71 100.00 72.87 67.64 75.85 81.33 74.73 28.45 22.74 70.66 63.13 59.81 61.67 70.76 70.76 19.23 21.86 96.85 48.06 59.05 2.54
JPMAC 2006-RM1 JPMAC 2006-RM1 JPMAC 2006-WMC1 JPMAC 2006-WMC2 JPMAC 2006-WMC3 JPMAC 2006-WMC3 JPMAC 2006-WMC4 JPMAC 2006-WMC4 JPMAC 2007-CH2 JPMAC 2007-CH3 JPMAC 2007-CH3 JPMAC 2007-CH4 JPMAC 2007-CH5 JPMMT 2006-A3 LBMLT 2005-3 LBMLT 2006-1 LBMLT 2006-2 LBMLT 2006-3 LBMLT 2006-4 LBMLT 2006-5 LBMLT 2006-6 LBMLT 2006-7 LBMLT 2006-8 LBMLT 2006-9 LBMLT 2006-10 LBMLT 2006-11 LBMLT 2006-WL1 LBMLT 2006-WL1 LBMLT 2006-WL2 LBMLT 2006-WL3 LUM 2006-3 NCMT 2007-1 PCHLT 2005-4 SACO 2007-1
A1A A1B A1 A1 A1SS A1MZ A1A A1B AV1 A1A A1B A1 A1 1A1 IA IA IA IA IA IA IA IA IA IA IA IA IA1 IA2 IA IA II2A1 1A1 2A1 IIA
Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 2-A Group 1 Group 1 Group 1 Group 1 Pool 1 Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group II-2 Group 1 Group 2 Group II
True Percentage of Loans in Sample With LTV Ratios At Or Less Than 80% Based on Data Analysis 35.04 35.04 43.20 39.78 39.31 39.31 31.19 31.19 41.12 38.00 38.00 40.32 32.39 54.52 56.13 50.10 42.70 46.02 40.50 46.95 29.62 24.05 44.13 34.87 36.05 36.74 46.32 46.32 25.15 23.17 55.23 31.51 43.48 3.17
Percentage of Loans Reported to Have LTV Ratios Greater Than 100% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
True Percentage of Loans in Sample With LTV Ratios Greater Than 100% Based on Data Analysis 19.26 19.26 16.73 16.36 18.24 18.24 23.87 23.87 15.37 16.62 16.62 17.85 22.13 5.81 6.45 11.25 11.94 12.74 12.40 12.34 14.00 14.38 16.70 19.60 20.72 21.35 11.69 11.69 9.40 14.57 7.03 27.78 14.71 57.82
132
Transaction
Tranche
Percentage of Loans Reported to Have LTV Ratios At Or Less Than 80% 1.17 91.65 93.43 59.84 40.79 22.83 49.18 62.14 60.98 89.08 94.88 77.29 90.48 76.36 70.75 76.48 77.21 76.47 45.17 46.97 49.34 90.37 60.41 58.78 59.11 57.07
SACO 2007-2 SAMI 2006-AR4 WAMU 2007-OA3 WMABS 2006-HE1 WMABS 2006-HE3 WMABS 2006-HE4 WMABS 2006-HE5 WMABS 2007-HE1 WMABS 2007-HE2 WMALT 2005-9 WMALT 2005-10 WMALT 2006-AR4 WMALT 2006-AR4 WMALT 2006-AR4 WMALT 2006-AR5 WMALT 2006-AR5 WMALT 2006-AR8 WMALT 2006-AR9 WMALT 2007-OA1 WMALT 2007-OA2 WMALT 2007-OA3 WMALT 2007-OA3 WMHE 2007-HE1 WMHE 2007-HE2 WMHE 2007-HE3 WMHE 2007-HE4
IIA IA1 1A IA IA IA IA IA IA 1CB 1CB 1A 2A 3A 1A 2A 1A 1A 1A 1A 1A 3A IA IA IA IA
Group II Group I Group 1 Group 1 Group I Group I Group I Group I Group I Group 1 Group 1 Group 1 Group 2 Group 3 Group 1 Group 2 Group 1 Group 1 Group 1 Group 1 Group 1 Group 3 Group I Group I Group I Group I
True Percentage of Loans in Sample With LTV Ratios At Or Less Than 80% Based on Data Analysis 2.71 46.49 64.08 42.14 32.96 29.10 21.97 34.22 33.29 77.70 72.62 54.58 66.33 55.17 51.69 57.57 53.16 45.61 47.68 48.02 42.86 47.97 38.83 40.12 37.65 34.97
Percentage of Loans Reported to Have LTV Ratios Greater Than 100% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
True Percentage of Loans in Sample With LTV Ratios Greater Than 100% Based on Data Analysis 54.37 9.55 10.53 15.51 19.52 13.52 24.78 21.30 21.95 3.72 6.39 10.21 6.67 9.10 11.03 6.65 9.87 14.58 13.31 11.93 14.37 18.12 23.08 22.89 21.59 26.24
352.
As Table 8 demonstrates, the Prospectus Supplements for all but one of the
Securitizations reported that none of the mortgage loans in the Supporting Loan Groups had an LTV ratio over 100 percent. In contrast, the data analysis revealed that at least 3.72 percent of
133
the mortgage loans for each Securitization had an LTV ratio over 100 percent, and for most Securitizations this figure was much larger. 353. These inaccuracies with respect to reported LTV ratios also indicate that the
representations in the Registration Statements relating to appraisal practices were false, and that the appraisers themselves, in many instances, furnished appraisals that they understood were inaccurate and that they knew bore no reasonable relationship to the actual value of the underlying properties. Indeed, independent appraisers following proper practices and, providing genuine estimates as to valuation, would not systematically generate appraisals that deviate so significantly (and so consistently upward) from the true values of the appraised properties. This conclusion is further confirmed by the findings of the Financial Crisis Inquiry Commission (the FCIC), which identified inflated appraisals as a pervasive problem during the period of the Securitizations, and determined through its investigation that appraisers were often pressured by mortgage originators, among others, to produce inflated results. See FCIC, Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (January 2011). B. 354. The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines
The Registration Statements contained material misstatements and omissions
regarding compliance with underwriting guidelines. Indeed, the originators for the loans underlying the Securitizations systematically disregarded their respective underwriting guidelines in order to increase production and profits derived from their mortgage lending businesses. This is confirmed by systematically misreported owner-occupancy and LTV statistics, discussed above, and by (1) government investigations into originators underwriting practices, which have revealed widespread abandonment of originators reported underwriting 134
guidelines during the relevant period; (2) the collapse of the Certificates credit ratings; and (3) the surge in delinquency and default in the mortgages in the Securitizations. 1. Government Investigations and Private Actions Have Confirmed That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines
355.
The abandonment of underwriting guidelines is further confirmed by several
government reports and investigations that have described rampant underwriting failures throughout the period of the Securitizations, and, more specifically, have described underwriting failures by the very originators whose loans were included by the Defendants in the Securitizations. 356. For instance, in November 2008, the Office of the Comptroller of the Currency,
an office within the United States Department of the Treasury, issued a report identifying the Worst Ten mortgage originators in the Worst Ten metropolitan areas. The worst originators were defined as those with the largest number of non-prime mortgage foreclosures for 20052007 originations. WMC, Fremont, and Countrywide, which originated many of the loans for the Securitizations at issue here, were all on that list. See Worst Ten in the Worst Ten, Office of the Comptroller of the Currency Press Release (Nov. 13, 2008), available at http://www.occ.treas.gov/news-issuances/news-releases/2009/nr-occ-2009-112b.pdf. 357. The originators of the mortgage loans underlying the Securitizations went beyond
the systematic disregard of their own underwriting guidelines. Indeed, as the FCIC has confirmed, mortgage loan originators throughout the industry pressured appraisers, during the period of the Securitizations, to issue inflated appraisals that met or exceeded the amount needed for the subject loans to be approved, regardless of the accuracy of such appraisals, and especially when the originators aimed at putting the mortgages into a package of mortgages that would be
135
sold for securitization. This resulted in lower LTV ratios, discussed above, which in turn made the loans appear to the investors less risky than they were. 358. As described by Patricia Lindsay, a former wholesale lender who testified before
the FCIC in April 2010, appraisers fear[ed] for their livelihoods, and therefore cherry-picked data that would help support the needed value rather than finding the best comparables to come up with the most accurate value. See Written Testimony of Patricia Lindsay to the FCIC, April 7, 2010, at 5. Likewise, Jim Amorin, President of the Appraisal Institute, confirmed in his testimony that [i]n many cases, appraisers are ordered or severely pressured to doctor their reports and to convey a particular, higher value for a property, or else never see work from those parties again . [T]oo often state licensed and certified appraisers are forced into making a Hobsons Choice. See Testimony of Jim Amorin to the FCIC, available at www.appraisalinstitute.org/newsadvocacy/downloads/ltrs_tstmny/2009/AI-ASA-ASFMRANAIFATestimonyonMortgageReform042309final.pdf. Faced with this choice, appraisers systematically abandoned applicable guidelines and over-valued properties in order to facilitate the issuance of mortgages that could then be collateralized into mortgage-backed securitizations. (a) 359. WMC Mortgage Corp.
WMC originated the majority of the loans in the JPMAC 2005-WMC1, JPMAC
2006-WMC1, JPMAC 2006-WMC2, JPMAC 2006-WMC3, JPMAC 2006-WMC4, and WMABS 2007-HE2 Securitizations. 360. WMC employed reckless underwriting standards and practices, as described more
fully below, that resulted in a huge amount of foreclosures, ranking WMC fourth in the report presented to the FCIC in April 2010 identifying the Worst Ten mortgage originators in the Worst Ten metropolitan areas. See Worst Ten in the Worst Ten, Office of the Comptroller of the Currency Press Release, November 13, 2008. General Electric, which had purchased 136
WMC in 2004, closed down operations at WMC in late 2007 and took a $1.4 billion charge in the third quarter of that year. See, e.g., Diane Brady, Adventures of a Subprime Survivor, Bloomberg Businessweek, Oct. 29, 2007 (available at http://www.businessweek.com/magazine/content/07_44/b4056074.htm). 361. WMCs reckless loan originating practices were noticed by regulatory authorities.
In June 2008, the Washington State Department of Financial Institutions, Division of Consumer Services filed a Statement of Charges and Notice of Intention to Enter an Order to Revoke License, Prohibit From Industry, Impose Fine, Order Restitution and Collect Investigation Fees (the Statement of Charges) against WMC Mortgage and its principal owners individually. See Statement of Charges, No. C-07-557-08-SC01, Jun. 4, 2008. The Statement of Charges referenced a review of 86 loan files, which revealed that at least 76 loans were defective or otherwise in violation of Washington state law. Id. Among other things, the investigation uncovered that WMC had originated loans with unlicensed or unregistered mortgage brokers, understated amounts of finance charges on loans, understated amounts of payments made to escrow companies, understated annual percentage rates to borrowers and committed many other violations of Washington State deceptive and unfair practices laws. Id. (b) 362. Fremont Investment & Loan
Fremont originated the majority of the loans in the PMAC 2005-FRE1, JPMAC
2006-FRE1, JPMAC 2006-FRE2, and NCMT 2007-1 Securitizations. Fremont was one of the countrys largest subprime lenders and originated subprime residential real estate loans nationwide on a wholesale basis through independent loan brokers in nearly all 50 states. 363. On October 4, 2007, the Commonwealth of Massachusetts, through its Attorney
General, brought an enforcement action against Fremont for an array of unfair and deceptive business conduct, on a broad scale. See Complaint, Commonwealth v. Fremont Investment & 137
Loan and Fremont General Corp., No. 07-4373 (Mass. Super. Ct.) (the Fremont Complaint). According to the Massachusetts Attorney Generals complaint, Fremont approve[ed] borrowers without considering or verifying the relevant documentation related to the borrowers credit qualifications, including the borrowers income; approv[ed] borrowers for loans with inadequate debt-to-income analyses that do not properly consider the borrowers ability to meet their overall level of indebtedness and common housing expenses; failed to meaningfully account for [ARM] payment adjustments in approving and selling loans; approved borrowers for these ARM loans based only on the initial fixed teaser rate, without regard for borrowers ability to pay after the initial two year period; consistently failed to monitor or supervise brokers practices or to independently verify the information provided to Fremont by brokers; and ma[de] loans based on information that Fremont knew or should have known was inaccurate or false, including, but not limited to, borrowers income, property appraisals, and credit scores. See Fremont Complaint. 364. On December 9, 2008, the Supreme Judicial Court of Massachusetts affirmed a
preliminary injunction that prevented Fremont from foreclosing on thousands of its loans issued to Massachusetts residents. As a basis for its unanimous ruling, the Supreme Judicial Court found that the record supported the lower courts conclusions that Fremont made no effort to determine whether borrowers could make the scheduled payments under the terms of the loan, and that Fremont knew or should have known that [its lending practices and loan terms] would operate in concert essentially to guarantee that the borrower would be unable to pay and default would follow. Commonwealth v. Fremont Inv. & Loan, 897 N.E.2d 548, 556 (Mass. 2008). The terms of the preliminary injunction were made permanent by a settlement reached on June 9, 2009.
138
(c) 365.
Countrywide Home Loans, Inc.
Countrywide originated the majority of the loans in the BALTA 2006-4, JPMAC
2006-CW1, and JPMAC 2006-CW2 Securitizations. 366. In January 2011, the FCIC issued its final report, which detailed, among other
things, the collapse of mortgage underwriting standards and subsequent collapse of the mortgage market and wider economy. See Financial Crisis Inquiry Commission, Final Report of the National Commission of the Causes of the Financial and Economic Crisis in the United States (2011) (FCIC Report). The FCIC Report singled out Countrywide for its role: Lenders made loans that they knew borrowers could not afford and that could cause massive losses to investors in mortgage securities. As early as September 2004, Countrywide executives recognized that many of the loans they were originating could result in catastrophic consequences. Less than a year later, they noted that certain high-risk loans they were making could result not only in foreclosures but also in financial and reputational catastrophe for the firm. But they did not stop. See FCIC Report, at xxii. 367. Countrywide has also been the subject of several investigations and actions
concerning its lax and deficient underwriting practices. In June 2009, for instance, the SEC initiated a civil action against Countrywide executives Angelo Mozilo (founder and Chief Executive Officer), David Sambol (Chief Operating Officer), and Eric Sieracki (Chief Financial Officer) for securities fraud and insider trading. In a September 16, 2010 opinion denying these defendants motions for summary judgment, the United States District Court for the Central District of California found that the SEC raised genuine issues of fact as to, among other things, whether the defendants had misrepresented the quality of Countrywides underwriting processes. The court noted that the SEC presented evidence that Countrywide routinely ignored its official underwriting to such an extent that Countrywide would underwrite any loan it could sell into the 139
secondary mortgage market, and that a significant portion (typically in excess of 20%) of Countrywides loans were issued as exceptions to its official underwriting guidelines . The court concluded that a reasonable jury could conclude that Countrywide all but abandoned managing credit risk through its underwriting guidelines . S.E.C. v. Mozilo, No. CV 09-3994, 2010 WL 3656068, at *10 (C.D. Cal. Sept. 16, 2010). Mozilo, Sambol, and Sieracki subsequently settled with the SEC. 368. The testimony and documents only recently made available to the GSEs by way
of the SECs investigation confirm that Countrywide was systematically abusing exceptions and low-documentation processes in order to circumvent its own underwriting standards. For example, in an April 13, 2006 e-mail, Mozilo wrote to Sieracki and others that he was concerned that certain subprime loans had been originated with serious disregard for process [and] compliance with guidelines, resulting in the delivery of loans with deficient documentation. Mozilo further stated that I have personally observed a serious lack of compliance within our origination system as it relates to documentation and generally a deterioration in the quality of loans originated versus the pricing of those loan[s]. (d) 369. Greenpoint Mortgage Funding, Inc.
GreenPoint originated the majority of the loans in trusts GPMF 2005-AR5 and
GPMF 2006-AR3. 370. GreenPoint systematically disregarded its underwriting standards, granted
exceptions in the absence of compensating factors, required less documentation, and granted nodocumentation or limited-documentation loans to individuals without sound credit histories. In November 2008, Business Week Magazine reported that GreenPoints employees and independent mortgage brokers targeted borrowers who were less able to afford the loan payments they were required to make, and many had no realistic ability to pay back the loans. 140
GreenPoints parent corporation, Capital One Financial Corp., eventually liquidated GreenPoint in December 2008, taking an $850 million write-down due to mortgage-related losses associated with GreenPoints origination business. 371. GreenPoints pervasive disregard of underwriting standards resulted in its
regarding the quality of the loans GreenPoint underwrote and originated. For example, in U.S. Bank Natl Assn v. GreenPoint Mortgage Funding, Inc., No. 09-600352 (N.Y. Sup. Ct. filed Apr. 22, 2009), a consultants investigation concluded that 93 percent of the loans that GreenPoint sold contained errors, omissions, misrepresentations, and negligence related to origination and underwriting. The investigation found that GreenPoint loans suffered from serious defects including: Pervasive misrepresentations and/or negligence with respect to the statement of the income, assets or employment of the borrower. Violations of GreenPoints own underwriting guidelines and prudent mortgage lending practices, including loans made to borrowers (i) who made unreasonable claims as to their income, (ii) with multiple, unverified social security numbers, (iii) with credit scores below the required minimum, (iv) with debt-to-income and/or loan-to-value ratios above the allowed maximum or (v) with relationships to GreenPoint or other non-arms-length relationships. Misrepresentations of the borrowers intent to occupy the property as the borrowers residence and subsequent failure to so occupy the property. Inflated appraisal values. 141
373.
On March 3, 2010, the court denied GreenPoints motion to dismiss this claim,
holding that discovery would be required to determine whether GreenPoint would be required under the parties contract to repurchase all 30,000 loans based on the deficiencies in individual loans identified by U.S. Bank. 2. The Collapse of the Certificates Credit Ratings Further Indicates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines
374.
assigned credit ratings of AAA or its equivalent, which purportedly reflected the description of the mortgage loan collateral and underwriting practices set forth in the Registration Statements. These ratings were artificially inflated, however, as a result of the very same misrepresentations that the Defendants made to investors in the Prospectus Supplements. 376. JPMorgan, Bear Stearns, WaMu, and Long Beach provided, or caused to be
provided, loan level information to the rating agencies that they relied upon in order to calculate the Certificates assigned ratings, including the borrowers LTV ratio, debt-to-income ratio, owner occupancy status, and other loan level information described in aggregation reports in the Prospectus Supplements. Because the information that JPMorgan, Bear Stearns, WaMu and Long Beach provided or caused to be provided was false, the ratings were inflated and the level of subordination that the rating agencies required for the sale of AAA (or its equivalent) certificates was inadequate to provide investors with the level of protection that those ratings signified. As a result, the GSEs paid Defendants inflated prices for purported AAA (or its 142
equivalent) Certificates, unaware that those Certificates actually carried a severe risk of loss and carried inadequate credit enhancement. 377. Since the issuance of the Certificates, the ratings agencies have dramatically
Transaction AABST 2005-5 AHM 2005-1 AHM 2005-4 ARSI 2006-M2 BALTA 2005-10 BALTA 2005-10 BALTA 2006-1 BALTA 2006-2 BALTA 2006-3 BALTA 2006-4 BALTA 2006-4 BSABS 2005-HE12 BSABS 2006-AQ1 BSABS 2006-HE2 BSABS 2006-HE4 BSABS 2006-HE5 BSABS 2006-HE7 BSABS 2006-HE8 BSABS 2006-HE9 BSABS 2006-HE9 BSABS 2006-HE10 BSABS 2006-HE10 BSABS 2007-FS1 Tranche IIA VIA IVA A1 II2A1 II3A1 II1A1 II2A1 II1A1 I2A1 III1A1 IIA I2A IIA IIA IIA II2A II2A IIA IIIA II2A II3A IIA Ratings at Issuance (Moodys/S&P/Fitch) Aaa/AAA/AAA Aaa/AAA /-Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa /AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Ratings at July 31, 2011 (Moodys/S&P/Fitch) B2/AAA/CCC B3/--/-Caa3/CCC/-Caa2/CCC/C Ca/D/-Ca/D/-Ca/D/-Ca/D/-Ca/D/-Ca/D/-Caa3/CC/-Aa3/AA/-Caa3/CCC/-Ba3/AAA/-Ca/CCC/-Caa2/A/-Ca/CCC/-B1/B-/-Caa3/B/-Caa3/B/-Caa3/CCC/-Caa3/CCC/-Ca/B-/--
21
Transaction BSABS 2007-HE1 BSABS 2007-HE1 BSABS 2007-HE2 BSABS 2007-HE2 BSABS 2007-HE3 BSABS 2007-HE3 BSABS 2007-HE4 BSABS 2007-HE5 BSABS 2007-HE5 BSABS 2007-HE6 BSABS 2007-HE7 BSABS 2007-HE7 BSMF 2006-SL5 BSMF 2006-SL6 BSMF 2007-AR3 BSMF 2007-SL1 BSMF 2007-SL2 CBASS 2006-CB2 CBASS 2006-CB7 GPMF 2005-AR5 GPMF 2006-AR3 GPMF 2006-AR3 JPALT 2005-A2 JPALT 2007-A2 JPMAC 2005-FRE1 JPMAC 2005-OPT2 JPMAC 2005-WMC1 JPMAC 2006-ACC1 JPMAC 2006-CH1 JPMAC 2006-CH2 JPMAC 2006-CW1 JPMAC 2006-CW2 JPMAC 2006-FRE1 JPMAC 2006-FRE2 JPMAC 2006-HE1 JPMAC 2006-HE2 JPMAC 2006-HE3 JPMAC 2006-NC1 JPMAC 2006-NC2 JPMAC 2006-RM1
Tranche II2A II3A II2A II3A IIA IIIA IIA IIA IIIA IIA IIA1 IIIA1 IIA IIA II2A1 IIA IIA AV A1 IIA1 IIA1 IIA2 2A1 11A1 AI A1A A1 A1 A1 AV1 A1A AV1 A1 A1 A1 A1 A1 A1 A1A A1A
Ratings at Issuance (Moodys/S&P/Fitch) Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/--/AAA Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA
Ratings at July 31, 2011 (Moodys/S&P/Fitch) Caa3/BB+/-Caa3/BBB-/-Ca/CCC/-Ca/CCC/-Caa3/B-/-Caa3/B-/-Caa2/CCC/-Caa3/CCC/-Caa2/CCC/-Ca/--/C Caa3/B-/-Ca/B-/-C/D/-C/D/-Ca/CC/-C/D/-C/D/-Caa2/BB+/CCC Caa3/CCC/C Caa3/CCC/-Caa3/BB/-C/D/-Caa3/CCC/-Ca/CCC/C Ba3/AA+/BB Aa2/AAA/A Aaa/AAA/AAA Ba3/B+/CCC B2/A/CCC Caa3/CCC/C Aa3/AAA/BB B1/B-/CC Ba3/B/CCC Ba3/B-/CCC Caa1/CCC/CC Caa2/CCC/CC Ca/CCC/C Caa1/CCC/CC Aa3/B+/BB Caa2/CCC/CC
144
Transaction JPMAC 2006-RM1 JPMAC 2006-WMC1 JPMAC 2006-WMC2 JPMAC 2006-WMC3 JPMAC 2006-WMC3 JPMAC 2006-WMC4 JPMAC 2006-WMC4 JPMAC 2007-CH2 JPMAC 2007-CH3 JPMAC 2007-CH3 JPMAC 2007-CH4 JPMAC 2007-CH5 JPMMT 2006-A3 LBMLT 2005-3 LBMLT 2006-1 LBMLT 2006-2 LBMLT 2006-3 LBMLT 2006-4 LBMLT 2006-5 LBMLT 2006-6 LBMLT 2006-7 LBMLT 2006-8 LBMLT 2006-9 LBMLT 2006-10 LBMLT 2006-11 LBMLT 2006-WL1 LBMLT 2006-WL1 LBMLT 2006-WL2 LBMLT 2006-WL3 LUM 2006-3 NCMT 2007-1 PCHLT 2005-4 SACO 2007-1 SACO 2007-2 SAMI 2006-AR4 WAMU 2007-OA3 WMABS 2006-HE1 WMABS 2006-HE3 WMABS 2006-HE4 WMABS 2006-HE5
Tranche A1B A1 A1 A1SS A1MZ A1A A1B AV1 A1A A1B A1 A1 1A1 IA IA IA IA IA IA IA IA IA IA IA IA IA1 IA2 IA IA II2A1 1A1 2A1 IIA IIA IA1 1A IA IA IA IA
Ratings at Issuance (Moodys/S&P/Fitch) Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/--/AAA Aaa/AAA/AAA Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/AAA Aaa/--/AAA Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/-Aaa/AAA/-Aaa/AAA/--
Ratings at July 31, 2011 (Moodys/S&P/Fitch) C/CCC/C B3/B+/CCC Ca/CCC/C B2/CCC/CC C/CCC/C Caa3/CCC/C C/CCC/C B3/B/CCC B3/CCC/CC Ca/CCC/CC Caa1/CCC/CC Caa1/CCC/CC Caa3/--/C Ca/CCC/CC Caa3/CCC/-Ca/CCC/C Caa3/CCC/-Ca/CCC/-Caa3/CCC/-Ca/CCC/C Ca/CCC/C Caa3/CCC/-Ca/CCC/-Caa2/CCC/-Ca/CCC/-Caa1/BB/-B1/BB/-Caa3/B-/C Caa3/B-/C Caa3/--/D Caa2/CCC/-Ba1/BBB+/BB C/D/-C/D/-Ca/CC/-Caa3/CCC/-Caa3/CCC/CC Ca/CCC/-Ca/CCC/-Ca/CCC/--
145
Transaction WMABS 2007-HE1 WMABS 2007-HE2 WMALT 2005-9 WMALT 2005-10 WMALT 2006-AR4 WMALT 2006-AR4 WMALT 2006-AR4 WMALT 2006-AR5 WMALT 2006-AR5 WMALT 2006-AR8 WMALT 2006-AR9 WMALT 2007-OA1 WMALT 2007-OA2 WMALT 2007-OA3 WMALT 2007-OA3 WMHE 2007-HE1 WMHE 2007-HE2 WMHE 2007-HE3 WMHE 2007-HE4
Tranche IA IA 1CB 1CB 1A 2A 3A 1A 2A 1A 1A 1A 1A 1A 3A IA IA IA IA
Ratings at Issuance (Moodys/S&P/Fitch) Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/--
Ratings at July 31, 2011 (Moodys/S&P/Fitch) Ca/CCC/-Ca/CCC/-Caa2/CCC/-Ca/CCC/-Ca/CCC/-Ca/CCC/-Ca/CCC/-Ca/CCC/-Ca/CCC/-Ca/CC/-Ca/CCC/-Ca/CCC/-Ca/CCC/-Ca/CCC/-Ca/CC/-Caa2/CCC/-Caa3/CCC/C Caa2/B-/CC Caa2/CCC/--
3.
378.
characteristics represented in the Registration Statements would have experienced substantially fewer payment problems and substantially lower percentages of defaults, foreclosures, and
146
delinquencies than occurred here. Table 10 reflects the percentage of loans in the Supporting Loan Groups that are in default, have been foreclosed upon, or are delinquent as of July 2011. Table 10
Transaction AABST 2005-5 AHM 2005-1 AHM 2005-4 ARSI 2006-M2 BALTA 2005-10 BALTA 2005-10 BALTA 2006-1 BALTA 2006-2 BALTA 2006-3 BALTA 2006-4 BALTA 2006-4 BSABS 2005-HE12 BSABS 2006-AQ1 BSABS 2006-HE2 BSABS 2006-HE4 BSABS 2006-HE5 BSABS 2006-HE7 BSABS 2006-HE8 BSABS 2006-HE9 BSABS 2006-HE9 BSABS 2006-HE10 BSABS 2006-HE10 BSABS 2007-FS1 BSABS 2007-HE1 BSABS 2007-HE1 BSABS 2007-HE2 BSABS 2007-HE2 BSABS 2007-HE3 BSABS 2007-HE3 BSABS 2007-HE4 BSABS 2007-HE5 BSABS 2007-HE5 BSABS 2007-HE6 BSABS 2007-HE7 Tranche IIA VIA IVA A1 II2A1 II3A1 II1A1 II2A1 II1A1 I2A1 III1A1 IIA I2A IIA IIA IIA II2A II2A IIA IIIA II2A II3A IIA II2A II3A II2A II3A IIA IIIA IIA IIA IIIA IIA IIA1 Supporting Loan Group Pool 2 Group VI Group IV Group I Group II-2 Group II-3 Group II-1 Group II-2 Group II-1 Group I-2 Group III-1 Group II Group I-2 Group II Group II Group II Group II-2 Group II-2 Group II Group III Group II-2 Group II-3 Group II Group II-2 Group II-3 Group II-2 Group II-3 Group II Group III Group II Group II Group III Group II Group II Delinquent/Defaulted/Foreclosed Loans 35.60 22.40 29.11 36.46 32.88 37.55 39.11 38.36 44.37 60.60 37.39 55.84 63.33 58.08 54.93 57.38 59.29 56.11 59.13 59.66 61.76 61.19 61.24 58.11 55.91 62.69 68.22 59.80 59.67 38.41 53.23 51.90 59.56 57.73
147
Transaction BSABS 2007-HE7 BSMF 2006-SL5 BSMF 2006-SL6 BSMF 2007-AR3 BSMF 2007-SL1 BSMF 2007-SL2 CBASS 2006-CB2 CBASS 2006-CB7 GPMF 2005-AR5 GPMF 2006-AR3 GPMF 2006-AR3 JPALT 2005-A2 JPALT 2007-A2 JPMAC 2005-FRE1 JPMAC 2005-OPT2 JPMAC 2005-WMC1 JPMAC 2006-ACC1 JPMAC 2006-CH1 JPMAC 2006-CH2 JPMAC 2006-CW1 JPMAC 2006-CW2 JPMAC 2006-FRE1 JPMAC 2006-FRE2 JPMAC 2006-HE1 JPMAC 2006-HE2 JPMAC 2006-HE3 JPMAC 2006-NC1 JPMAC 2006-NC2 JPMAC 2006-RM1 JPMAC 2006-RM1 JPMAC 2006-WMC1 JPMAC 2006-WMC2 JPMAC 2006-WMC3 JPMAC 2006-WMC3 JPMAC 2006-WMC4 JPMAC 2006-WMC4 JPMAC 2007-CH2 JPMAC 2007-CH3 JPMAC 2007-CH3 JPMAC 2007-CH4
Tranche IIIA1 IIA IIA II2A1 IIA IIA AV A1 IIA1 IIA1 IIA2 2A1 11A1 AI A1A A1 A1 A1 AV1 A1A AV1 A1 A1 A1 A1 A1 A1 A1A A1A A1B A1 A1 A1SS A1MZ A1A A1B AV1 A1A A1B A1
Supporting Loan Group Group III Group II Group II Group II-2 Group II Group II Group 1 Group I Group II Group II Group II Pool 2 Pool 1A Group I Group 1 Group 1 Group 1 Group 1 Group 2-A Group 1 Group 2 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 2-A Group 1 Group 1 Group 1
Delinquent/Defaulted/Foreclosed Loans 57.36 24.34 32.33 58.43 32.64 20.31 46.82 50.80 50.08 56.45 56.45 23.68 54.12 44.69 36.17 50.44 57.48 45.85 50.82 70.65 62.47 55.13 54.63 50.34 55.43 56.37 47.13 43.66 50.31 50.31 51.22 55.31 53.37 53.37 55.15 55.15 44.65 49.56 49.56 47.83
148
Transaction JPMAC 2007-CH5 JPMMT 2006-A3 LBMLT 2005-3 LBMLT 2006-1 LBMLT 2006-2 LBMLT 2006-3 LBMLT 2006-4 LBMLT 2006-5 LBMLT 2006-6 LBMLT 2006-7 LBMLT 2006-8 LBMLT 2006-9 LBMLT 2006-10 LBMLT 2006-11 LBMLT 2006-WL1 LBMLT 2006-WL1 LBMLT 2006-WL2 LBMLT 2006-WL3 LUM 2006-3 NCMT 2007-1 PCHLT 2005-4 SACO 2007-1 SACO 2007-2 SAMI 2006-AR4 WAMU 2007-OA3 WMABS 2006-HE1 WMABS 2006-HE3 WMABS 2006-HE4 WMABS 2006-HE5 WMABS 2007-HE1 WMABS 2007-HE2 WMALT 2005-9 WMALT 2005-10 WMALT 2006-AR4 WMALT 2006-AR4 WMALT 2006-AR4 WMALT 2006-AR5 WMALT 2006-AR5 WMALT 2006-AR8 WMALT 2006-AR9
Tranche A1 1A1 IA IA IA IA IA IA IA IA IA IA IA IA IA1 IA2 IA IA II2A1 1A1 2A1 IIA IIA IA1 1A IA IA IA IA IA IA 1CB 1CB 1A 2A 3A 1A 2A 1A 1A
Supporting Loan Group Group 1 Pool 1 Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group II-2 Group 1 Group 2 Group II Group II Group I Group 1 Group 1 Group I Group I Group I Group I Group I Group 1 Group 1 Group 1 Group 2 Group 3 Group 1 Group 2 Group 1 Group 1
Delinquent/Defaulted/Foreclosed Loans 52.97 27.43 56.21 55.96 57.68 56.85 57.25 57.61 53.79 56.39 52.80 57.55 56.91 53.95 52.40 52.40 55.55 55.23 24.98 34.50 48.00 17.96 15.01 43.54 33.87 34.69 55.97 48.87 53.16 56.11 55.54 18.42 24.72 53.25 56.63 49.36 51.62 55.04 45.56 51.27
149
Transaction WMALT 2007-OA1 WMALT 2007-OA2 WMALT 2007-OA3 WMALT 2007-OA3 WMHE 2007-HE1 WMHE 2007-HE2 WMHE 2007-HE3 WMHE 2007-HE4
Tranche 1A 1A 1A 3A IA IA IA IA
Supporting Loan Group Group 1 Group 1 Group 1 Group 3 Group I Group I Group I Group I
Delinquent/Defaulted/Foreclosed Loans 51.74 51.23 47.64 47.74 48.65 55.76 53.06 58.34
380.
confirmed systematic underwriting failures by the originators responsible for the mortgage loans across the Securitizations, the extraordinary drop in credit rating, and the rise in delinquencies across those Securitizations, all confirm that the mortgage loans in the Supporting Loan Groups, contrary to the representations in the Registration Statements, were not originated in accordance with the stated underwriting guidelines. V. Defendants JPMorgan, Bear Stearns, WaMu, and Long Beach Knew Their Representations Were False 381. The allegations in this Section V are made in support of Plaintiffs common law
fraud and aiding and abetting fraud claims, and not in support of Plaintiffs claims under (i) Sections 11, 12(a)(2) and 15 of the Securities Act, (ii) Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, (iii) Sections 31-5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, or (iv) negligent misrepresentation, which are based solely on strict liability and negligence. A. JPMorgan, Bear Stearns, WaMu, and Long Beach Had Actual Knowledge From Their Due Diligence That They Were Securitizing Defective Loans
382.
JPMorgan, Bear Stearns, WaMu, and Long Beach originated and acquired from
the loan originators the underlying mortgage loans in the 94 Securitizations they sponsored.
150
JPMorgan, Bear Stearns, WaMu, and Long Beach performed due diligence to determine the quality of the loans they were purchasing. JPMorgan, Bear Stearns, WaMu, and Long Beach also conducted due diligence on the originators from whom they were purchasing loans, and on the loans included in each offering to determine whether such loans complied with the applicable underwriting guidelines. 383. The Registration Statements of JPMorgan, Bear Stearns, WaMu, and Long Beach
represented that the loans were underwritten in accordance with their respective underwriting guidelines and contained further assurances of quality control and due diligence. For example, WaMu represented that it conducted due diligence on third-party lenders who originated loans for the securitization and that they carefully inspected the loan sellers underwriting standards: In initially approving a mortgage loan seller, the sponsor takes into account the following: annual origination volume, tenure of business and key staff in originating loans, policies and procedures for originating loans including quality control and appraisal review, review audits performed on mortgage loan seller by rating agencies, regulatory agencies and government sponsored entities, the mortgage loan sellers financial statements, errors and omissions insurance coverage and fidelity bond and liability insurance coverage. Approved mortgage loan sellers financial statements, insurance coverage and new review audits are reviewed on an annual basis. Additionally, the sponsor performs a monthly ongoing performance review of previously purchased mortgage loans for trends in delinquencies, losses and repurchases. The mortgage loan sellers underwriting guidelines are reviewed for consistency with the sponsors credit parameters and conformity with the underwriting standards described under Underwriting of the Mortgage Loans below and are either approved or approved with exceptions. WMALT 2007-OA1 Prospectus Supplement, at S-37 (filed Jan. 25, 2007) (emphasis added). 384. In another example, Bear Stearns represented that [p]erforming loans acquired
by the sponsor are subject to varying levels of due diligence prior to purchase with the loans being reviewed for credit, data integrity, appraisal valuation, documentation, as well as compliance with certain laws. BSABS 2006-HE8 Prospectus Supplement. Further, Bear 151
Stearns represented that [p]erforming loans purchased will have been originated pursuant to the sponsors underwriting guidelines or the originators underwriting guidelines that are acceptable to the sponsor. Id. 385. WaMu made similar representations. For example, the WMALT 2007-OA1
Prospectus Supplement also provided that [t]he sponsors credit risk oversight department conducts a credit, appraisal, and compliance review of adverse samplings (and, in some cases, statistical samplings) of mortgage loans prior to purchase from unaffiliated mortgage loan sellers. Sample size is determined by due diligence results for prior purchased pools from that seller, performance of mortgage loans previously purchased and characteristics of the pool presented for purchase. Automated valuation models are obtained on all mortgage loans purchased from unaffiliated sellers. Id. at S-41. 386. Similar assurances and representations are made in the Prospectus Supplements
for the other GSE Certificates. Thus, by virtue of their roles as sponsors and their own independent due diligence, JPMorgan, Bear Stearns, WaMu, and Long Beach had access to information regarding the true credit quality of the loans collateralizing the Securitizations that they sponsored. 387. JPMorgan, Bear Stearns, WaMu, and Long Beach knew or recklessly disregarded
the fact that certain loan originators were not originating loans in accordance with their underwriting guidelines. WaMu, for example, had long been put on notice of their poor underwriting standards by regulators. As stated in the PSI: From 2004 to 2008, WaMus regulators also repeatedly criticized WaMus failure to exercise sufficient oversight of its loan personnel to reduce excessive loan error and exception rates that allowed the issuance of loans in violation of WaMus credit standards. According to Lawrence Carter, the Office of Thrift
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Supervision Examiner-in-Chief at WaMu, WaMu President of Home Loans Craig Chapman, had been going around the country visiting home lending and fulfillment offices. His view is that band-aids have been used to address past issues and that there is a fundamental absence of process. 388. Documents recently released by a third-party due diligence firm, Clayton, confirm
that JPMorgan, Bear Stearns, and Long Beach were awareon a daily basisof the weakness in the loan pools and in the underwriting standards of the originators they used in their residential mortgage backed securitizations. As discussed above, according to an internal Clayton Trending Report made public by the Government in conjunction with testimony given in September 2010, JPMorgan, Bear Stearns, and WaMu were informed that a significant percent of the loans Clayton reviewed for their respective sponsor entities failed to meet guidelines. These loans were not properly approved as exception loans because they did not have any compensating factors. 389. JPMorgan, Bear Stearns, and WaMu were informed that 27 percent, 16 percent,
27 percent, and 9 percent of the loans reviewed by Clayton for J.P. Morgan Acquisition, EMC, WaMu Bank, and WaMu Securities, respectively, were not underwritten according to represented underwriting standards. 390. Confronted with such a high failure rate, JPMorgan, Bear Stearns, and WaMu
should have either rejected the pool outright, increased oversight of their own internal underwriting, or investigated whether the third-party originators involved could be considered a trusted source of loans in the future. Even assuming JPMorgan, Bear Stearns, and WaMu incredibly believed a 27 percent, 16 percent, 27 percent, or 9 percent failure rate could be chalked up to sampling error (due to the fact that Clayton Holdings did not review every loan
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in a pool), the proper response would have been to increase the sample size to test that hypothesis. 391. Instead, JPMorgan, Bear Stearns, and WaMu continued to carry on with their own
poor internal underwriting and work with problematic originators. Moreover, not only did they fail to expand the sample size to truly investigate the problems, they failed to disclose the red flags revealed by Claytons review to the GSEs. According to Claytons Trending Report, JPMorgan, Bear Stearns, and WaMu waived in to their pools 51 percent, 42 percent, 29 percent, and 50 percent, for J.P. Morgan Acquisition, EMC, WaMu Bank, and WaMu Securities, respectively, of the defective loans that Clayton had identified as being outside the guidelines. 392. Claytons Trending Report provides compelling evidence that JPMorgan, Bear
Stearns, and WaMu knew they were securitizing defective loans and selling the resulting securities to investors like Fannie Mae and Freddie Mac. According to the September 23, 2010 testimony of Claytons Vice President Vicki Beal, through their numerous roles as underwriter and sponsor, JPMorgan, Bear Stearns, and WaMu were made fully aware on a regular basis that a significant percentage of their loans failed to meet stated underwriting guidelines, but were being included anyway in the pools underlying securities sold to investors, such as those collateralizing the GSE Certificates. 393. Not only did JPMorgan, Bear Stearns, and WaMu let poor loans pass into their
securitizations in exchange for underwriting and securitization fees, they also took the fraud further, affirmatively seeking to profit from this knowledge. Rather than rejecting these loans from the loan pool, as they should have, JPMorgan, Bear Stearns, and WaMu used the evidence of underwriting defects to negotiate lower prices for the loans and thus boost their own profits. According to the September 2010 FCIC testimony of Claytons former president, D. Keith
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Johnson, the banks would use the exception reports to force a lower price for itself, and not to benefit investors at all: I dont think that we added any value to the investor, the end investor, to get down to your point. I think only our value was done in negotiating the purchase between the seller and securitizer. Perhaps the securitizer was able to negotiate a lower price, and could maximize the line. We added no value to the investor, to the rating agencies. FCIC Staff Intv with D. Keith Johnson, Clayton Holdings, LLC (Sept. 2, 2010), available at http://fcic.law.stanford.edu/resource/interviews. In other words, rather than exclude defective loans from collateral pools, or cease doing business with consistently failing originators, investment banks like JPMorgan, Bear Stearns, and WaMu would instead use the Clayton data simply to insist on a lower price from the loan originators, thereby increasing their own profits while the defective loans were included in the pools for securitization. 394. Further, JPMorgan, Bear Stearns, WaMu, and Long Beach failed to disclose the
defect rates and other misinformation found in the Registration Statements to the credit ratings agencies that depended on the information provided by the GSEs in determining the credit rating of a Securitization. JPMorgan, Bear Stearns, WaMu, and Long Beach fed the ratings agencies the same false loan level data regarding loan-to-value ratios, owner-occupancy status, home values, and debt-to-income ratios that they provided to investors in aggregate form in the Prospectuses and Prospectus Supplements. The rating agencies then input this false data into their quantitative models to assess the credit risk associated with the RMBS, project likely future defaults, and ultimately, determine the ratings on the RMBS products of JPMorgan, Bear Stearns, WaMu, and Long Beach. As a result, Defendants essentially pre-determined the ratings by feeding bad data into the ratings system.
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B. 395.
JPMorgan Knew Its Representations Were False And Was Willing to Capitalize On Its Unique Knowledge At The Expense of Investors
The evidence discussed above not only shows that the representations were
untrue, but also that JPMorgan knew, or was reckless in not knowing, that it was falsely representing the underlying origination and securitization process and the riskiness of the mortgage loans that collateralized the GSE Certificates. As discussed above, such evidence includes: The pervasive misrepresentations relating to basic information about the underlying mortgage loans, such as owner occupancy and LTV ratios, and knowledge of inaccurate and misleading credit ratings; Third-party due diligence providers such as Clayton and Bohan informed JPMorgan that significant percentages of loans in the pools did not adhere to underwriting guidelines. For example, Clayton admitted that in the period from the first quarter of 2006 to the second quarter of 2007, 27 percent of the mortgage loans JPMorgan submitted to Clayton to review in RMBS loan pools were rejected by Clayton as falling outside the applicable underwriting guidelines. Of the 27 percent of mortgage loans that Clayton found defective, 51 percent were subsequently waived in by JPMorgan without proper consideration and analysis of compensating factors and included in securitizations such as the ones in which Fannie Mae and Freddie Mac invested here. JPMorgans waiver of over half of the defective loans shows that JPMorgan knew of or recklessly disregarded the systemic failure in underwriting and the fraudulent misrepresentations in the offering materials received by the GSEs. As discussed above, the strikingly high number of JPMorgans loans that were
396.
rejected by third party due diligence firms, yet subsequently waived into securitizations by JPMorgan, demonstrates JPMorgans knowledge that defective loans were being included in their offerings. 397. Through its various affiliates and subsidiaries, JPMorgan participated in every
step of the securitization process, from the origination and servicing of the mortgage loans, to the sponsoring and structuring of the securitization, to the underwriting and marketing of the Certificates. This vertical integration allowed JPMorgan to control and manipulate the loan level 156
documentation and the value at which properties were appraised, and to ensure that loans would be approved by its loan underwriters. By virtue of their control over each step in the securitization process, JPMorgan had knowledge of the true characteristics and credit quality of the mortgage loans. 398. JPMorgan also purchased mortgages to securitize from third-party originators.
While JPMorgan could have examined the loan files themselves as part of its due diligence process, JPMorgan instead used third-party due diligence firms like Clayton to examine only a small percentage of the loan files. In instances where the third party due diligence firms rated the loans as failing to meet the underwriting standards, JPMorgan often chose to include such defective loans in the securitizations, thereby passing the risk of delinquency and default to investors. 399. JPMorgan continued this behavior during the worst period of the financial crisis.
As investors were demanding that JPMorgans newly acquired subsidiary, Bear Stearns, repurchase mortgage loans that were not underwritten to represented standards of quality, JPMorgan was denying those repurchase requests while simultaneously making repurchase demands for the very same loans from the originator, Capital One Financial Corp. In a June 26, 2008 letter to Capital One, Allison Malkin, an executive director with J.P. Morgan Securities (the entity with which BSC was eventually merged), stated that it is [Bear Stearns] position that these breaches materially and adversely affect the value of the mortgage loans. JPMorgan Refused Mortgage Repurchases It Also Sought, Ambac Says, Bloomberg (Jan. 24, 2011) 400. JPMorgans own subprime lender, Chase Home Finance LLC (CHF),
originated all or the majority of the mortgage loans underlying the JPMAC 2006-CH1, JPMAC 2006-CH2, JPMAC 2007-CH2, JPMAC 2007-CH3, JPMAC 2007-CH4, and JPMAC 2007-CH5
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Securitizations. CHF also originated a significant number of the mortgage loans underlying the JPALT 2005-A2 Securitization. CHF is a wholly-owned subsidiary of JPMorgan Bank. JPMorgan Bank directed and controlled the business operations of CHF as part of its plan to originate and securitize an increasingly larger volume of mortgage loans. 401. JPMorgan abandoned its underwriting standards and condoned fraud by
encouraging its employees to ignore and manipulate JPMorgans automated underwriting system, called ZiPPY. Chase mortgage memo pushes Cheats & Tricks, The Oregonian (March 27, 2008). CHF went so far as to explicitly instruct loan originators to falsify loan information in order to elicit approval from the ZiPPY automated underwriting system for stated income loans of poor quality. At internal memorandum circulated by CHF in its Portland, Oregon office titled Cheats & Tricks gave originators tips on how to circumvent the underwriting system, including exhortations that a mortgage should Never Fear!! because ZiPPY can be adjusted to get the findings you need. The memorandum encouraged brokers to game the ZiPPY system because [i]ts super easy! Give it a try! It provided the following handy steps in order to gain approval for an otherwise rejected Stated Income / Stated Asset loan application: (1) In the income section of your 1003, make sure you input all income in base income. DO NOT break it down by overtime, commissions or bonus. (2) NO GIFT FUNDS! If your borrower is getting a gift, add it to a bank account along with the rest of the assets. Be sure to remove any mention of gift funds on the rest of your 1003. (3) If you do not get Stated/Stated, try resubmitting with slightly higher income. Inch it up $500 to see if you can get the findings you want. Do the same for assets. (emphasis added).
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402.
Through these and other techniques, JPMorgan was able to substantially increase
the volume of mortgage loans that it originated and securitized by abandoning its underwriting standards. 403. By 2006, however, JPMorgan had grown alarmed at the increasing rate of late
payments in its subprime portfolio. As the poor quality of these mortgage loans became apparent, JPMorgan decided to exit its subprime positions. This decision came from JPMorgans CEO, Jamie Dimon, evidencing knowledge of the perilous state of the JPMorgans subprime assets by JPMorgan senior management. An article in Bloomberg on February 17, 2010 revealed that JPMorgan CEO Jamie Dimon was fully aware that its residential mortgage backed securities were of poor and deteriorating credit quality and that he attempted to shed the associated risk from JPMorgans own balance sheet. The article reported that [i]n October 2006, Mr. Dimon, JPMorgans CEO, told William A. King, its then head of securitized products, that [JPMorgan] needed to start selling its subprime-mortgage positions. In late 2008, Fortune Magazine quoted the same October 2006 phone conversation, where Mr. Dimon instructed Mr. King to sell JPMorgans positions: I really want you to watch out for subprime! . . . We need to sell a lot of our positions. Ive seen it before. This stuff could go up in smoke! Jamie Dimon's swat team: How J.P. Morgan's CEO and his crew are helping the big bank beat the credit crunch, Fortune Magazine (September 2, 2008). By the end of 2006, JPMorgan had unloaded $12 billion in subprime assets that JPMorgan itself had originated. Id. 404. Despite Mr. Dimons view that JPMorgans subprime holdings could go up in
smoke! and JPMorgans decision to sell its own holdings in subprime assets, JPMorgan continued to originate and securitize poorly underwritten mortgage loans and vouch for their quality. This was the time period in which the GSEs acquired a significant amount of the
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JPMorgan Certificates, relying on JPMorgans representations that the mortgage loans were underwritten in accordance with JPMorgans purported underwriting standards. 405. JPMorgan waived a significant (over 51 percent) number of the loans rejected by
its third-party due diligence firm into loan pools for securitization. JPMorgan also abandoned its underwriting standards in directing its employees to enter untrue and misleading information into its automated underwriting system in order to generate approvals for loans that would otherwise be rejected. Finally, JPMorgan CEO Jamie Dimon himself knew that subprime positions were risky and dangerous; all the while JPMorgan continued to originate, acquire and securitize defective and credit-impaired loans for inclusion in its securitizations. These loans collateralized the certificates issued in connection with such securitizations, which were sold to investors like the GSEs. These facts demonstrate that JPMorgan knew its representations were false but nonetheless was willing to, and in fact did, profit from such knowledge to the detriment of the GSEs. C. 406. Bear Stearns Knew Its Representations Were False And Was Willing to Capitalize On Its Unique Knowledge At The Expense of Investors
untrue, but also that Bear Stearns knew, or was reckless in not knowing, that it was falsely representing the underlying origination and securitization process and the riskiness of the mortgage loans that collateralized the GSE Certificates. As discussed above, such evidence includes: The pervasive misrepresentations relating to basic information about the underlying mortgage loans, such as owner occupancy and LTV ratios, and knowledge of inaccurate and misleading credit ratings; Third-party due diligence providers such as Clayton and Bohan informed Bear Stearns that significant percentages of loans in the pools did not adhere to underwriting guidelines. For example, Clayton admitted that in the period from the first quarter of 2006 to the second quarter of 2007, 16 percent of the mortgage 160
loans Bear Stearns submitted to Clayton to review in RMBS loan pools were rejected by Clayton as falling outside the applicable underwriting guidelines. Of the 16 percent of mortgage loans that Clayton found defective, 42 percent were subsequently waived in by Bear Stearns without proper consideration and analysis of compensating factors and included in securitizations such as the ones in which Fannie Mae and Freddie Mac invested here. Bear Stearns waiver of 42 percent of the defective loans shows that Bear Stearns knew of or recklessly disregarded the systemic failure in underwriting and the fraudulent misrepresentations in the offering materials received by the GSEs. Bear Stearns collapse and subsequent acquisition by JPMorgan has been the
407.
subject of intense public scrutiny and investigation, most notably by the FCIC. In February 2011, the FCIC released interviews with Bear Stearns executives regarding its role in the origination, acquisition, and securitization of mortgage loans. The documentary evidence revealed widespread fraudulent conduct on the part of Bear Stearns. Such fraudulent conduct has been the basis for both investigation and litigation by public officials, including the Attorney General of Oregon, who filed an action on behalf of the Oregon Public Employees Retirement Fund against Bear Stearns for misrepresentations in its role as issuer and underwriter in the sale of certificates. In re Bear Stearns Mortgage Pass-Through Certificates Litigation, 08 Civ. 8093 (SDNY). 408. Through its various affiliates and subsidiaries, Bear Stearns participated in every
step of the securitization process, from the origination and servicing of the mortgage loans to the sponsoring and structuring of the securitization, to the underwriting and marketing of the Certificates. This vertical integration allowed Bear Stearns to control and manipulate the loan level documentation, to knowingly choose poor quality mortgage loans for securitization as a method of off-loading the loans to investors as soon as possible, and to selectively make repurchase claims of originators while simultaneously denying those of investors. By virtue of
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their control over each step in the securitization process, Bear Stearns had knowledge of the true characteristics and credit quality of the mortgage loans. 409. Bear Stearns own subprime lender, EMC, originated or acquired all or the
majority of the mortgage loans underlying the BALTA 2005-10, BALTA 2006-1, BALTA 20062, BALTA 2006-4, BSMF 2006-SL5, BSMF 2006-SL6, BSMF 2007-SL1, and BSMF 2007-SL2 Securitizations. EMC also originated or acquired a significant number of the mortgage loans underlying the BSABS 2007-HE1 and BSMF 2007-AR3 Securitizations. EMC was a whollyowned subsidiary of BSI and is now a subsidiary of JPMorgan Bank. 410. Encore Credit, a division of Bear Stearns Residential Mortgage Corporation
(BSRM), originated the mortgage loans underlying the WMABS 2006-HE3, BSABS 2006HE9, BSABS 2007-HE4, BSABS 2007-HE5, BSABS 2007-HE6, and BSABS 2007-HE7 Securitizations. Encore Credit and BSRM also originated a significant number of the mortgage loans underlying the BSABS 2007-HE1, BSABS 2007-HE5, BSMF 2007-SL1, and BSMF 2007SL2 Securitizations. BSRM was a wholly-owned subsidiary of BSI and is now believed to be a subsidiary of JPMorgan Chase. 411. Bear Stearns directed and controlled the business operations of EMC and Encore
Credit as part of its plan to originate and securitize an increasingly larger volume of mortgage loans. EMC began acquiring subprime loans in 2003. From 2004 to 2007, EMC more than doubled the volume of subprime loans it acquired for securitization, from over $27 billion in 2004 to over $80 billion in 2007. BSRM began originating mortgage loans in 2005. In 2006, BSRM originated over $4 billion in mortgages. Bear Stearns securitized these loans through BSC, its underwriting affiliate. According to Inside Mortgage Finance, BSC underwrote approximately $130.8 billion and $103.4 billion of mortgage-backed securities in 2005 and 2006,
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respectively. It was the first and third largest underwriter of non-agency mortgage-backed securities in those years. Bear Stearns mortgage securitization business helped to increase Bear Stearns revenue by over 123 percent from 2003 to 2006. 412. Like JPMorgan, Bear Stearns used third-party due diligence firms such as Clayton
to review whether the loans Bear Stearns intended to acquire for securitization were underwritten in accordance with applicable underwriting standards. If a loan did not comply with underwriting guidelines, Bear Stearns could (i) demand that the originator cure the defect, (ii) reject the loan for inclusion in the securitization, or (iii) accept the defective loan as part of the loan pool for purchase. As its appetite for mortgage loans to securitize grew, Bear Stearns rejected fewer and fewer defective loans. Bear Stearns made use of the exception process to waive defective loans into the loan pool, effectively abandoning its underwriting standards. The vast majority of these loans did not have sufficient compensating factors to justify these exceptions. In testimony to the FCIC in September 2010, former Clayton President Keith Johnson said that investment banks like Bear Stearns were aware that valid compensating factors did not exist, and used these defects as leverage to negotiate a lower purchase price for the loans. Internal communications from Bear Stearns, discussed below, confirm that Bear Stearns would simultaneously deny repurchase demands from investors while making such repurchase demands on originators for the same loans. As such, Bear Stearns knowingly securitized, marketed, and sold loans that did not meet its underwriting standards. 413. Bear Stearns management was so eager to securitize as many mortgage loans as
possible that it abandoned any adherence to underwriting or due diligence standards. On February 11, 2005, Bear Stearns Senior Managing Director Mary Haggerty e-mailed Vice President of Due Diligence John Mongelluzo with instructions to reduce the amount of due
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diligence conducted in order to make us more competitive on bids with larger sub-prime sellers. 414. Third-party due diligence firms were also told to reduce due diligence. In an e-
mail dated April 5, 2007, an EMC Assistant Manager for Quality Control Underwriting and Vendor Management ordered Adfitech, Inc. (Adfitech) not to take efforts to verify information in a loan file, directing: Effective immediately, in addition to not ordering occupancy inspections and review appraisals, DO NOT PERFORM REVERIFICATIONS OR RETRIEVE CREDIT REPORTS ON THE SECURITIZATION BREACH AUDITS, Do not make phone calls on employment, and Occupancy misrep is not a securitization breach. Bear Stearns Internal Audit Reports also described the various reductions in due
415.
diligence. According to February 28, 2006, and June 22, 2006 reports, Bear Stearns would reduce the number of loans in the loan samples that were reviewed as part of the due diligence process, conduct due diligence only after the loans were purchased (post-closing due diligence), eliminate internal reports on defective loans, and conduct no due diligence if such due diligence would interfere with mortgage loan pools being securitized. The Atlantic confirmed this abandonment of reasonable due diligence procedures in a May 2010 article describing: how Bear Stearns pressured EMC analysts to perform their due diligence of the underlying mortgages in only one to three days; how Bear Stearns encouraged EMC analysts to falsify loan data (including FICO scores) if the loan file was missing the requisite information; and how Bear Stearns pushed EMC analysts to avoid investigating a potentially bad loan and instead focus on making it fit.
E-mails Suggest Bear Stearns Cheated Clients Out of Billions, The Atlantic (Jan. 25, 2011)
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416.
Former EMC mortgage analyst Matthew Van Leeuwen, an employee from 2004
to 2006, confirmed in a March 30, 2009 e-mail that the pressure was pretty great for everybody to just churn the mortgages on through the system, so that if there were outstanding data issues analysts should just fill in the holes. The pressure was directed from the top of Bear Stearns corporate structure. For example, EMCs Senior Vice President of Conduit Operations, Jo-Karen Whitlock, told her staff to do whatever is necessary to meet Bear Stearns objectives for desired loan production. Her April 14, 2006 e-mail further stated: I refuse to receive any more emails . . . questioning why were not funding more loans each day. Im holding each of you responsible for making sure we fund at least 500 each and every day. . . . [I]f we have 500+ loans in this office we MUST find a way to . . . buy them. . . . I expect to see 500+ each day. . . . Ill do whatever is necessary to make sure youre successful in meeting this objective. 417. Not surprisingly, given the abandonment of due diligence and underwriting
standards by Bear Stearns, loans acquired by Bear Stearns began to default at an increasing rate. These triggered concern in Bear Stearns as early as 2005. Rather than improving the quality of loans acquired for securitization, Bear Stearns reacted by changing the time period in which Bear Stearns was required to hold loans it acquired. Previously, Bear Stearns was required to hold third-party loans in inventory for between 30 and 90 days before the loans could be securitized. This allowed Bear Stearns to determine whether any of the loans would suffer from an early payment default. In 2006, Bear Stearns stopped screening out these defective loans and instead required that all mortgage loans be securitized before the early payment default period expired. Bear Stearns Senior Managing Director Jeffrey Verschleiser confirmed the revised protocol in a June 13, 2006 e-mail to Haggerty stating that they need to be certain we can securitize the loans with 1 month epd before the epd period expires. This desire to unload bad mortgage loans by selling them to other investors through the securitization process was further evidenced by a May 5, 2007 e-mail from Bear Stearns Managing Director Keith Lind, who demanded to know 165
why we are taking losses on 2nd lien loans from 2005 when they could have been securitized????? 418. In addition to purposely acquiring and securitizing defective loans that did not
meet their represented underwriting guidelines and selling them to investors, Bear Stearns subprime subsidiary, EMC, further profited from these bad loans by making repurchase claims against the originator of the loans. Repurchase claims are derived from rights found in mortgage loan purchase agreements, whereby the originator makes representations to the sponsor (EMC) that the loans were underwritten in accordance with certain underwriting standards. If the sponsor (EMC) discovers this not to be the case, it can request that the originator repurchase any affected loans. Similarly, the PSA between EMC and the trust requires that EMC repurchase any loans it knows are defective. Instead of seeking the actual repurchase of these bad loans, howeverwhich would remove the loans from the trust and compensate the certificateholders EMC settled its repurchase claims and kept the settlement proceeds for itself. EMC did not pass the proceeds of these repurchase claims on to the trust. 419. EMC came to several such settlement agreements and other arrangements as part
of its repurchase scheme. On January 30, 2007, an originator agreed to pay over $2.5 million to EMC in lieu of repurchasing the Defective Loans. On December 18, 2007, an originator agreed to pay almost $12 million for full payment and satisfaction of the Monetary Claims, and the balance of the Settlement Amount (if any) for settlement of the Defective Loans. On October 1, 2007, an originator agreed to pay $1 million in lieu of repurchasing the Defective Loans. According to an internal presentation requested by Bear Stearns Managing Director and Head of Mortgage-Backed Securities, Thomas Marano, EMC received $1.9 billion from April 2006 to April 2007 in claim resolutions, with most resolutions being settlements. Bear
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Stearns would also accept discounts on future loan purchasers instead of immediate cash settlements, valuing these arrangements at $367 million for the period beginning in 2007 through the first quarter of 2008. See also E-mails Suggest Bear Stearns Cheated Clients Out of Billions, The Atlantic (Jan. 25, 2011). 420. These funds should have been passed to the trusts but Bear Stearns did not
disclose its repurchase settlements with certificateholders in the trust. In a December 11, 2009 deposition, Bear Stearns Deal Manager Robert Durden could not identify a single instance in which EMC or Bear Stearns disclosed to Ambac or other investors that it was recovering on EPDs from originators with respect to securitized mortgage loans, pocketing the money and not putting it into the trust. Bear Stearns knew this practice breached its representations and warranties made to purchasers of certificates: PriceWaterhouseCoopers advised Bear Stearns that the program was contrary to common industry practices, the expectation of investors and . . . the provisions in the [deal documents] in an August 31, 2006 audit, and, according to EMC President Stephen Golden, EMC concluded that it could not retain funds in connection with the repurchase claims in mid-2007. Despite this advice, EMC reached two such agreements in the latter half of 2007 and continued to fail to remit the proceeds to the trust. PricewaterhouseCoopers LLP, Bear Stearns/EMC UPB Break Repurchase Project Audit Report, August 31, 2006 (Haas Decl., Ex. 18, EMC-AMB 006803209). 421. Bear Stearns also abused its reduced documentation programs, including its stated
income, low documentation, and no documentation loan programs in its pursuit to originate as many loans as possible. Low documentation loan programs were originally designed for selfemployed business owners and professionals with high credit scores and loans with low loan-tovalue ratios. Despite representations in the Registration Statements that low documentation
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loans adhered to traditional underwriting standards, low documentation loan programs were instead used as a tactic to circumvent Bear Stearns underwriting standards altogether. 422. A Bear Stearns Internal Audit Report dated February 28, 2006 revealed that Bear
Stearns systematically issued reduced documentation loans to borrowers who misrepresented their income, assets, employment, and intentions to occupy purchased properties. Bear Stearns loan officers were encouraged to ignore red flags and close the loans regardless. Former EMC Mortgage Analyst Matthew Van Leeuwen explained in a March 30, 2009 e-mail that a missing credit score would magically become a 680 in Bears system, things like that. Stated Income loans were typically approved even if the stated income could not be verified as reasonable by sources like Salary.com or support in the loan application. 423. The evidence discussed above reveals that Bear Stearns had knowledge that it
had, in fact, completely abandoned its underwriting standards. Bear Stearns waived a significant number of loans rejected by its third-party due diligence firm into loan pools for securitization. Bear Stearns packaged loans for securitization at an earlier and earlier date, effectively gutting any sort of due diligence and thereby passing the risk of default onto the certificateholders. Senior management of Bear Stearns also directed its employees to abandon purported underwriting standards by not verifying employment or checking credit reportsall in the pursuit of increased volume and market share. Further, Bear Stearns demanded that originators repurchase loans and then retained the payments received, as opposed to remitting such funds to the trusts. These facts demonstrate that Bear Stearns knew its representations were false, but nonetheless was willing to, and in fact did, profit from such knowledge to the detriment of the GSEs.
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D.
WaMu and Long Beach Knew Their Representations Were False And Were Willing to Capitalize On Their Unique Knowledge At The Expense of Investors
424.
untrue, but also that WaMu and Long Beach knew, or was reckless in not knowing, that it was falsely representing the underlying origination and securitization process and the riskiness of the mortgage loans that collateralized the GSE Certificates. As discussed above, such evidence includes: The pervasive misrepresentations relating to basic information about the underlying mortgage loans, such as owner occupancy and LTV ratios, and knowledge of inaccurate and misleading credit ratings; Third-party due diligence providers such as Clayton and Bohan informed WaMu that significant percentages of loans in the pools did not adhere to underwriting guidelines. For example, Clayton admitted that in the period from the first quarter of 2006 to the second quarter of 2007, 27 percent of the mortgage loans WaMu Bank submitted to Clayton to review in RMBS loan pools were rejected by Clayton as falling outside the applicable underwriting guidelines. Of the 27 percent of mortgage loans that Clayton found defective, 29 percent were subsequently waived in by WaMu without proper consideration and analysis of compensating factors and included in securitizations such as the ones in which Fannie Mae and Freddie Mac invested here. WaMus waiver of nearly a third of the defective loans shows that WaMu knew of or recklessly disregarded the systemic failure in underwriting and the fraudulent misrepresentations in the offering materials received by the GSEs. Like JPMorgan and Bear Stearns, WaMu and its Long Beach subsidiaries also
425.
systematically abandoned their underwriting standards in pursuit of greater volumes of mortgage loans to securitize and sell to investors. As part of its strategy to grow and become a vertically integrated origination and securitization operation, WaMu acquired Long Beach Mortgage in 1999, thereby securing an in-house subprime originator, and also acquired WaMu Capital, thereby giving WaMu an in-house underwriter that could control the underwriting process and retain securitization underwriting fees. By virtue of their control over each step in the 169
securitization process, WaMu and Long Beach and their senior management had actual knowledge of the true characteristics and credit quality of the mortgage loans. 426. Long Beach Mortgage, which was exclusively a subprime lender, originated all or
the majority of the mortgage loans underlying the LBMLT 2005-3, LBMLT 2006-2, LBMLT 2006-3, LBMLT 2006-4, LBMLT 2006-5, LBMLT 2006-6, LBMLT 2006-7, LBMLT 2006-8, LBMLT 2006-9, LBMLT 2006-10, LBMLT 2006-11, LBMLT 2006-WL1, LBMLT 2006-WL2, LBMLT 2006-WL3, WMABS 2006-HE1, WMHE 2007-HE1, WMHE 2007-HE2, WMHE 2007-HE3, and WMHE 2007-HE4 Securitizations. Long Beach Mortgage, formerly a WaMu Bank subsidiary, became a division of WaMu Bank in July 2006 and was shut down in 2007. In addition, WaMu Bank itself originated all or the majority of the mortgage loans underlying the WAMU 2007-OA3 Securitization. 427. WaMu directed and controlled the business operations of Long Beach Mortgage
as part of its plan to originate and securitize an increasingly larger volume of mortgage loans. In 2000, Long Beach originated and securitized approximately $2.5 billion in subprime mortgage loans; in 2006, it securitized nearly $30 billion in subprime home loans. PSI Report, p. 54. WaMu accomplished this rapid pace of growth by allowing and encouraging employees to ignore its purported underwriting standards. 428. WaMus management purposely originated and securitized increasingly risky
mortgage loans in order to grow market share. WaMus strategy is made clear by internal documents that called for riskier and riskier lending activities: A June 2004 Strategic Direction Memorandum wherein WaMu CEO Kerry Killinger, in presented a five-year strategic plan to take on more credit risk (with more home equity, Alt A and non-prime residential loans) over the next five years, in the belief that [a]bove average creation of shareholder value requires significant risk taking.
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A January 2005 presentation to the board of directors entitled Higher Risk Lending Strategy Asset Allocation Initiative that advocated WaMus strategic shift from originating low risk fixed rate and government-backed loans to high risk subprime, Option ARM and home equity loans. A June 2005 Strategic Direction Memorandum wherein WaMu CEO Kerry Killinger called for WaMu to increase its market share of Option ARM, home equity, subprime and Alt A loans to over 10 percent. An April 18, 2006 presentation titled Home Loans Discussion, Board of Directors Meeting that described WaMus plan to increase the percentage of its loans that were considered high risk from 49 percent in 2005 to 82 percent by 2008; the presentation also described how subprime loans were eight times as profitable as government-backed loans. A June 12, 2006 Strategic Direction Memorandum wherein WaMu CEO Kerry Killinger noted that Wall Street appears to assign higher P/Es to companies embracing credit risk and penalizes companies with higher interest-rate and operating risks, further encouraging riskier lending practices. A June 18, 2007 Strategic Direction Memorandum wherein WaMu CEO Kerry Killinger stressed WaMus emphasis on higher-risk adjusted return products such as home equity, sub-prime first mortgages, Alt A mortgages and proprietary products such as Mortgage Plus. WaMu expanded into higher risk loan products while simultaneously abandoning
429.
its stated underwriting standards through the use of exceptions. James G. Vanasek, WaMus Chief Risk Officer until 2005, acknowledged to the Senate PSI that exceptions were a continual problem at Washington Mutual where line managers particularly in the mortgage area not only authorized but encouraged policy exceptions. PSI Hearing, April 13, 2010. The Office of Thrift Supervision issued a Report of Examination to WaMu in August 2005, stating that it remain[ed] concerned with the number of underwriting exceptions and with issues that evidence lack of compliance with bank policy. The OTS followed up with a May 2006 Findings Memorandum, stating that the loans it reviewed did not have exceptions and probably should not have been made. PSI Report, p. 180.
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430.
In a 2005 internal memorandum, Mr. Vanasek described WaMus own loan sales
team as infectious and dangerous, aggressive, and often times abusive in response to his attempts to enforce a more disciplined underwriting approach. PSI Report, p. 143. Mr. Vanasek further testified to the Senate PSI that if an underwriter rejected a loan application, the loans were always escalated up, so if they declined a loan, it was escalated to a higher level, a marketing officer who would ultimately approve. PSI Hearing, April 13, 2010. Keysha Cooper, a WaMu Senior Mortgage Underwriter from 2003-2007 stated in a November 1, 2008 New York Times article, I swear 60 percent of the loans I approved I was made to. At WaMu, a loan factory, The New York Times (Nov. 2, 2008). 431. In addition, contrary to its guidelines and prudent standards of underwriting,
WaMu used the starter interest rate as the qualifying rate as opposed to the eventual, higher interest rate, thereby resulting in a payment shock if the interest rate increased. WaMu also focused on borrower credit scores in originating loans, as opposed to verifying borrower income and assets. 432. WaMu encouraged its employees to avoid investigating red flags. According to a
December 27, 2008 New York Times article, John D. Parsons, a WaMu mortgage processing supervisor, stated that he was accustomed to seeing baby sitters claiming salaries worthy of college presidents, and schoolteachers with incomes rivaling stockbrokers, but that WaMu was all about saying yes. Saying Yes, WaMu Built Empire on Shaky Loans, The New York Times (December 27, 2008). Nancy Erken, a former WaMu loan consultant in Seattle, told the Seattle Times in December 2009, that [t]he big saying was A skinny file is a good file. Part One: Reckless Strategies Doomed WaMu, The Seattle Times (October 25, 2009). She would take
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the files over to the processing center in Bellevue and theyd tell me Nancy, why do you have all this stuff in here? Were just going to take this stuff and throw it out. Id. 433. A PSI hearing exhibit details admissions by several WaMu employees to
falsifying loan documentation in order to approve more loans. PSI Hearing, Ex. 30. A Westlake Village loan office sales associate stated that sales team members would cut and paste the current borrowers name and address onto the old bank statements. PSI Hearing, Ex. 31. 434. Karen Weaver, a former Long Beach underwriter, acknowledged that brokers
were making up pay stubs and presenting that. At Top Subprime Mortgage Lender, Policies Were An Invitation To Fraud, Huffington Post (Dec. 21, 2009). Anoinette Hendryx, a former Long Beach manager and underwriter, said that account executives would offer kickbacks of money to underwriters to get bad loans approved. Id. 435. WaMus strategy of approving virtually every loan was successful in increasing
its volume of loans originated at the sacrifice of quality. This has been confirmed by WaMu employees and insiders. In the same New York Times article, WaMu senior underwriter Keysha Cooper acknowledged that [a]t WaMu it wasnt about the quality of the loans; it was about the numbers . . . . They didnt care if we were giving loans to people that didnt qualify. Instead, it was how many loans did you guys close and fund? A former WaMu senior home consultant told the Seattle Times in the October 25, 2009 article discussed above that WaMu employees were subject to total blanketing emails, memos, meetings set up so people understood that this was what the company wanted them to do. 436. WaMu senior management was aware that its personnel ignored WaMus stated
underwriting standards, and even sought to benefit from this asymmetrical knowledge. The minutes of a December 2006 WaMu Risk Committee Meeting reflect that delinquency behavior
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was flagged in October [2006] for further review and analysis . . . . The primary factors contributing to increased delinquency appear to be caused by process issues including the sale and securitization of delinquent loans, loans not underwritten to standards, lower credit quality loans and seller servicers reporting false delinquent payment status. Despite this concern for rising delinquencies, Cheryl Feltgen, WaMus Chief Risk Officer, wrote in a February 2007 email that WaMu was contemplating selling a larger portion of our Option ARMs than we have in the recent past. Gain on sale is attractive and this could be a way to address California concentration, rising delinquencies, falling house prices in California with a favorable arbitrage given that the market seems not to be yet discounting a lot for those factors. In other words, WaMu sought arbitrage of its loan portfolio by selling risky and increasingly delinquent loans to investors who were not aware that WaMu had systematically abandoned its underwriting standards. 437. WaMu avoided taking losses on these poor quality loans by packaging them into
mortgage-backed securities and selling them to investors who were not aware of WaMus systematic abandonment of its purported underwriting standards. A January 2005 presentation to the WaMu board of directors titled Higher Risk Lending Strategy highlighted the success of this strategy because [c]redit-related losses from newly originated [High Risk Loan] portfolio . . . will occur several years after origination. Mr. Vanasek, in his testimony before the PSI, was asked by Senator Levin: Is it fair to say that WaMu was not particularly worried about the risk associated with Long Beach subprime mortgages because it sold those loans and passed the risk on to investors? Mr. Vanasek responded: Yes, I would say that was a fair characterization. 438. WaMu accelerated its strategy to sell as many high risk loans as possible as the
housing market worsened. WaMu Executive Vice President and securitization chief, David
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Beck, wrote in a February 2007 e-mail that [t]he performance of newly minted option arm loans is causing us problems. Cheryl can validate but my view is our alt a (high margin) option arms [are] not performing well. We should address selling 1Q as soon as we can before we loose [sic] the [opportunity]. Cheryl Feltgen, the Chief Risk Officer for WaMu Home Loans, confirmed her acceptance of this strategy, stating [t]here is a meltdown in the subprime market which is creating a flight to quality. . . . This seems to me to be a great time to sell as many Option ARMs as we possibly can. [CEO] Kerry Killinger was certainly encouraging us to think seriously about it at the MBR last week. WaMu was particularly concerned about the Long Beach loans as they had the highest rates of default. To help offset that risk, WaMu COO Stephen Rotella told WaMu CEO Kerry Killinger that he asked the guys to work with Becks group to see if we could package and sell any of the bad portfolio product flat. 439. WaMu knew that the loans it was securitizing and selling to investors had
fraudulent information. One internal report WaMu Risk Mitigation and Mortgage Fraud 2008 Targeted Review, completed in September 2008, confirmed that WaMu had sold loans to investors after WaMus internal controls had identified loans as fraudulent. The controls that are intended to prevent the sale of loans that have been confirmed by Risk Mitigation to contain misrepresentations or fraud are not currently effective. There is not a systematic process to prevent a loan in the Risk Mitigation Inventory and/or confirmed to contain suspicious activity from being sold to an investor. ... Of the 25 loans tested, 11 reflected a sale date after the completion of the investigation which confirmed fraud. There is evidence that this control weakness has existed for some time. A 2008 study by WaMus Corporate Credit Review team confirmed that WaMus had allocated far too few resources to monitoring and combating fraud.
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Exposure is considerable and immediate corrective action is essential in order to limit or avoid considerable losses, reputation damage, or financial statement errors. 440. Long Beach in particular was known to be a source of fraudulently originated
loans. One internal audit from 2005 found that Long Beach suffered from [r]elaxed credit guidelines, breakdowns in manual underwriting processes, and inexperienced subprime personnel. . . . coupled with a push to increase loan volume and the lack of an automated fraud monitoring tool. Ronald Cathcart, the Chief Enterprise Risk Officer for WaMu, noted in a 2007 e-mail that, for Long Beach, deterioration was accelerating in recent vintages with each vintage since 2002 having performed worse than the prior vintage. Mr. Cathcart cited [a]ppraisal deficiencies . . . . Material misrepresentations . . . Legal documents were missing or contained errors or discrepancies . . . loan decision errors as the cause. WaMu shut down Long Beach in June 2007, incorporating the former subsidiary as WaMus Wholesale Specialty Lending channel. 441. WaMu, itself wary of holding risky or poorly underwritten loans, conducted
internal studies to determine the risk of its loan holdings. WaMu did not inform investors of the results of these studies. During his testimony before the PSI, Senator Levin asked David Beck, WaMus Executive Vice President and head of securitization, about whether WaMu disclosed its findings to investors: Did they know, were they informed that loans with those or some of those characteristics had a greater propensity towards delinquency in WaMus analysis? Mr. Beck confirmed: They were not told of the WaMu analysis. 442. WaMu was very aware of the risk of purchasing poorly underwritten and risky
loans and retaining them on its balance sheet. As such, WaMu made an effort to purchase and retain only higher quality loans on its books. Mr. Vanasek told the PSI that some subprime
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mortgage loans purchased from others, namely Ameriquest, were retained on the balance sheet. They tended to be higher quality subprime loans and they were monitored very closely. Senator Coburn asked for confirmation: So basically, you were buying higher quality subprime loans from competitors than you were selling to the market. Mr. Vanasek responded, Correct. 443. WaMu falsely overstated appraisals in order to secure low LTV ratios for
mortgages, thereby making the loans more attractive to prospective purchasers of certificates. WaMu utilized two appraisal management companies, eAppraiseIT and Lenders Service, Inc. (LSI), to oversee the appraisals of its loans. Documents produced in the New York Attorney Generals suit against eAppraiseIT and its parent First American, New York v. First American Corp. (eAppraiseIT), reveals that WaMu selected individual appraisers who were willing to produce false, inflated appraisals and refused to hire appraisers who maintained their independence. New York v. First American Corp and First American eAppraiseIT, No. 1:2007cv10397 (NY. Sup. Ct. 2007). WaMu rebuked any sign of independence in its appraisers, returning appraisals it deemed too low to eAppraiseIT for reconsideration and shifting its business to a competitor of eAppraiseIT when one regional office refused to compromise its independence. 444. eAppraiseITs management was initially resistant to this pressure from WaMu but
eventually was pressured into sacrificing its independence to meet WaMus demands. eAppraiseITs President complained in an August 9, 2006 e-mail to WaMu that [t]he Wamu internal staff . . . admonish us to be certain we solve the [requests for reconsideration of appraisal] issue quickly or we will all be in for some pretty rough seas. An August 15, 2006 email to eAppraiseITs president reflects an eAppraiseIT Executive Vice President complaining because WaMus loan officers demanded that eAppraiseITs appraisers tell them specifically
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what they needed. However, on September 14, 2006, that same executive VP wrote that eAppraiseIT was studying allowing [the managers] group a little flexibility to raise the value 5% with a cap of $50k if it is fully justified. Eventually, all independence would be lost, as confirmed by the eAppraiseITs Chief Appraiser, Peter Gailitis, who stated in an August 10, 2010 sworn affidavit that the pressure from WaMu sales staff to hit value continued throughout the time I was with [eAppraiseIT] . . . Requests from WaMu loan officers to increase values would come in various forms . . . to the effect of we need X value or we need to hit a certain value in order to make the deal go through. 445. WaMu used the influence and leverage of its continued business to turn
eAppraiseIT into virtually a captive appraiser. eAppraiseIT hired over 60 former WaMu appraisal office employees as staff appraisers and Appraisal Business Managers (ABM), reflecting eAppraiseITs recognition that hiring former WaMu employees was instrumental in [eAppraiseITs] relational and operational success with [WaMus] sales force. WaMu directed that its former employees, now comprising a third of eAppraiseITs staff, would deal with any requests by WaMu for reconsideration of appraisals. When eAppraiseITs office in Northern California refused to comply with WaMus requests, WaMu moved all its Northern California business to a competitor, LSI. 446. WaMu further compromised the independence of appraisers and the quality of
appraisal values by requiring eAppraiseIT and LSI to use WaMus own selected list of appraisers. WaMu knew that these appraisers would deliver the inflated values they required to make the mortgage loans look attractive to potential investors. eAppraiseITs President recapped WaMus strategy in a February 22, 2007 e-mail to senior executives at eAppraiseITs parent company, First American. He wrote: We had a joint call with Wamu and LSI today. The
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attached document outlines the new appraiser assigning process. In short, we will now assign all Wamus work to Wamus Proven Appraisers. . . . We will pay their appraisers whatever they demand. Performance ratings to retain position as a Wamu Proven Appraiser will be based on how many come in on value. 447. Despite the Office of Thrift Supervisions 2005 guidance that Staff responsible
for the development and maintenance of the [approved loan appraiser] list should be independent of the loan production process, WaMu, eAppraiseIT, and LSI decided in a March 1, 2007 meeting that, according to the minutes, a Proven Appraiser List is being created. This will replace the WaMu preferred list. The initial list of names will be provided by lending. . . Majority of work must be assigned to the appraisers on the Proven Appraiser List on a Priority Basis. eAppraiseIT informed its staff in an April 17, 2007 e-mail that WaMu decided to construct their own appraisal panel, now known as the wamu proven panel, and instructed the [appraisal managers] to utilize appraisers from this panel whenever possible. The end result is that if you are not on this proven panel it is very unlikely you will receive wamu work. 448. LSI received the same treatment from WaMu. If LSI wanted to use a appraiser
that wasnt on WaMus Proven Appraiser List, LSI had to provide a justification. A 2007 Memorandum by eAppraiseIT Executive Vice President attached to an April 17, 2007 email drafted by eAppraiseIT President sent to First American Corp executives stated that we need a short sentence in the message log so that we can monitor, AND most important - lending can see why you didnt assign to a PAL service provider. Not using a PAL appraiser will be an issue so we need to ensure weve covered our bases as to why theyre not utilized. 449. According to the New York Attorney Generals complaint, when one appraiser
refused to reconsider the values of five appraisals he was removed from the proven appraiser list
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by WaMu. He was told by a WaMu employee that many appraisers who had previously been removed from WaMus list of active appraisers for conducting fraudulent appraisals were being reinstated on WaMus Proven List in order to help ensure that appraisals would come in at sufficiently high value to permit the loans to close. See Complaint, New York v. First American & eAppraiseIT, No. 1:2007cv10397, 2007 WL 6420430 (N.Y.Sup. Nov. 1, 2007). 450. Indeed, the situation was best summed up by one of WaMus former employees.
On April 27, 2007, a former WaMu Oversight officer, Sabina Senorans, who had moved to sales wrote in an e-mail: The sales people finally got their way at WAMU. The appraisal list that Eappraiseit and LSI is using has been totally scrubbed, but instead of keeping good appraisers, they went for the Badd [sic] ones . . . So many appraisers have been knocked off the list. . . . I did manage to salvage a few in Nassau County, but other area, forget about it. Now sales can easily threaten to take an appraiser off their list if they cannnot [sic] get what they want. Scary, huh? In her February 20, 2009 deposition, the Sabina Senorans testified that the people who are good appraisers were removed at the request of the loan officers and the sales staff. 451. Such improper influence by WaMu and lack of independence on the part of
appraisers was confirmed by the Office of Thrift Supervision in July 2008. The OTS investigated WaMus appraisal practices and found that [n]umerous instances were identified where, because of undue influence on the appraiser, values were increased without supporting documentation and constituted unsafe or unsound banking practices. PSI Report, p. 190. 452. eAppraiseIT recognized WaMus practices for what they were: In an e-mail dated
September 13, 2006, eAppraiseITs President, Anthony Merlo, wrote to WaMus executives that [t]he issue is getting outrageously unethical and now border line [sic] dangerous. Please respond what you will do to have this stopped within the Wamu organization. eAppraiseITs
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President then forwarded the e-mail to First American executives, noting: I need to clamp down, especially since we warrant appraisals. Its pure pressure to commit fraud. In spite of these concerns, eAppraiseIT continued its work for WaMu, conducting over 260,000 appraisals for WaMu, until the fall of 2007 when the New York Attorney General brought its action. 453. WaMu also developed a series of internal practices that directly led to the
origination and securitization of fraudulent loans. First, as discussed above, WaMu tied bonuses to the number of loans closed by a loan officer, thereby encouraging employees to be more concerned with volume than quality. Second, WaMu adopted a plan to pay for overages, which were payments to loan officers who sold mortgages to clients at a higher rate of interest than the rate for which the client was qualified. A 2008 WaMu internal study titled AIG/UG and OTS Allegation of Loan Frauds Originated by [redacted employee] found that these compensation practices lead to unsound underwriting. The memorandum concluded that because volume was emphasized above all else, the temptation to advise the borrower on means and methods to game the system may occur. Our compensation and reward structure is heavily tilted for these employees toward production of closed loans. 454. WaMus Chief Risk Officer, Mr. Vanasek, confirmed these findings in his
testimony to the Senate PSI. Because of the compensation systems rewarding volume versus quality and the independent structure of the originators, I am confident at times borrowers were coached to fill out applications with overstated incomes or net worth to meet the minimum underwriting requirements. Catching this kind of fraud was difficult at best and required the support of line management. Not surprisingly, loan originators constantly threatened to quit and go to Countrywide or elsewhere if the loan applications were not approved. PSI Report, p. 103.
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455.
The internal corporate culture at WaMu emphasized market growth over sound
risk management. Mr. Vanasek and his risk department repeatedly issues warnings to WaMus senior management concerning WaMus origination and acquisition of mortgage loans of increasingly poor credit quality. In a February 28, 2005 memorandum to WaMu CEO Kerry Killinger and others members of the Executive Committee, Mr. Vanasek warned that [m]y credit team and I fear that we are considering expanding our risk appetite beyond the 05 Plan at exactly the wrong point in the cycle the market is over heated in many key areas of the country. In another 2005 memorandum, Mr. Vanasek warned WaMu that the increasing use of Option ARM loans would result in a high number of defaulted mortgages, stating: The organization is at significant risk in its Option ARM and Hybrid portfolio of payment shock created by abnormally low Start or teaser rates, and aggressively low underwriting rates.... It is our contention that in the upwardly sloping rate environment and expected flattening of housing appreciation, we are putting borrowers into homes that they simply cannot afford. 456. WaMus senior management ignored these repeated warnings and created a
corporate culture that empowered sales at the expense of risk management. WaMus management told risk managers, via an October 31, 2005 memorandum, that they had to shift [their] ways of thinking from being a regulatory burden that restricted lending operations to being a customer service that supported WaMus aggressive growth strategy. WaMus Chief Compliance and Risk Oversight Officer, Melissa Martinez, told risk managers they had to rely less on loan documentation and more on automated underwriting systems. 457. In 2004, WaMu promoted a new advertising slogan called The Power of Yes.
Mr. Vanasek told the Senate PSI that [t]he implication of that statement was that Washington
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Mutual would find some way to make a loan. The tag line symbolized the management attitude about mortgage lending more clearly than anything I can tell you. PSI Report, p. 146. 458. Those executives who dissented from WaMus aggressive growth strategy were
generally dismissed or asked to leave. Indeed, Mr. Vanasek retired in December 2005 due to a lack of management support for his attempts at reigning in WaMus aggressive lending. When he left, WaMu subordinated the risk department to the business division. WaMu continued its risky lending. Ronald Cathcart, the Chief Enterprise Risk Officer for WaMu, told the Senate PSI: By February 2008, I had been so fully isolated that I initiated a meeting with the Director, where I advised that I was being marginalized by senior management to the point that I was no longer able to discharge my responsibilities as Chief Enterprise Risk Officer of WaMu. Within several weeks, I was terminated by the Chairman. PSI Report, p. 115. 459. This evidence, which has been exhaustively documented in the Senate PSI Report
and other government sources, reveals that WaMu and Long Beach knew that their underwriting standards had been utterly abandoned. WaMu and Long Beach pressured their employees to rubber stamp loans; effectively gutting any sort of due diligence and making employment contingent on an employees willingness to close as many loans as possible. WaMus own internal controls indicated the poor credit quality of WaMu and Long Beach mortgage loans, which WaMu and Long Beach proceeded to sell into securitizations regardless, capitalizing on their asymmetrical information. WaMu also knew that its internal controls were inadequate. Further, WaMu actively sought to elicit false and misleading valuations from supposedly independent appraisers. Finally, WaMu fired, forced out, or ignored any employees who attempted to put an end to WaMus fraudulent and reckless behavior. These facts demonstrate
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that WaMu and Long Beach knew their representations were false and, in spite of this, were willing to, and in fact did, profit from such knowledge to the detriment of the GSEs. VI. The GSEs Justifiably Relied on the Representations of JPMorgan, Bear Stearns, WaMu, and Long Beach 460. Fannie Mae and Freddie Mac purchased the GSE Certificates based upon the
representations by JPMorgan, Bear Stearns, WaMu, and Long Beach in their capacities as the sponsor, depositor, and lead and selling underwriter for the 94 JPMorgan, Bear Stearns, WaMu, and Long Beach-sponsored Securitizations. JPMorgan, Bear Stearns, WaMu, and Long Beach provided term sheets to the GSEs that contained critical data as to the Securitizations, including with respect to anticipated credit ratings by the credit rating agencies, loan-to-value and combined loan-to-value ratios for the underlying collateral, and owner occupancy statistics. This data was subsequently incorporated into Prospectus Supplements that were received by the GSEs upon the close of each Securitization. 461. The GSEs relied upon the accuracy of the data transmitted to them and
subsequently reflected in the Prospectus Supplements. In particular, the GSEs relied upon the credit ratings that the credit rating agencies indicated they would bestow on the Certificates based on the information provided by J.P. Morgan Acquisition, EMC, WaMu Bank, WaMu Securities, Long Beach Mortgage, J.P. Morgan Securities, BSC, and WaMu Capital relating to the collateral quality of the underlying loans and the structure of the Securitization. These credit ratings represented a determination by the credit rating agencies that the GSE Certificates were AAA quality (or its equivalent)meaning the Certificates had an extremely strong capacity to meet the payment obligations described in the respective PSAs. 462. JPMorgan, Bear Stearns, WaMu, and Long Beach in their capacities as the
sponsors, depositors, and lead and selling underwriters for the 94 JPMorgan, Bear Stearns, 184
WaMu, and Long Beach-sponsored Securitizations, provided detailed information about the underlying collateral and structure of each Securitization it sponsored to the credit rating agencies. The credit rating agencies based their ratings on the information provided to them by JPMorgan, Bear Stearns, WaMu, and Long Beach, and the agencies anticipated ratings of the Certificates were dependant on the accuracy of that information. The GSEs relied on the accuracy of the anticipated credit ratings and the actual credit ratings assigned to the Certificates by the credit rating agencies, and upon the accuracy of representations of JPMorgan, Bear Stearns, WaMu, and Long Beach in the term sheets and Prospectus Supplements. 463. In addition, the GSEs relied on the fact that the originators of the mortgage loans
in the Securitizations had acted in conformity with their underwriting guidelines, which were described in the Prospectus Supplements. Compliance with underwriting guidelines was a precondition to the GSEs purchase of the GSE Certificates in that the GSEs decision to purchase the Certificates was directly premised on their reasonable belief that the originators complied with applicable underwriting guidelines and standards. 464. In purchasing the GSE Certificates, the GSEs justifiably relied on the false
representations and omissions of material fact, detailed above, that were made by JPMorgan, Bear Stearns, WaMu, and Long Beach, including the misstatements and omissions in the term sheets about the underlying collateral, which were reflected in the Prospectus Supplements. 465. But for the above misrepresentations and omissions, the GSEs would not have
purchased or acquired the Certificates as they ultimately did, because those representations and omissions were material to their decision to acquire the GSE Certificates, as described above.
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VII. Fannie Maes and Freddie Macs Purchases of the GSE Certificates and the Resulting Damages 466. In total, between September 7, 2005 and September 19, 2007, Fannie Mae and
Freddie Mac purchased over $33 billion in residential mortgage-backed securities issued in connection with the Securitizations. Tables 11 and 12 reflect Fannie Maes and Freddie Macs purchases of the Certificates, respectively.22 Table 11
Transaction BALTA 2005-10 BALTA 2006-4 BALTA 2006-4 BSABS 2006HE9 BSABS 2006HE10 BSABS 2007FS1 BSABS 2007HE1 BSABS 2007HE2 BSABS 2007HE3 BSABS 2007HE3 BSABS 2007HE4 BSABS 2007HE5 BSABS 2007HE7 BSABS 2007HE7 GPMF 2005AR5 GPMF 2006AR3 GPMF 2006AR3 JPALT 2005-A2 JPMAC 2005OPT2
22
Tranche II3A1 I2A1 III1A1 IIA II2A IIA II2A II2A IIA IIIA IIA IIA IIA1 IIIA1 IIA1 IIA1 IIA2 2A1 A1A
CUSIP 07386HZG9 073871AC9 073871BL8 07389MAD9 07389RAR7 073855AG3 07389UAR0 07389YAE1 073852AE5 073852AF2 07386RAE9 073859AE0 07387VAC3 07387VAE9 39538WEE4 39538WHA9 39538WHB7 46627MBS5 46626LEF3
Date of Purchase by Fannie Mae 12/30/2005 6/30/2006 6/30/2006 11/30/2006 12/29/2006 2/28/2007 1/30/2007 2/28/2007 3/30/2007 3/30/2007 4/30/2007 5/30/2007 9/19/2007 9/19/2007 10/31/2005 4/28/2006 4/28/2006 12/29/2005 12/21/2005
Initial Unpaid Principal Balance $569,686,000.00 $403,000,000.00 $132,532,000.00 $218,304,000.00 $201,892,000.00 $70,635,000.00 $118,512,000.00 $75,162,000.00 $131,715,000.00 $90,354,000.00 $210,625,000.00 $99,922,000.00 $137,892,000.00 $69,504,000.00 $470,923,000.00 $492,223,000.00 $259,690,000.00 $68,406,000.00 $311,578,000.00
Purchase Price (% of Par) 101.1406 100 99.3125 100 100 99.9935 100 100 100 100 100 100 100 100 100 100 100 100.1484 100
Seller to Fannie Mae BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC J.P. Morgan Securities J.P. Morgan Securities
Transaction JPMAC 2006CW1 JPMAC 2006HE3 JPMAC 2006NC2 JPMAC 2006RM1 JPMAC 2006RM1 JPMAC 2006WMC1 JPMAC 2006WMC2 JPMAC 2006WMC3 JPMAC 2006WMC3 JPMAC 2006WMC4 JPMAC 2006WMC4 JPMAC 2007CH3 JPMAC 2007CH3 JPMAC 2007CH5 JPMMT 2006A3 LBMLT 2006-3 LBMLT 2006-4 LBMLT 2006WL1 LBMLT 2006WL2 LUM 2006-3 WMALT 2005-9 WMALT 200510
Tranche A1A A1 A1A A1A A1B A1 A1 A1SS A1MZ A1A A1B A1A A1B A1 1A1 IA IA IA2 IA II2A1 1CB 1CB
CUSIP 46628MAA4 46629VAA3 46629HAA4 46629NAA1 46629NAB9 46626LJK7 46628TAA9 46629KAA7 46629KAB5 46630BAA4 46630BAB2 46630XAA6 46630XAB4 46631KAA3 46628KAA8 542514UG7 54251MAA2 542514QQ0 542514RZ9 55027AAD2 93934FEL2 93934FFY3
Date of Purchase by Fannie Mae 5/31/2006 11/10/2006 8/23/2006 9/27/2006 9/27/2006 3/30/2006 6/28/2006 9/14/2006 9/14/2006 12/20/2006 12/20/2006 5/15/2007 5/15/2007 7/12/2007 4/28/2006 5/2/2006 4/6/2006 5/9/2006 2/8/2006 1/30/2006 7/3/2006 10/31/2005 11/30/2005
Initial Unpaid Principal Balance $213,081,000.00 $189,800,000.00 $223,083,000.00 $230,853,000.00 $57,713,000.00 $161,500,000.00 $324,255,000.00 $175,270,000.00 $43,817,000.00 $376,675,000.00 $41,853,000.00 $374,118,000.00 $41,569,000.00 $304,336,000.00 $174,498,090.91 $256,950,500.00 $393,834,000.00 $256,209,000.00 $462,263,000.00 $143,433,854.79 $69,400,400.00 $62,532,200.00
Purchase Price (% of Par) 100 100 100 100 100 100 100 100 100 100 100 100 100 100 99.6914 99.5430 100 100 100 100 99.1289 101.5156 102.5938
Seller to Fannie Mae J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities WaMu Capital WaMu Capital Goldman Sachs Lehman Brothers Inc. Citigroup WaMu Capital WaMu Capital
Table 12
Transaction AABST 2005-5 AHM 2005-1 AHM 2005-4 ARSI 2006-M2 Tranche IIA VIA IVA A1 CUSIP 00764MHD2 02660TDH3 02660TGV9 04013BAR3 Date of Purchase by Freddie Mac 10/28/2005 4/28/2006 2/1/2006 8/29/2006 Initial Unpaid Principal Balance $500,000,000.00 $251,446,839.54 $556,435,000.00 $717,382,000.00 Purchase Price (% of Par) 100 99.234375 99.203125 100 Seller to Freddie Mac BSC BSC BSC J.P. Morgan Securities
187
Transaction BALTA 2005-10 BALTA 2006-1 BALTA 2006-2 BALTA 2006-3 BALTA 2006-4 BSABS 2005HE12 BSABS 2006AQ1 BSABS 2006HE2 BSABS 2006HE4 BSABS 2006HE5 BSABS 2006HE7 BSABS 2006HE8 BSABS 2006HE9 BSABS 2006HE10 BSABS 2007HE1 BSABS 2007HE2 BSABS 2007HE5 BSABS 2007HE6 BSMF 2006-SL5 BSMF 2006-SL6 BSMF 2007AR3 BSMF 2007-SL1 BSMF 2007-SL2 CBASS 2006CB2 CBASS 2006CB7 JPALT 2007-A2 JPMAC 2005FRE1 JPMAC 2005WMC1 JPMAC 2006ACC1 JPMAC 2006CH1 JPMAC 2006CH2
Tranche II2A1 II1A1 II2A1 II1A1 I2A1 IIA I2A IIA IIA IIA II2A II2A IIIA II3A II3A II3A IIIA IIA IIA IIA II2A1 IIA IIA AV A1 11A1 AI A1 A1 A1 AV1
CUSIP 07386HZE4 07386HB75 07386HF30 07386HK83 073871AC9 0738795P9 07389PAD2 07387UEL1 07388AAD6 07388CAD2 07388HAR0 07388JAR6 07389MAE7 07389RAS5 07389UAS8 07389YAF8 073859AF7 07387YAE3 07401HAB8 07400LAT1 07401VAS0 07401PAB0 07401RAB6 12498NAW3 12479DAA6 466278AA6 46626LBU3 46626LBD1 46628RAA3 46629TAA8 46629QAS5
Date of Purchase by Freddie Mac 12/30/2005 2/28/2006 3/31/2006 4/28/2006 6/30/2006 12/30/2005 11/30/2006 2/28/2006 4/28/2006 5/30/2006 8/30/2006 10/30/2006 11/30/2006 12/29/2006 1/30/2007 2/28/2007 5/30/2007 8/30/2007 11/30/2006 12/29/2006 3/30/2007 1/30/2007 2/28/2007 2/28/2006 10/5/2006 5/31/2007 11/29/2005 10/27/2005 6/2/2006 11/14/2006 12/14/2006
Initial Unpaid Principal Balance $407,783,000.00 $208,000,000.00 $381,136,000.00 $276,267,000.00 $404,809,000.00 $302,737,000.00 $192,142,000.00 $241,697,000.00 $264,889,000.00 $162,020,000.00 $100,275,000.00 $51,306,000.00 $236,045,000.00 $132,221,000.00 $92,100,000.00 $77,349,000.00 $122,752,000.00 $291,210,000.00 $23,706,000.00 $20,279,000.00 $241,679,000.00 $24,050,000.00 $21,671,000.00 $347,712,000.00 $385,237,000.00 $369,061,000.00 $274,516,000.00 $404,000,000.00 $266,700,000.00 $149,925,000.00 $900,296,000.00
Purchase Price (% of Par) 100.9199219 99.7890625 100.671875 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
Seller to Freddie Mac BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC BSC J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities
188
Transaction JPMAC 2006CW2 JPMAC 2006FRE1 JPMAC 2006FRE2 JPMAC 2006HE1 JPMAC 2006HE2 JPMAC 2006NC1 JPMAC 2007CH2 JPMAC 2007CH4 LBMLT 2005-3 LBMLT 2006-1 LBMLT 2006-2 LBMLT 2006-3 LBMLT 2006-4 LBMLT 2006-5 LBMLT 2006-6 LBMLT 2006-7 LBMLT 2006-8 LBMLT 2006-9 LBMLT 2006-10 LBMLT 2006-11 LBMLT 2006WL1 LBMLT 2006WL3 NCMT 2007-1 PCHLT 2005-4 SACO 2007-1 SACO 2007-2 SAMI 2006-AR4 WAMU 2007OA3 WMABS 2006HE1
Tranche AV1 A1 A1 A1 A1 A1 AV1 A1 IA IA IA IA IA IA IA IA IA IA IA IA IA1 IA 1A1 2A1 IIA IIA IA1 1A IA
CUSIP 46629BAN9 46626LFX3 46626LGX2 46626LGT1 46625SAA4 46626LJL5 46630MAS1 46630CAA2 542514NT7 542514RH9 542514TQ7 542514UG7 54251MAA2 54251PAA5 54251RAA1 54251TAA7 54251UAA4 54251WAA0 54251YAA6 542512AA6 542514QP2 542514SS4 65106FAA0 71085PDF7 785814AB0 78581NAB8 86360QAA3 93364AAA0 92925CEP3
Date of Purchase by Freddie Mac 8/8/2006 1/27/2006 3/29/2006 2/28/2006 6/30/2006 4/27/2006 3/15/2007 6/15/2007 9/7/2005 2/7/2006 3/7/2006 4/6/2006 5/9/2006 6/15/2006 7/26/2006 8/30/2006 9/21/2006 10/12/2006 11/9/2006 12/14/2006 2/8/2006 1/30/2006 7/12/2007 10/26/2005 1/16/2007 2/28/2007 6/30/2006 3/27/2007 4/20/2006
Initial Unpaid Principal Balance $410,588,000.00 $279,696,000.00 $267,476,000.00 $166,827,000.00 $171,430,000.00 $345,251,000.00 $234,600,000.00 $435,000,000.00 $604,830,000.00 $870,736,000.00 $1,101,891,000.00 $256,950,500.00 $393,834,000.00 $631,423,000.00 $415,891,000.00 $360,139,000.00 $366,091,000.00 $420,396,000.00 $288,380,000.00 $408,047,000.00 $284,678,000.00 $440,218,000.00 $370,224,000.00 $433,582,000.00 $50,429,000.00 $20,226,000.00 $316,180,000.00 $140,139,000.00 $53,578,000.00
Purchase Price (% of Par) 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
Seller to Freddie Mac J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities J.P. Morgan Securities Lehman Brothers Inc. Credit Suisse RBS Greenwich WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital Goldman Sachs Lehman Brothers Inc. BSC BSC BSC BSC BSC WaMu Capital WaMu Capital
189
Transaction WMABS 2006HE3 WMABS 2006HE4 WMABS 2006HE5 WMABS 2007HE1 WMABS 2007HE2 WMALT 2006AR4 WMALT 2006AR4 WMALT 2006AR4 WMALT 2006AR5 WMALT 2006AR5 WMALT 2006AR8 WMALT 2006AR9 WMALT 2007OA1 WMALT 2007OA2 WMALT 2007OA3 WMALT 2007OA3 WMHE 2007HE1 WMHE 2007HE2 WMHE 2007HE3 WMHE 2007HE4
Tranche IA IA IA IA IA 1A 2A 3A 1A 2A 1A 1A 1A 1A 1A 3A IA IA IA IA
CUSIP 93934MAA5 93934QAA6 93934XAA1 93935KAA8 93934TAA0 939345AA2 939345AB0 939345AC8 93935AAA0 93935AAB8 93935LAA6 939346AA0 93935NAA2 93935QAA5 939355AA1 939355AC7 933631AA1 92926SAA4 93364EAA2 93363XAA1
Date of Purchase by Freddie Mac 9/27/2006 10/27/2006 12/7/2006 1/17/2007 3/13/2007 5/30/2006 5/30/2006 5/30/2006 6/28/2006 6/28/2006 9/28/2006 10/26/2006 1/26/2007 2/26/2007 3/28/2007 3/28/2007 1/16/2007 4/10/2007 5/10/2007 6/13/2007
Initial Unpaid Principal Balance $175,828,000.00 $117,798,000.00 $269,063,000.00 $115,217,000.00 $286,276,000.00 $76,071,000.00 $69,518,000.00 $251,313,000.00 $74,766,000.00 $57,966,000.00 $211,150,000.00 $270,142,000.00 $255,047,000.00 $222,967,000.00 $230,966,000.00 $195,998,000.00 $368,226,000.00 $491,550,000.00 $372,475,000.00 $249,921,000.00
Purchase Price (% of Par) 100 100 100 99.9908 100 99.75 99.796875 99.859375 99.65625 99.65625 100 100 100 100 100 100 100 99.9781 100 100
Seller to Freddie Mac WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital
467.
quality and characteristics of the mortgage loans underlying the GSE Certificates, and the origination and underwriting practices pursuant to which the mortgage loans were originated, which were summarized in such documents, were material to a reasonable investors decision to purchase the GSE Certificates.
190
468.
Registration Statements, including the Prospectuses and Prospectus Supplements, directly caused Fannie Mae and Freddie Mac to suffer billions of dollars in damages, including without limitation depreciation in the value of the securities. The mortgage loans underlying the GSE Certificates experienced defaults and delinquencies at a much higher rate than they would have had the loan originators adhered to the underwriting guidelines set forth in the Registration Statements, and the payments to the trusts were therefore much lower than they would have been had the loans been underwritten as described in the Registration Statements. 469. Fannie Maes and Freddie Macs losses have been much greater than they would
regarding the true characteristics of the loans were the proximate cause of Fannie Maes and Freddie Macs losses relating to their purchase of the GSE Certificates. 471. Defendants misstatements and omissions in the Registration Statements
regarding the true characteristics of the loans were the proximate cause of Fannie Maes and Freddie Macs losses relating to their purchases of the GSE Certificates. Based upon sales of the Certificates or similar certificates in the secondary market, Defendants proximately caused billions of dollars in damages to Fannie Mae and Freddie Mac in an amount to be determined at trial.
191
FIRST CAUSE OF ACTION Violation of Section 11 of the Securities Act of 1933 (Against J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, Long Beach Securities, J.P. Morgan Securities, BSC, WaMu Capital, Citigroup, Credit Suisse, Goldman Sachs, RBS Greenwich, David Beck, Brian Bernard, Larry Breitbarth, Richard Careaga, Thomas W. Casey, Christine E. Cole, David M. Duzyk, Stephen Fortunato, Katherine Garniewski, Michael J. Giampaolo, Thomas Green, Keith Johnson, Rolland Jurgens, Joseph T. Jurkowski, Jr., William A. King, Suzanne Krahling, Thomas G. Lehmann, Kim Lutthans, Thomas F. Marano, Jeffrey Mayer, Edwin F. McMichael, Samuel L. Molinaro, Jr., Michael B. Nierenberg, Diane Novak, Matthew E. Perkins, John F. Robinson, Louis Schioppo, Jr., Jeffrey L. Verschleiser, Donald Wilhelm, and David H. Zielke) 472. Plaintiff realleges each allegation in paragraphs 1 through 380 and paragraphs 460
through 471 above as if fully set forth herein, except to the extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 473. This claim is brought by Plaintiff pursuant to Section 11 of the Securities Act of
1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements. This claim is brought against Defendants J.P. Morgan Securities (both in its own capacity and as successor to BSC), BSC, WaMu Capital, Citigroup, Credit Suisse, Goldman Sachs, and RBS Greenwich with respect to each of the Registration Statements. This claim is also brought against (i) Defendants J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, and Long Beach Securities, and (ii) David Beck, Brian Bernard, Larry Breitbarth, Richard Careaga, Thomas W. Casey, Christine E. Cole, David M. Duzyk, Stephen Fortunato, Katherine Garniewski, Michael J. Giampaolo, Thomas Green, Keith Johnson, Rolland Jurgens, Joseph T. Jurkowski, Jr., William King, Suzanne Krahling, Thomas G. Lehmann, Kim Lutthans, Thomas F. Marano, Jeffrey Mayer, Edwin F. McMichael, Samuel L. Molinaro, Jr., Michael B. Nierenberg, Diane Novak, Matthew E. Perkins, John F. Robinson, Louis Schioppo, Jr., Jeffrey L. Verschleiser, Donald Wilhelm, and David H. Zielke (the foregoing Individual Defendants collectively referred to as 192
the Section 11 Individual Defendants), each with respect to the Registration Statements filed by J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, and Long Beach Securities that registered securities that were bona fide offered to the public on or after September 6, 2005. 474. Defendants J.P. Morgan Securities, BSC, WaMu Capital, Citigroup, Credit
Suisse, Goldman Sachs, and RBS Greenwich are strictly liable for making false and materially misleading misstatements in each of the Registration Statements, and for omitting facts necessary to make the facts stated therein not misleading. Defendants J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, Long Beach Securities, and the Section 11 Individual Defendants are strictly liable for making false and materially misleading statements in the Registration Statements filed by J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, and Long Beach Securities that registered securities that were bona fide offered to the public on or after September 6, 2005, which are applicable to 74 of the 103 Securitizations (as specified in Tables 2 and 3 above), including the related Prospectus Supplements, and for omitting facts necessary to make the facts stated therein not misleading. 475. Defendant J.P. Morgan Securities served as the lead underwriter of 30 of the
Securitizations and, as such, is strictly liable under Section 11 of the Securities Act for the misstatements and omissions in the Registration Statements for those 30 Securitizations. 476. Defendant BSC served as the lead underwriter of 38 of the Securitizations and, as
such, is strictly liable under Section 11 of the Securities Act for the misstatements and omissions in the Registration Statements for those 38 Securitizations.
193
477.
Defendant WaMu Capital served as the lead underwriter of 31 of the
Securitizations and, as such, is strictly liable under Section 11 of the Securities Act for the misstatements and omissions in the Registration Statements for those 31 Securitizations. 478. Defendant Citigroup served as the lead underwriter of one of the Securitizations
and, as such, is strictly liable under Section 11 of the Securities Act for the misstatements and omissions in the Registration Statement for that Securitization. 479. Defendant Credit Suisse served as the lead underwriter of one of the
Securitizations and, as such, is strictly liable under Section 11 of the Securities Act for the misstatements and omissions in the Registration Statement for that Securitization. 480. Defendant Goldman Sachs served as the lead underwriter of one of the
Securitizations and, as such, is strictly liable under Section 11 of the Securities Act for the misstatements and omissions in the Registration Statement for that Securitization. 481. Defendant RBS Greenwich served as the lead underwriter of one of the
Securitizations and, as such, is strictly liable under Section 11 of the Securities Act for the misstatements and omissions in the Registration Statement for that Securitization. 482. Defendant J.P. Morgan Acceptance filed three Registration Statements under
which 27 of the 103 Securitizations were carried out. As depositor, Defendant J.P. Morgan Acceptance is an issuer of the GSE Certificates issued pursuant to the Registration Statements it filed within the meaning of Section 2(a)(4) of the Securities Act, 15 U.S.C. 77b(a)(4), and in accordance with Section 11(a), 15 U.S.C. 77k(a). As such, J.P. Morgan Acceptance is liable under Section 11 of the Securities Act for the misstatements and omissions in the 333-141607 and 333-130192 Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005.
194
483.
Defendants SAMI and BSABS filed five Registration Statements under which 35
of the 103 Securitizations were carried out. As depositors, Defendants SAMI and BSABS are issuers of the GSE Certificates issued pursuant to the Registration Statements they filed within the meaning of Section 2(a)(4) of the Securities Act, 15 U.S.C. 77b(a)(4), and in accordance with Section 11(a), 15 U.S.C. 77k(a). As such, SAMI and BSABS are liable under Section 11 of the Securities Act for the misstatements and omissions in the 333-140247, 333-131374, and 333-132232 Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005. 484. Defendants WaMu Securities and WaMu Acceptance filed three Registration
Statements under which 20 of the 103 Securitizations were carried out. As depositors, Defendants WaMu Securities and WaMu Acceptance are issuers of the GSE Certificates issued pursuant to the Registration Statements they filed within the meaning of Section 2(a)(4) of the Securities Act, 15 U.S.C. 77b(a)(4), and in accordance with Section 11(a), 15 U.S.C. 77k(a). As such, WaMu Securities and WaMu Acceptance are liable under Section 11 of the Securities Act for the misstatements and omissions in the 333-141255 and 333-130795 Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005. 485. Defendant Long Beach Securities filed two Registration Statements under which
15 of the 103 Securitizations were carried out. As depositor, Defendant Long Beach Securities is an issuer of the GSE Certificates issued pursuant to the Registration Statements it filed within the meaning of Section 2(a)(4) of the Securities Act, 15 U.S.C. 77b(a)(4), and in accordance with Section 11(a), 15 U.S.C. 77k(a). As such, Long Beach Securities is liable under Section 11 of
195
the Securities Act for the misstatements and omissions in the 333-131252 Registration Statement that registered securities that were bona fide offered to the public on or after September 6, 2005. 486. At the time Defendant J.P. Morgan Acceptance filed three Registration
Statements applicable to 27 of the Securitizations, the JPMorgan Section 11 Individual Defendants were officers and/or directors of J.P. Morgan Acceptance. In addition, the JPMorgan Section 11 Individual Defendants signed those Registration Statements and/or either signed or authorized another to sign on their behalf the amendments to those Registration Statements. As such, the JPMorgan Section 11 Individual Defendants are liable under Section 11 of the Securities Act for the misstatements and omissions in the 333-141607 and 333-130192 Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005. 487. At the time Defendants SAMI and BSABS filed five Registration Statements
applicable to 35 of the Securitizations, the Bear Stearns Section 11 Individual Defendants were officers and/or directors of SAMI and BSABS. In addition, the Bear Stearns Section 11 Individual Defendants signed those Registration Statements and/or either signed or authorized another to sign on their behalf the amendments to those Registration Statements. As such, the Bear Stearns Section 11 Individual Defendants are liable under Section 11 of the Securities Act for the misstatements and omissions in the 333-140247, 333-131374, and 333-132232 Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005. 488. At the time Defendants WaMu Securities and WaMu Acceptance filed three
Registration Statements applicable to 20 of the Securitizations, the WaMu Section 11 Individual Defendants were officers and/or directors of WaMu Securities and WaMu Acceptance. In
196
addition, the WaMu Section 11 Individual Defendants signed those Registration Statements and/or either signed or authorized another to sign on their behalf the amendments to those Registration Statements. As such, the WaMu Section 11 Individual Defendants are liable under Section 11 of the Securities Act for the misstatements and omissions in the 333-141255 and 333130795 Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005. 489. At the time Defendant Long Beach Securities filed two Registration Statements
applicable to 15 of the Securitizations, the Long Beach Section 11 Individual Defendants were officers and/or directors of Long Beach Securities. In addition, the Long Beach Section 11 Individual Defendants signed those Registration Statements and/or either signed or authorized another to sign on their behalf the amendments to those Registration Statements. As such, the Long Beach Section 11 Individual Defendants are liable under Section 11 of the Securities Act for the misstatements and omissions in the 333-131252 Registration that registered securities that were bona fide offered to the public on or after September 6, 2005. 490. At the time that they became effective, each of the Registration Statements
Registration Statements are set forth above in Section IV and pertain to, among other things, compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings.
197
492.
Fannie Mae and Freddie Mac purchased or otherwise acquired the GSE
Certificates pursuant to the false and misleading Registration Statements. Fannie Mae and Freddie Mac made these purchases in the primary market or, for the LUM 2006-3 Securitization, shortly after issuance. At the time they purchased the GSE Certificates, Fannie Mae and Freddie Mac did not know, and in the exercise of reasonable diligence could not have known, of the facts concerning the false and misleading statements and omissions alleged herein, and if the GSEs would have known those facts, they would not have purchased the GSE Certificates. 493. J.P. Morgan Securities, BSC, WaMu Capital, Citigroup, Credit Suisse, Goldman
Sachs, and RBS Greenwich owed Fannie Mae, Freddie Mac and other investors a duty to make a reasonable and diligent investigation of the statements contained in the Registration Statements at the time they became effective to ensure that such statements were true and correct and that there were no omissions of material facts required to be stated in order to make the statements contained therein not misleading. The Section 11 Individual Defendants owed the same duty with respect to the Registration Statements filed by J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, and Long Beach Securities that they signed that registered securities that were bona fide offered to the public on or after September 6, 2005, which are applicable to 74 of the Securitizations. 494. J.P. Morgan Securities, BSC, WaMu Capital, Citigroup, Credit Suisse, Goldman
Sachs, RBS Greenwich and the Section 11 Individual Defendants did not exercise such due diligence and failed to conduct a reasonable investigation. In the exercise of reasonable care, these Defendants should have known of the false statements and omissions contained in or omitted from the Registration Statements filed in connection with the Securitizations, as set forth herein. In addition, J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu
198
Acceptance, and Long Beach Securities, though subject to strict liability without regard to whether they performed diligence, also failed to take reasonable steps to ensure the accuracy of the representations. 495. Fannie Mae and Freddie Mac sustained substantial damages as a result of the
misstatements and omissions in the Registration Statements. 496. The time period from June 16, 2009 through July 31, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and J.P. Morgan Securities, J.P. Morgan Acquisition, J.P. Morgan Acceptance, EMC, BSABS, SAMI, BSC, Chase Mortgage Finance Corp., WaMu Capital, WaMu Securities, Long Beach Securities, Long Beach Mortgage, and Chase Home Finance LLC. The time period from July 14, 2011 through September 1, 2011 has been tolled for statute of limitations purposes by virtue of a tolling agreement entered into among the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, and J.P. Morgan Securities, J.P. Morgan Acquisition, J.P. Morgan Acceptance, EMC, BSABS, SAMI, BSC, Chase Mortgage Finance Corp., WaMu Capital, WaMu Securities, Long Beach Securities, and JPMorgan Bank. This action is brought within three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). 497. By reason of the conduct herein alleged, Defendants J.P. Morgan Securities, J.P.
Morgan Acceptance, BSC, SAMI, BSABS, WaMu Capital, WaMu Securities, WaMu Acceptance, Long Beach Securities, Citigroup, Credit Suisse, Goldman Sachs, RBS Greenwich, and the Section 11 Individual Defendants are jointly and severally liable for their wrongdoing.
199
SECOND CAUSE OF ACTION Violation of Section 12(a)(2) of the Securities Act of 1933 (Against J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, Long Beach Securities, J.P. Morgan Securities, BSC, WaMu Capital, Credit Suisse, Goldman Sachs, and RBS Greenwich) 498. Plaintiff realleges each allegation in paragraphs 1 through 380 and paragraphs 460
through 471 above as if fully set forth herein, except to the extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 499. This claim is brought by Plaintiff pursuant to Section 12(a)(2) of the Securities
Act of 1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements in the Securitizations listed in Table 1, against J.P. Morgan Securities (both in its own capacity and as successor to BSC), BSC, WaMu Capital, Credit Suisse, Goldman Sachs, and RBS Greenwich as underwriters; and J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, and Long Beach Securities as depositors (collectively, the Section 12(a)(2) Defendants). 500. This claim is predicated upon J.P. Morgan Securities, BSC, WaMu Capital, Credit
Suisse, Goldman Sachs, and RBS Greenwichs negligence in making materially false and misleading statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as Prospectuses) for the Securitizations listed in Table 1 that were purchased in the primary market, other than the LBMLT 2005-3 and LBMLT 2006WL3 Securitizations, for which none of the Defendants were the selling underwriter and as to which the allegations in this section to do not apply. Defendants J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, and Long Beach Securities acted negligently in making materially false and misleading statements in the Prospectuses for the
200
Securitizations carried out under the 13 Registration Statements they filed, which are applicable to 97 of the Securitizations. 501. J.P. Morgan Securities, BSC, WaMu Capital, Credit Suisse, Goldman Sachs, and
RBS Greenwich are prominently identified in the Prospectuses, the primary documents that they used to sell the Certificates. J.P. Morgan Securities, BSC, WaMu Capital, Credit Suisse, Goldman Sachs, and RBS Greenwich offered the Certificates publicly, including selling to Fannie Mae and Freddie Mac their GSE Certificates, as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. 502. J.P. Morgan Securities, BSC, WaMu Capital, Credit Suisse, Goldman Sachs, and
RBS Greenwich offered and sold the GSE Certificates to Fannie Mae and Freddie Mac by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. J.P. Morgan Securities, BSC, WaMu Capital, Credit Suisse, Goldman Sachs, and RBS Greenwich participated in drafting the Prospectuses. 503. J.P. Morgan Securities, BSC, WaMu Capital, Credit Suisse, Goldman Sachs, and
RBS Greenwich successfully solicited Fannie Maes and Freddie Macs purchases of the GSE Certificates. As underwriters, J.P. Mortgage Securities, BSC, WaMu Capital, Credit Suisse, Goldman Sachs, and RBS Greenwich obtained substantial commissions based upon the amount received from the sale of the Certificates to the public. 504. J.P. Morgan Securities, BSC, WaMu Capital, Credit Suisse, Goldman Sachs, and
RBS Greenwich offered the GSE Certificates for sale, sold them, and distributed them by the use of means or instruments of transportation and communication in interstate commerce.
201
505.
J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance,
and Long Beach Securities are prominently identified in the Prospectuses for the Securitizations carried out under the Registration Statements that they filed. These Prospectuses were the primary documents each used to sell Certificates for the 97 Securitizations under those Registration Statements. J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, and Long Beach Securities offered the Certificates publicly and actively solicited their sale, including to Fannie Mae and Freddie Mac. 506. With respect to the 97 Securitizations for which they filed Registration
Statements, J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, and Long Beach Securities offered the GSE Certificates to Fannie Mae and Freddie Mac by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. Upon information and belief, J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, and Long Beach Securities reviewed and participated in drafting the Prospectuses. 507. J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance,
and Long Beach Securities offered the GSE Certificates for sale by the use of means or instruments of transportation and communication in interstate commerce. 508. Each of the Section 12(a)(2) Defendants actively participated in the solicitation of
the GSEs purchase of the GSE Certificates, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates.
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509.
information to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectuses. 510. The untrue statements of material facts and omissions of material fact in the
Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 511. The Section 12(a)(2) Defendants offered and sold the GSE Certificates offered
pursuant to the Registration Statements directly to Fannie Mae and Freddie Mac, pursuant to the false and misleading Prospectuses. 512. J.P. Morgan Securities, BSC, WaMu Capital, Credit Suisse, Goldman Sachs, and
RBS Greenwich owed to Fannie Mae and Freddie Mac, as well as to other investors, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, and Long Beach Securities owed the same duty with respect to the Prospectuses for the Securitizations carried out under the 97 Registration Statements filed by them. 513. The Section 12(a)(2) Defendants failed to exercise such reasonable care. These
defendants, in the exercise of reasonable care, should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above.
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514.
In contrast, Fannie Mae and Freddie Mac did not know, and in the exercise of
reasonable diligence could not have known, of the untruths and omissions contained in the Prospectuses at the time they purchased the GSE Certificates. Had GSEs known of those untruths and omissions, they would not have purchased the GSE Certificates. 515. Fannie Mae and Freddie Mac acquired the GSE Certificates in the primary market
pursuant to the Prospectuses, except for LUM 2006-3, which it acquired shortly after issuance. 516. Fannie Mae and Freddie Mac sustained substantial damages in connection with
their investments in the GSE Certificates and have the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 517. The time period from June 16, 2009 through July 31, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and J.P. Morgan Securities, J.P. Morgan Acquisition, J.P. Morgan Acceptance, EMC, BSABS, SAMI, BSC, Chase Mortgage Finance Corp., WaMu Capital, WaMu Securities, Long Beach Securities, Long Beach Mortgage, and Chase Home Finance LLC. The time period from July 14, 2011 through September 1, 2011 has been tolled for statute of limitations purposes by virtue of a tolling agreement entered into among the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, and J.P. Morgan Securities, J.P. Morgan Acquisition, J.P. Morgan Acceptance, EMC, BSABS, SAMI, BSC, Chase Mortgage Finance Corp., WaMu Capital, WaMu Securities, Long Beach Securities, and JPMorgan Bank. This action is brought within three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12).
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THIRD CAUSE OF ACTION Violation of Section 15 of the Securities Act of 1933 (Against JPMorgan Chase, JPMorgan Bank, J.P. Morgan Securities, J.P. Morgan Acquisition, EMC, WaMu Securities, and the Individual Defendants) 518. Plaintiff realleges each allegation in paragraphs 1 through 380 and paragraphs 460
through 471 above as if fully set forth herein, except to the extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 519. This claim is brought by Plaintiff pursuant to Section 15 of the Securities Act of
1933, 15 U.S.C. 77o (Section 15), against JPMorgan Chase (both in its own capacity and as successor to BSI), JPMorgan Bank (both in its own capacity and as successor to WaMu Bank and Long Beach Mortgage), J.P. Morgan Acquisition, EMC, WaMu Securities, and the Individual Defendants (collectively the Section 15 Defendants) for controlling-person liability with regard to the Section 11 and Section 12(a)(2) causes of actions set forth above. 520. The JPMorgan Individual Defendants at all relevant times participated in the
operation and management of J.P. Morgan Acceptance and its related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of J.P. Morgan Acceptances business affairs. Defendant David M. Duzyk served as President of J.P. Morgan Acceptance. Defendant Louis Schioppo, Jr. served as Controller and Chief Financial Officer of J.P. Morgan Acceptance. Defendant Christine E. Cole served as Director of J.P. Morgan Acceptance. Defendant Edwin F. McMichael served as Director of J.P. Morgan Acceptance. Defendant William A. King served as President and Director of J.P. Morgan Acceptance. Defendant Brian Bernard served as President of J.P. Morgan Acceptance. 521. The Bear Stearns Individual Defendants at all relevant times participated in the
operation and management of SAMI and/or BSABS and their related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of SAMI and/or BSABS business affairs. 205
Defendant Matthew E. Perkins served as President and Director of BSABS. Defendant Joseph T. Jurkowski, Jr. served as Vice President of BSABS. Defendant Samuel L. Molinaro, Jr. served as Treasurer and Director of BSABS. Defendant Thomas F. Marano served as Director of BSABS and as Director of SAMI. Defendant Kim Lutthans served as Independent Director of BSABS. Defendant Katherine Garniewski served as Independent Director of BSABS. Defendant Jeffrey Mayer served as Director of BSABS and as Director of SAMI. Defendant Jeffrey L. Verschleiser served as President of SAMI. Defendant Michael B. Nierenberg served as Treasurer of SAMI. 522. The WaMu Individual Defendants at all relevant times participated in the
operation and management of WaMu Securities and/or WaMu Acceptance and their related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of WaMu Securities and/or WaMu Acceptances business affairs. Defendant Richard Careaga served as First Vice President of WaMu Acceptance. Defendant David Beck served as Director and President of WaMu Acceptance. Defendant Diane Novak served as Director of WaMu Acceptance. Defendant Thomas Green served as Chief Financial Officer of WaMu Acceptance. Defendant Rolland Jurgens served as Controller of WaMu Acceptance. Defendant Thomas G. Lehmann served as Director and President of WaMu Acceptance and as First Vice President, Director and Senior Counsel of WaMu Securities. Defendant Stephen Fortunato served as Chief Financial Officer of WaMu Acceptance. Defendant Donald Wilhelm served as Controller of WaMu Acceptance. Defendant Michael J. Kula served as Director, Senior Vice President and Chief Financial Officer of WaMu Securities. Defendant Craig S. Davis served as Director of WaMu Securities. Defendant Marc K. Malone served as First Vice President and Controller of WaMu Securities. Defendant Michael L. Parker served as Director and President of WaMu
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Securities. Defendant Megan M. Davidson served as Director and Senior Vice President of WaMu Securities. Defendant Marangal I. Domingo served as Director of WaMu Securities. 523. The Long Beach Individual Defendants at all relevant times participated in the
operation and management of Long Beach Securities and its related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of Long Beach Securities business affairs. Defendant David H. Zielke served as First Vice President and Assistant General Counsel of WaMu Bank. Defendant Thomas W. Casey served as Director of Long Beach Securities. Defendant John F. Robinson served as Director of Long Beach Securities. Defendant Keith Johnson served as Director and President of Long Beach Securities. Defendant Suzanne Krahling served as Chief Financial Officer and Senior Vice President of Long Beach Securities. Defendant Larry Breitbarth served as Controller and Senior Vice President of Long Beach Securities. Defendant Craig S. Davis served as Director and President of Long Beach Securities. Defendant Marangal I. Domingo served as Director and Chief Executive Officer of Long Beach Securities. Defendant Troy A. Gotschall served as Chief Operations Officer and Executive Vice President of Long Beach Securities. Defendant Art Den Heyer served as Controller and Assistant Vice President of Long Beach Securities. Defendant Stephen Lobo served as Treasurer and Senior Vice President of Long Beach Securities. Defendant Stephen Fortunato served as Chief Financial Officer of Long Beach Securities. Defendant Rolland Jurgens served as Controller of Long Beach Securities. 524. Because of their positions of authority and control as senior officers and directors,
the above-named Individual Defendants were able to, and in fact did, control the contents of the applicable Registration Statements, including the related Prospectus Supplements, that each is
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associated with as set forth above. These materials contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 525. Defendant J.P. Morgan Acquisition was the sponsor for the 27 Securitizations
carried out under the three Registration Statements filed by Defendant J.P. Morgan Acceptance, and culpably participated in the violations of Sections 11 and 12(a)(2) set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting J.P. Morgan Acceptance as the special purpose vehicle, and selecting the underwriters. In its role as sponsor, J.P. Morgan Acquisition knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 526. Defendant J.P. Morgan Acquisition also acted as the seller of the mortgage loans
for the 27 Securitizations carried out under the three Registration Statements filed by Defendant J.P. Morgan Acceptance, in that it conveyed such mortgage loans to J.P. Morgan Acceptance pursuant to an Assignment Agreement or Assignment, Assumption and Recognition Agreement. 527. Defendant J.P. Morgan Acquisition also controlled all aspects of the business of
J.P. Morgan Acceptance, as J.P. Morgan Acceptance was merely a special purpose entity that was created for the purpose of acting as a pass-through for the issuance of certain of the Certificates. Upon information and belief, the officers and directors of J.P. Morgan Acquisition overlapped with the officers and directors of J.P. Morgan Acceptance. In addition, because of its position as sponsor, J.P. Morgan Acquisition was able to, and did in fact, control the contents of the three Registration Statements filed by J.P. Morgan Acceptance, including the Prospectuses
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and Prospectus Supplements, which pertained to 27 Securitizations and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 528. Defendant EMC was the sponsor for the 32 Securitizations carried out under the
five Registration Statements filed by Defendants SAMI and BSABS, and culpably participated in the violations of Sections 11 and 12(a)(2) set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting SAMI and BSABS as the special purpose vehicles, and selecting the underwriters. In its role as sponsor, EMC knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the mortgages would be issued by the relevant trusts. 529. Defendant EMC also acted as the seller of the mortgage loans for the 32
Securitizations carried out under the five Registration Statements filed by Defendants SAMI and BSABS, in that it conveyed such mortgage loans to SAMI and BSABS pursuant to a Mortgage Loan Purchase Agreement, Stock and Mortgage Loan Purchase Agreement, or Assignment Agreement. 530. Defendant EMC also controlled all aspects of the businesses of SAMI and
BSABS, as SAMI and BSABS were merely special purpose entities that were created for the purpose of acting as pass-throughs for the issuance of certain of the Certificates. Upon information and belief, the officers and directors of EMC overlapped with the officers and directors of SAMI and BSABS. In addition, because of its position as sponsor, EMC was able to, and did in fact, control the contents of the five Registration Statements filed by SAMI and BSABS, including the Prospectuses and Prospectus Supplements, which pertained to 35
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Securitizations and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 531. This claim is against Defendant JPMorgan Bank in its capacity as successor-in-
interest to WaMu Bank. Non-party WaMu Bank was the sponsor or co-sponsor for 12 of the 20 Securitizations carried out under three of the Registration Statements filed by Defendants WaMu Securities and WaMu Acceptance, and culpably participated in the violations of Sections 11 and 12(a)(2) set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting WaMu Securities and WaMu Acceptance as the special purpose vehicles, and selecting the underwriters. In its role as sponsor, WaMu Bank knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the mortgages would be issued by the relevant trusts. 532. Non-party WaMu Bank also acted as the seller of the mortgage loans for 12 of the
20 Securitizations carried out under three of the Registration Statements filed by Defendants WaMu Securities and WaMu Acceptance, in that it conveyed such mortgage loans to WaMu Securities and WaMu Acceptance pursuant to a Mortgage Loan Purchase Agreement or Mortgage Loan Sale Agreement. 533. Non-party WaMu Bank also controlled all aspects of the businesses of WaMu
Securities and WaMu Acceptance, as WaMu Securities and WaMu Acceptance were merely special purpose entities that were created for the purpose of acting as pass-throughs for the issuance of certain of the Certificates. Upon information and belief, the officers and directors of WaMu Bank overlapped with the officers and directors of WaMu Securities and WaMu
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Acceptance. In addition, because of its position as sponsor, WaMu Bank was able to, and did in fact, control the contents of three of the Registration Statements filed by WaMu Securities and WaMu Acceptance, including the Prospectuses and Prospectus Supplements, which pertained to 20 Securitizations and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 534. Defendant WaMu Securities was the sponsor or co-sponsor for 15 of the 20
Securitizations carried out under three of the Registration Statements filed by itself or Defendant WaMu Acceptance, and culpably participated in the violations of Sections 11 and 12(a)(2) set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting itself and WaMu Acceptance as the special purpose vehicles, and selecting the underwriters. In its role as sponsor, WaMu Bank knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the mortgages would be issued by the relevant trusts. 535. Defendant WaMu Securities also acted as the seller of the mortgage loans for 15
of the 20 Securitizations carried out under three of the Registration Statements filed by itself and Defendant WaMu Acceptance, in that it retained or conveyed such mortgage loans to WaMu Acceptance pursuant to a Mortgage Loan Purchase Agreement or Mortgage Loan Sale Agreement. 536. Upon information and belief, the officers and directors of WaMu Securities
overlapped with the officers and directors of WaMu Acceptance. In addition, because of its position as sponsor, WaMu Securities was able to, and did in fact, control the contents of three of
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the Registration Statements filed by itself and WaMu Acceptance, including the Prospectuses and Prospectus Supplements, which pertained to 20 Securitizations and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 537. This claim is against Defendant JPMorgan Bank in its capacity as successor-in-
interest to WaMu Bank. Non-party Long Beach Mortgage, a wholly-owned subsidiary and, later, a division of WaMu Bank, was the sponsor for the nine Securitizations carried out under the two Registration Statements filed by Defendant Long Beach Securities, and culpably participated in the violations of Sections 11 and 12(a)(2) set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting Long Beach Securities as the special purpose vehicle, and selecting the underwriters. In its role as sponsor, Long Beach Mortgage knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the mortgages would be issued by the relevant trusts. 538. Non-party Long Beach Mortgage, a wholly-owned subsidiary and, later, a
division of WaMu Bank, also acted as the seller of the mortgage loans for the nine Securitizations carried out under the two Registration Statements filed by Defendant Long Beach Securities, in that it conveyed such mortgage loans to Long Beach Securities pursuant to a Mortgage Loan Purchase Agreement. 539. Non-party Long Beach Mortgage, a wholly-owned subsidiary and, later, a
division of WaMu Bank, also controlled all aspects of the business of Long Beach Securities, as Long Beach Securities was merely a special purpose entity that was created for the purpose of acting as a pass-through for the issuance of certain of the Certificates. Upon information and
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belief, the officers and directors of Long Beach Mortgage overlapped with the officers and directors of Long Beach Securities. In addition, because of its position as sponsor, Long Beach Mortgage was able to, and did in fact, control the contents of the two Registration Statements filed by Long Beach Securities, including the Prospectuses and Prospectus Supplements, which pertained to 15 Securitizations and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 540. Defendant JPMorgan Bank controlled the business operations of J.P. Morgan
Acquisition. Defendant JPMorgan Bank wholly owns J.P. Morgan Acquisition. As the sole corporate parent of J.P. Morgan Acquisition, JPMorgan Bank had the practical ability to direct and control the actions of J.P. Morgan Acquisition in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of J.P. Morgan Acquisition in connection with the issuance and sale of the Certificates. 541. JPMorgan Bank expanded its share of the residential mortgage-backed
securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 542. JPMorgan Bank culpably participated in the violations of Section 11 and 12(a)(2)
set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and establish special-purpose financial entities such as J.P. Morgan Acceptance and the issuing trusts to serve as conduits for the mortgage loans. 543. Defendant JPMorgan Chase controlled the business operations of JPMorgan
Bank, J.P. Morgan Securities, and J.P. Morgan Acceptance. Defendant JPMorgan Chase wholly
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owns JPMorgan Bank, J.P. Morgan Securities, and J.P. Morgan Acceptance and is the ultimate corporate parent of JPMorgan Bank, J.P. Morgan Acquisition, J.P. Morgan Acceptance, and J.P. Morgan Securities. As the corporate parent of JPMorgan Bank, J.P. Morgan Securities, and J.P. Morgan Acceptance, JPMorgan Chase had the practical ability to direct and control the actions of JPMorgan Bank, J.P. Morgan Securities, and J.P. Morgan Acceptance in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of JPMorgan Bank, J.P. Morgan Securities and J.P. Morgan Acceptance in connection with the issuance and sale of the Certificates. 544. JPMorgan Chase expanded its share of the residential mortgage-backed
securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 545. JPMorgan Chase culpably participated in the violations of Section 11 and 12(a)(2)
set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and establish special-purpose financial entities such as J.P. Morgan Acceptance and the issuing trusts to serve as conduits for the mortgage loans. 546. This claim is against Defendant JPMorgan Bank in its capacity as successor-in-
interest to WaMu Bank. Non-party WaMu Bank controlled the business operations of WaMu Capital, WaMu Securities, WaMu Acceptance, Long Beach Mortgage, and Long Beach Securities. WaMu Bank wholly owned WaMu Capital, WaMu Securities, WaMu Acceptance, Long Beach Mortgage, and Long Beach Securities. As the sole corporate parent of WaMu Capital, WaMu Securities, WaMu Acceptance, Long Beach Mortgage, and Long Beach
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Securities, WaMu Bank had the practical ability to direct and control the actions of WaMu Capital, WaMu Securities, WaMu Acceptance, Long Beach Mortgage, and Long Beach Securities in issuing and selling the Certificates, and in fact, exercised such direction and control over the activities of WaMu Capital, WaMu Securities, WaMu Acceptance, Long Beach Mortgage, and Long Beach Securities in connection with the issuance and sale of the Certificates. 547. Non-party WaMu Bank expanded its share of the residential mortgage-backed
securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 548. Non-party WaMu Bank culpably participated in the violations of Section 11 and
12(a)(2) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and establish special-purpose financial entities such as WaMu Securities, WaMu Acceptance, and Long Beach Securities and the issuing trusts to serve as conduits for the mortgage loans. 549. This claim is against Defendant JPMorgan Chase in its capacity as successor-in-
interest to BSI. Non-party BSI controlled the business operations of BSC, EMC, SAMI, and BSABS. BSI wholly owned BSC, EMC, SAMI, and BSABS. As the sole corporate parent of BSC, EMC, SAMI, and BSABS, BSI had the practical ability to direct and control the actions of BSC, EMC, SAMI, and BSABS in issuing and selling the Certificates, and in fact, exercised such direction and control over the activities of BSC, EMC, SAMI, and BSABS in connection with the issuance and sale of the Certificates.
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550.
Non-party BSI expanded its share of the residential mortgage-backed
securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 551. Non-party BSI culpably participated in the violations of Section 11 and 12(a)(2)
set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and establish special-purpose financial entities such as SAMI and BSABS and the issuing trusts to serve as conduits for the mortgage loans. 552. The Section 15 Defendants, in their own capacity or as successors-in-interest, are
controlling persons within the meaning of Section 15 by virtue of their actual power over, control of, ownership of, and/or directorship of J.P. Morgan Securities, BSC, WaMu Capital, J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, Long Beach Mortgage, and Long Beach Securities at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 553. Fannie Mae and Freddie Mac purchased in the primary market, or, for the LUM
2006-3 Securitization, shortly after issuance, Certificates issued pursuant to the Registration Statements, including the Prospectuses and Prospectus Supplements, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements.
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554.
misstatements and omissions in the Registration Statements, for which they are entitled to compensation. 556. The time period from June 16, 2009 through July 31, 2011 has been tolled for
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FOURTH CAUSE OF ACTION Violation of Section 13.1-522(A)(ii) of the Virginia Code (Against J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, Long Beach Securities, J.P. Morgan Securities, BSC, WaMu Capital, Credit Suisse, Goldman Sachs, and RBS Greenwich) 557. Plaintiff realleges each allegation in paragraphs 1 through 380 and paragraphs 460
through 471 above as if fully set forth herein, except to the extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 558. This claim is brought by Plaintiff pursuant to Section 13.1-522(A)(ii) of the
Virginia Code and is asserted on behalf of Freddie Mac. The allegations set forth below in this cause of action pertain to only those GSE Certificates identified in Table 12 above that were purchased by Freddie Mac on or after September 6, 2006. This claim is brought against J.P. Morgan Securities (both in its own capacity and as successor to BSC), BSC, WaMu Capital, Credit Suisse, Goldman Sachs, and RBS Greenwich as underwriters; and J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, and Long Beach Securities as depositors (collectively, the Section 13.1-522(A)(ii) Defendants). 559. This claim is predicated upon the negligence of J.P. Morgan Securities, BSC,
WaMu Capital, Credit Suisse, Goldman Sachs, and RBS Greenwich in making materially false and misleading statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as Prospectuses) for the Securitizations listed in Table 1, other than the LBMLT 2005-3 and LBMLT 2006-WL3 Securitizations, for which none of the Defendants were the selling underwriter and as to which the allegations in this section to do not apply. Defendants J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, and Long Beach Securities acted negligently in making materially false and
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misleading statements in the Prospectuses for the Securitizations carried out under the 13 Registration Statements they filed, which are applicable to 97 of the Securitizations. 560. J.P. Morgan Securities, BSC, WaMu Capital, Credit Suisse, Goldman Sachs, and
RBS Greenwich are prominently identified in the Prospectuses, the primary documents that they used to sell the Certificates. J.P. Morgan Securities, BSC, WaMu Capital, Credit Suisse, Goldman Sachs, and RBS Greenwich offered the Certificates publicly, including selling to Freddie Mac its GSE Certificates, as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. 561. J.P. Morgan Securities, BSC, WaMu Capital, Credit Suisse, Goldman Sachs, and
RBS Greenwich offered and sold the GSE Certificates to Freddie Mac by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. J.P. Morgan Securities, BSC, WaMu Capital, Credit Suisse, Goldman Sachs, and RBS Greenwich participated in drafting the Prospectuses. 562. J.P. Morgan Securities, BSC, WaMu Capital, Credit Suisse, Goldman Sachs, and
RBS Greenwich successfully solicited Freddie Macs purchases of the GSE Certificates. As underwriters, J.P. Mortgage Securities, BSC, WaMu Capital, Credit Suisse, Goldman Sachs, and RBS Greenwich obtained substantial commissions based upon the amount received from the sale of the Certificates to the public. 563. J.P. Morgan Securities, BSC, WaMu Capital, Credit Suisse, Goldman Sachs, and
RBS Greenwich offered the GSE Certificates for sale, sold them, and distributed them to Freddie Mac in the State of Virginia.
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564.
J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance,
and Long Beach Securities are prominently identified in the Prospectuses for the Securitizations carried out under the Registration Statements that they filed. These Prospectuses were the primary documents each used to sell Certificates for the 97 Securitizations under those Registration Statements. J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, and Long Beach Securities offered the Certificates publicly and actively solicited their sale, including to Freddie Mac. 565. With respect to the 97 Securitizations for which they filed Registration
Statements, J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, and Long Beach Securities offered the GSE Certificates to Freddie Mac by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. Upon information and belief, J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, and Long Beach Securities reviewed and participated in drafting the Prospectuses. 566. Each of the Section 13.1-522(A)(ii) Defendants actively participated in the
solicitation of Freddie Macs purchase of the GSE Certificates, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates. 567. Each of the Prospectuses contained material misstatements of fact and omitted
information to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectuses.
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568.
Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 569. The Section 13.1-522(A)(ii) Defendants offered and sold the GSE Certificates
offered pursuant to the Registration Statements directly to Freddie Mac, pursuant to the false and misleading Prospectuses. 570. J.P. Morgan Securities, BSC, WaMu Capital, Credit Suisse, Goldman Sachs, and
RBS Greenwich owed to Freddie Mac, as well as to other investors, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, and Long Beach Securities owed the same duty with respect to the Prospectuses for the Securitizations carried out under the 97 Registration Statements filed by them. 571. The Section 13.1-522(A)(ii) Defendants failed to exercise such reasonable care.
These defendants, in the exercise of reasonable care, should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above. 572. In contrast, Freddie Mac did not know of the untruths and omissions contained in
the Prospectuses at the time it purchased the GSE Certificates. Had Freddie Mac known of those untruths and omissions, it would not have purchased the GSE Certificates.
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573.
Freddie Mac sustained substantial damages in connection with its investments in
the GSE Certificates and has the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 574. The time period from July 14, 2011 through September 1, 2011 has been tolled
for statute of limitations purposes by virtue of a tolling agreement entered into among the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, and J.P. Morgan Securities, J.P. Morgan Acquisition, J.P. Morgan Acceptance, EMC, BSABS, SAMI, BSC, Chase Mortgage Finance Corp., WaMu Capital, WaMu Securities, Long Beach Securities, and JPMorgan Bank. This action is brought within three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12).
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FIFTH CAUSE OF ACTION Violation of Section 13.1-522(C) of the Virginia Code (Against JPMorgan Chase, JPMorgan Bank, J.P. Morgan Securities, J.P. Morgan Acquisition, EMC, WaMu Securities, and the Individual Defendants) 575. Plaintiff realleges each allegation in paragraphs 1 through 380 and paragraphs 460
through 471 above as if fully set forth herein, except to the extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 576. This claim is brought by Plaintiff pursuant to Section 13.1-522(C) of the Virginia
Code and is asserted on behalf of Freddie Mac. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 12 above that were purchased by Freddie Mac on or after September 6, 2006. This claim is brought against JPMorgan Chase (both in its own capacity and as successor to BSI), JPMorgan Bank (both in its own capacity and as successor to WaMu Bank and Long Beach Mortgage), J.P. Morgan Acquisition, EMC, WaMu Securities, and the Individual Defendants (collectively the Section 13.1-522(C) Defendants) for controlling-person liability with regard to the Fourth Cause of Action set forth above. 577. The JPMorgan Individual Defendants at all relevant times participated in the
operation and management of J.P. Morgan Acceptance and its related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of J.P. Morgan Acceptances business affairs. Defendant David M. Duzyk served as President of J.P. Morgan Acceptance. Defendant Louis Schioppo, Jr. served as Controller and Chief Financial Officer of J.P. Morgan Acceptance. Defendant Christine E. Cole served as Director of J.P. Morgan Acceptance. Defendant Edwin F. McMichael served as Director of J.P. Morgan Acceptance. Defendant William A. King served as President and Director of J.P. Morgan Acceptance. Defendant Brian Bernard served as President of J.P. Morgan Acceptance.
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578.
The Bear Stearns Individual Defendants at all relevant times participated in the
operation and management of SAMI and/or BSABS and their related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of SAMI and/or BSABS business affairs. Defendant Matthew E. Perkins served as President and Director of BSABS. Defendant Joseph T. Jurkowski, Jr. served as Vice President of BSABS. Defendant Samuel L. Molinaro, Jr. served as Treasurer and Director of BSABS. Defendant Thomas F. Marano served as Director of BSABS and as Director of SAMI. Defendant Kim Lutthans served as Independent Director of BSABS. Defendant Katherine Garniewski served as Independent Director of BSABS. Defendant Jeffrey Mayer served as Director of BSABS and as Director of SAMI. Defendant Jeffrey L. Verschleiser served as President of SAMI. Defendant Michael B. Nierenberg served as Treasurer of SAMI. 579. The WaMu Individual Defendants at all relevant times participated in the
operation and management of WaMu Securities and/or WaMu Acceptance and their related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of WaMu Securities and/or WaMu Acceptances business affairs. Defendant Richard Careaga served as First Vice President of WaMu Acceptance. Defendant David Beck served as Director and President of WaMu Acceptance. Defendant Diane Novak served as Director of WaMu Acceptance. Defendant Thomas Green served as Chief Financial Officer of WaMu Acceptance. Defendant Rolland Jurgens served as Controller of WaMu Acceptance. Defendant Thomas G. Lehmann served as Director and President of WaMu Acceptance and as First Vice President, Director and Senior Counsel of WaMu Securities. Defendant Stephen Fortunato served as Chief Financial Officer of WaMu Acceptance. Defendant Donald Wilhelm served as Controller of WaMu Acceptance. Defendant Michael J. Kula served as Director, Senior Vice President and
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Chief Financial Officer of WaMu Securities. Defendant Craig S. Davis served as Director of WaMu Securities. Defendant Marc K. Malone served as First Vice President and Controller of WaMu Securities. Defendant Michael L. Parker served as Director and President of WaMu Securities. Defendant Megan M. Davidson served as Director and Senior Vice President of WaMu Securities. Defendant Marangal I. Domingo served as Director of WaMu Securities. 580. The Long Beach Individual Defendants at all relevant times participated in the
operation and management of Long Beach Securities and its related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of Long Beach Securities business affairs. Defendant David H. Zielke served as First Vice President and Assistant General Counsel of WaMu Bank. Defendant Thomas W. Casey served as Director of Long Beach Securities. Defendant John F. Robinson served as Director of Long Beach Securities. Defendant Keith Johnson served as Director and President of Long Beach Securities. Defendant Suzanne Krahling served as Chief Financial Officer and Senior Vice President of Long Beach Securities. Defendant Larry Breitbarth served as Controller and Senior Vice President of Long Beach Securities. Defendant Craig S. Davis served as Director and President of Long Beach Securities. Defendant Marangal I. Domingo served as Director and Chief Executive Officer of Long Beach Securities. Defendant Troy A. Gotschall served as Chief Operations Officer and Executive Vice President of Long Beach Securities. Defendant Art Den Heyer served as Controller and Assistant Vice President of Long Beach Securities. Defendant Stephen Lobo served as Treasurer and Senior Vice President of Long Beach Securities. Defendant Stephen Fortunato served as Chief Financial Officer of Long Beach Securities. Defendant Rolland Jurgens served as Controller of Long Beach Securities.
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581.
Because of their positions of authority and control as senior officers and directors,
the above-named Individual Defendants were able to, and in fact did, control the contents of the applicable Registration Statements, including the related Prospectus Supplements, that each is associated with as set forth above. 582. Defendant J.P. Morgan Acquisition was the sponsor for the 27 Securitizations
carried out under the five Registration Statements filed by Defendant J.P. Morgan Acceptance, and culpably participated in the violations of Section 13.1-522(A)(ii) set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting J.P. Morgan Acceptance as the special purpose vehicle, and selecting the underwriters. In its role as sponsor, J.P. Morgan Acquisition knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 583. Defendant J.P. Morgan Acquisition also acted as the seller of the mortgage loans
for the 27 Securitizations carried out under the five Registration Statements filed by Defendant J.P. Morgan Acceptance, in that it conveyed such mortgage loans to J.P. Morgan Acceptance pursuant to an Assignment Agreement or Assignment, Assumption and Recognition Agreement. 584. Defendant J.P. Morgan Acquisition also controlled all aspects of the business of
J.P. Morgan Acceptance, as J.P. Morgan Acceptance was merely a special purpose entity that was created for the purpose of acting as a pass-through for the issuance of certain of the Certificates. Upon information and belief, the officers and directors of J.P. Morgan Acquisition overlapped with the officers and directors of J.P. Morgan Acceptance. In addition, because of its position as sponsor, J.P. Morgan Acquisition was able to, and did in fact, control the contents of
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the five Registration Statements filed by J.P. Morgan Acceptance, including the Prospectuses and Prospectus Supplements, which pertained to 27 Securitizations and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 585. Defendant EMC was the sponsor for the 32 Securitizations carried out under the
five Registration Statements filed by Defendants SAMI and BSABS, and culpably participated in the violations of Section 13.1-522(A)(ii) set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting SAMI and BSABS as the special purpose vehicles, and selecting the underwriters. In its role as sponsor, EMC knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the mortgages would be issued by the relevant trusts. 586. Defendant EMC also acted as the seller of the mortgage loans for the 32
BSABS, as SAMI and BSABS were merely special purpose entities that were created for the purpose of acting as pass-throughs for the issuance of certain of the Certificates. Upon information and belief, the officers and directors of EMC overlapped with the officers and directors of SAMI and BSABS. In addition, because of its position as sponsor, EMC was able to, and did in fact, control the contents of the five Registration Statements filed by SAMI and
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BSABS, including the Prospectuses and Prospectus Supplements, which pertained to 35 Securitizations and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 588. This claim is against Defendant JPMorgan Bank in its capacity as successor-in-
interest to WaMu Bank. Non-party WaMu Bank was the sponsor or co-sponsor for 12 of the 20 Securitizations carried out under three of the Registration Statements filed by Defendants WaMu Securities and WaMu Acceptance, and culpably participated in the violations of Section 13.1522(A)(ii) set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting WaMu Securities and WaMu Acceptance as the special purpose vehicles, and selecting the underwriters. In its role as sponsor, WaMu Bank knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the mortgages would be issued by the relevant trusts. 589. Non-party WaMu Bank also acted as the seller of the mortgage loans for 12 of the
Securities and WaMu Acceptance, as WaMu Securities and WaMu Acceptance were merely special purpose entities that were created for the purpose of acting as pass-throughs for the issuance of certain of the Certificates. Upon information and belief, the officers and directors of
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WaMu Bank overlapped with the officers and directors of WaMu Securities and WaMu Acceptance. In addition, because of its position as sponsor, WaMu Bank was able to, and did in fact, control the contents of three of the Registration Statements filed by WaMu Securities and WaMu Acceptance, including the Prospectuses and Prospectus Supplements, which pertained to 20 Securitizations and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 591. Defendant WaMu Securities was the sponsor or co-sponsor for 15 of the 20
Securitizations carried out under three of the Registration Statements filed by itself or Defendant WaMu Acceptance, and culpably participated in the violations of Section 13.1-522(A)(ii) set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting itself and WaMu Acceptance as the special purpose vehicles, and selecting the underwriters. In its role as sponsor, WaMu Bank knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the mortgages would be issued by the relevant trusts. 592. Defendant WaMu Securities also acted as the seller of the mortgage loans for 15
overlapped with the officers and directors of WaMu Acceptance. In addition, because of its
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position as sponsor, WaMu Securities was able to, and did in fact, control the contents of three of the Registration Statements filed by itself and WaMu Acceptance, including the Prospectuses and Prospectus Supplements, which pertained to 20 Securitizations and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 594. This claim is against Defendant JPMorgan Bank in its capacity as successor-in-
interest to WaMu Bank. Non-party Long Beach Mortgage, a wholly-owned subsidiary and, later, a division of WaMu Bank, was the sponsor for the nine Securitizations carried out under the two Registration Statements filed by Defendant Long Beach Securities, and culpably participated in the violations of Section 13.1-522(A)(ii) set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting Long Beach Securities as the special purpose vehicle, and selecting the underwriters. In its role as sponsor, Long Beach Mortgage knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the mortgages would be issued by the relevant trusts. 595. Non-party Long Beach Mortgage, a wholly-owned subsidiary and, later, a
division of WaMu Bank, also controlled all aspects of the business of Long Beach Securities, as Long Beach Securities was merely a special purpose entity that was created for the purpose of
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acting as a pass-through for the issuance of certain of the Certificates. Upon information and belief, the officers and directors of Long Beach Mortgage overlapped with the officers and directors of Long Beach Securities. In addition, because of its position as sponsor, Long Beach Mortgage was able to, and did in fact, control the contents of the two Registration Statements filed by Long Beach Securities, including the Prospectuses and Prospectus Supplements, which pertained to 15 Securitizations and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 597. Defendant JPMorgan Bank controlled the business operations of J.P. Morgan
securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 599. JPMorgan Bank culpably participated in the violations of Section 13.1-522(A)(ii)
set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and establish special-purpose financial entities such as J.P. Morgan Acceptance and the issuing trusts to serve as conduits for the mortgage loans.
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600.
Defendant JPMorgan Chase controlled the business operations of JPMorgan
Bank, J.P. Morgan Securities, and J.P. Morgan Acceptance. Defendant JPMorgan Chase wholly owns JPMorgan Bank, J.P. Morgan Securities, and J.P. Morgan Acceptance and is the ultimate corporate parent of JPMorgan Bank, J.P. Morgan Acquisition, J.P. Morgan Acceptance, and J.P. Morgan Securities. As the corporate parent of JPMorgan Bank, J.P. Morgan Securities, and J.P. Morgan Acceptance, JPMorgan Chase had the practical ability to direct and control the actions of JPMorgan Bank, J.P. Morgan Securities, and J.P. Morgan Acceptance in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of JPMorgan Bank, J.P. Morgan Securities and J.P. Morgan Acceptance in connection with the issuance and sale of the Certificates. 601. JPMorgan Chase expanded its share of the residential mortgage-backed
securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 602. JPMorgan Chase culpably participated in the violations of Section 13.1-522(A)(ii)
set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and establish special-purpose financial entities such as J.P. Morgan Acceptance and the issuing trusts to serve as conduits for the mortgage loans. 603. This claim is against Defendant JPMorgan Bank in its capacity as successor-in-
interest to WaMu Bank. Non-party WaMu Bank controlled the business operations of WaMu Capital, WaMu Securities, WaMu Acceptance, Long Beach Mortgage, and Long Beach Securities. WaMu Bank wholly owned WaMu Capital, WaMu Securities, WaMu Acceptance,
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Long Beach Mortgage, and Long Beach Securities. As the sole corporate parent of WaMu Capital, WaMu Securities, WaMu Acceptance, Long Beach Mortgage, and Long Beach Securities, WaMu Bank had the practical ability to direct and control the actions of WaMu Capital, WaMu Securities, WaMu Acceptance, Long Beach Mortgage, and Long Beach Securities in issuing and selling the Certificates, and in fact, exercised such direction and control over the activities of WaMu Capital, WaMu Securities, WaMu Acceptance, Long Beach Mortgage, and Long Beach Securities in connection with the issuance and sale of the Certificates. 604. Non-party WaMu Bank expanded its share of the residential mortgage-backed
securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 605. Non-party WaMu Bank culpably participated in the violations of Section 13.1-
522(A)(ii) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and establish special-purpose financial entities such as WaMu Securities, WaMu Acceptance, and Long Beach Securities and the issuing trusts to serve as conduits for the mortgage loans. 606. This claim is against Defendant JPMorgan Chase in its capacity as successor-in-
interest to BSI. Non-party BSI controlled the business operations of BSC, EMC, SAMI, and BSABS. BSI wholly owned BSC, EMC, SAMI, and BSABS. As the sole corporate parent of BSC, EMC, SAMI, and BSABS, BSI had the practical ability to direct and control the actions of BSC, EMC, SAMI, and BSABS in issuing and selling the Certificates, and in fact, exercised
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such direction and control over the activities of BSC, EMC, SAMI, and BSABS in connection with the issuance and sale of the Certificates. 607. Non-party BSI expanded its share of the residential mortgage-backed
securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 608. Non-party BSI culpably participated in the violations of Section 13.1-522(A)(ii)
set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and establish special-purpose financial entities such as SAMI and BSABS and the issuing trusts to serve as conduits for the mortgage loans. 609. The Section 13.1-522(C) Defendants, in their own capacity or as successors-in-
interest, are controlling persons within the meaning of Section 13.1-522(C) by virtue of their actual power over, control of, ownership of, and/or directorship of J.P. Morgan Securities, BSC, WaMu Capital, J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, Long Beach Mortgage, and Long Beach Securities at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 610. Freddie Mac purchased in the primary market the GSE Certificates issued
pursuant to the Registration Statements, including the Prospectuses and Prospectus Supplements, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements.
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611.
omissions in the Registration Statements, for which it is entitled to compensation. 613. The time period from July 14, 2011 through September 1, 2011 has been tolled
for statute of limitations purposes by virtue of a tolling agreement entered into among the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, and J.P. Morgan Securities, J.P. Morgan Acquisition, J.P. Morgan Acceptance, EMC, BSABS, SAMI, BSC, Chase Mortgage Finance Corp., WaMu Capital, WaMu Securities, Long Beach Securities, and JPMorgan Bank. This action is brought within three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12).
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SIXTH CAUSE OF ACTION Violation of Section 31-5606.05(a)(1)(B) of the District of Columbia Code (Against J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, Long Beach Securities, J.P. Morgan Securities, BSC, WaMu Capital, Citigroup, and Goldman Sachs) 614. Plaintiff realleges each allegation in paragraphs 1 through 380 and paragraphs 460
through 471 above as if fully set forth herein, except to the extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 615. This claim is brought by Plaintiff pursuant to 31-5606.05(a)(1)(B) of the District
of Columbia Code and is asserted on behalf of Fannie Mae. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 11 above that were purchased by Fannie Mae. This claim is brought against J.P. Morgan Securities (both in its own capacity and as successor to BSC), BSC, WaMu Capital, Citigroup, and Goldman Sachs as underwriters; and J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, and Long Beach Securities as depositors (collectively, the Section 315606.05(a)(1)(B) Defendants). 616. This claim is predicated upon the negligence of J.P. Morgan Securities, BSC,
WaMu Capital, Citigroup and Goldman Sachs in making materially false and misleading statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as Prospectuses) for the Securitizations listed in Table 1, other than the LBMLT 2005-3 and LBMLT 2006-WL3 Securitizations, for which none of the Defendants were the selling underwriter and as to which the allegations in this section to do not apply. Defendants J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, and Long Beach Securities acted negligently in making materially false and misleading statements in
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the Prospectuses for the Securitizations carried out under the 13 Registration Statements they filed, which are applicable to 97 of the Securitizations. 617. J.P. Morgan Securities, BSC, WaMu Capital, Citigroup, and Goldman Sachs are
prominently identified in the Prospectuses, the primary documents that they used to sell the Certificates. J.P. Morgan Securities, BSC, WaMu Capital, Citigroup, and Goldman Sachs offered the Certificates publicly, including selling to Fannie Mae its GSE Certificates, as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. 618. J.P. Morgan Securities, BSC, WaMu Capital, Citigroup, and Goldman Sachs
offered and sold the GSE Certificates to Fannie Mae by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. J.P. Morgan Securities, BSC, WaMu Capital, Citigroup, and Goldman Sachs participated in drafting the Prospectuses. 619. J.P. Morgan Securities, BSC, WaMu Capital, Citigroup, and Goldman Sachs
successfully solicited Fannie Maes purchases of the GSE Certificates. As underwriters, J.P. Mortgage Securities, BSC, WaMu Capital, Citigroup, and Goldman Sachs obtained substantial commissions based upon the amount received from the sale of the Certificates to the public. 620. J.P. Morgan Securities, BSC, WaMu Capital, Citigroup, and Goldman Sachs
offered the GSE Certificates for sale, sold them, and distributed them to Fannie Mae in the District of Columbia. 621. J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance,
and Long Beach Securities are prominently identified in the Prospectuses for the Securitizations carried out under the Registration Statements that they filed. These Prospectuses were the
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primary documents each used to sell Certificates for the 97 Securitizations under those Registration Statements. J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, and Long Beach Securities offered the Certificates publicly and actively solicited their sale, including to Fannie Mae. 622. With respect to the 97 Securitizations for which they filed Registration
Statements, J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, and Long Beach Securities offered the GSE Certificates to Fannie Mae by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. Upon information and belief, J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, and Long Beach Securities reviewed and participated in drafting the Prospectuses. 623. Each of the Section 31-5606.05(a)(1)(B) Defendants actively participated in the
solicitation of Fannie Maes purchase of the GSE Certificates, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates. 624. Each of the Prospectuses contained material misstatements of fact and omitted
information to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectuses. 625. The untrue statements of material facts and omissions of material fact in the
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626.
The Section 31-5606.05(a)(1)(B) Defendants offered and sold the GSE
Certificates offered pursuant to the Registration Statements directly to Fannie Mae, pursuant to the false and misleading Prospectuses. 627. J.P. Morgan Securities, BSC, WaMu Capital, Citigroup, and Goldman Sachs
owed to Fannie Mae, as well as to other investors, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, and Long Beach Securities owed the same duty with respect to the Prospectuses for the Securitizations carried out under the 97 Registration Statements filed by them. 628. The Section 31-5606.05(a)(1)(B) Defendants failed to exercise such reasonable
care. These defendants, in the exercise of reasonable care, should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above. 629. In contrast, Fannie Mae did not know of the untruths and omissions contained in
the Prospectuses at the time it purchased the GSE Certificates. Had Fannie Mae known of those untruths and omissions, it would not have purchased the GSE Certificates. 630. Fannie Mae sustained substantial damages in connection with its investments in
the GSE Certificates and has the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 631. The time period from June 16, 2009 through July 31, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae
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and J.P. Morgan Securities, J.P. Morgan Acquisition, J.P. Morgan Acceptance, EMC, BSABS, SAMI, BSC, Chase Mortgage Finance Corp., WaMu Capital, WaMu Securities, Long Beach Securities, Long Beach Mortgage, and Chase Home Finance LLC. The time period from July 14, 2011 through September 1, 2011 has been tolled for statute of limitations purposes by virtue of a tolling agreement entered into among the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, and J.P. Morgan Securities, J.P. Morgan Acquisition, J.P. Morgan Acceptance, EMC, BSABS, SAMI, BSC, Chase Mortgage Finance Corp., WaMu Capital, WaMu Securities, Long Beach Securities, and JPMorgan Bank. This action is brought within three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12).
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SEVENTH CAUSE OF ACTION Violation of Section 31-5606.05(c) of the District of Columbia Code (Against JPMorgan Chase, JPMorgan Bank, J.P. Morgan Securities, J.P. Morgan Acquisition, EMC, WaMu Securities, and the Individual Defendants) 632. Plaintiff realleges each allegation in paragraphs 1 through 380 and paragraphs 460
through 471 above as if fully set forth herein, except to the extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 633. This claim is brought under Section 31-5606.05(c) of the District of Columbia
Code and is asserted on behalf of Fannie Mae. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 11 above, that were purchased by Fannie Mae. This claim is brought against JPMorgan Chase (both in its own capacity and as successor to BSI), JPMorgan Bank (both in its own capacity and as successor to WaMu Bank and Long Beach Mortgage), J.P. Morgan Acquisition, EMC, WaMu Securities, and the Individual Defendants (collectively the Section 31-5606.05(c) Defendants) for controllingperson liability with regard to the Sixth Cause of Action set forth above. 634. The JPMorgan Individual Defendants at all relevant times participated in the
operation and management of J.P. Morgan Acceptance and its related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of J.P. Morgan Acceptances business affairs. Defendant David M. Duzyk served as President of J.P. Morgan Acceptance. Defendant Louis Schioppo, Jr. served as Controller and Chief Financial Officer of J.P. Morgan Acceptance. Defendant Christine E. Cole served as Director of J.P. Morgan Acceptance. Defendant Edwin F. McMichael served as Director of J.P. Morgan Acceptance. Defendant William A. King served as President and Director of J.P. Morgan Acceptance. Defendant Brian Bernard served as President of J.P. Morgan Acceptance.
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635.
The Bear Stearns Individual Defendants at all relevant times participated in the
operation and management of SAMI and/or BSABS and their related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of SAMI and/or BSABS business affairs. Defendant Matthew E. Perkins served as President and Director of BSABS. Defendant Joseph T. Jurkowski, Jr. served as Vice President of BSABS. Defendant Samuel L. Molinaro, Jr. served as Treasurer and Director of BSABS. Defendant Thomas F. Marano served as Director of BSABS and as Director of SAMI. Defendant Kim Lutthans served as Independent Director of BSABS. Defendant Katherine Garniewski served as Independent Director of BSABS. Defendant Jeffrey Mayer served as Director of BSABS and as Director of SAMI. Defendant Jeffrey L. Verschleiser served as President of SAMI. Defendant Michael B. Nierenberg served as Treasurer of SAMI. 636. The WaMu Individual Defendants at all relevant times participated in the
operation and management of WaMu Securities and/or WaMu Acceptance and their related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of WaMu Securities and/or WaMu Acceptances business affairs. Defendant Richard Careaga served as First Vice President of WaMu Acceptance. Defendant David Beck served as Director and President of WaMu Acceptance. Defendant Diane Novak served as Director of WaMu Acceptance. Defendant Thomas Green served as Chief Financial Officer of WaMu Acceptance. Defendant Rolland Jurgens served as Controller of WaMu Acceptance. Defendant Thomas G. Lehmann served as Director and President of WaMu Acceptance and as First Vice President, Director and Senior Counsel of WaMu Securities. Defendant Stephen Fortunato served as Chief Financial Officer of WaMu Acceptance. Defendant Donald Wilhelm served as Controller of WaMu Acceptance. Defendant Michael J. Kula served as Director, Senior Vice President and
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Chief Financial Officer of WaMu Securities. Defendant Craig S. Davis served as Director of WaMu Securities. Defendant Marc K. Malone served as First Vice President and Controller of WaMu Securities. Defendant Michael L. Parker served as Director and President of WaMu Securities. Defendant Megan M. Davidson served as Director and Senior Vice President of WaMu Securities. Defendant Marangal I. Domingo served as Director of WaMu Securities. 637. The Long Beach Individual Defendants at all relevant times participated in the
operation and management of Long Beach Securities and its related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of Long Beach Securities business affairs. Defendant David H. Zielke served as First Vice President and Assistant General Counsel of WaMu Bank. Defendant Thomas W. Casey served as Director of Long Beach Securities. Defendant John F. Robinson served as Director of Long Beach Securities. Defendant Keith Johnson served as Director and President of Long Beach Securities. Defendant Suzanne Krahling served as Chief Financial Officer and Senior Vice President of Long Beach Securities. Defendant Larry Breitbarth served as Controller and Senior Vice President of Long Beach Securities. Defendant Craig S. Davis served as Director and President of Long Beach Securities. Defendant Marangal I. Domingo served as Director and Chief Executive Officer of Long Beach Securities. Defendant Troy A. Gotschall served as Chief Operations Officer and Executive Vice President of Long Beach Securities. Defendant Art Den Heyer served as Controller and Assistant Vice President of Long Beach Securities. Defendant Stephen Lobo served as Treasurer and Senior Vice President of Long Beach Securities. Defendant Stephen Fortunato served as Chief Financial Officer of Long Beach Securities. Defendant Rolland Jurgens served as Controller of Long Beach Securities.
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638.
Because of their positions of authority and control as senior officers and directors,
the above-named Individual Defendants were able to, and in fact did, control the contents of the applicable Registration Statements, including the related Prospectus Supplements, that each is associated with as set forth above. 639. Defendant J.P. Morgan Acquisition was the sponsor for the 27 Securitizations
carried out under the five Registration Statements filed by Defendant J.P. Morgan Acceptance, and culpably participated in the violations of Section 31-5606.05(a)(1)(B) set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting J.P. Morgan Acceptance as the special purpose vehicle, and selecting the underwriters. In its role as sponsor, J.P. Morgan Acquisition knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 640. Defendant J.P. Morgan Acquisition also acted as the seller of the mortgage loans
for the 27 Securitizations carried out under the five Registration Statements filed by Defendant J.P. Morgan Acceptance, in that it conveyed such mortgage loans to J.P. Morgan Acceptance pursuant to an Assignment Agreement or Assignment, Assumption and Recognition Agreement. 641. Defendant J.P. Morgan Acquisition also controlled all aspects of the business of
J.P. Morgan Acceptance, as J.P. Morgan Acceptance was merely a special purpose entity that was created for the purpose of acting as a pass-through for the issuance of certain of the Certificates. Upon information and belief, the officers and directors of J.P. Morgan Acquisition overlapped with the officers and directors of J.P. Morgan Acceptance. In addition, because of its position as sponsor, J.P. Morgan Acquisition was able to, and did in fact, control the contents of
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the five Registration Statements filed by J.P. Morgan Acceptance, including the Prospectuses and Prospectus Supplements, which pertained to 27 Securitizations and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 642. Defendant EMC was the sponsor for the 32 Securitizations carried out under the
five Registration Statements filed by Defendants SAMI and BSABS, and culpably participated in the violations of Section 31-5606.05(a)(1)(B) set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting SAMI and BSABS as the special purpose vehicles, and selecting the underwriters. In its role as sponsor, EMC knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the mortgages would be issued by the relevant trusts. 643. Defendant EMC also acted as the seller of the mortgage loans for the 32
BSABS, as SAMI and BSABS were merely special purpose entities that were created for the purpose of acting as pass-throughs for the issuance of certain of the Certificates. Upon information and belief, the officers and directors of EMC overlapped with the officers and directors of SAMI and BSABS. In addition, because of its position as sponsor, EMC was able to, and did in fact, control the contents of the five Registration Statements filed by SAMI and
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BSABS, including the Prospectuses and Prospectus Supplements, which pertained to 35 Securitizations and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 645. This claim is against Defendant JPMorgan Bank in its capacity as successor-in-
interest to WaMu Bank. Non-party WaMu Bank was the sponsor or co-sponsor for 12 of the 20 Securitizations carried out under three of the Registration Statements filed by Defendants WaMu Securities and WaMu Acceptance, and culpably participated in the violations of Section 315606.05(a)(1)(B) set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting WaMu Securities and WaMu Acceptance as the special purpose vehicles, and selecting the underwriters. In its role as sponsor, WaMu Bank knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the mortgages would be issued by the relevant trusts. 646. Non-party WaMu Bank also acted as the seller of the mortgage loans for 12 of the
Securities and WaMu Acceptance, as WaMu Securities and WaMu Acceptance were merely special purpose entities that were created for the purpose of acting as pass-throughs for the issuance of certain of the Certificates. Upon information and belief, the officers and directors of
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WaMu Bank overlapped with the officers and directors of WaMu Securities and WaMu Acceptance. In addition, because of its position as sponsor, WaMu Bank was able to, and did in fact, control the contents of three of the Registration Statements filed by WaMu Securities and WaMu Acceptance, including the Prospectuses and Prospectus Supplements, which pertained to 20 Securitizations and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 648. Defendant WaMu Securities was the sponsor or co-sponsor for 15 of the 20
Securitizations carried out under three of the Registration Statements filed by itself or Defendant WaMu Acceptance, and culpably participated in the violations of Section 31-5606.05(a)(1)(B) set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting itself and WaMu Acceptance as the special purpose vehicles, and selecting the underwriters. In its role as sponsor, WaMu Bank knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the mortgages would be issued by the relevant trusts. 649. Defendant WaMu Securities also acted as the seller of the mortgage loans for 15
overlapped with the officers and directors of WaMu Acceptance. In addition, because of its
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position as sponsor, WaMu Securities was able to, and did in fact, control the contents of three of the Registration Statements filed by itself and WaMu Acceptance, including the Prospectuses and Prospectus Supplements, which pertained to 20 Securitizations and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 651. This claim is against Defendant JPMorgan Bank in its capacity as successor-in-
interest to WaMu Bank. Non-party Long Beach Mortgage, a wholly-owned subsidiary and, later, a division of WaMu Bank, was the sponsor for the nine Securitizations carried out under the two Registration Statements filed by Defendant Long Beach Securities, and culpably participated in the violations of Section 31-5606.05(a)(1)(B) set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting Long Beach Securities as the special purpose vehicle, and selecting the underwriters. In its role as sponsor, Long Beach Mortgage knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the mortgages would be issued by the relevant trusts. 652. Non-party Long Beach Mortgage, a wholly-owned subsidiary and, later, a
division of WaMu Bank, also controlled all aspects of the business of Long Beach Securities, as Long Beach Securities was merely a special purpose entity that was created for the purpose of
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acting as a pass-through for the issuance of certain of the Certificates. Upon information and belief, the officers and directors of Long Beach Mortgage overlapped with the officers and directors of Long Beach Securities. In addition, because of its position as sponsor, Long Beach Mortgage was able to, and did in fact, control the contents of the two Registration Statements filed by Long Beach Securities, including the Prospectuses and Prospectus Supplements, which pertained to 15 Securitizations and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 654. Defendant JPMorgan Bank controlled the business operations of J.P. Morgan
securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 656. JPMorgan Bank culpably participated in the violations of Section 31-
5606.05(a)(1)(B) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and establish special-purpose financial entities such as J.P. Morgan Acceptance and the issuing trusts to serve as conduits for the mortgage loans.
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657.
Defendant JPMorgan Chase controlled the business operations of JPMorgan
Bank, J.P. Morgan Securities, and J.P. Morgan Acceptance. Defendant JPMorgan Chase wholly owns JPMorgan Bank, J.P. Morgan Securities, and J.P. Morgan Acceptance and is the ultimate corporate parent of JPMorgan Bank, J.P. Morgan Acquisition, J.P. Morgan Acceptance, and J.P. Morgan Securities. As the corporate parent of JPMorgan Bank, J.P. Morgan Securities, and J.P. Morgan Acceptance, JPMorgan Chase had the practical ability to direct and control the actions of JPMorgan Bank, J.P. Morgan Securities, and J.P. Morgan Acceptance in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of JPMorgan Bank, J.P. Morgan Securities and J.P. Morgan Acceptance in connection with the issuance and sale of the Certificates. 658. JPMorgan Chase expanded its share of the residential mortgage-backed
securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 659. JPMorgan Chase culpably participated in the violations of Section 31-
5606.05(a)(1)(B) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and establish special-purpose financial entities such as J.P. Morgan Acceptance and the issuing trusts to serve as conduits for the mortgage loans. 660. This claim is against Defendant JPMorgan Bank in its capacity as successor-in-
interest to WaMu Bank. Non-party WaMu Bank controlled the business operations of WaMu Capital, WaMu Securities, WaMu Acceptance, Long Beach Mortgage, and Long Beach Securities. WaMu Bank wholly owned WaMu Capital, WaMu Securities, WaMu Acceptance,
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Long Beach Mortgage, and Long Beach Securities. As the sole corporate parent of WaMu Capital, WaMu Securities, WaMu Acceptance, Long Beach Mortgage, and Long Beach Securities, WaMu Bank had the practical ability to direct and control the actions of WaMu Capital, WaMu Securities, WaMu Acceptance, Long Beach Mortgage, and Long Beach Securities in issuing and selling the Certificates, and in fact, exercised such direction and control over the activities of WaMu Capital, WaMu Securities, WaMu Acceptance, Long Beach Mortgage, and Long Beach Securities in connection with the issuance and sale of the Certificates. 661. Non-party WaMu Bank expanded its share of the residential mortgage-backed
securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 662. Non-party WaMu Bank culpably participated in the violations of Section 31-
5606.05(a)(1)(B) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and establish special-purpose financial entities such as WaMu Securities, WaMu Acceptance, and Long Beach Securities and the issuing trusts to serve as conduits for the mortgage loans. 663. This claim is against Defendant JPMorgan Chase in its capacity as successor-in-
interest to BSI. Non-party BSI controlled the business operations of BSC, EMC, SAMI, and BSABS. BSI wholly owned BSC, EMC, SAMI, and BSABS. As the sole corporate parent of BSC, EMC, SAMI, and BSABS, BSI had the practical ability to direct and control the actions of BSC, EMC, SAMI, and BSABS in issuing and selling the Certificates, and in fact, exercised
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such direction and control over the activities of BSC, EMC, SAMI, and BSABS in connection with the issuance and sale of the Certificates. 664. Non-party BSI expanded its share of the residential mortgage-backed
securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 665. Non-party BSI culpably participated in the violations of Section 31-
5606.05(a)(1)(B) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and establish special-purpose financial entities such as SAMI and BSABS and the issuing trusts to serve as conduits for the mortgage loans. 666. The Section 31-5606.05(c) Defendants, in their own capacity or as successors-in-
interest, are controlling persons within the meaning of Section 31-5606.05(c) by virtue of their actual power over, control of, ownership of, and/or directorship of J.P. Morgan Securities, BSC, WaMu Capital, J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, Long Beach Mortgage, and Long Beach Securities at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 667. Fannie Mae purchased in the primary market, or, for the LUM 2006-3
Securitization, shortly after issuance, Certificates issued pursuant to the Registration Statements, including the Prospectuses and Prospectus Supplements, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements.
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668.
Fannie Mae did not know of the misstatements and omissions in the Registration
in the Registration Statements, for which it is entitled to compensation. 670. The time period from June 16, 2009 through July 31, 2011 has been tolled for
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EIGHTH CAUSE OF ACTION Common Law Negligent Misrepresentation (Against J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, Long Beach Securities, J.P. Morgan Securities, BSC, WaMu Capital, Citigroup, Credit Suisse, Goldman Sachs, and RBS Greenwich) 671. forth herein. 672. This is a claim for common law negligent misrepresentation against Defendants Plaintiff realleges each allegation in paragraphs 1 through 471 above as if fully set
J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, Long Beach Securities, J.P. Morgan Securities (both in its own capacity and as successor to BSC), BSC, WaMu Capital, Citigroup, Credit Suisse, Goldman Sachs, and RBS Greenwich. 673. Between September 7, 2005 and September 19, 2007, J.P. Morgan Acceptance,
SAMI, BSABS, WaMu Securities, WaMu Acceptance, Long Beach Securities, J.P. Morgan Securities, BSC, WaMu Capital, Citigroup, Credit Suisse, Goldman Sachs, and RBS Greenwich sold the GSE Certificates to the GSEs as described above. Because J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, and Long Beach Securities owned and then conveyed the underlying mortgage loans that collateralized the Securitizations for which they served as depositors, J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, and Long Beach Securities had unique, exclusive, and special knowledge about the mortgage loans in the Securitizations through their possession of the loan files and other documentation. 674. Likewise, as lead underwriters for 99 of the Securitizations, J.P. Morgan
Securities, BSC, and WaMu Capital were each obligatedand had the opportunityto perform sufficient due diligence to ensure that the Registration Statements for those Securitizations, including without limitation the corresponding Prospectus Supplements, did not contain an
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untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. As a result of this privileged position as underwriterwhich gave each access to loan file information and obligated each to perform adequate due diligence to ensure the accuracy of the Registration StatementsJ.P. Morgan Securities, BSC, and WaMu Capital had unique, exclusive, and special knowledge about the underlying mortgage loans in the Securitizations. 675. J.P. Morgan Securities, BSC, WaMu Capital, Citigroup, Credit Suisse, Goldman
Sachs, and RBS Greenwich also had unique, exclusive, and special knowledge of the work of third-party due diligence providers, such as Clayton, who identified significant failures of originators to adhere to the underwriting standards represented in the Registration Statements. The GSEs, like other investors, had no access to borrower loan files prior to the closing of the Securitizations and their purchase of the Certificates. Accordingly, when determining whether to purchase the GSE Certificates, the GSEs could not evaluate the underwriting quality or the servicing practices of the mortgage loans in the Securitizations on a loan-by-loan basis. The GSEs therefore reasonably relied on the knowledge and express representations of J.P. Morgan Securities, BSC, WaMu Capital, Citigroup, Credit Suisse, Goldman Sachs, and RBS Greenwich made prior to the closing of the Securitizations regarding the underlying mortgage loans. 676. J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance,
Long Beach Securities, J.P. Morgan Securities, BSC, WaMu Capital, Citigroup, Credit Suisse, Goldman Sachs, and RBS Greenwich were aware that the GSEs reasonably relied on their reputations and unique, exclusive, and special expertise and experience, as well as their express representations made prior to the closing of the Securitizations, and that the GSEs depended upon these Defendants for complete, accurate, and timely information. The standards under
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which the underlying mortgage loans were actually originated were known to these Defendants and were not known, and could not be determined, by the GSEs prior to the closing of the Securitizations. In purchasing the GSE Certificates from J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, Long Beach Securities, J.P. Morgan Securities, BSC, WaMu Capital, Citigroup, Credit Suisse, Goldman Sachs, and RBS Greenwich, the GSEs relied on their long-standing relationship with those Defendants, and the purchases were made, in part, in reliance on that relationship. 677. Based upon their unique, exclusive, and special knowledge and expertise about
the loans held by the trusts in the Securitizations, J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, Long Beach Securities, J.P. Morgan Securities, BSC, WaMu Capital, Citigroup, Credit Suisse, Goldman Sachs, and RBS Greenwich had a duty to provide the GSEs complete, accurate, and timely information regarding the mortgage loans and the Securitizations. J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, Long Beach Securities, J.P. Morgan Securities, BSC, WaMu Capital, Citigroup, Credit Suisse, Goldman Sachs, and RBS Greenwich breached their duty to provide such information to the GSEs by instead making to the GSEs untrue statements of material facts in the Securitizations, or otherwise misrepresenting to the GSEs material facts about the Securitizations. The misrepresentations are set forth in Section IV above, and include misrepresentations as to the accuracy of the represented credit ratings, compliance with underwriting guidelines for the mortgage loans, and the accuracy of the owner-occupancy statistics and the loan-to-value ratios applicable to the Securitizations, as disclosed in the terms sheets and Prospectus Supplements.
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678.
In addition, having made actual representations about the underlying collateral in
the Securitizations and the facts bearing on the riskiness of the Certificates, J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, Long Beach Securities, J.P. Morgan Securities, BSC, WaMu Capital, Citigroup, Credit Suisse, Goldman Sachs, and RBS Greenwich had a duty to correct misimpressions left by their statements, including with respect to any half truths. The GSEs were entitled to rely upon the representations of J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, Long Beach Securities, J.P. Morgan Securities, BSC, WaMu Capital, Citigroup, Credit Suisse, Goldman Sachs, and RBS Greenwich about the Securitizations, and these Defendants failed to correct in a timely manner any of their misstatements or half truths, including misrepresentations as to compliance with underwriting guidelines for the mortgage loans. 679. The GSEs reasonably relied on the information J.P. Morgan Acceptance, SAMI,
BSABS, WaMu Securities, WaMu Acceptance, Long Beach Securities, J.P. Morgan Securities, BSC, WaMu Capital, Citigroup, Credit Suisse, Goldman Sachs, and RBS Greenwich did provide, and J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, Long Beach Securities, J.P. Morgan Securities, BSC, WaMu Capital, Citigroup, Credit Suisse, Goldman Sachs, and RBS Greenwich knew that the GSEs were acting in reliance on such information. The GSEs were damaged in an amount to be determined at trial as a direct, proximate, and foreseeable result of the misrepresentations, including any half truths, of J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, Long Beach Securities, J.P. Morgan Securities, BSC, WaMu Capital, Citigroup, Credit Suisse, Goldman Sachs, and RBS Greenwich.
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680.
The time period from June 16, 2009 through July 31, 2011 has been tolled for
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NINTH CAUSE OF ACTION Common Law Fraud (Against J.P. Morgan Acquisition, EMC, WaMu Securities, JPMorgan Bank, J.P. Morgan Acceptance, SAMI, BSABS, WaMu Acceptance, Long Beach Securities, J.P. Morgan Securities, BSC, and WaMu Capital) 681. forth herein. 682. This is a claim for common law fraud against Defendants J.P. Morgan Plaintiff realleges each allegation in paragraphs 1 through 471 above as if fully set
Acquisition, EMC, WaMu Securities, JPMorgan Bank (in its capacity as successor to WaMu Bank and Long Beach Mortgage), J.P. Morgan Acceptance, SAMI, BSABS, WaMu Acceptance, Long Beach Securities, J.P. Morgan Securities, BSC, and WaMu Capital with respect to the Securitizations J.P. Morgan Acquisition, EMC, WaMu Securities, WaMu Bank, or Long Beach Mortgage sponsored. JPMorgan Bank is the successor to WaMu Bank and Long Beach Mortgage. J.P. Morgan Securities is the successor to BSC. 683. The material representations set forth above were fraudulent, and the
representations of J.P. Morgan Securities, BSC, and WaMu Capital falsely and misleadingly misrepresented and omitted material statements of fact. The misrepresentations are set forth in Section IV above, and include misrepresentations as to the accuracy of the represented credit ratings, compliance with underwriting guidelines for the mortgage loans, and the accuracy of the owner-occupancy statistics and the loan-to-value ratios applicable to the Securitizations, as disclosed in the term sheets and Prospectus Supplements. The representations on which the GSEs relied were directly communicated to them by J.P. Morgan Securities, BSC, and WaMu Capital. J.P. Morgan Securities, BSC, and WaMu Capital knew, or were reckless in not knowing, that their representations and omissions were false and/or misleading at the time they
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were made. J.P. Morgan Securities, BSC, and WaMu Capital made the misleading statements for the purpose of inducing the GSEs to purchase the GSE Certificates. 684. The basis for the false representations in the term sheets and Prospectus
Supplements that J.P. Morgan Securities, BSC, and WaMu Capital made to the GSEs was information that J.P. Morgan Acquisition, EMC, WaMu Bank, WaMu Securities, Long Beach Mortgage, J.P. Morgan Acceptance, SAMI, BSABS, WaMu Acceptance, and Long Beach Securities provided to J.P. Morgan Securities, BSC, and WaMu Capital as to the strength of the collateral underlying the GSE Certificates and the structure of the Securitizations. J.P. Morgan Acquisition, EMC, WaMu Bank, WaMu Securities, Long Beach Mortgage, J.P. Morgan Acceptance, SAMI, BSABS, WaMu Acceptance, and Long Beach Securities communicated this information to J.P. Morgan Securities, BSC, and WaMu Capital with the knowledge and intent that J.P. Morgan Securities, BSC, and WaMu Capital would communicate this information to purchasers of the GSE Certificates. J.P. Morgan Acquisition, EMC, WaMu Bank, WaMu Securities, Long Beach Mortgage, J.P. Morgan Acceptance, SAMI, BSABS, WaMu Acceptance, and Long Beach Securities each had reason to expect that the GSEs were among the class of persons who would receive and rely on such representations. 685. Each of J.P. Morgan Acquisition, EMC, WaMu Bank, WaMu Securities, Long
Beach Mortgage, J.P. Morgan Acceptance, SAMI, BSABS, WaMu Acceptance, Long Beach Securities, J.P. Morgan Securities, BSC, and WaMu Capital intended that the above misleading statements were to be made for the purpose of inducing the GSEs to purchase the GSE Certificates. 686. The GSEs justifiably relied on the false representations and misleading omissions
of J.P. Morgan Acquisition, EMC, WaMu Bank, WaMu Securities, Long Beach Mortgage, J.P.
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Morgan Acceptance, SAMI, BSABS, WaMu Acceptance, Long Beach Securities, J.P. Morgan Securities, BSC, and WaMu Capital. 687. Had the GSEs known the true facts regarding the underwriting practices of
JPMorgan, Bear Stearns, WaMu, and Long Beach, and the quality of the mortgage loans collateralizing the GSE Certificates, they would not have purchased the GSE Certificates. 688. As a result of the foregoing, the GSEs have suffered damages according to proof.
In the alternative, Plaintiff hereby demands rescission and makes any necessary tender of the GSE Certificates. 689. The misconduct of JPMorgan, Bear Stearns, WaMu, and Long Beach was
intentional and wanton. The immediate victims of their fraud was Fannie Mae and Freddie Mac, two Government-sponsored entities whose primary mission is assuring affordable housing to millions of Americans. Further, the public nature of the harm caused by JPMorgan, Bear Stearns, WaMu, and Long Beach is apparentand conclusively demonstrated byin the congressional hearings and federal enforcement actions that have been pursued against JPMorgan, Bear Stearns, WaMu, and Long Beach as a direct result of their fraudulent conduct at issue in this Complaint. See, e.g., the Senate PSI Report, passim; the FCIC Report, passim; Criminal Probe Targets 6 Wall Street Firms: Source, Reuters (May 13, 2010); JPMorgan Said to Face SEC Subpoena Along With Credit Suisse, Bloomberg (May 6, 2011); Feds Investigate Washington Mutual Failure, Associated Press (Oct. 16, 2008); Washington Mutual Created Mortgage Time Bomb, Senate Panel Says, Los Angeles Times (Apr. 13, 2010). Punitive damages are therefore warranted for the actions of JPMorgan, Bear Stearns, WaMu, and Long Beach in order to punish, deter them from future misconduct, and protect the public.
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690.
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TENTH CAUSE OF ACTION Aiding and Abetting Fraud (Against J.P. Morgan Acquisition, EMC, WaMu Securities, JPMorgan Bank, J.P. Morgan Acceptance, SAMI, BSABS, WaMu Acceptance, and Long Beach Securities) 691. forth herein. 692. This is a claim for aiding and abetting fraud against Defendants J.P. Morgan Plaintiff realleges each allegation in paragraphs 1 through 471 above as if fully set
Acquisition, EMC, WaMu Securities, JPMorgan Bank (in its capacity as successor to WaMu Bank), J.P. Morgan Acceptance, SAMI, BSABS, WaMu Acceptance, and Long Beach Securities with respect to the Securitizations sponsored by J.P. Morgan Acquisition, EMC, WaMu Securities, WaMu Bank, and Long Beach Mortgage. JPMorgan Bank is the successor to WaMu Bank and Long Beach Mortgage. 693. J.P. Morgan Acquisition, EMC, WaMu Securities, WaMu Bank, and Long Beach
Mortgage, as sponsors for 94 of the Securitizations, substantially assisted J.P. Morgan Securities, BSCs, and WaMu Capitals fraud by choosing which mortgage loans would be included in those Securitizations, even though they knew the loans had been underwritten to shoddy standards. The actions of J.P. Morgan Acquisition, EMC, WaMu Securities, WaMu Bank, and Long Beach Mortgage in assisting in the origination of, and then purchasing, poorly underwritten loans was an integral part of the Securitizations. 694. Likewise, J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu
Acceptance, and Long Beach Securities, as depositors for 97 of the Securitizations, substantially assisted J.P. Morgan Securities, BSCs, and WaMu Capitals fraud by issuing the Registration Statements that were used to offer publicly the Certificates. As the issuer of the Certificates, J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, and Long Beach
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Securities were an integral part of the sale of the Certificates to the GSEs by J.P. Morgan Securities, BSC, and WaMu Capital. 695. As described above, J.P. Morgan Securities, BSC, and WaMu Capital made
fraudulent and untrue statements of material fact and omitted to state material facts regarding the true credit quality of the GSE Certificates, the true rate of owner occupancy, the true LTV and CLTV ratio of the underlying mortgage loans, and compliance by the originators with applicable underwriting guidelines. 696. Each of J.P. Morgan Acquisition, EMC, WaMu Securities, WaMu Bank, Long
Beach Mortgage, J.P. Morgan Acceptance, SAMI, BSABS, WaMu Acceptance, and Long Beach Securities had unique access to the loan files, and therefore was aware of the extreme weakness of the loans. In fact, JPMorgan, Bear Stearns, WaMu, and Long Beach during the same period they were selling the GSE Certificates to the GSEs were also engaging in putback requests with originators and other parties based upon the weakness of the underlying loans. Accordingly, J.P. Morgan Acquisition, EMC, WaMu Securities, WaMu Bank, Long Beach Mortgage, J.P. Morgan Acceptance, SAMI, BSABS, WaMu Acceptance, and Long Beach Securities were aware that the representations and omissions of J.P. Morgan Securities, BSC, and WaMu Capital were fraudulent. 697. The central role of J.P. Morgan Acquisition, EMC, WaMu Securities, WaMu
Bank, Long Beach Mortgage, J.P. Morgan Acceptance, SAMI, BSABS, WaMu Acceptance, and Long Beach Securities in J.P. Morgan Securities, BSCs, and WaMu Capitals vertically integrated sales strategy for the Certificates substantially assisted in J.P. Morgan Securities, BSCs, and WaMu Capitals fraud. J.P. Morgan Acquisition, EMC, WaMu Securities, WaMu Bank, and Long Beach Mortgage, as the purchasers of the underlying mortgage loans, worked
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closely with J.P. Morgan Acceptance, SAMI, BSABS, WaMu Securities, WaMu Acceptance, and Long Beach Securities, as the vehicles for securitizing the mortgage loans, which in turn worked closely with J.P. Morgan Securities, BSC, and WaMu Capital, as the distribution arms for the Certificates that were collateralized by those mortgage loans and then sold to the GSEs. J.P. Morgan Acquisition, EMC, WaMu Securities, WaMu Bank, Long Beach Mortgage, J.P. Morgan Acceptance, SAMI, BSABS, WaMu Acceptance, and Long Beach Securities worked hand-in-glove to provide J.P. Morgan Securities, BSC, and WaMu Capital with Certificates that it could fraudulently sell to the GSEs. 698. J.P. Morgan Acquisition, EMC, WaMu Securities, WaMu Bank, Long Beach
Mortgage, J.P. Morgan Acceptance, SAMI, BSABS, WaMu Acceptance, and Long Beach Securities provided substantial assistance in J.P. Morgan Securities, BSCs, and WaMu Capitals fraud that played a significant and material role in inducing the GSEs to purchase the GSE Certificates. As a direct, proximate and foreseeable result of J.P. Morgan Acquisition, EMC, WaMu Securities, WaMu Bank, Long Beach Mortgage, J.P. Morgan Acceptance, SAMI, BSABS, WaMu Acceptance, and Long Beach Securities aiding and abetting J.P. Morgan Securities, BSC, and WaMu Capital in their fraud against the GSEs, the GSEs have been damaged in an amount to be determined at trial. 699. Because J.P. Morgan Acquisition, EMC, WaMu Securities, WaMu Bank, Long
Beach Mortgage, J.P. Morgan Acceptance, SAMI, BSABS, WaMu Acceptance, and Long Beach Securities aided and abetted J.P. Morgan Securities, BSCs, and WaMu Capitals fraud willfully and wantonly, and because, by their acts, J.P. Morgan Acquisition, EMC, WaMu Securities, WaMu Bank, Long Beach Mortgage, J.P. Morgan Acceptance, SAMI, BSABS, WaMu Acceptance, and Long Beach Securities knowingly affected the general public, including but not
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limited to all persons with interests in the Certificates, Plaintiff is entitled to recover punitive damages. 700. The time period from June 16, 2009 through July 31, 2011 has been tolled for
266
ELEVENTH CAUSE OF ACTION Successor and Vicarious Liability (Against JPMorgan Chase, J.P. Morgan Securities, and JPMorgan Bank) 701. forth herein. 702. Defendant JPMorgan Chase is the successor to BSI, pursuant to the Merger. J.P. Plaintiff realleges each allegation in paragraphs 1 through 471 above as if fully set
Morgan Chase is liable for BSIs wrongdoing, in its entirety, under common law, because BSI merged and consolidated with JPMorgan Chase, because JPMorgan Chase has expressly or impliedly assumed BSIs tort liabilities, and because JPMorgan Chase is a mere continuation of BSI. This action is thus brought against JPMorgan Chase both in its own capacity and as successor to BSI. 703. Defendant J.P. Morgan Securities is the successor to BSC, pursuant to the Merger.
J.P. Morgan Securities is liable for BSCs wrongdoing, in its entirety, under common law, because BSC merged and consolidated with J. P. Morgan Securities, because J.P. Morgan Securities has expressly or impliedly assumed BSCs tort liabilities, and because J.P. Morgan Securities is a mere continuation of BSC. This action is thus brought against J.P. Morgan Securities both in its own capacity and as successor to BSC. 704. Defendant JPMorgan Bank succeeded to WaMu Banks liabilities pursuant to the
PAA. JPMorgan Bank is liable for WaMu Banks wrongdoing, in its entirety, under common law, because WaMu Bank merged and consolidated with JPMorgan Bank, because JPMorgan Bank has expressly or impliedly assumed WaMu Banks tort liabilities, and because JPMorgan Bank is a mere continuation of WaMu Bank. This action is thus brought against JPMorgan Bank both in its own capacity and as successor to WaMu Bank.
267
705.
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and J.P. Morgan Securities, J.P. Morgan Acquisition, J.P. Morgan Acceptance, EMC, BSABS, SAMI, BSC, Chase Mortgage Finance Corp., WaMu Capital, WaMu Securities, Long Beach Securities, Long Beach Mortgage, and Chase Home Finance LLC. The time period from July 14, 2011 through September 1, 2011 has been tolled for statute of limitations purposes by virtue of a tolling agreement entered into among the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, and J.P. Morgan Securities, J.P. Morgan Acquisition, J.P. Morgan Acceptance, EMC, BSABS, SAMI, BSC, Chase Mortgage Finance Corp., WaMu Capital, WaMu Securities, Long Beach Securities, and JPMorgan Bank. This action is brought within three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). PRAYER FOR RELIEF WHEREFORE Plaintiff prays for relief as follows: 706. An award in favor of Plaintiff against all Defendants, jointly and severally, for all
damages sustained as a result of Defendants wrongdoing, in an amount to be proven at trial, but including: a. Rescission and recovery of the consideration paid for the GSE Certificates, with interest thereon; Each GSEs monetary losses, including any diminution in value of the GSE Certificates, as well as lost principal and lost interest payments thereon; Punitive damages; Attorneys fees and costs; Prejudgment interest at the maximum legal rate; and 268
b.
c. d. e.
f.
Such other and further relief as the Court may deem just and proper. JURY TRIAL DEMANDED
707.
Pursuant to Federal Rule of Civil Procedure 38(b), Plaintiff hereby demands a
269
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK FEDERAL HOUSING FINANCE AGENCY, AS CONSERVATOR FOR THE FEDERAL NATIONAL MORTGAGE ASSOCIATION AND THE FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff, -againstMERRILL LYNCH & CO., INC.; MERRILL LYNCH, PIERCE, FENNER & SMITH INC.; MERRILL LYNCH MORTGAGE LENDING, INC.; MERRILL LYNCH MORTGAGE CAPITAL INC.; FIRST FRANKLIN FINANCIAL CORP.; MERRILL LYNCH MORTGAGE INVESTORS, INC.; MERRILL LYNCH GOVERNMENT SECURITIES, INC.; MATTHEW WHALEN; BRIAN T. SULLIVAN; MICHAEL M. MCGOVERN; DONALD J. PUGLISI; PAUL PARK; and DONALD C. HAN, Defendants.
___ CIV. ___ (___)
TABLE OF CONTENTS NATURE OF ACTION ...................................................................................................................1 PARTIES .........................................................................................................................................8 The Plaintiff and the GSEs...................................................................................................8 The Defendants ....................................................................................................................9 The Non-Party Originators ................................................................................................12 JURISDICTION AND VENUE ....................................................................................................12 FACTUAL ALLEGATIONS ........................................................................................................13 I. THE SECURITIZATIONS................................................................................................13 A. B. C. Residential Mortgage-Backed Securitizations In General .....................................13 The Securitizations At Issue In This Case .............................................................15 The Securitization Process .....................................................................................22 1. Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, and First Franklin Financial Grouped Mortgage Loans in Special Purpose Trusts ...............................................................................22 The Trusts Issue Securities Backed by the Loans ......................................23
2.
II. THE DEFENDANTS PARTICIPATION IN THE SECURITIZATION PROCESS ..........................................................................................................................30 A. The Role of Each of the Defendants ......................................................................30 1. 2. 3. 4. 5. 6. 7. First Franklin Financial ..............................................................................31 Merrill Lynch Mortgage Capital ................................................................32 Merrill Lynch Mortgage Lending ..............................................................33 Merrill Lynch Mortgage Investors .............................................................34 Merrill Lynch, Pierce, Fenner & Smith .....................................................34 Merrill Lynch Government Securities .......................................................35 Merrill Lynch & Co. ..................................................................................35
8. B.
The Individual Defendants .........................................................................36
III. THE REGISTRATION STATEMENTS AND THE PROSPECTUS SUPPLEMENTS................................................................................................................41 A. B. C. D. IV. Compliance With Underwriting Guidelines ..........................................................41 Statements Regarding Occupancy Status of Borrower ..........................................44 Statements Regarding Loan to Value Ratios .........................................................48 Statements Regarding Credit Ratings ....................................................................52
FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS......................................................................................57 A. The Statistical Data Provided in the Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False ....................................57 1. 2. B. Owner Occupancy Data Was Materially False ..........................................57 Loan to Value Data Was Materially False .................................................61
The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines .........................................................66 1. Government Investigations Have Confirmed That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines ..............................................................67 The Collapse of the Certificates Credit Ratings Further Indicates that the Mortgage Loans were not Originated in Adherence to the Stated Underwriting Guidelines .................................................................74 The Surge in Mortgage Delinquency and Default Further Demonstrates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines ....................................77
2.
3.
V.
MERRILL LYNCH KNEW THAT ITS REPRESENTATIONS WERE FALSE ............80 A. Evidence Regarding Merrill Lynchs Due Diligence ............................................81 1. 2. Merrill Lynchs Due Diligence Benefitted From a Direct Window Into the Originators Practices ...................................................................81 Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, Merrill Lynch Mortgage
ii
Investors, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch Government Securities Intentionally Misrepresented the Risks Inherent in the Securitizations..........................................................84 3. Merrill Lynch Recognized the Problems With Its RMBS and Developed De-Risking and Mitigation Strategies While Marketing Similar Securitizations to the GSEs .........................................91
VI. THE GSES JUSTIFIABLY RELIED ON MERRILL LYNCHS REPRESENTATIONS ......................................................................................................93 VII. FANNIE MAES AND FREDDIE MACS PURCHASES OF THE GSE CERTIFICATES AND THE RESULTING DAMAGES .................................................95 FIRST CAUSE OF ACTION ......................................................................................................102 SECOND CAUSE OF ACTION .................................................................................................106 THIRD CAUSE OF ACTION .....................................................................................................110 FOURTH CAUSE OF ACTION .................................................................................................114 FIFTH CAUSE OF ACTION ......................................................................................................117 SIXTH CAUSE OF ACTION .....................................................................................................121 SEVENTH CAUSE OF ACTION ...............................................................................................125 EIGHTH CAUSE OF ACTION ..................................................................................................129 NINTH CAUSE OF ACTION .....................................................................................................133 TENTH CAUSE OF ACTION ....................................................................................................136 PRAYER FOR RELIEF ..............................................................................................................139 JURY TRIAL DEMANDED .......................................................................................................140
iii
Plaintiff Federal Housing Finance Agency (FHFA), as conservator of The Federal National Mortgage Association (Fannie Mae) and The Federal Home Loan Mortgage Corporation (Freddie Mac), by its attorneys, Quinn Emanuel Urquhart & Sullivan, LLP, for its Complaint herein against Merrill Lynch & Co., Inc. (Merrill Lynch & Co.), Merrill Lynch, Pierce, Fenner & Smith Inc. (Merrill Lynch, Pierce, Fenner & Smith), Merrill Lynch Mortgage Lending, Inc. (Merrill Lynch Mortgage Lending), Merrill Lynch Mortgage Capital Inc. (Merrill Lynch Mortgage Capital), First Franklin Financial Corp. (First Franklin Financial), Merrill Lynch Mortgage Investors, Inc. (Merrill Lynch Mortgage Investors), Merrill Lynch Government Securities, Inc. (Merrill Lynch Government Securities) (collectively, Merrill Lynch), Matthew Whalen, Brian T. Sullivan, Michael M. McGovern, Donald J. Puglisi, Paul Park, and Donald C. Han (the Individual Defendants) (together with Merrill Lynch, the Defendants) alleges as follows: NATURE OF ACTION 1. This action arises out of Defendants actionable conduct in connection with the
offer and sale of certain residential mortgage-backed securities to Fannie Mae and Freddie Mac (collectively, the Government Sponsored Enterprises or GSEs). These securities were sold pursuant to registration statements, including prospectuses and prospectus supplements that formed part of those registration statements, which contained materially false or misleading statements and omissions. Defendants falsely represented that the underlying mortgage loans complied with certain underwriting guidelines and standards, including representations that significantly overstated the ability of the borrowers to repay their mortgage loans. These representations were material to the GSEs, as reasonable investors, and their falsity violates Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77a et seq., Section 13.1522(A)(ii) and 13.1-522(C) of the Virginia Code, Sections 31-5606.05(a)(1)(B) and 1
31.5606.05(c) of the District of Columbia Code, and constitutes negligent misrepresentation, common law fraud, and aiding and abetting fraud. 2. Between September 29, 2005 and October 10, 2007, Fannie Mae and Freddie Mac
purchased over $24.853 billion in residential mortgage-backed securities (the GSE Certificates) issued in connection with 72 Merrill Lynch related entity-sponsored and/or Merrill Lynch, Pierce, Fenner & Smith underwritten securitizations.1 The GSE Certificates purchased by Fannie Mae, along with the date and amount of the purchases, are listed infra in Table 12. The GSE Certificates purchased by Freddie Mac, along with the date and amount of the purchases, are listed infra in Table 13. The 72 securitizations (from which the GSEs purchased a total of 88 Certificates) at issue are: Table 1
Full Name ARGENT SECURITIES INC., ASSET-BACKED PASS-THROUGH CERTIFICATES, SERIES 2005-W4 ARGENT SECURITIES INC., ASSET-BACKED PASS-THROUGH CERTIFICATES, SERIES 2006-M1 C-BASS MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2006-CB8 MERRILL LYNCH FIRST FRANKLIN MORTGAGE LOAN TRUST MORTGAGE LOAN ASSET - BACKED CERTIFICATES, SERIES 2007-1 MERRILL LYNCH FIRST FRANKLIN MORTGAGE LOAN TRUST MORTGAGE LOAN ASSET - BACKED CERTIFICATES, SERIES 2007-2 MERRILL LYNCH FIRST FRANKLIN MORTGAGE LOAN TRUST MORTGAGE LOAN ASSET - BACKED CERTIFICATES, SERIES 2007-3 MERRILL LYNCH FIRST FRANKLIN MORTGAGE LOAN TRUST, MORTGAGE LOAN ASSET - BACKED CERTIFICATES, SERIES 2007-4 MERRILL LYNCH FIRST FRANKLIN MORTGAGE LOAN TRUST MORTGAGE LOAN ASSET - BACKED CERTIFICATES, SERIES 2007-5 MERRILL LYNCH FIRST FRANKLIN MORTGAGE LOAN TRUST MORTGAGE LOAN ASSET - BACKED CERTIFICATES, SERIES 2007-H1 FIRST FRANKLIN MORTGAGE LOAN TRUST MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2005-FF12 FIRST FRANKLIN MORTGAGE LOAN TRUST MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2006-FF18 Abbreviation ARSI 2005-W4 ARSI 2006-M1 CBASS 2006-CB8 FFMER 2007-1 FFMER 2007-2 FFMER 2007-3 FFMER 2007-4 FFMER 2007-5 FFMER 2007-H1 FFML 2005-FF12 FFML 2006-FF18
Full Name FIRST FRANKLIN MORTGAGE LOAN TRUST MORTGAGE LOAN ASSET - BACKED CERTIFICATES, SERIES 2007-FF1 FIRST FRANKLIN MORTGAGE LOAN TRUST MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2006-FF2 FIELDSTONE MORTGAGE INVESTMENT TRUST MORTGAGE-BACKED NOTES, SERIES 2006-3 INDYMAC INDX MORTGAGE LOAN TRUST MORTGAGE PASSTHROUGH CERTIFICATES, SERIES 2005-AR33 INDYMAC INDX MORTGAGE LOAN TRUST MORTGAGE PASSTHROUGH CERTIFICATES, SERIES 2006-AR5 INDYMAC INDX MORTGAGE LOAN TRUST MORTGAGE PASSTHROUGH CERTIFICATES, SERIES 2006-AR7 INDYMAC INDX MORTGAGE LOAN TRUST, SERIES 2007-FLX4 INDYMAC INDX MORTGAGE LOAN TRUST, SERIES 2007-FLX5 INDYMAC INDX MORTGAGE LOAN TRUST, SERIES 2007-FLX6 MERRILL LYNCH ALTERNATIVE NOTE ASSET TRUST, SERIES 2007-A1 MERRILL LYNCH ALTERNATIVE NOTE ASSET TRUST, SERIES 2007-A2 MERRILL LYNCH ALTERNATIVE NOTE ASSET TRUST, SERIES 2007-A3 MERRILL LYNCH MORTGAGE INVESTORS TRUST, MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2005-A8 MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN ASSET BACKED CERTIFICATES, SERIES 2005-AR-1 MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN ASSET BACKED CERTIFICATES, SERIES 2005-HE2 MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN ASSET BACKED CERTIFICATES, SERIES 2005-HE3 MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE PASSTHROUGH CERTIFICATES, SERIES 2006-A3 MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE PASSTHROUGH CERTIFICATES, SERIES 2006-AF2 MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2006-AHL1 MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2006-AR1 MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2006-FF1 MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2006-FM1 MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2006-HE1 MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2006-HE4 MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2006-HE5 MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2006-HE6 MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2006-MLN1 MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2006-OPT1 MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN ASSET -- BACKED CERTIFICATES, SERIES 2006-RM1 MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN ASSET -- BACKED CERTIFICATES, SERIES 2006-RM2 MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN ASSET -- BACKED CERTIFICATES, SERIES 2006-RM3
Abbreviation FFML 2007-FF1 FFML 2007-FF2 FMIC 2006-3 INDX 2005-AR33 INDX 2006-AR5 INDX 2006-AR7 INDX 2007-FLX4 INDX 2007-FLX5 INDX 2007-FLX6 MANA 2007-A1 MANA 2007-A2 MANA 2007-A3 MLMI 2005-A8 MLMI 2005-AR1 MLMI 2005-HE2 MLMI 2005-HE3 MLMI 2006-A3 MLMI 2006-AF2 MLMI 2006-AHL1 MLMI 2006-AR1 MLMI 2006-FF1 MLMI 2006-FM1 MLMI 2006-HE1 MLMI 2006-HE4 MLMI 2006-HE5 MLMI 2006-HE6 MLMI 2006-MLN1 MLMI 2006-OPT1 MLMI 2006-RM1 MLMI 2006-RM2 MLMI 2006-RM3
Full Name MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN ASSET -- BACKED CERTIFICATES, SERIES 2006-RM4 MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN ASSET -- BACKED CERTIFICATES, SERIES 2006-RM5 MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2006-WMC1 MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2006-WMC2 MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN ASSET BACKED CERTIFICATES, SERIES 2007-HE1 MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN ASSET BACKED CERTIFICATES, SERIES 2007-HE2 MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN ASSET BACKED CERTIFICATES, SERIES 2007-MLN1 OPTION ONE MORTGAGE LOAN TRUST ASSET-BACKED CERTIFICATES, SERIES 2007-1 OWNIT MORTGAGE LOAN TRUST MORTGAGE LOAN ASSET BACKED CERTIFICATES, SERIES 2005-4 OWNIT MORTGAGE LOAN TRUST MORTGAGE LOAN ASSET BACKED CERTIFICATES, SERIES 2005-5 OWNIT MORTGAGE LOAN TRUST LOAN ASSET-BACKED CERTIFICATES, SERIES 2006-1 OWNIT MORTGAGE LOAN TRUST MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2006-2 OWNIT MORTGAGE LOAN TRUST MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2006-3 OWNIT MORTGAGE LOAN TRUST MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2006-4 OWNIT MORTGAGE LOAN TRUST MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2006-5 OWNIT MORTGAGE LOAN TRUST MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2006-6 OWNIT MORTGAGE LOAN TRUST MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2006-7 SPECIALTY UNDERWRITING AND RESIDENTIAL FINANCE TRUST MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2005- AB3 SPECIALTY UNDERWRITING AND RESIDENTIAL FINANCE TRUST MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2005- BC3 SPECIALTY UNDERWRITING AND RESIDENTIAL FINANCE TRUST MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2005- BC4 SPECIALTY UNDERWRITING AND RESIDENTIAL FINANCE TRUST MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2006-AB2 SPECIALTY UNDERWRITING AND RESIDENTIAL FINANCE TRUST MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2006- AB3 SPECIALTY UNDERWRITING AND RESIDENTIAL FINANCE TRUST MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2006- BC1 SPECIALTY UNDERWRITING AND RESIDENTIAL FINANCE TRUST MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2006- BC2 SPECIALTY UNDERWRITING AND RESIDENTIAL FINANCE TRUST MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2006- BC3 SPECIALTY UNDERWRITING AND RESIDENTIAL FINANCE TRUST MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2006- BC4 SPECIALTY UNDERWRITING AND RESIDENTIAL FINANCE TRUST MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2006- BC5 SPECIALTY UNDERWRITING AND RESIDENTIAL FINANCE TRUST MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2007- AB1 SPECIALTY UNDERWRITING AND RESIDENTIAL FINANCE TRUST MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2007- BC1
Abbreviation MLMI 2006-RM4 MLMI 2006-RM5 MLMI 2006-WMC1 MLMI 2006-WMC2 MLMI 2007-HE1 MLMI 2007-HE2 MLMI 2007-MLN1 OOMLT 2007-1 OWNIT 2005-4 OWNIT 2005-5 OWNIT 2006-1 OWNIT 2006-2 OWNIT 2006-3 OWNIT 2006-4 OWNIT 2006-5 OWNIT 2006-6 OWNIT 2006-7 SURF 2005-AB3 SURF 2005-BC3 SURF 2005-BC4 SURF 2006-AB2 SURF 2006-AB3 SURF 2006-BC1 SURF 2006-BC2 SURF 2006-BC3 SURF 2006-BC4 SURF 2006-BC5 SURF 2007-AB1 SURF 2007-BC1
Full Name SPECIALTY UNDERWRITING AND RESIDENTIAL FINANCE TRUST MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2007- BC2
Abbreviation SURF 2007-BC2
(collectively, the Securitizations). 3. The Certificates were offered for sale pursuant to one of ten shelf registration
statements (the Shelf Registration Statements) filed with the Securities and Exchange Commission (the SEC). Defendant Merrill Lynch Mortgage Investors filed three Shelf Registration Statements that pertained to 62 of the 72 Securitizations at issue in this action. The Individual Defendants signed one or more of the three Shelf Registration Statements, and, the amendments thereto. Argent Securities Inc., IndyMac MBS Inc., Fieldstone Mortgage Investment Corp., and Option One Mortgage Acceptance Corp. each filed one or more of the seven remaining Shelf Registration Statements. With respect to all of the Securitizations, Merrill Lynch, Pierce, Fenner & Smith was the lead underwriter or co-lead underwriter. With respect to the Certificates purchased by Freddie Mac, all but one were purchased from Merrill Lynch, Pierce, Fenner & Smith; and, with respect to the Certificates purchased by Fannie Mae, all but one were purchased from Merrill Lynch Government Securities. 4. For each Securitization, a prospectus (Prospectus) and prospectus supplement
(Prospectus Supplement) were filed with the SEC as part of the Registration Statement2 for that Securitization. The GSE Certificates were marketed and sold to Fannie Mae and Freddie Mac pursuant to the Registration Statements, including the Shelf Registration Statements and the corresponding Prospectuses and Prospectus Supplements.
The term Registration Statement, as used herein, incorporates the Shelf Registration Statement, the Prospectus, and the Prospectus Supplement for each referenced Securitization, except where otherwise indicated. 5
5.
The Registration Statements contained statements about the characteristics and
credit quality of the mortgage loans underlying the Securitizations, the creditworthiness of the borrowers of those underlying mortgage loans, and the origination and underwriting practices used to make and approve the loans. Such statements were material to a reasonable investors decision to invest in mortgage-backed securities by purchasing the Certificates. Unbeknownst to Fannie Mae and Freddie Mac, these statements were materially false, as significant percentages of the underlying mortgage loans were not originated in accordance with the represented underwriting standards and origination practices, and had materially poorer credit quality than what was represented in the Registration Statements. 6. The Registration Statements also contained statistical summaries of the groups of
mortgage loans in each Securitization, such as the percentage of loans secured by owneroccupied properties and the percentage of the loan groups aggregate principal balance with loan-to-value ratios within specified ranges. This information was also material to reasonable investors. However, a loan level analysis of a sample of loans for each Securitization a review that encompassed thousands of mortgages across all of the Securitizations has revealed that these statistics were also false and omitted material facts due to widespread falsification of borrowers incomes and debts, inflated property values and misstatements of other key characteristics of the mortgage loans. 7. For example, the percentage of owner-occupied properties is a material risk factor
to the purchasers of Certificates, such as Fannie Mae and Freddie Mac, since a borrower who lives in a mortgaged property is generally less likely to stop paying his or her mortgage and more likely to take better care of the property. The loan level review reveals that the true percentage of owner-occupied properties for the loans supporting the GSE Certificates was materially lower
than what was stated in the Prospectus Supplements. Likewise, the Prospectus Supplements misrepresented other material factors, including the true value of the mortgaged properties relative to the amount of the underlying loans, and the actual ability of the individual mortgage holders to satisfy their debts. 8. Defendants Merrill Lynch, Pierce, Fenner & Smith (which lead underwrote or co-
lead underwrote the Certificates, and sold the Certificates to Freddie Mac), Merrill Lynch Government Securities (which sold the Certificates to Fannie Mae), Merrill Lynch Mortgage Investors (which acted as the depositor in 62 of the Securitizations), and the Individual Defendants (who signed the Registration Statements with respect to 62 of the Securitizations) are directly responsible for the misstatements and omissions of material fact contained in the Registration Statements because they prepared, signed, filed, and/or used these documents to market and sell the Certificates to Fannie Mae and Freddie Mac. 9. Defendants Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital,
First Franklin Financial, and Merrill Lynch & Co. are also responsible for the misstatements and omissions of material fact contained in the Registration Statements by virtue of their direction and control over Defendants Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Government Securities, and Merrill Lynch Mortgage Investors. Merrill Lynch & Co. directly participated in and exercised dominion and control over the business operations of Defendants Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Government Securities, and Merrill Lynch Mortgage Investors. 10. Fannie Mae and Freddie Mac purchased over $24.853 billion of the Certificates
pursuant to the Registration Statements filed with the SEC. These documents contained misstatements and omissions of material facts concerning the quality of the underlying mortgage
loans, the creditworthiness of the borrowers, and the practices used to originate such loans. As a result of Defendants misstatements and omissions of material fact, Fannie Mae and Freddie Mac have suffered substantial losses as the value of their holdings has significantly deteriorated. 11. FHFA, as Conservator of Fannie Mae and Freddie Mac, brings this action against
the Defendants for violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77k, 77(a)(2), 77o, Section 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, Sections 31-5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, and for negligent misrepresentation, common law fraud, and aiding and abetting fraud. PARTIES The Plaintiff and the GSEs 12. The Federal Housing Finance Agency is a federal agency located at 1700 G
Congress with a mission to provide liquidity, stability and affordability to the United States housing and mortgage markets. As part of this mission, Fannie Mae and Freddie Mac invested in residential mortgage-backed securities. Fannie Mae is located at 3900 Wisconsin Avenue, NW in Washington, D.C. Freddie Mac is located at 8200 Jones Branch Drive in McLean, Virginia. 8
The Defendants 14. Defendant Merrill Lynch & Co., is the ultimate parent corporation of all of the
Merrill Lynch Defendants. It is a Delaware corporation with its principal executive office located at 4 World Financial Center, 250 Vesey Street, New York, New York 10080. It is a holding company that, through its subsidiaries, purports to be a leading global trader and underwriter of securities and derivatives across a broad range of asset classes and serves as a strategic advisor to corporations, governments, institutions and individuals worldwide. On January 1, 2009, Merrill Lynch & Co. became a wholly owned subsidiary of Bank of America Corporation. 15. Defendant Merrill Lynch Mortgage Lending, is a Delaware corporation with its
principal place of business located at 4 World Financial Center, 250 Vesey Street, New York, New York 10080. It is a wholly owned subsidiary of Merrill Lynch Mortgage Capital. It is engaged in the business of, among other things, acquiring residential mortgage loans and selling those loans through Securitization programs. It acted as the sponsor or co-sponsor for 55 of the Securitizations at issue. 16. Defendant Merrill Lynch Mortgage Capital is a Delaware corporation with its
principal place of business located at One Bryant Park, New York, New York 10036. It is a wholly owned subsidiary of Merrill Lynch & Co. It is engaged in the business of, among other things, acquiring residential mortgage loans and selling those loans through Securitization programs. It acted as the co-sponsor for one of the Securitizations at issue in this action. 17. Defendant First Franklin Financial is a Georgia corporation with its principal
place of business located at 2150 North 1st Street, San Jose, California 95131. It is a wholly owned subsidiary of Merrill Lynch Mortgage Capital. First Franklin Financial regularly engaged in business in New York including, without limitation, extending loans. It is engaged in the 9
business of, among other things, acquiring residential mortgage loans and selling those loans through Securitization programs. It acted as the sponsor for five of the Securitizations at issue in this action. 18. Defendant Merrill Lynch, Pierce, Fenner & Smith is a Delaware corporation and
registered broker-dealer with its principal place of business located at 4 World Financial Center, 250 Vesey Street, New York, New York 10080. Merrill Lynch, Pierce, Fenner & Smith acted as the lead underwriter or co-lead underwriter for each Securitization, and as the underwriter participated in the drafting and dissemination of the Offering Materials pursuant to which the Certificates were sold to Fannie Mae and Freddie Mac. Defendant Merrill Lynch, Pierce, Fenner & Smith was the lead underwriter or co-lead underwriter for each of the 72 Securitizations, and was intimately involved in the offerings. Furthermore, Freddie Mac purchased 47 of the GSE Certificates from Merrill Lynch, Pierce, Fenner & Smith. 19. Defendant Merrill Lynch Mortgage Investors, is a Delaware corporation and an
indirect subsidiary of Merrill Lynch & Co., with its principal place of business located at 4 World Financial Center, 250 Vesey Street, New York, New York 10080. It was the depositor for 62 of the Securitizations at issue here, the registrant for three of the Registration Statements filed with the SEC, and the issuer for certain of the offerings at issue in this action. The depositor is considered the issuer of the Certificates within the meaning of Section 2(a)(4) of the Securities Act of 1933, 15 U.S.C. 77b(a)(4), and in accordance with Section 11(a), 15 U.S.C. 77k(a). Merrill Lynch Mortgage Investors, as depositor, was also responsible for preparing and filing reports required under the Securities Exchange Act of 1934. 20. Defendant Merrill Lynch Government Securities, is a Delaware corporation with
its principal place of business located at One Bryant Park, New York, NY 10036. It is a wholly
10
owned subsidiary of Merrill Lynch & Co. Fannie Mae purchased 39 of the GSE Certificates from Merrill Lynch Government Securities.3 21. Defendant Matthew Whalen served at the time of the Securitizations as President
and Chairman of the Board of Directors of Merrill Lynch Mortgage Investors, and worked in New York. Defendant Whalen signed two of the Shelf Registration Statements and the amendments thereto that are at issue in this action, and did so in New York. 22. Defendant Brian T. Sullivan served at the time of the Securitizations as the Vice
President, Treasurer (Principal Financial Officer), and Controller of Merrill Lynch Mortgage Investors, and worked in New York. Defendant Sullivan signed three of the Shelf Registration Statements and two of the amendments thereto that are at issue in this action, and did so in New York. 23. Defendant Michael M. McGovern served at the time of the Securitizations as a
Director of Merrill Lynch Mortgage Investors and Senior Counsel of Merrill Lynch, and worked in New York. Defendant McGovern signed three of the Shelf Registration Statements and the amendments thereto that are at issue in this action, and did so in New York. 24. Defendant Donald J. Puglisi served at the time of the Securitizations as a Director
of Merrill Lynch Mortgage Investors, and worked in New York. Defendant Puglisi signed three of the Shelf Registration Statements and the amendments thereto that are at issue in this action, and did so in New York. 25. Defendant Paul Park served at the time of the Securitizations as the President and
Chairman of the Board of Directors of Merrill Lynch Mortgage Investors, and worked in New
The two remaining GSE Certificates were purchased by Fannie Mae and Freddie Mac from Lehman Brothers, Inc. 11
York. Defendant Park signed one of the Shelf Registration Statements and the amendments thereto that are at issue in this action, and did so in New York. 26. Defendant Donald C. Han served at the time of the Securitizations as the
Treasurer of Merrill Lynch Mortgage Investors, and worked in New York. Defendant Han signed one of the Shelf Registration Statements that is at issue in this action., and did so in New York The Non-Party Originators 27. The loans underlying the Certificates were acquired by the sponsor for each
Securitization from non-party mortgage originators.4 The originators principally responsible for the loans underlying the Certificates were First NLC Financial Services, LLC. (First NLC); ResMAE Mortgage Corporation (ResMAE); WMC Mortgage Corp. (WMC); GreenPoint Mortgage Funding, Inc. (GreenPoint); Fremont Investment & Loan (Fremont); National City Mortgage Co. (National City); and Option One Mortgage Corporation (Option One). JURISDICTION AND VENUE 28. Jurisdiction of this Court is founded upon 28 U.S.C. 1345, which gives federal
Securities Act claims asserted herein arise under Sections 11, 12(a)(2), and 15 of the Securities
Defendants Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, and First Franklin Financial were the sponsors for 60 of the 72 Securitizations. The remaining 12 Securitizations had sponsors who are not parties. Ameriquest Mortgage Company, Credit-Based Asset Servicing and Securitization LLC, Fieldstone Investment Corp., IndyMac Bank F.S.B, and Option One Mortgage Corp. each were the sponsors for one or more of those 12 Securitizations. 12
Act of 1933, 15 U.S.C. 77k, 77l(a)(2), and 77o. This Court further has jurisdiction over the Securities Act claims pursuant to Section 22 of the Securities Act of 1933, 15 U.S.C. 77v. 30. This Court has jurisdiction over the statutory claims of violations of Sections
13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code and Sections 31-5606.05(a)(1)(B) and 315606.05(c) of the District of Columbia Code pursuant to this Courts supplemental jurisdiction under 28 U.S.C. 1367(a). This Court also has jurisdiction over the common law claims of negligent misrepresentation, fraud, and aiding and abetting fraud pursuant to this Courts supplemental jurisdiction under 28 U.S.C. 1367(a). 31. Venue is proper in this district pursuant to Section 22 of the Securities Act of
1933, 15 U.S.C. 77v, and 28 U.S.C. 1391(b). The Merrill Lynch Defendants do business in or derive substantial revenue from activities carried out in New York and all but one of the Merrill Lynch Defendants, including the parent company Merrill Lynch & Co., have their principal place of business in the state. Many of the acts and transactions alleged herein, including the preparation and dissemination of the Registration Statements, occurred in substantial part in the State of New York. Additionally, the GSE Certificates were actively marketed and sold from this State, and several of the Defendants can be found and transact business in this District. Defendants are also subject to personal jurisdiction in this District. FACTUAL ALLEGATIONS I. THE SECURITIZATIONS A. 32. Residential Mortgage-Backed Securitizations In General Asset-backed securitization distributes risk by pooling cash-producing financial
assets and issuing securities backed by those pools of assets. In residential mortgage-backed securitizations, the cash-producing financial assets are residential mortgage loans.
13
33.
The most common form of securitization of mortgage loans involves a sponsor
statements filed with the SEC. These registration statements include prospectuses, which explain the general structure of the investment, and prospectus supplements, which contain detailed descriptions of the mortgage groups underlying the certificates. Certificates are issued by the
14
trust pursuant to the registration statement and the prospectus and prospectus supplement. Underwriters sell the certificates to investors. 36. A mortgage servicer is necessary to manage the collection of proceeds from the
mortgage loans. The servicer is responsible for collecting homeowners mortgage loan payments, which the servicer remits to the trustee after deducting a monthly servicing fee. The servicers duties include making collection efforts on delinquent loans, initiating foreclosure proceedings, and determining when to charge off a loan by writing down its balance. The servicer is required to report key information about the loans to the trustee. The trustee (or trust administrator) administers the trusts funds and delivers payments due each month on the certificates to the investors. B. 37. The Securitizations At Issue In This Case This case involves the 72 Securitizations listed in paragraph 2 supra, 60 of which
were sponsored by Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, and First Franklin Financial Corporation and all of which were underwritten by Merrill Lynch, Pierce, Fenner & Smith. For each of the 72 Securitizations, Table 2 identifies: (1) the sponsor; (2) the depositor; (3) the lead underwriter; (4) the principal amount issued for the tranches5 purchased by the GSEs; (5) the date of issuance; and (6) the loan group or groups backing the GSE Certificate for that Securitization (referred to as the Supporting Loan Groups). Table 2
Transaction Tranche Sponsor/Seller Depositor Lead Underwriter Merrill Lynch, Pierce, Fenner & Smith, Inc. Principal Amount Issued ($) $344,465,000 Date of Issuance November 22, 2005 Supporting Loan Group(s) Group 1
ARSI 2005W4
A1B
Ameriquest Mortgage Company
Argent Securities, Inc.
Transaction
Tranche
Sponsor/Seller
Depositor
Lead Underwriter Merrill Lynch, Pierce, Fenner & Smith, Inc. Merrill Lynch, Pierce, Fenner & Smith, Inc. Merrill Lynch, Pierce, Fenner & Smith, Inc. Merrill Lynch, Pierce, Fenner & Smith, Inc. Merrill Lynch, Pierce, Fenner & Smith, Inc. Merrill Lynch, Pierce, Fenner & Smith, Inc. Merrill Lynch, Pierce, Fenner & Smith, Inc. Merrill Lynch, Pierce, Fenner & Smith, Inc. Merrill Lynch, Pierce, Fenner & Smith, Inc. Merrill Lynch, Pierce, Fenner & Smith, Inc. Merrill Lynch, Pierce, Fenner & Smith, Inc. Merrill Lynch, Pierce, Fenner & Smith, Inc. Merrill Lynch, Pierce, Fenner & Smith, Inc. Merrill Lynch, Pierce, Fenner & Smith, Inc.
ARSI 2005W4
A1A2
Ameriquest Mortgage Company Ameriquest Mortgage Company Ameriquest Mortgage Company Credit-Based Asset Servicing and Securitization, LLC Merrill Lynch Mortgage Lending, Inc. First Franklin Financial Corporation First Franklin Financial Corporation First Franklin Financial Corporation First Franklin Financial Corporation First Franklin Financial Corporation First Franklin Financial Corporation First Franklin Financial Corporation First Franklin Financial Corporation First Franklin Financial Corporation
Argent Securities, Inc. Argent Securities, Inc. Argent Securities, Inc. Merrill Lynch Mortgage Investors, Inc.
Principal Amount Issued ($) $687,112,000
Date of Issuance November 22, 2005
ARSI 2005W4
A1A3
$151,807,000
November 22, 2005
Group 1
ARSI 2006M1
A1
$1,401,905,000
June 28, 2006
Group 1
CBASS 2006-CB8
A1
$183,951,000
October 30, 2006
Group I
FFMER 2007-1
A1
Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc.
$725,544,000
On or about March 27, 2007 April 26, 2007
Group I
FFMER 2007-2
A1
$588,366,000
Group I
FFMER 2007-3
A1A
$285,760,000
May 30, 2007
Group I
FFMER 2007-3
A1C
$205,174,000
May 30, 2007
Group I
FFMER 2007-3
A1D
$33,199,000
May 30, 2007
Group I
FFMER 2007-3
M11
$35,135,000
May 30, 2007
Group I
FFMER 2007-3
M21
$28,590,000
May 30, 2007
Group I
FFMER 2007-3
M31
$7,922,000
May 30, 2007
Group I
FFMER 2007-3
M41
$9,989,000
May 30, 2007
Group I
FFMER 2007-4
1A
$509,625,000
June 26, 2007
Group I
16
Transaction
Tranche
Sponsor/Seller
Depositor
FFMER 2007-4
1M1
First Franklin Financial Corporation First Franklin Financial Corporation First Franklin Financial Corporation First Franklin Financial Corporation First Franklin Financial Corporation Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Fieldstone Investment Corporation IndyMac Bank, F.S.B
Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Fieldstone Mortgage Investment Corporation IndyMac MBS, Inc.
Date of Issuance June 26, 2007
Supporting Loan Group(s) Group I
FFMER 2007-4
1M2
$23,356,000
June 26, 2007
Group I
FFMER 2007-4
1M3
$12,327,000
June 26, 2007
Group I
FFMER 2007-5
1A
$241,175,000
October 10, 2007
Group I
FFMER 2007-H1
1A1
$295,640,000
October 9, 2007
Group I
FFML 2005FF12
A1
$663,543,000
December 28, 2005
Group I
FFML 2006FF18
A1
$689,394,000
December 28, 2006
Group I
FFML 2007FF1
A1
$608,774,000
January 26, 2007
Group I
FFML 2007FF2
A1
$1,021,839,000
February 28, 2007
Group I
FMIC 20063
1A
$221,277,000
October 27, 2006
Group 1
INDX 2005AR33
2A1
$234,872,000
December 29, 2005
Group 2
INDX 2006AR5
1A1
IndyMac Bank, F.S.B
IndyMac MBS, Inc.
$210,047,000
March 30, 2006
Group 1
INDX 2006AR7
2A1
IndyMac Bank, F.S.B
IndyMac MBS, Inc.
$341,217,000
March 30, 2006
Group 2
INDX 2007FLX4
1A1
IndyMac Bank, F.S.B
IndyMac MBS, Inc.
$127,861,000
May 30, 2007
Group 1
17
Transaction
Tranche
Sponsor/Seller
Depositor
Lead Underwriter Merrill Lynch, Pierce, Fenner & Smith, Inc. Merrill Lynch, Pierce, Fenner & Smith, Inc. Merrill Lynch, Pierce, Fenner & Smith, Inc. Merrill Lynch, Pierce, Fenner & Smith, Inc. Merrill Lynch, Pierce, Fenner & Smith, Inc. Merrill Lynch, Pierce, Fenner & Smith, Inc. Merrill Lynch, Pierce, Fenner & Smith, Inc. Merrill Lynch, Pierce, Fenner & Smith, Inc. Merrill Lynch, Pierce, Fenner & Smith, Inc. Merrill Lynch, Pierce, Fenner & Smith, Inc.
INDX 2007FLX5
1A1
IndyMac Bank, F.S.B
IndyMac MBS, Inc.
INDX 2007FLX6
1A1
IndyMac Bank, F.S.B
IndyMac MBS, Inc.
$94,391,000
July 30, 2007
Group 1
MANA 2007-A1
A1
Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Capital, Inc. and Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Capital, Inc. and Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc.
Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc.
$68,226,000
February 9, 2007
Group I
MANA 2007-A2
A1
$180,475,000
March 30, 2007
Group I
MANA 2007-A2
A2A
$165,226,000
March 30, 2007
Group 2
MANA 2007-A3
A1
$189,695,000
April 30, 2007
Group 1
MLMI 2005A8
A2A
$182,596,000
November 15, 2005
Group 2
MLMI 2005A8
A2B1
$178,723,000
November 15, 2005
Group 2
MLMI 2005AR1
A2
$250,727,000
September 29, 2005
Group 2
MLMI 2005HE2
A1A
$236,060,000
November 30, 2005
Group 1
MLMI 2005HE2
A1B
Merrill Lynch Mortgage Investors, Inc.
Merrill Lynch, Pierce, Fenner & Smith, Inc.
$59,015,000
November 30, 2005
Group 1
MLMI 2005HE3
A1A
Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc.
MLMI 2006A3
IIA1
Merrill Lynch, Pierce, Fenner & Smith, Inc. Merrill Lynch, Pierce, Fenner & Smith, Inc.
$335,591,000
December 28, 2005
Group 1
$89,730,000
May 31, 2006
Group 2
18
Transaction
Tranche
Sponsor/Seller
Depositor
MLMI 2006AF2
AV1
Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc.
Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc.
Date of Issuance October 30, 2006
MLMI 2006AHL1
A1
$160,748,000
June 29, 2006
Group I
MLMI 2006AR1
A1
$333,038,000
April 27, 2006
Group I
MLMI 2006FF1
A1
$1,098,020,000
December 27, 2006
Group I
MLMI 2006FM1
A1
$204,693,000
June 30, 2006
Group I
MLMI 2006HE1
A1
$355,063,000
February 7, 2006
Group I
MLMI 2006HE4
A1
$125,624,000
July 25, 2006
Group I
MLMI 2006HE5
A1
$169,018,000
September 28, 2006
Group I
MLMI 2006HE6
A1
$250,830,000
December 28, 2006
Group I
MLMI 2006MLN1
A1
$316,858,000
September 29, 2006
Group I
MLMI 2006OPT1
A1
$469,721,000
September 26, 2006
Group I
MLMI 2006RM1
A1
$171,181,000
March 21, 2006
Group I
MLMI 2006RM2
A1A
$411,649,000
May 31, 2006
Group I
MLMI 2006RM3
A1A
$227,029,000
June 30, 2006
Group I
19
Transaction
Tranche
Sponsor/Seller
Depositor
MLMI 2006RM4
A1
Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Option One Mortgage Corporation Option One Mortgage Corporation Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Credit-Based Asset Servicing and Securitization, LLC Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc.
Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Option One Mortgage Acceptance Corporation Option One Mortgage Acceptance Corporation Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc.
Date of Issuance September 27, 2006
Supporting Loan Group(s) Group I
MLMI 2006RM5
A1
$138,699,000
October 27, 2006
Group I
MLMI 2006WMC1
A1A
$419,318,000
On or about February 14, 2006 March 30, 2006
Group I
MLMI 2006WMC2
A1
$493,651,000
Group I
MLMI 2007HE1
A1
$354,933,000
March 8, 2007
Group 1
MLMI 2007HE2
A1
$431,956,000
March 30, 2007
Group 1
MLMI 2007MLN1
A1
$415,943,000
April 26, 2007
Group 1
OOMLT 2007-1
IA2
$ 259,609,000
January 24, 2007
Group 1
OOMLT 2007-1
IA1
$ 259,610,000
January 24, 2007
Group 1
OWNIT 2005-4
A1
$285,517,000
October 28, 2005
Group 1
OWNIT 2005-5
A1
$205,391,000
December 28, 2005
Group 1
OWNIT 2006-1
AV
$225,112,000
January 30, 2006
Group 1
OWNIT 2006-2
A1
Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc.
$221,310,000
March 9, 2006
Group 1
OWNIT 2006-3
A1
$180,115,000
On or about April 13, 2006
Group 1
20
Transaction
Tranche
Sponsor/Seller
Depositor
OWNIT 2006-4
A1
Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc.
Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc.
OWNIT 2006-5
A1B
$27,738,000
July 27, 2006
Group 1
OWNIT 2006-5
A1A
$110,953,000
July 27, 2006
Group 1
OWNIT 2006-6
A1
$113,153,000
September 28, 2006
Group 1
OWNIT 2006-7
A1
$184,746,000
November 3, 2006
Group 1
SURF 2005AB3
A1A
$135,861,000
December 28, 2005
Group 1
SURF 2005BC3
A1A
$302,990,000
September 29, 2005
Group 1
SURF 2005BC4
A1A
$470,632,000
December 20, 2005
Group 1
SURF 2006AB2
A1
$194,773,000
May 31, 2006
Group I
SURF 2006AB3
A1
$190,723,000
September 26, 2006
Group 1
SURF 2006BC1
A1
$583,827,000
On or about February 21, 2006 March 30, 2006
Group 1
SURF 2006BC2
A1
$173,248,000
Group 1
SURF 2006BC3
A1
$384,110,000
June 27, 2006
Group 1
SURF 2006BC4
A1
$439,858,000
September 27, 2006
Group 1
21
Transaction
Tranche
Sponsor/Seller
Depositor
Lead Underwriter Merrill Lynch, Pierce, Fenner & Smith, Inc. Merrill Lynch, Pierce, Fenner & Smith, Inc. Merrill Lynch, Pierce, Fenner & Smith, Inc. Merrill Lynch, Pierce, Fenner & Smith, Inc.
SURF 2006BC5
A1
Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc. Merrill Lynch Mortgage Lending, Inc.
Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc. Merrill Lynch Mortgage Investors, Inc.
Date of Issuance November 28, 2006
SURF 2007AB1
A1
$127,954,000
March 26, 2007
Group 1
SURF 2007BC1
A1
$294,133,000
January 24, 2007
Group 1
SURF 2007BC2
A1
$174,640,000
April 24, 2007
Group 1
C.
The Securitization Process 1. Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, and First Franklin Financial Grouped Mortgage Loans in Special Purpose Trusts
38.
As the sponsors for 60 of the 72 Securitizations, Merrill Lynch Mortgage
Lending, Merrill Lynch Mortgage Capital, and First Franklin Financial purchased the mortgage loans underlying the Certificates for those 60 Securitizations after the loans were originated, either directly from the originators or through affiliates of the originators.6 39. Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, and First
Franklin Financial then sold the mortgage loans for the 60 Securitizations that they sponsored to a depositor, which was a Merrill Lynch affiliated entity: Merrill Lynch Mortgage Investors. With respect to two of the remaining 12 Securitizations, non-party sponsor Credit-Based Asset Servicing and Securitization LLC sold the mortgage loans to Defendant Merrill Lynch Mortgage Investors, as depositor. With respect to the remaining ten Securitizations, non-party sponsors
Non-party sponsors Ameriquest Mortgage Company, Credit-Based Asset Servicing and Securitization LLC, Fieldstone Investment Corp., IndyMac Bank F.S.B, and Option One Mortgage Corp. were each a Sponsor of one or more of the remaining 12 Securitizations. The sponsor for each Securitization is included in Table 2, supra at paragraph 37. 22
sold the mortgage loans to non-party depositors, as reflected in Table 2, supra at paragraph 37; Defendant Merrill Lynch, Pierce, Fenner & Smith was the lead underwriter or co-lead underwriter for those ten Securitizations and sold three of those Securitizations to Freddie Mac, while Defendant Merrill Lynch Government Securities sold seven of those ten Securitizations to Fannie Mae.7 40. Merrill Lynch Mortgage Investors, is a wholly-owned, subsidiary of Merrill
Lynch & Co. The sole purpose of Merrill Lynch Mortgage Investors as depositor was to act as a conduit through which loans acquired by the sponsors can be securitized and interests in those loans sold to investors. 41. As depositors for 62 of the Securitizations, Merrill Lynch Mortgage Investors,
transferred the relevant mortgage loans to the trusts. As part of each of the Securitizations, the trustee, on behalf of the Certificateholders, executed a Pooling and Servicing Agreement (PSA) with the relevant depositor and the parties responsible for monitoring and servicing the mortgage loans in that Securitization. The trust, administered by the trustee, held the mortgage loans pursuant to the related PSA and issued Certificates, including the GSE Certificates, backed by such loans. The GSEs purchased the GSE Certificates, through which they obtained an ownership interest in the assets of the trust including the mortgage loans. 2. 42. The Trusts Issue Securities Backed by the Loans
PSAs, each trust issued Certificates backed by the underlying mortgage loans. The Certificates were then sold to investors like Fannie Mae and Freddie Mac, which thereby acquired an ownership interest in the assets of the corresponding trust. Each Certificate entitles its holder to The two remaining GSE Certificates were purchased by Fannie Mae and Freddie Mac from Lehman Brothers, Inc. 23
7
a specified portion of the cashflows from the underlying mortgages in the Supporting Loan Group. The level of risk inherent in the Certificates is a function of the capital structure of the related transaction and the credit quality of those underlying mortgages. 43. The Certificates were issued pursuant to one of ten Shelf Registration Statements
filed with the SEC on a Form S-3. The Shelf Registration Statements were amended by one or more Forms S-3/A filed with the SEC. Each Individual Defendant signed one or more of the three Shelf Registration Statements, including any amendments thereto, which were filed by Merrill Lynch Mortgage Investors. The SEC filing number, registrants, signatories and filing dates for the ten Shelf Registration Statements and amendments thereto, as well as the Certificates covered by each Shelf Registration Statement, are reflected in Table 3 below.
24
Table 3
SEC File Number Date Registration Statement Filed 12/21/2005 Date(s) Amended Registration Statements Filed 2/24/2006, 3/21/2006, 3/28/2006 Registrant(s) Covered Certificates Signatories of Registration Statement Signatories of Amendments
333-130545
333-140436
2/2/2007
3/7/2007
CBASS 2006-CB8, FFML 2006-FF18, FFML 2007-FF1, FFML 2007-FF2, MANA 2007-A1, MLMI 2006-A3, MLMI 2006-AF2, MLMI 2006-AHL1, MLMI 2006-AR1, MLMI 2006-FF1, MLMI 2006-FM1, MLMI 2006-HE4, MLMI 2006-HE5, MLMI 2006-HE6, MLMI 2006-MLN1, MLMI 2006-OPT1, MLMI 2006-RM2, MLMI 2006-RM3, MLMI 2006-RM4, MLMI 2006-RM5, MLMI 2007-HE1, OWNIT 2006-3, OWNIT 2006-4, OWNIT 2006-5, OWNIT 2006-6, OWNIT 2006-7, SURF 2006-AB2, SURF 2006-AB3, SURF 2006-BC3, SURF 2006-BC4, SURF 2006-BC5, SURF 2007-AB1, SURF 2007-BC1 FFMER 2007-1, FFMER 2007-2, FFMER 2007-3, FFMER 2007-4, FFMER 2007-5, FFMER 2007-H1, MANA 2007-A2, MANA 2007-A3, MLMI 2007-HE2, MLMI 2007-MLN1, SURF 2007-BC2
Matthew Whalen, Brian T. Sullivan, Michael M. McGovern, Donald J. Puglisi
Paul Park, Brian T. Sullivan, Michael M. McGovern, Donald J. Puglisi
Paul Park, Brian T. Sullivan, Michael M. McGovern, Donald J. Puglisi
25
SEC File Number
333-127233
Date(s) Amended Registration Statements Filed 8/17/2005
Registrant(s)
333-131895
2/16/2006
3/17/2006
Argent Securities, Inc. IndyMac MBS, Inc.
FFML 2005-FF12, MLMI 2005-A8, MLMI 2005-AR1, MLMI 2005-HE2, MLMI 2005-HE3, MLMI 2006-HE1, MLMI 2006-RM1, MLMI 2006-WMC1, MLMI 2006-WMC2, OWNIT 2005-4, OWNIT 2005-5, OWNIT 2006-1, OWNIT 2006-2, SURF 2005-AB3, SURF 2005-BC3, SURF 2005-BC4, SURF 2006-BC1, SURF 2006-BC2 ARSI 2006-M1
Matthew Whalen, Donald C. Han, Michael M. McGovern, Donald J. Puglisi
333-127556
8/15/2005
Not applicable
INDX 2006-AR5, INDX 2005-AR33, INDX 2006-AR7
333-132444
3/15/2006
5/8/2006, 5/31/2006
Fieldstone Mortgage Investment Corporation
FMIC 2006-3
Adam J. Bass, John P. Grazer and Andrew L. Stidd John Olinski, S. Blair Abernathy, Lynnette Antosh and Samir Grover John C. Kendall, Michael J. Sonnenfeld, Nayan V. Kisnadwala
Adam J. Bass, John P. Grazer and Andrew L. Stidd Not applicable
333-121782
12/30/2004
1/12/2006
Argent Securities, Inc.
ARSI 2005-W4
Adam J. Bass, John P. Grazer, and Andrew L. Stidd
5/8/2006: John C. Kendall, Michael J. Sonnenfeld, Nayan V. Kisnadwala; 5/31/2006: John C. Kendall, Michael J. Sonnenfeld, Nayan V. Kisnadwala Adam J. Bass, John P. Grazer, and Andrew L. Stidd
26
SEC File Number
333-132042
Date(s) Amended Registration Statements Filed 3/29/2006, 4/13/2006, 6/5/2007
Registrant(s)
IndyMac MBS, Inc.
INDX 2007-FLX4
John Olinski, S. Blair Abernathy, Raphael Bostic, Samir Grover and Victor H. Woodworth
333-140726
2/14/2007
3/1/2007, 6/6/2007, 6/19/2007
IndyMac MBS, Inc.
INDX 2007-FLX5, INDX 2007-FLX6
333-130870
1/5/2006
3/31/2006, 3/30/2006, 3/17/2006, 3/02/2006, 2/10/2006
Option One Mortgage Acceptance Corporation
OOMLT 2007-1
John Olinski, S. Blair Abernathy, Raphael Bostic, Simon Heyrick, Victor H. Woodworth Robert E. Dubrish, Steven L. Nadon and William L. ONeill
3/29/2006: Simon Heyrick, Victor H. Woodworth, John Olinski, S. Blair Abernathy and Raphael Bostic; 4/13/2006: Victor H. Woodworth, John Olinski, S. Blair Abernathy, Simon Heyrick and Raphael Bostic; 6/5/2007 Victor H. Woodworth, John Olinski, S. Blair Abernathy, Simon Heyrick and Raphael Bostic John Olinski, S. Blair Abernathy, Raphael Bostic, Simon Heyrick, Victor H. Woodworth Robert E. Dubrish, Steven L. Nadon and William L. ONeill
44.
guidelines that purportedly were used in connection with the origination of the underlying mortgage loans. In addition, the Prospectus Supplements purport to provide accurate statistics regarding the mortgage loans in each group, including the ranges of and weighted average FICO credit scores of the borrowers, the ranges of and weighted average loan-to-value ratios of the loans, the ranges of and weighted average outstanding principal balances of the loans, the debtto-income ratios, the geographic distribution of the loans, the extent to which the loans were for purchase or refinance purposes, and information concerning whether the loans were secured by a
27
property to be used as a primary residence, second home, or investment property; and information concerning whether the loans were delinquent. 45. The Prospectus Supplements associated with each Securitization were filed with
the SEC as part of the Registration Statements. The Form 8-Ks attaching the PSAs for the majority of the Securitizations were also filed with the SEC. The date on which the Prospectus Supplement and Form 8-K were filed for each Securitization, as well as the filing number of the Shelf Registration Statement related to each, are set forth in Table 4 below. Table 4
Transaction ARSI 2005-W4 ARSI 2006-M1 CBASS 2006-CB8 FFMER 2007-1 FFMER 2007-2 FFMER 2007-3 FFMER 2007-4 FFMER 2007-5 FFMER 2007-H1 FFML 2005-FF12 FFML 2006-FF18 FFML 2007-FF1 FFML 2007-FF2 FMIC 2006-3 INDX 2005-AR33 INDX 2006-AR5 INDX 2006-AR7 INDX 2007-FLX4 INDX 2007-FLX5 INDX 2007-FLX6 MANA 2007-A1 MANA 2007-A2 MANA 2007-A3 MLMI 2005-A8 MLMI 2005-AR1 MLMI 2005-HE2 Date Prospectus Supplement Filed 11/22/2005 6/23/2006 11/1/2006 3/27/2007 4/27/2007 5/30/2007 6/26/2007 10/10/2007 10/11/2007 1/6/2006 12/26/2006 1/25/2007 2/28/2007 10/26/2006 12/30/2005 4/3/2006 4/3/2006 6/4/2007 7/2/2007 8/1/2007 2/12/2007 4/2/2007 4/30/2007 11/15/2005 9/28/2005 12/1/2005 Date Form 8-K Attaching PSA Filed 12/7/2005 7/21/2006 11/14/2006 Not applicable 5/11/2007 6/14/2007 7/11/2007 10/25/2007 10/24/2007 1/12/2006 1/12/2007 2/12/2007 3/15/2007 11/7/2006 1/30/2006 4/14/2006 4/14/2006 6/20/2007 7/13/2007 8/17/2007 2/26/2007 4/16/2007 5/15/2007 11/30/2005 10/14/2005 12/12/2005 Filing Number of Related Registration Statement 333-121782 333-131895 333-130545 333-140436 333-140436 333-140436 333-140436 333-140436 333-140436 333-127233 333-130545 333-130545 333-130545 333-132444 333-127556 333-127556 333-127556 333-132042 333-140726 333-140726 333-130545 333-140436 333-140436 333-127233 333-127233 333-127233
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Transaction MLMI 2005-HE3 MLMI 2006-A3 MLMI 2006-AF2 MLMI 2006-AHL1 MLMI 2006-AR1 MLMI 2006-FF1 MLMI 2006-FM1 MLMI 2006-HE1 MLMI 2006-HE4 MLMI 2006-HE5 MLMI 2006-HE6 MLMI 2006-MLN1 MLMI 2006-OPT1 MLMI 2006-RM1 MLMI 2006-RM2 MLMI 2006-RM3 MLMI 2006-RM4 MLMI 2006-RM5 MLMI 2006-WMC1 MLMI 2006-WMC2 MLMI 2007-HE1 MLMI 2007-HE2 MLMI 2007-MLN1 OOMLT 2007-1 OWNIT 2005-4 OWNIT 2005-5 OWNIT 2006-1 OWNIT 2006-2 OWNIT 2006-3 OWNIT 2006-4 OWNIT 2006-5 OWNIT 2006-6 OWNIT 2006-7 SURF 2005-AB3 SURF 2005-BC3 SURF 2005-BC4 SURF 2006-AB2 SURF 2006-AB3 SURF 2006-BC1 SURF 2006-BC2
Date Prospectus Supplement Filed 12/27/2005 5/31/2006 10/31/2006 6/29/2006 4/26/2006 12/22/2006 6/29/2006 2/7/2006 7/26/2006 9/28/2006 12/27/2006 9/28/2006 9/26/2006 3/21/2006 5/31/2006 6/27/2006 9/28/2006 10/27/2006 2/14/2006 3/30/2006 3/8/2007 4/2/2007 4/27/2007 1/24/2007 10/28/2005 12/23/2005 1/30/2006 3/9/2006 4/13/2006 6/26/2006 7/26/2006 9/22/2006 11/2/2006 12/23/2005 9/29/2005 12/20/2005 5/31/2006 9/25/2006 2/17/2006 3/29/2006
Date Form 8-K Attaching PSA Filed 1/12/2006 6/15/2006 11/15/2006 7/14/2006 5/12/2006 1/11/2007 7/14/2006 2/22/2006 8/9/2006 10/13/2006 1/12/2007 10/16/2006 10/11/2006 4/5/2006 6/15/2006 7/14/2006 10/10/2006 11/13/2006 Not applicable 4/14/2006 3/23/2007 4/16/2007 5/11/2007 2/8/2007 11/14/2005 1/12/2006 2/14/2006 3/24/2006 Not applicable 7/11/2006 8/11/2006 10/13/2006 11/20/2006 1/11/2006 10/14/2005 1/3/2006 6/15/2006 10/11/2006 Not applicable 4/14/2006
Filing Number of Related Registration Statement 333-127233 333-130545 333-130545 333-130545 333-130545 333-130545 333-130545 333-127233 333-130545 333-130545 333-130545 333-130545 333-130545 333-127233 333-130545 333-130545 333-130545 333-130545 333-127233 333-127233 333-130545 333-140436 333-140436 333-130870 333-127233 333-127233 333-127233 333-127233 333-130545 333-130545 333-130545 333-130545 333-130545 333-127233 333-127233 333-127233 333-130545 333-130545 333-127233 333-127233
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Transaction SURF 2006-BC3 SURF 2006-BC4 SURF 2006-BC5 SURF 2007-AB1 SURF 2007-BC1 SURF 2007-BC2
Date Prospectus Supplement Filed 6/23/2006 9/26/2006 11/24/2006 3/26/2007 1/24/2007 4/24/2007
Date Form 8-K Attaching PSA Filed 7/12/2006 10/11/2006 12/13/2006 4/10/2007 2/8/2007 5/8/2007
Filing Number of Related Registration Statement 333-130545 333-130545 333-130545 333-130545 333-130545 333-140436
46.
The Certificates were issued pursuant to the PSAs, and Defendants Merrill Lynch
Government Securities and Merrill Lynch, Pierce, Fenner & Smith offered and sold the GSE Certificates to Fannie Mae and Freddie Mac, respectively, pursuant to the Registration Statements, which, as noted previously, included the Prospectuses and Prospectus Supplements.8 II. THE DEFENDANTS PARTICIPATION IN THE SECURITIZATION PROCESS A. 47. The Role of Each of the Defendants Each of the Defendants, including the Individual Defendants, had a role in the
securitization process and the marketing for some or all of the Certificates, which included purchasing the mortgage loans from the originators, arranging the Securitizations, selling the mortgage loans to the depositor, transferring the mortgage loans to the trustee on behalf of the Certificateholders, underwriting the public offering of the Certificates, structuring and issuing the Certificates, and marketing and selling the Certificates to investors such as Fannie Mae and Freddie Mac. 48. With respect to each Securitization, the depositor, underwriter, selling entity, and
Individual Defendants who signed the Registration Statement, as well as the Defendants who exercised control over their activities, are liable, jointly and severally, as participants in the
Together Merrill Lynch Government Securities and Merrill Lynch, Pierce, Fenner & Smith sold to the GSEs 86 of the GSE Certificates; for the remaining 2 GSE Certificates, the seller was a non-party underwriter. The entity that sold each Certificate to the GSEs is reflected at Tables 12 and 13, infra at paragraphs 169 through 170. 30
registration, issuance and offering of the Certificates, including issuing, causing, or making materially misleading statements in the Registration Statements, and omitting material facts required to be stated therein or necessary to make the statements contained therein not misleading. 1. 49. First Franklin Financial
Defendant First Franklin Financial is a wholly owned subsidiary of Merrill Lynch
Mortgage Capital. First Franklin Financial was the sponsor for five of the 72 Securitizations. In that capacity First Franklin Financial initiated the Securitizations, determined their structure, purchased the mortgage loans to be securitized, determined distribution of principal and interest, and provided data to the rating agencies to secure investment grade ratings for the GSE Certificates. First Franklin Financial also selected Merrill Lynch Mortgage Investors as the special purpose vehicle that would be used to transfer the mortgage loans from First Franklin Financial to the trusts, and selected Merrill Lynch, Pierce, Fenner & Smith as the lead underwriter or co-lead underwriter for the Securitizations. In its role as sponsor, First Franklin Financial knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing interests in such loans would be issued by the relevant trusts. 50. For the five Securitizations that it sponsored First Franklin Financial also
conveyed the mortgage loans to Defendant Merrill Lynch Mortgage Investors, as depositor, pursuant to a mortgage loan purchase agreement, mortgage loan sale and assignment agreement, pooling and servicing agreement, or another substantially similar agreement. In these agreements, First Franklin Financial made certain representations and warranties to Merrill Lynch Mortgage Investors regarding the groups of loans collateralizing the Certificates. These
31
representations and warranties were assigned by Merrill Lynch Mortgage Investors to the trustees for the benefit of the Certificateholders. 2. 51. Merrill Lynch Mortgage Capital
Defendant Merrill Lynch Mortgage Capital is a wholly owned subsidiary of
Merrill Lynch & Co. Merrill Lynch Mortgage Capital was the co-sponsor for one of the 72 Securitizations. In that capacity, Merrill Lynch Mortgage Capital determined the structure of the Securitization, initiated the Securitization, purchased the mortgage loans to be Securitized, determined distribution of principal and interest, and provided data to the rating agencies to secure investment grade ratings for the Certificates. Merrill Lynch Mortgage Capital also selected Merrill Lynch Mortgage Investors as the special purpose vehicle that would be used to transfer the mortgage loans from Merrill Lynch Mortgage Capital to the trusts, and selected Merrill Lynch, Pierce, Fenner & Smith as the lead underwriter or co-lead underwriter for the Securitization. In its role as co-sponsor, Merrill Lynch Mortgage Capital knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing interests in such loans would be issued by the relevant trusts. 52. For the Securitization that it co-sponsored Merrill Lynch Mortgage Capital also
conveyed the mortgage loans to Defendant Merrill Lynch Mortgage Investors, as depositor, pursuant to a mortgage loan purchase agreement, mortgage loan sale and assignment agreement, pooling and servicing agreement, or other substantially similar agreement. In these agreements, Merrill Lynch Mortgage Capital made certain representations and warranties to Merrill Lynch Mortgage Investors regarding the group of loans collateralizing the Certificates. These representations and warranties were assigned by Merrill Lynch Mortgage Investors to the trustees for the benefit of the Certificateholders.
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3. 53.
Merrill Lynch Mortgage Lending
Defendant Merrill Lynch Mortgage Lending is a wholly owned subsidiary of
Merrill Lynch Mortgage Capital. It is engaged in the business of, among other things, acquiring mortgage loans and selling those loans through securitization programs. Merrill Lynch Mortgage Lending was the sponsor or co-sponsor for 55 of the 72 Securitizations. In that capacity, Merrill Lynch Mortgage Lending determined the structure of the Securitizations, initiated the Securitizations, purchased the mortgage loans to be Securitized, determined distribution of principal and interest, and provided data to the rating agencies to secure investment grade ratings for the Certificates. Merrill Lynch Mortgage Lending also selected Merrill Lynch Mortgage Investors as the special purpose vehicle that would be used to transfer the mortgage loans from Merrill Lynch Mortgage Lending to the trusts, and selected Merrill Lynch, Pierce, Fenner & Smith as the lead underwriter or co-lead underwriter for the Securitizations. In its role as sponsor, Merrill Lynch Mortgage Lending knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing interests in such loans would be issued by the relevant trusts. 54. For the 55 Securitizations that it sponsored or co-sponsored, Merrill Lynch
Mortgage Lending also conveyed the mortgage loans to Defendant Merrill Lynch Mortgage Investors, as depositor, pursuant to a mortgage loan purchase agreement, mortgage loan sale and assignment agreement, pooling and servicing agreement, or other substantially similar agreement. In these agreements, Merrill Lynch Mortgage Lending made certain representations and warranties to Merrill Lynch Mortgage Investors regarding the group of loans collateralizing the Certificates. These representations and warranties were assigned by Merrill Lynch Mortgage Investors to the trustees for the benefit of the Certificateholders.
33
4. 55.
Merrill Lynch Mortgage Investors
Defendant Merrill Lynch Mortgage Investors is an indirect subsidiary of Merrill
Lynch & Co. Merrill Lynch Mortgage Investors was the depositor for 62 of the Securitizations. In its capacity as depositor, Merrill Lynch Mortgage Investors purchased the mortgage loans from First Franklin Financial, Merrill Lynch Mortgage Capital, and Merrill Lynch Mortgage Lending (as sponsors) pursuant to a mortgage loan purchase agreement, mortgage loan sale and assignment agreement, pooling and servicing agreement, or other substantially similar agreement.9 Merrill Lynch Mortgage Investors then sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trusts. Merrill Lynch Mortgage Investors, together with the other Defendants, was also responsible for preparing and filing the Registration Statements pursuant to which the Certificates were offered for sale. The trusts in turn held the mortgage loans for the benefit of the Certificateholders, and issued the Certificates in public offerings for sale to investors such as Fannie Mae and Freddie Mac. 5. 56. Merrill Lynch, Pierce, Fenner & Smith
Defendant Merrill Lynch, Pierce, Fenner & Smith is an investment bank, and was,
at all relevant times, a registered broker/dealer. Merrill Lynch, Pierce, Fenner & Smith was the lead underwriter or co-lead underwriter for each of the Securitizations. In that role, it was responsible for managing the offer of the Certificates for Fannie Mae and Freddie Mac, and the sale of the Certificates to Freddie Mac. Merrill Lynch, Pierce, Fenner & Smith was also obligated to conduct meaningful due diligence to ensure that the Registration Statements did not
First Franklin Financial, Merrill Lynch Mortgage Capital, and Merrill Lynch Mortgage Lending served as the sponsors for 60 of the 62 Securitizations for which Merrill Lynch Mortgage Investors was the depositor. For the two remaining Securitizations, Credit-Based Asset Servicing and Securitization, LLC served as the sponsor. 34
contain any material misstatements or omissions, including as to the manner in which the underlying mortgage loans were originated and sold. 6. 57. Merrill Lynch Government Securities
Defendant Merrill Lynch Government Securities is a wholly owned subsidiary of
Merrill Lynch & Co. Merrill Lynch Government Securities sold Certificates to Fannie Mae in 39 of the Securitizations. Merrill Lynch Government Securities was also obligated to conduct meaningful due diligence to ensure that the Registration Statements did not contain any material misstatements or omissions, including as to the manner in which the underlying mortgage loans were originated, transferred and underwritten. 7. 58. Merrill Lynch & Co.
Defendant Merrill Lynch & Co. employed its wholly-owned subsidiaries, First
Franklin Financial, Merrill Lynch Mortgage Capital, Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Investors, and Merrill Lynch, Pierce, Fenner & Smith, in the key steps of the securitization process. Unlike typical arms length transactions, the Securitizations here involved various Merrill Lynch subsidiaries and affiliates at virtually each step of the process. With respect to all but 12 of the Securitizations, the sponsor was First Franklin Financial, Merrill Lynch Mortgage Capital, or Merrill Lynch Mortgage Lending; the depositor was Merrill Lynch Mortgage Investors; the lead underwriter was Merrill Lynch, Pierce, Fenner & Smith; and the entity that sold the Certificates to the GSEs was Merrill Lynch Government Securities or Merrill Lynch, Pierce, Fenner & Smith. As to the remaining deals, Merrill Lynch, Pierce, Fenner & Smith was the lead underwriter in ten instances and sold three of the Certificates to Freddie Mac; Merrill Lynch Government Securities sold seven of the Certificates to the GSEs; and in two instances Merrill Lynch Mortgage Investors was the depositor.
35
59.
As the corporate parent of First Franklin Financial, Merrill Lynch Mortgage
Capital, Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch Government Securities, Merrill Lynch & Co. had the practical ability to direct and control the actions of First Franklin Financial, Merrill Lynch Mortgage Capital, Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch Government Securities related to the Securitizations. 8. 60. The Individual Defendants
Defendant Matthew Whalen served at the time of the Securitizations as President
and Chairman of the Board of Directors of Merrill Lynch Mortgage Investors, Inc. Mr. Whalen signed the Merrill Lynch Mortgage Investors Shelf Registration Statement under file number 333-130545 filed with the SEC on December 21, 2005 and the related pre-effective amendments on Form S-3/A filed with the SEC on February 24, 2006, March 21, 2006 and March 28, 2006. Mr. Whalen further signed the Merrill Lynch Mortgage Investors Shelf Registration Statement under file number 333-127233 filed with the SEC on August 5, 2005 and the related preeffective amendments on Form S-3/A filed with the SEC on August 17, 2005. 61. Defendant Brian T. Sullivan served at the time of the Securitizations as the Vice
President, Treasurer (Principal Financial Officer), and Controller of Merrill Lynch Mortgage Investors, Inc. Mr. Sullivan signed the Merrill Lynch Mortgage Investors Shelf Registration Statement under file number 333-130545 filed with the SEC on December 21, 2005 and the related pre-effective amendments on Form S-3/A filed with the SEC on February 24, 2006, March 21, 2006 and March 28, 2006. Mr. Sullivan further signed the Merrill Lynch Mortgage Investors Shelf Registration Statement under file number 333-140436 filed with the SEC on February 2, 2007 and signed through a power of attorney the related pre-effective amendments 36
on Form S-3/A filed with the SEC on March 7, 2007. Mr. Sullivan also signed the Merrill Lynch Mortgage Investors related pre-effective amendments on Form S-3/A filed on August 17, 2005 for the Shelf Registration Statement under file number 333-1273233, which was filed with the SEC on August 5, 2005. 62. Defendant Michael M. McGovern served at the time of the Securitizations as a
Director of Merrill Lynch Mortgage Investors, Inc. and Senior Counsel of Merrill Lynch. Mr. McGovern signed the Merrill Lynch Mortgage Investors Shelf Registration Statement under file number 333-130545 filed with the SEC on December 21, 2005 and the related pre-effective amendments on Form S-3/A filed with the SEC on February 24, 2006, March 21, 2006 and March 28, 2006. Mr. McGovern further signed the Merrill Lynch Mortgage Investors Shelf Registration Statement under file number 333-140436 filed with the SEC on February 2, 2007 and signed through a power of attorney the related pre-effective amendments on Form S-3/A filed with the SEC on March 7, 2007. Mr. McGovern additionally signed the Merrill Lynch Mortgage Investors Shelf Registration Statement under file 333-127233 filed with the SEC on August 5, 2005 and the related pre-effective amendments on Form S-3/A filed with the SEC on August 17, 2005. 63. Defendant Donald J. Puglisi served at the time of the Securitizations as a Director
of Merrill Lynch Mortgage Investors, Inc. Mr. Puglisi signed the Merrill Lynch Mortgage Investors Shelf Registration Statement under file number 333-130545 filed with the SEC on December 21, 2005 and the related pre-effective amendments on Form S-3/A filed with the SEC on February 24, 2006, March 21, 2006 and March 28, 2006. Mr. Puglisi further signed the Merrill Lynch Mortgage Investors Shelf Registration Statement under file number 333-140436 filed with the SEC on February 2, 2007 and signed through a power of attorney the related pre-
37
effective amendments on Form S-3/A filed with the SEC on March 7, 2007. Mr. Puglisi additionally signed the Merrill Lynch Mortgage Investors Shelf Registration Statement under file 333-127233 filed with the SEC on August 5, 2005 and the related pre-effective amendments on Form S-3/A filed with the SEC on August 17, 2005. 64. Defendant Paul Park served at the time of the Securitizations as the President and
Chairman of the Board of Directors of Merrill Lynch Mortgage Investors, Inc. Mr. Park signed the Merrill Lynch Mortgage Investors Shelf Registration Statement under file number 333140436 filed with the SEC on February 2, 2007 and signed, in both his individual capacity and with a power of attorney on behalf of Defendant Brian T. Sullivan, Defendant Michael M. McGovern, and Defendant Donald J. Puglisi, the related pre-effective amendments on Form S3/A filed with the SEC on March 7, 2007. 65. Defendant Donald C. Han served at the time of the Securitizations as the
Treasurer of Merrill Lynch Mortgage Investors, Inc. Mr. Han signed the Merrill Lynch Mortgage Investors Shelf Registration Statement under file 333-127233 filed with the SEC on August 5, 2005. B. 66. Defendants Failure To Conduct Proper Due Diligence The Defendants failed to conduct adequate and sufficient due diligence to ensure
that the mortgage loans underlying the Securitizations complied with the statements in the Registration Statements. 67. During the time period during which the Certificates were issued, approximately
2005 through 2007, Merrill Lynchs involvement in the mortgage-backed securitization market was rapidly expanding. In an effort to increase revenue and profits, Merrill Lynch, at the direction of its corporate parent, Merrill Lynch & Co., vastly expanded the volume of mortgagebacked securities it securitized. Merrill Lynch Mortgage Investors securitized a relatively small 38
volume of mortgage loans in 2000 as measured against the years that followed, $14.3 billion. In 2001, the volume of mortgage loans securitized nearly doubled, from $14.3 billion to $24.2 billion, and was $26.1 billion in 2002. In 2003, the volume of mortgage loans that Merrill Lynch Mortgage Investors securitized almost doubled again, to $43.7 billion, and was $45.9 billion in 2004. In 2005, the volume of Merrill Lynch Mortgage Investors securitizations rose to $57.9 billion and nearly doubled, to $97.4 billion, in 2006. In 2007, the volume of securitization surpassed $100 billion, Merrill Lynch Mortgage Investors highest volume of residential mortgage loans. In fact, Merrill Lynch was the fourth largest issuer of subprime mortgagebacked securities from 2005 to 2007, and by 2007, Merrill Lynch was the second largest issuer of subprime mortgage-backed securities. Merrill Lynchs ascent towards the top of the league tables was aided by its acquisition, in late 2006 at the height of the market, of First Franklin Financial, a leading originator and sponsor of residential mortgages, and its servicer subsidiary, Home Loan Services. 68. Defendants had enormous financial incentives to complete as many offerings as
quickly as possible without regard to ensuring the accuracy or completeness of the Registration Statements, or conducting adequate and reasonable due diligence. For example, Merrill Lynch Mortgage Investors, as the depositor, was paid a percentage of the total dollar amount of the offerings upon completion of the Securitizations. Merrill Lynch, Pierce, Fenner & Smith, as the underwriter and as the entity that sold the Certificates purchased by Freddie Mac, and Merrill Lynch Government Securities, as the entity that sold the Certificates purchased by Fannie Mae, were each paid a commission based on the amount they received from the sale of the Certificates.
39
69.
The push to securitize large volumes of mortgage loans contributed to the absence
of controls needed to prevent the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. In particular, Defendants failed to conduct adequate diligence or otherwise to ensure the accuracy of the statements in the Registration Statements pertaining to the Securitizations. 70. For instance, Merrill Lynch retained third-parties, including Clayton
Holdings, Inc. (Clayton) and The Bohan Group, Inc. (Bohan), to analyze the loans it was considering placing in its securitizations, but waived a significant number of loans into the securitizations that these firms had recommended for exclusion, and did so without taking adequate steps to ensure that these loans had in fact been underwritten in accordance with applicable guidelines or had compensating factors that excused the loans non-compliance with those guidelines. On January 27, 2008, Clayton revealed that it had entered into an agreement with the New York Attorney General (the NYAG) to provide documents and testimony regarding its due diligence reports, including copies of the actual reports provided to its clients. According to The New York Times, as reported on January 27, 2008, Clayton told the NYAG that starting in 2005, it saw a significant deterioration of lending standards and a parallel jump in lending expectations, and some investment banks directed Clayton to halve the sample of loans it evaluated in each portfolio. 71. Merrill Lynch was negligent in allowing into the securitizations a substantial
number of mortgage loans that, as reported to Merrill Lynch by third-party due diligence firms, did not conform to the underwriting standards stated in the Registration Statements pursuant to which they made offerings, including the Prospectuses and Prospectus Supplements that formed part of those Registration Statements.
40
72.
Claytons trending reports revealed that in the period from the first quarter of
2006 to the second quarter of 2007, 23 percent of the mortgage loans that Merrill Lynch submitted to Clayton to review in residential mortgage-backed securities groups were rejected by Clayton as falling outside the applicable underwriting guidelines. Of the mortgage loans that Clayton found defective, 32 percent of the loans were subsequently waived in by Merrill Lynch without proper consideration and analysis of compensating factors and included in securitizations such as the ones in which Fannie Mae and Freddie Mac invested. See Clayton Trending Reports, available at http://fcic.law.stanford.edu/hearings/testimony/the-impact-of-thefinancial-crisis-sacramento#documents. 73. Merrill Lynchs underwriting and due diligence practices with respect to
mortgage-backed securities are being investigated by the SEC. In October 2007, the SEC launched an informal investigation into Merrill Lynchs underwriting of mortgage-backed securities. See, e.g., Associated Press, Merrill Lynch Acknowledges SEC Investigation, Nov. 7, 2007 (available at http://www.msnbc.msn.com/id/21680312/ns/business-us_business/t/merrilllynch-acknowledges-sec-investigation/#.TkDMnmEniSo). That investigation was upgraded, and became formal in early 2008. See, e.g., Amir Efrati, Susan Pulliam, Kara Scannel and Craig Karmin, Prosecutors Widen Probes Into Subprime U.S. Attorneys Office Seeks Merrill Material; SEC Upgrades Inquiry, Wall St. J., Feb. 8, 2008. III. THE REGISTRATION STATEMENTS AND THE PROSPECTUS SUPPLEMENTS A. 74. Compliance With Underwriting Guidelines The Prospectus Supplements for each Securitization describe the mortgage loan
underwriting guidelines pursuant to which the mortgage loans underlying the related Securitizations were to have been originated. These guidelines were intended to assess the 41
creditworthiness of the borrower, the ability of the borrower to repay the loan, and the adequacy of the mortgaged property as security for the loan. 75. The statements made in the Prospectus Supplements, which, as discussed, formed
part of the Registration Statement for each Securitization, were material to a reasonable investors decision to purchase and invest in the Certificates because the failure to originate a mortgage loan in accordance with the applicable guidelines creates a higher risk of delinquency and default by the borrower, as well as a risk that losses upon liquidation will be higher thus resulting in a greater economic risk to an investor such as Fannie Mae or Freddie Mac. 76. The Prospectus Supplements for the Securitizations contained several key
statements with respect to the underwriting standards of the entities that originated the loans in the Securitizations. For example, the Prospectus Supplement for the MLMI 2006-OPT1 Securitization, for which Option One was the originator, Merrill Lynch, Pierce, Fenner & Smith was the underwriter, and Merrill Lynch Mortgage Investors was the depositor, stated that: The Mortgage Loans will have been originated generally in accordance with Option Ones NonPrime Guidelines (the Option One Underwriting Guidelines) and that the Option One Underwriting Guidelines are primarily intended to assess the value of the mortgaged property, to evaluate the adequacy of such property as collateral for the mortgage loan and to assess the applicants ability to repay the mortgage loan. 77. The MLMI 2006-OPT1 Prospectus Supplement stated that exceptions to the
Option One Underwriting Guidelines (including a debt-to-income ratio exception, a pricing exception, a loan-to-value exception, a credit score exception or an exception from certain requirements of a particular risk category) are made on a case-by-case basis, but emphasized that exceptions are made where compensating factors exist.
42
78.
With respect to the information evaluated by the originator, the MLMI 2006-
OPT1 Prospectus Supplement stated that: Each mortgage loan applicant completes an application that includes information with respect to the applicants liabilities, income, credit history, employment history and personal information. The Option One Underwriting Guidelines require a credit report and, if available, a credit score on each applicant from a creditreporting agency. The credit report typically contains information relating to such matters as credit history with local and national merchants and lenders, installment debt payments and any record of defaults, bankruptcies, repossessions or judgments. 79. The MLMI 2006-OPT1 Prospectus Supplement further stated that: The Option
One Underwriting Guidelines require that mortgage loans be underwritten in a standardized procedure which complies with applicable federal and state laws and regulations and require Option Ones underwriters to be satisfied that the value of the property being financed, as indicated by an appraisal, supports the loan balance. 80. The Prospectus and Prospectus Supplement for each of the Securitizations had
similar representations to those quoted above. The relevant representations in the Prospectus and Prospectus Supplement pertaining to originating entity underwriting standards for each Securitization are reflected in Appendix A to this Complaint. As discussed below in paragraphs 108 through 124, in fact, the originators of the mortgage loans in the Supporting Loan Groups for the Securitizations did not adhere to their stated underwriting guidelines, thus rendering the description of those guidelines in the Prospectus and Prospectus Supplements false and misleading. 81. Further, for the vast majority of the Securitizations, the Prospectus and Prospectus
Supplement described or referenced additional representations and warranties in the PSA by the
43
originator concerning the mortgage loans underlying the Securitizations. Such representations and warranties, which are described more fully for each Securitization in Appendix A, included: (i) the mortgage loans were underwritten in accordance with the sellers underwriting guidelines in effect at the time of origination, subject to only limited exceptions; and, (ii) the origination and collection practices used by the originator with respect to each mortgage note and mortgage have been in all respects legal, proper, prudent and customary in the mortgage origination and servicing business. 82. The inclusion of these representations in the Prospectuses and Prospectus
Supplements had the purpose and effect of providing additional assurances to investors regarding the quality of the mortgage collateral underlying the Securitizations and the compliance of that collateral with the underwriting guidelines described in the Prospectuses and Prospectus Supplements. These representations were material to a reasonable investors decisions to purchase the Certificates. B. 83. Statements Regarding Occupancy Status of Borrower The Prospectus Supplements contained collateral group-level information about
the occupancy status of the borrowers of the loans in the Securitizations. Occupancy status refers to whether the property securing a mortgage is to be the primary residence of the borrower, a second home, or an investment property. The Prospectus Supplements for each of the Securitizations presented this information in tabular form, usually in a table entitled Occupancy Status or Occupancy Types of the Group Mortgage Loans. This table divided all the loans in the collateral group by occupancy status, e.g., into the following categories: (i) Primary, or Owner Occupied; (ii) Second Home, or Secondary; and (iii) Investment or Non-Owner. For each category, the table stated the number of loans in
44
that category. Occupancy statistics for the Supporting Loan Groups for each Securitization were reported in the Prospectus Supplements as follows:10 Table 5
Transaction Tranche Supporting Loan Group Group 1 Group 1 Group 1 Group 1 Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group 1 Group 2 Group 1 Group 2 Group 1 Group 1 Primary or Owner Occupied % 90.26 90.26 90.26 87.69 92.19 96.10 93.36 92.43 92.43 92.43 92.43 92.43 92.43 92.43 92.22 92.22 92.22 92.22 90.81 99.96 93.87 97.41 93.81 94.05 93.17 85.92 86.41 82.87 81.93 81.84 Second Home/Secondary % 1.02 1.02 1.02 1.07 1.31 0.21 0.60 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.96 0.96 0.96 0.96 0.29 0.04 0.90 0.28 0.79 0.71 0.69 5.00 2.15 3.71 3.12 2.63 Investor %
ARSI 2005-W4 ARSI 2005-W4 ARSI 2005-W4 ARSI 2006-M1 CBASS 2006-CB8 FFMER 2007-1 FFMER 2007-2 FFMER 2007-3 FFMER 2007-3 FFMER 2007-3 FFMER 2007-3 FFMER 2007-3 FFMER 2007-3 FFMER 2007-3 FFMER 2007-4 FFMER 2007-4 FFMER 2007-4 FFMER 2007-4 FFMER 2007-5 FFMER 2007-H1 FFML 2005-FF12 FFML 2006-FF18 FFML 2007-FF1 FFML 2007-FF2 FMIC 2006-3 INDX 2005-AR33 INDX 2006-AR5 INDX 2006-AR7 INDX 2007-FLX4 INDX 2007-FLX5
A1B A1A2 A1A3 A1 A1 A1 A1 A1A A1C A1D M11 M21 M31 M41 1A 1M1 1M2 1M3 1A 1A1 A1 A1 A1 A1 1A 2A1 1A1 2A1 1A1 1A1
8.72 8.72 8.72 11.24 6.50 3.70 6.04 6.83 6.83 6.83 6.83 6.83 6.83 6.83 6.83 6.83 6.83 6.83 8.90 0.00 5.22 2.31 5.40 5.24 6.14 9.08 11.44 13.42 14.95 15.54
Each Prospectus Supplement provided the total number of loans and the number of loans in the following categories: owner occupied, investor, and second home. These numbers have been converted to percentages. 45
10
Transaction
Tranche
Supporting Loan Group Group 1 Group I Group I Group 2 Group 1 Group 2 Group 2 Group 2 Group 1 Group 1 Group 1 Group 2 Group 2 Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1
INDX 2007-FLX6 MANA 2007-A1 MANA 2007-A2 MANA 2007-A2 MANA 2007-A3 MLMI 2005-A8 MLMI 2005-A8 MLMI 2005-AR1 MLMI 2005-HE2 MLMI 2005-HE2 MLMI 2005-HE3 MLMI 2006-A3 MLMI 2006-AF2 MLMI 2006-AHL1 MLMI 2006-AR1 MLMI 2006-FF1 MLMI 2006-FM1 MLMI 2006-HE1 MLMI 2006-HE4 MLMI 2006-HE5 MLMI 2006-HE6 MLMI 2006-MLN1 MLMI 2006-OPT1 MLMI 2006-RM1 MLMI 2006-RM2 MLMI 2006-RM3 MLMI 2006-RM4 MLMI 2006-RM5 MLMI 2006-WMC1 MLMI 2006-WMC2 MLMI 2007-HE1 MLMI 2007-HE2 MLMI 2007-MLN1 OOMLT 2007-1 OOMLT 2007-1 OWNIT 2005-4 OWNIT 2005-5 OWNIT 2006-1 OWNIT 2006-2
1A1 A1 A1 A2A A1 A2A A2B1 A2 A1A A1B A1A IIA1 AV1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1A A1A A1 A1 A1A A1 A1 A1 A1 IA2 IA1 A1 A1 AV A1
Primary or Owner Occupied % 83.52 76.77 69.60 82.21 56.24 47.42 47.42 86.22 92.22 92.22 93.99 92.03 68.85 86.96 86.61 88.71 93.73 91.16 90.79 87.83 88.37 96.35 93.40 87.80 94.78 96.87 91.62 89.39 95.74 94.47 90.72 93.67 89.47 87.02 87.02 92.79 91.38 96.44 94.48
Second Home/Secondary % 1.11 4.84 6.74 3.94 6.70 3.13 3.13 1.55 0.74 0.74 1.87 7.97 6.26 0.76 1.09 0.84 0.85 0.79 0.59 1.33 0.56 0.75 0.73 1.42 0.79 0.47 1.12 1.39 2.93 3.27 1.87 0.69 2.05 1.25 1.25 0.86 1.20 0.69 0.31
Investor %
15.37 18.39 23.66 13.85 37.07 49.45 49.45 12.22 7.04 7.04 4.14 0.00 24.89 12.28 12.30 10.45 5.43 8.04 8.63 10.84 11.07 2.91 5.87 10.79 4.43 2.66 7.26 9.22 1.33 2.26 7.41 5.64 8.48 11.73 11.73 6.35 7.42 2.87 5.21
46
Transaction
Tranche
Supporting Loan Group Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group I Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1
OWNIT 2006-3 OWNIT 2006-4 OWNIT 2006-5 OWNIT 2006-5 OWNIT 2006-6 OWNIT 2006-7 SURF 2005-AB3 SURF 2005-BC3 SURF 2005-BC4 SURF 2006-AB2 SURF 2006-AB3 SURF 2006-BC1 SURF 2006-BC2 SURF 2006-BC3 SURF 2006-BC4 SURF 2006-BC5 SURF 2007-AB1 SURF 2007-BC1 SURF 2007-BC2
A1 A1 A1B A1A A1 A1 A1A A1A A1A A1 A1 A1 A1 A1 A1 A1 A1 A1 A1
Primary or Owner Occupied % 94.88 96.01 97.62 97.62 96.49 96.19 77.64 96.89 97.31 84.60 75.39 97.64 98.57 96.37 93.81 96.79 78.03 95.29 96.06
Second Home/Secondary % 0.41 0.28 0.23 0.23 0.27 0.38 4.28 0.51 0.47 0.82 2.57 0.43 0.10 0.19 1.22 0.76 2.78 0.71 0.47
Investor %
4.71 3.70 2.15 2.15 3.24 3.43 18.08 2.59 2.21 14.58 22.04 1.94 1.33 3.43 4.97 2.44 19.19 3.99 3.46
84.
As Table 5 makes clear, the Prospectus Supplements for each Securitization, with
the exception of MLMI 2005-A8, reported that the majority (typically more than 90%) of the mortgage loans in the Supporting Loan Groups were owner occupied, while only a small percentage were reported as non-owner occupied (i.e., a second home or investor property). 85. The statements about occupancy status were material to a reasonable investors
decision to invest in the Certificates. Information about occupancy status is an important factor in determining the credit risk associated with a mortgage loan and, therefore, the securitization that it collateralizes. Because borrowers who reside in mortgaged properties are less likely to default than borrowers who purchase homes as second homes or investments and live elsewhere, and are more likely to care for their primary residence, the percentage of loans on owner-
47
occupied properties in the supporting loan group is an important measure of the risk of the certificates sold in that securitization. 86. Other things being equal, the higher the percentage of loans not secured by
owner-occupied residences, the greater the risk of loss to the certificateholders. Even small differences in the percentages of primary/owner-occupied, second home/secondary, and investment properties in the collateral group of a securitization can have a significant effect on the risk of each certificate sold in that securitization, and thus, are important to the decision of a reasonable investor whether to purchase any such certificate. As discussed below at paragraphs 98 through 101, the Registration Statement for each Securitization materially overstated the percentage of loans in the Supporting Loan Groups that were owner occupied, thereby misrepresenting the degree of risk of the GSE Certificates. C. 87. Statements Regarding Loan to Value Ratios The loan-to-value ratio of a mortgage loan, or LTV ratio, is the ratio of the
48
greater than 100 percent as reported in the Prospectus Supplements for the Supporting Loan Groups are reflected in Table 6 below.11 Table 6
Transaction Tranche Supporting Loan Group Percentage of loans, by aggregate principal balance, with LTV less than or equal to 80% 65.49 65.49 65.49 53.77 34.83 59.35 49.68 42.71 42.71 42.71 42.71 42.71 42.71 42.71 33.18 33.18 33.18 33.18 40.24 60.30 72.38 57.54 56.98 63.91 34.12 95.47 99.33 Percentage of loans, by aggregate principal balance, with LTV greater than 100% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
ARSI 2005-W4 ARSI 2005-W4 ARSI 2005-W4 ARSI 2006-M1 CBASS 2006-CB8 FFMER 2007-1 FFMER 2007-2 FFMER 2007-3 FFMER 2007-3 FFMER 2007-3 FFMER 2007-3 FFMER 2007-3 FFMER 2007-3 FFMER 2007-3 FFMER 2007-4 FFMER 2007-4 FFMER 2007-4 FFMER 2007-4 FFMER 2007-5 FFMER 2007-H1 FFML 2005-FF12 FFML 2006-FF18 FFML 2007-FF1 FFML 2007-FF2 FMIC 2006-3 INDX 2005-AR33 INDX 2006-AR5
11
A1B A1A2 A1A3 A1 A1 A1 A1 A1A A1C A1D M11 M21 M31 M41 1A 1M1 1M2 1M3 1A 1A1 A1 A1 A1 A1 1A 2A1 1A1
Group 1 Group 1 Group 1 Group 1 Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group 1 Group 2 Group 1
As used in this Complaint, LTV refers to the original loan-to-value ratio for first lien mortgages and for properties with second liens that are subordinate to the lien that was included in the securitization (i.e., only the securitized lien is included in the numerator of the LTV calculation). Where the securitized lien is junior to another loan, the more senior lien has been added to the securitized one to determine the numerator in the LTV calculation (this later calculation is sometimes referred to as the combined-loan-to-value ratio, or CLTV). 49
Transaction
Tranche
INDX 2006-AR7 INDX 2007-FLX4 INDX 2007-FLX5 INDX 2007-FLX6 MANA 2007-A1 MANA 2007-A2 MANA 2007-A2 MANA 2007-A3 MLMI 2005-A8 MLMI 2005-A8 MLMI 2005-AR1 MLMI 2005-HE2 MLMI 2005-HE2 MLMI 2005-HE3 MLMI 2006-A3 MLMI 2006-AF2 MLMI 2006-AHL1 MLMI 2006-AR1 MLMI 2006-FF1 MLMI 2006-FM1 MLMI 2006-HE1 MLMI 2006-HE4 MLMI 2006-HE5 MLMI 2006-HE6 MLMI 2006-MLN1 MLMI 2006-OPT1 MLMI 2006-RM1 MLMI 2006-RM2 MLMI 2006-RM3 MLMI 2006-RM4 MLMI 2006-RM5 MLMI 2006-WMC1 MLMI 2006-WMC2 MLMI 2007-HE1 MLMI 2007-HE2 MLMI 2007-MLN1 OOMLT 2007-1 OOMLT 2007-1 OWNIT 2005-4
2A1 1A1 1A1 1A1 A1 A1 A2A A1 A2A A2B1 A2 A1A A1B A1A IIA1 AV1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1A A1A A1 A1 A1A A1 A1 A1 A1 IA2 IA1 A1
Group 2 Group 1 Group 1 Group 1 Group I Group I Group 2 Group 1 Group 2 Group 2 Group 2 Group 1 Group 1 Group 1 Group 2 Group 2 Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group 1 Group 1 Group 1 Group 1 Group 1 Group 1
Percentage of loans, by aggregate principal balance, with LTV less than or equal to 80% 97.79 98.96 98.46 99.17 93.49 93.66 93.50 96.26 79.66 79.66 18.76 58.96 58.96 63.86 95.71 78.02 54.48 50.90 86.35 69.85 57.48 55.51 64.41 35.81 72.92 62.41 60.45 67.91 68.99 62.43 46.50 73.03 74.94 53.86 40.89 48.44 51.10 51.10 66.50
Percentage of loans, by aggregate principal balance, with LTV greater than 100% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
50
Transaction
Tranche
OWNIT 2005-5 OWNIT 2006-1 OWNIT 2006-2 OWNIT 2006-3 OWNIT 2006-4 OWNIT 2006-5 OWNIT 2006-5 OWNIT 2006-6 OWNIT 2006-7 SURF 2005-AB3 SURF 2005-BC3 SURF 2005-BC4 SURF 2006-AB2 SURF 2006-AB3 SURF 2006-BC1 SURF 2006-BC2 SURF 2006-BC3 SURF 2006-BC4 SURF 2006-BC5 SURF 2007-AB1 SURF 2007-BC1 SURF 2007-BC2
A1 AV A1 A1 A1 A1B A1A A1 A1 A1A A1A A1A A1 A1 A1 A1 A1 A1 A1 A1 A1 A1
Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group I Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1
Percentage of loans, by aggregate principal balance, with LTV less than or equal to 80% 57.51 84.23 74.79 75.47 73.60 78.75 78.75 74.84 64.66 61.80 54.56 56.65 59.44 63.64 59.27 63.07 55.65 50.89 52.16 59.45 47.33 47.53
Percentage of loans, by aggregate principal balance, with LTV greater than 100% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
90.
As Table 6 makes clear, the Prospectus Supplements for most of the
Securitizations reported that many or most of the mortgage loans in the Supporting Loan Groups had an LTV ratio of 80 percent or less, and that the Prospectus Supplement for all of the Securitizations reported that zero mortgage loans in the Supporting Loan Group had an LTV ratio over 100 percent. 91. The LTV ratio is among the most important measures of the risk of a mortgage
loan, and thus, it is one of the most important indicators of the default risk of the mortgage loans underlying the Certificates. The lower the ratio, the less likely that a decline in the value of the property will wipe out an owners equity, and thereby give an owner an incentive to stop making 51
mortgage payments and abandon the property. This ratio also predicts the severity of loss in the event of default. The lower the LTV, the greater the equity cushion, so the greater the likelihood that the proceeds of foreclosure will cover the unpaid balance of the mortgage loan. 92. Thus, LTV ratio is a material consideration to a reasonable investor in deciding
whether to purchase a certificate in a securitization of mortgage loans. Even small differences in the LTV ratios of the mortgage loans in the collateral group of a securitization have a significant effect on the likelihood that the collateral groups will generate sufficient funds to pay certificateholders in that securitization, and thus are material to the decision of a reasonable investor whether to purchase any such certificate. As discussed infra at paragraphs 102 through 107, the Registration Statements for the Securitizations materially overstated the percentage of loans in the Supporting Loan Groups with an LTV ratio at or less than 80 percent and materially understated the percentage of loans in the Supporting Loan Groups with an LTV ratio over 100 percent, thereby misrepresenting the degree of risk of the Certificates. D. 93. Statements Regarding Credit Ratings Credit ratings are assigned to the tranches of mortgage-backed securitizations by
the credit rating agencies, including Moodys Investors Service, Standard & Poors, and Fitch Ratings. Each credit rating agency uses its own scale with letter designations to describe various levels of risk. In general, AAA, or its equivalent, ratings are at the top of the credit rating scale and are intended to designate the safest investments. C and D ratings are at the bottom of the scale and refer to investments that are currently in default and exhibit little or no prospect for recovery. At the time the GSEs purchased the GSE Certificates, investments with AAA, or its equivalent, ratings historically experienced a loss rate of less than .05 percent. Investments with BBB ratings historically experienced a loss rate of less than 1 percent. As a result, securities
52
with credit ratings between AAA, or its equivalent, through BBB-, or its equivalent, were generally referred to as investment grade. 94. Ratings agencies determine the credit rating for each tranche of mortgage-backed
securitization by comparing the likelihood of contractual principal and interest repayment to the credit enhancements available to protect investors. Ratings agencies determine the likelihood of repayment by estimating cash flows based on the quality of the underlying mortgages by using sponsor provided loan level data. Credit enhancements, such as subordination, represent the amount of cushion or protection from loss incorporated into a given securitization.12 This cushion is intended to improve the likelihood that the holders of highly rated certificates receive the interest and principal to which they are contractually entitled. The level of credit enhancement offered is based on the make-up of the loans in the underlying collateral group and entire securitization. Riskier loans underlying the securitization necessitate higher levels of credit enhancement to insure payment to senior certificate holders. If the collateral within the deal is of a higher quality, then rating agencies require less credit enhancement for AAA, or its equivalent, rating. 95. Credit ratings have been an important tool to gauge risk when making investment
decisions. For almost a hundred years, investors like pension funds, municipalities, insurance companies, and university endowments have relied heavily on credit ratings to assist them in distinguishing between safe and risky investments. Fannie Mae and Freddie Macs respective internal policies limited their purchases of private label residential mortgage-backed securities to
12
those rated AAA (or its equivalent), and in very limited instances, AA or A bonds (or their equivalent). 96. Each tranche of the Securitizations received a credit rating upon issuance, which
purported to describe the riskiness of that tranche. The Defendants reported the credit ratings for each tranche in the Prospectus Statements. The credit ratings provided for the GSE Certificates were primarily AAA and were always investment grade; the lowest rated was A1/A+, as identified in Table 7 below.13 Fannie Mae and Freddie Mac relied on the accuracy of these ratings in making the investment decision to purchase the Certificates. As set forth in Table 10, infra at paragraph 128, the ratings for the Securitizations were inflated as a result of Defendants provision of incorrect data concerning the attributes of the underlying mortgage collateral to the ratings agencies, and, as a result, Defendants sold and marketed the GSE Certificates, in almost all cases, as AAA (or its equivalent) when, in fact they were not. Table 7
Transaction ARSI 2005-W4 ARSI 2005-W4 ARSI 2005-W4 ARSI 2006-M1 CBASS 2006-CB8 FFMER 2007-1 FFMER 2007-2 FFMER 2007-3 FFMER 2007-3 FFMER 2007-3 FFMER 2007-3 FFMER 2007-3 FFMER 2007-3 Tranche A1B A1A2 A1A3 A1 A1 A1 A1 A1A A1C A1D M11 M21 M31 Ratings at Issuance (Moodys/S&P/Fitch) -/AAA/AAA -/AAA/AAA -/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aa1/AA+/Aa2/AA/Aa3/AA-/-
13
Transaction FFMER 2007-3 FFMER 2007-4 FFMER 2007-4 FFMER 2007-4 FFMER 2007-4 FFMER 2007-5 FFMER 2007-H1 FFML 2005-FF12 FFML 2006-FF18 FFML 2007-FF1 FFML 2007-FF2 FMIC 2006-3 INDX 2005-AR33 INDX 2006-AR5 INDX 2006-AR7 INDX 2007-FLX4 INDX 2007-FLX5 INDX 2007-FLX6 MANA 2007-A1 MANA 2007-A2 MANA 2007-A2 MANA 2007-A3 MLMI 2005-A8 MLMI 2005-A8 MLMI 2005-AR1 MLMI 2005-HE2 MLMI 2005-HE2 MLMI 2005-HE3 MLMI 2006-A3 MLMI 2006-AF2 MLMI 2006-AHL1 MLMI 2006-AR1 MLMI 2006-FF1 MLMI 2006-FM1 MLMI 2006-HE1 MLMI 2006-HE4 MLMI 2006-HE5 MLMI 2006-HE6 MLMI 2006-MLN1 MLMI 2006-OPT1
Tranche M41 1A 1M1 1M2 1M3 1A 1A1 A1 A1 A1 A1 1A 2A1 1A1 2A1 1A1 1A1 1A1 A1 A1 A2A A1 A2A A2B1 A2 A1A A1B A1A IIA1 AV1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1
Ratings at Issuance (Moodys/S&P/Fitch) A1/A+/Aaa/AAA/Aa1/AA+/Aa2/AA/Aa3/AA-/Aaa/AAA/Aaa/AAA/AAA Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/-/AAA/AAA -/AAA/AAA -/AAA/AAA Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/-
55
Transaction MLMI 2006-RM1 MLMI 2006-RM2 MLMI 2006-RM3 MLMI 2006-RM4 MLMI 2006-RM5 MLMI 2006-WMC1 MLMI 2006-WMC2 MLMI 2007-HE1 MLMI 2007-HE2 MLMI 2007-MLN1 OOMLT 2007-1 OOMLT 2007-1 OWNIT 2005-4 OWNIT 2005-5 OWNIT 2006-1 OWNIT 2006-2 OWNIT 2006-3 OWNIT 2006-4 OWNIT 2006-5 OWNIT 2006-5 OWNIT 2006-6 OWNIT 2006-7 SURF 2005-AB3 SURF 2005-BC3 SURF 2005-BC4 SURF 2006-AB2 SURF 2006-AB3 SURF 2006-BC1 SURF 2006-BC2 SURF 2006-BC3 SURF 2006-BC4 SURF 2006-BC5 SURF 2007-AB1 SURF 2007-BC1 SURF 2007-BC2
Tranche A1 A1A A1A A1 A1 A1A A1 A1 A1 A1 IA2 IA1 A1 A1 AV A1 A1 A1 A1B A1A A1 A1 A1A A1A A1A A1 A1 A1 A1 A1 A1 A1 A1 A1 A1
Ratings at Issuance (Moodys/S&P/Fitch) Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/-
56
IV.
FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS A. 97. The Statistical Data Provided in the Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False A review of loan level data was conducted in order to assess whether the
statistical information provided in the Prospectus Supplements was true and accurate. For each Securitization, the sample consisted of 1,000 randomly selected loans per Supporting Loan Group, or all of loans in the group if there were fewer than 1,000 loans in the Supporting Loan Group. The sample data confirms, on a statistically-significant basis, material misrepresentations of underwriting standards and of certain key characteristics of the mortgage loans across the Securitizations. The data review demonstrates that the data concerning owner occupancy and LTV ratios was materially false and misleading. 1. 98. Owner Occupancy Data Was Materially False
claimed, a number of tests were conducted, including, inter alia, whether, months after the loan closed, the borrowers tax bill was being mailed to the property or to a different address; whether the borrower had claimed a tax exemption on the property; and whether the mailing address of the property was reflected in the borrowers credit reports, tax records, or lien records. Failing two or more of these tests is a strong indication that the borrower did not live at the mortgaged property and instead used it as a second home or an investment property, both of which make it much more likely that a borrower will not repay the loan. 57
100.
A significant number of the loans failed two or more of these tests, indicating that
the owner occupancy statistics provided to Fannie Mae and Freddie Mac were materially false and misleading. For example, for the SURF 2006-BC1 Securitization, for which Merrill Lynch Mortgage Lending was the sponsor, and Merrill Lynch, Pierce, Fenner & Smith was the underwriter, the Prospectus Supplement stated that 2.36 percent of the underlying properties by loan count in the Supporting Loan Group were not owner-occupied. But the data review revealed that, for 11.94 percent of the properties represented as owner-occupied, the owners lived elsewhere, indicating that the true percentage of non-owner occupied properties was 14.02 percent, nearly six times the percentage reported in the Prospectus Supplement.14 101. The data review revealed that for each Securitization, the Prospectus Supplement
misstated the percentage of non-owner occupied properties. The true percentage of non-owner occupied properties, as determined by the data review, versus the percentage stated in the Prospectus Supplement for each Securitization, is reflected in Table 8 below. Table 8 demonstrates that the Prospectus Supplements for each Securitization understated the percent of non-owner occupied properties by at least 6 percentage points, and for many Securitizations by 10 percentage points or more.
14
Table 8
Transaction Tranche Supporting Loan Group(s) Reported Percentage of NonOwner Occupied Properties 9.74 9.74 9.74 12.31 7.81 3.90 6.64 7.57 7.57 7.57 7.57 7.57 7.57 7.57 7.78 7.78 7.78 7.78 9.19 0.04 6.13 2.59 6.19 5.95 6.83 14.08 13.59 17.13 18.07 18.16 16.48 23.23 30.40 17.79 43.76 Percentage of Properties Reported as Owner-Occupied With Strong Indication of NonOwner Occupancy 11.26 11.26 11.26 9.37 10.72 11.51 11.06 9.88 9.88 9.88 9.88 9.88 9.88 9.88 10.11 10.11 10.11 10.11 11.20 12.49 10.45 7.97 9.52 12.76 12.07 11.34 13.59 12.61 13.99 13.89 12.64 16.74 15.15 15.53 17.05 Actual Percentage of NonOwner Occupied Properties 19.90 19.90 19.90 20.53 17.69 14.97 16.97 16.69 16.69 16.69 16.69 16.69 16.69 16.69 17.11 17.11 17.11 17.11 19.37 12.52 15.93 10.36 15.12 17.95 18.07 23.82 25.33 27.58 29.53 29.53 27.04 36.08 40.95 30.56 53.35 Prospectus Percentage Understatement of Non-Owner Occupied Properties 10.17 10.17 10.17 8.21 9.88 11.06 10.33 9.13 9.13 9.13 9.13 9.13 9.13 9.13 9.33 9.33 9.33 9.33 10.17 12.48 9.81 7.77 8.93 12.00 11.24 9.75 11.74 10.45 11.46 11.37 10.56 12.85 10.55 12.77 9.59
ARSI 2005-W4 ARSI 2005-W4 ARSI 2005-W4 ARSI 2006-M1 CBASS 2006-CB8 FFMER 2007-1 FFMER 2007-2 FFMER 2007-3 FFMER 2007-3 FFMER 2007-3 FFMER 2007-3 FFMER 2007-3 FFMER 2007-3 FFMER 2007-3 FFMER 2007-4 FFMER 2007-4 FFMER 2007-4 FFMER 2007-4 FFMER 2007-5 FFMER 2007-H1 FFML 2005-FF12 FFML 2006-FF18 FFML 2007-FF1 FFML 2007-FF2 FMIC 2006-3 INDX 2005-AR33 INDX 2006-AR5 INDX 2006-AR7 INDX 2007-FLX4 INDX 2007-FLX5 INDX 2007-FLX6 MANA 2007-A1 MANA 2007-A2 MANA 2007-A2 MANA 2007-A3
A1B A1A2 A1A3 A1 A1 A1 A1 A1A A1C A1D M11 M21 M31 M41 1A 1M1 1M2 1M3 1A 1A1 A1 A1 A1 A1 1A 2A1 1A1 2A1 1A1 1A1 1A1 A1 A1 A2A A1
Group 1 Group 1 Group 1 Group 1 Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group 1 Group 2 Group 1 Group 2 Group 1 Group 1 Group 1 Group I Group I Group 2 Group 1
59
Transaction
Tranche
MLMI 2005-A8 MLMI 2005-A8 MLMI 2005-AR1 MLMI 2005-HE2 MLMI 2005-HE2 MLMI 2005-HE3 MLMI 2006-A3 MLMI 2006-AF2 MLMI 2006-AHL1 MLMI 2006-AR1 MLMI 2006-FF1 MLMI 2006-FM1 MLMI 2006-HE1 MLMI 2006-HE4 MLMI 2006-HE5 MLMI 2006-HE6 MLMI 2006-MLN1 MLMI 2006-OPT1 MLMI 2006-RM1 MLMI 2006-RM2 MLMI 2006-RM3 MLMI 2006-RM4 MLMI 2006-RM5 MLMI 2006-WMC1 MLMI 2006-WMC2 MLMI 2007-HE1 MLMI 2007-HE2 MLMI 2007-MLN1 OOMLT 2007-1 OOMLT 2007-1 OWNIT 2005-4 OWNIT 2005-5 OWNIT 2006-1 OWNIT 2006-2 OWNIT 2006-3 OWNIT 2006-4 OWNIT 2006-5
A2A A2B1 A2 A1A A1B A1A IIA1 AV1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1A A1A A1 A1 A1A A1 A1 A1 A1 IA2 IA1 A1 A1 AV A1 A1 A1 A1B
Group 2 Group 2 Group 2 Group 1 Group 1 Group 1 Group 2 Group 2 Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1
Reported Percentage of NonOwner Occupied Properties 52.58 52.58 13.78 7.78 7.78 6.01 7.97 31.15 13.04 13.39 11.29 6.27 8.84 9.21 12.17 11.63 3.65 6.60 12.20 5.22 3.13 8.38 10.61 4.26 5.53 9.28 6.33 10.53 12.98 12.98 7.21 8.62 3.56 5.52 5.12 3.99 2.38
Percentage of Properties Reported as Owner-Occupied With Strong Indication of NonOwner Occupancy 13.72 13.72 14.20 14.11 14.11 11.57 15.18 10.68 15.12 10.62 10.67 15.98 11.14 11.68 9.41 11.61 9.85 10.42 14.22 12.51 14.26 12.82 12.69 13.08 11.84 11.03 12.39 8.26 10.44 10.44 10.75 9.11 7.81 9.13 7.85 7.97 10.47
Actual Percentage of NonOwner Occupied Properties 59.09 59.09 26.02 20.79 20.79 16.88 21.94 38.50 26.19 22.59 20.76 21.25 18.99 19.81 20.43 21.89 13.14 16.33 24.69 17.08 16.94 20.13 21.95 16.78 16.72 19.29 17.94 17.92 22.07 22.07 17.18 16.95 11.08 14.14 12.57 11.63 12.60
Prospectus Percentage Understatement of Non-Owner Occupied Properties 6.51 6.51 12.24 13.02 13.02 10.87 13.97 7.35 13.14 9.20 9.46 14.98 10.15 10.60 8.27 10.26 9.49 9.73 12.48 11.86 13.81 11.75 11.34 12.52 11.19 10.01 11.61 7.39 9.09 9.09 9.97 8.33 7.53 8.63 7.45 7.65 10.22
60
Transaction
Tranche
OWNIT 2006-5 OWNIT 2006-6 OWNIT 2006-7 SURF 2005-AB3 SURF 2005-BC3 SURF 2005-BC4 SURF 2006-AB2 SURF 2006-AB3 SURF 2006-BC1 SURF 2006-BC2 SURF 2006-BC3 SURF 2006-BC4 SURF 2006-BC5 SURF 2007-AB1 SURF 2007-BC1 SURF 2007-BC2
A1A A1 A1 A1A A1A A1A A1 A1 A1 A1 A1 A1 A1 A1 A1 A1
Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group I Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1
Reported Percentage of NonOwner Occupied Properties 2.38 3.51 3.81 22.36 3.11 2.69 15.40 24.61 2.36 1.43 3.63 6.19 3.21 21.97 4.71 3.94
Percentage of Properties Reported as Owner-Occupied With Strong Indication of NonOwner Occupancy 10.47 10.99 12.73 14.91 11.42 10.45 12.41 11.62 11.94 15.65 10.42 10.82 10.39 12.80 11.14 11.40
Actual Percentage of NonOwner Occupied Properties 12.60 14.12 16.05 33.94 14.18 12.85 25.90 33.37 14.02 16.85 13.67 16.34 13.26 31.96 15.32 14.88
Prospectus Percentage Understatement of Non-Owner Occupied Properties 10.22 10.61 12.24 11.58 11.07 10.17 10.50 8.76 11.66 15.42 10.04 10.15 10.06 9.98 10.61 10.95
2. 102.
Loan to Value Data Was Materially False
loans shows that the appraised value given to such properties was significantly higher than the 61
actual value of such properties. The result of this overstatement of property values is a material understatement of LTV. That is, if a propertys true value is significantly less than the value used in the loan underwriting, then the loan represents a significantly higher percentage of the propertys value. This, of course, increases the risk a borrower will not repay the loan and the risk of greater losses in the event of a default. As stated in the Prospectus Supplement for SURF 2007-BC2: Mortgage loans with higher combined loan-to-value ratios may present a greater risk of loss than mortgage loans with combined loan-to-value ratios of 80 percent or below. 104. For example, for the MLMI 2006-MLN1 Securitization, which was sponsored by
Merrill Lynch Mortgage Lending and underwritten by Merrill Lynch, Pierce, Fenner & Smith, the Prospectus Supplement stated that no LTV ratios for the Supporting Loan Group were above 100 percent. In fact, 20.65 percent of the sample of loans included in the data review had LTV ratios above 100 percent. In addition, the Prospectus Supplement stated that 72.92 percent of the loans had LTV ratios at or below 80 percent. The data review indicated that only 34.75 percent of the loans had LTV ratios at or below 80 percent. 105. The data review revealed that for each Securitization, the Prospectus Supplement
misstated the percentage of loans with an LTV ratio that were above 100 percent, as well as the percentage of the loans that had an LTV ratio at or below 80 percent. Table 9 reflects (i) the true percentage of mortgages in the Supporting Loan Group with LTV ratios above 100 percent, versus the percentage reported in the Prospectus Supplement; and (ii) the true percentage of mortgages in the Supporting Loan Group with LTV ratio at or below 80 percent, versus the percentage reported in the Prospectus Supplement. The percentages listed in Table 9 were calculated by aggregated principal balance.
62
Table 9
Transaction Tranche Supporting Loan Group PROSPECTUS Percentage of Loans Reported to Have LTV Ratios At Or Less Than 80% 65.49 65.49 65.49 53.77 34.83 59.35 49.68 42.71 42.71 42.71 42.71 42.71 42.71 42.71 33.18 33.18 33.18 33.18 40.24 60.30 72.38 57.54 56.98 63.91 34.12 95.47 99.33 97.79 98.96 98.46 99.17 93.49 93.66 DATA REVIEW True Percentage of Loans LTV Ratios At Or Less Than 80% 43.07 43.07 43.07 37.26 24.35 31.45 28.97 26.08 26.08 26.08 26.08 26.08 26.08 26.08 21.19 21.19 21.19 21.19 23.49 28.30 50.36 35.30 32.82 33.37 26.56 57.99 66.37 52.07 56.77 51.50 56.26 56.17 47.35 PROSPECTUS Percentage of Loans Reported to Have LTV Ratios Over 100% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 DATA REVIEW True Percentage of Loans With LTV Ratios Over 100% 12.56 12.56 12.56 14.71 30.82 23.07 25.75 29.37 29.37 29.37 29.37 29.37 29.37 29.37 31.80 31.80 31.80 31.80 29.92 24.16 10.97 18.18 22.05 16.61 18.24 6.35 5.10 6.09 12.54 12.38 14.68 12.92 12.24
ARSI 2005-W4 ARSI 2005-W4 ARSI 2005-W4 ARSI 2006-M1 CBASS 2006CB8 FFMER 2007-1 FFMER 2007-2 FFMER 2007-3 FFMER 2007-3 FFMER 2007-3 FFMER 2007-3 FFMER 2007-3 FFMER 2007-3 FFMER 2007-3 FFMER 2007-4 FFMER 2007-4 FFMER 2007-4 FFMER 2007-4 FFMER 2007-5 FFMER 2007-H1 FFML 2005-FF12 FFML 2006-FF18 FFML 2007-FF1 FFML 2007-FF2 FMIC 2006-3 INDX 2005AR33 INDX 2006-AR5 INDX 2006-AR7 INDX 2007FLX4 INDX 2007FLX5 INDX 2007FLX6 MANA 2007-A1 MANA 2007-A2
A1B A1A2 A1A3 A1 A1 A1 A1 A1A A1C A1D M11 M21 M31 M41 1A 1M1 1M2 1M3 1A 1A1 A1 A1 A1 A1 1A 2A1 1A1 2A1 1A1 1A1 1A1 A1 A1
Group 1 Group 1 Group 1 Group 1 Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group 1 Group 2 Group 1 Group 2 Group 1 Group 1 Group 1 Group I Group I
63
Transaction
Tranche
PROSPECTUS Percentage of Loans Reported to Have LTV Ratios At Or Less Than 80% 93.50 96.26 79.66 79.66 18.76 58.96 58.96 63.86 95.71 78.02 54.48 50.90 86.35 69.85 57.48 55.51 64.41 35.81 72.92 62.41 60.45 67.91 68.99 62.43 46.50 73.03 74.94 53.86 40.89 48.44 51.10 51.10 66.50 57.51
MANA 2007-A2 MANA 2007-A3 MLMI 2005-A8 MLMI 2005-A8 MLMI 2005-AR1 MLMI 2005-HE2 MLMI 2005-HE2 MLMI 2005-HE3 MLMI 2006-A3 MLMI 2006-AF2 MLMI 2006AHL1 MLMI 2006-AR1 MLMI 2006-FF1 MLMI 2006-FM1 MLMI 2006-HE1 MLMI 2006-HE4 MLMI 2006-HE5 MLMI 2006-HE6 MLMI 2006MLN1 MLMI 2006OPT1 MLMI 2006-RM1 MLMI 2006-RM2 MLMI 2006-RM3 MLMI 2006-RM4 MLMI 2006-RM5 MLMI 2006WMC1 MLMI 2006WMC2 MLMI 2007-HE1 MLMI 2007-HE2 MLMI 2007MLN1 OOMLT 2007-1 OOMLT 2007-1 OWNIT 2005-4 OWNIT 2005-5
A2A A1 A2A A2B1 A2 A1A A1B A1A IIA1 AV1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1A A1A A1 A1 A1A A1 A1 A1 A1 IA2 IA1 A1 A1
Group 2 Group 1 Group 2 Group 2 Group 2 Group 1 Group 1 Group 1 Group 2 Group 2 Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1
DATA REVIEW True Percentage of Loans LTV Ratios At Or Less Than 80% 45.42 50.69 53.42 53.42 16.01 43.73 43.73 34.48 48.29 51.22 34.46 30.75 59.67 39.42 35.89 32.06 44.78 26.53 34.75 40.00 43.32 38.26 38.72 42.27 31.59 41.99 41.86 33.49 24.57 26.56 34.40 34.40 43.89 40.28
PROSPECTUS Percentage of Loans Reported to Have LTV Ratios Over 100% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
DATA REVIEW True Percentage of Loans With LTV Ratios Over 100% 9.02 12.60 9.64 9.64 23.24 11.76 11.76 14.99 5.49 8.67 19.60 18.13 4.32 17.87 15.18 20.55 13.33 25.20 20.65 15.81 13.54 15.35 13.79 18.11 19.65 16.20 14.39 25.33 26.98 28.42 20.76 20.76 8.31 12.96
64
Transaction
Tranche
PROSPECTUS Percentage of Loans Reported to Have LTV Ratios At Or Less Than 80% 84.23 74.79 75.47 73.60 78.75 78.75 74.84 64.66 61.80 54.56 56.65 59.44 63.64 59.27 63.07 55.65 50.89 52.16 59.45 47.33 47.53
OWNIT 2006-1 OWNIT 2006-2 OWNIT 2006-3 OWNIT 2006-4 OWNIT 2006-5 OWNIT 2006-5 OWNIT 2006-6 OWNIT 2006-7 SURF 2005-AB3 SURF 2005-BC3 SURF 2005-BC4 SURF 2006-AB2 SURF 2006-AB3 SURF 2006-BC1 SURF 2006-BC2 SURF 2006-BC3 SURF 2006-BC4 SURF 2006-BC5 SURF 2007-AB1 SURF 2007-BC1 SURF 2007-BC2
AV A1 A1 A1 A1B A1A A1 A1 A1A A1A A1A A1 A1 A1 A1 A1 A1 A1 A1 A1 A1
Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group I Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1
DATA REVIEW True Percentage of Loans LTV Ratios At Or Less Than 80% 52.07 46.59 49.15 45.59 49.78 49.78 42.44 38.84 42.99 40.80 48.03 34.57 39.75 41.53 40.25 35.73 32.24 32.65 32.35 25.53 31.00
PROSPECTUS Percentage of Loans Reported to Have LTV Ratios Over 100% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
DATA REVIEW True Percentage of Loans With LTV Ratios Over 100% 8.80 11.03 10.35 11.75 10.77 10.77 13.08 17.67 13.75 14.61 10.47 17.95 18.28 13.96 15.70 19.93 20.91 19.85 20.98 22.37 23.04
106.
Securitizations reported that none of the mortgage loans in the Supporting Loan Groups had an LTV ratio over 100 percent. In contrast, the data review revealed that at least 4.32 percent of the mortgage loans for each Securitization had an LTV ratio over 100 percent, and for most Securitizations this figure was much larger. Indeed, for 63 of the Securitizations, the data review revealed that more than 10 percent of the mortgages in the Supporting Loan Group had a true LTV ratio over 100 percent. For 20 Securitizations, the data review revealed that more than 20 percent of the mortgages in the Supporting Loan Group had a true LTV ratio over 100 percent.
65
107.
These inaccuracies with respect to reported LTV ratios also indicate that the
representations in the Registration Statements relating to appraisal practices were false, and that the appraisers themselves, in many instances, furnished appraisals that they understood were inaccurate and that they knew bore no reasonable relationship to the actual value of the underlying properties. Indeed, independent appraisers following proper practices, and providing genuine estimates as to valuation, would not systematically generate appraisals that deviate so significantly (and so consistently upward) from the true values of the appraised properties. This conclusion is further confirmed by the findings of the Financial Crisis Inquiry Commission (FCIC), which identified inflated appraisals as a pervasive problem during the period of the Securitizations, and determined through its investigation that appraisers were often pressured by mortgage originators, among others, to produce inflated results. See Financial Crisis Inquiry Commission, Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States, at 91 (January 2011). B. 108. The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines The Registration Statements contained material misstatements and omissions
regarding compliance with underwriting guidelines. Indeed, the originators for the loans underlying the Securitizations systematically disregarded their respective underwriting guidelines in order to increase production and profits derived from their mortgage lending business. This is confirmed by the systematically misreported owner occupancy and LTV statistics, discussed above, and by (1) government investigations into originators underwriting practices, which have revealed widespread abandonment of originators reported underwriting guidelines during the relevant period; (2) the collapse of the Certificates credit ratings; and (3) the surge in delinquency and default in the mortgages in the Securitizations. 66
1.
Government Investigations Have Confirmed That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines
109.
reports and investigations that have described rampant underwriting failures throughout the period of the Securitizations, and, more specifically, have described underwriting failures by the very originators whose loans were included by the Defendants in the Securitizations. 110. For instance, in November 2008, the Office of the Comptroller of the Currency,
an office within the United States Department of the Treasury, issued a report identifying the Worst Ten mortgage originators in the Worst Ten metropolitan areas. The worst originators were defined as those with the largest number of non-prime mortgage foreclosures for 20052007 originations. Option One, Fremont, IndyMac, WMC, and GreenPoint, which originated many of the loans for the Securitization at issue here, were all on that list. See, Worst Ten in the Worst Ten, Office of the Comptroller of the Currency Press Release, (Nov. 13, 2008), available at http://www.occ.treas.gov/news-issuances/news-releases/2009/nr-occ-2009-112b.pdf. 111. Option One, which originated the loans for three of the Securitizations, has been
identified through multiple reports and investigations for its faulty underwriting. On June 3, 2008, for instance, the Attorney General for the Commonwealth of Massachusetts filed an action against Option One (the Option One Complaint), and its past and present parent companies, for their unfair and deceptive origination and servicing of mortgage loans. See Complaint, Commonwealth v. H&R Block, Inc., CV NO. 08-2474-BLS (Mass. Super. Ct. June. 3, 2008). According to the Massachusetts Attorney General, since 2004, Option One had increasingly disregarded underwriting standards and originated thousands of loans that [Option One] knew or should have known the borrowers would be unable to pay, all in an effort to increase loan origination volume so as to profit from the practice of packaging and selling the vast majority of 67
[Option Ones] residential subprime loans to the secondary market. See Option One Complaint. The Massachusetts Attorney General alleged that Option Ones agents and brokers frequently overstated an applicants income and/or ability to pay, and inflated the appraised value of the applicants home, and that Option One avoided implementing reasonable measures that would have prevented or limited these fraudulent practices. Option Ones origination policies employed from 2004 through 2007 have resulted in an explosion of foreclosures. Id. at 1. On November 24, 2008, the Superior Court of Massachusetts granted a preliminary injunction that prevented Option One from foreclosing on thousands of its loans issued to Massachusetts residents. Commonwealth v. H&R Block, Inc., No. 08-2474-BLS1, 2008 WL 5970550 (Mass. Super. Ct. Nov. 24, 2008). On October 29, 2009, the Appeals Court of Massachusetts affirmed the preliminary injunction. See Commonwealth v. Option One Mortgage Co., No. 09-P-134, 2009 WL 3460373 (Mass. App. Ct. Oct. 29, 2009). 112. On August 9, 2011, the Massachusetts Attorney General announced that H&R
Block, Inc., Option Ones parent company, had agreed to settle the suit for approximately $125 million. See Massachusetts Attorney General Press Release, H&R Block Mortgage Company Will Provide $125 Million in Loan Modifications and Restitutions, Aug. 9, 2011. Media reports noted that the suit was being settled amidst ongoing discussions among multiple states attorneys general, federal authorities, and five major mortgage servicers, aimed at resolving investigations of the lenders foreclosure and mortgage-servicing practices. The Massachusetts Attorney General released a statement saying that no settlement should include a release for conduct relating to the lenders packaging of mortgages into securitizations. See, e.g., Bloomberg.com, H&R Block, Massachusetts Reach $125 Million Accord in State Mortgage Suit, Aug. 9, 2011.
68
113.
On October 4, 2007, the Commonwealth of Massachusetts, through its Attorney
General, brought an enforcement action against Fremont, which originated loans for two of the Securitizations, for an array of unfair and deceptive business conduct, on a broad scale. See Complaint, Commonwealth v. Fremont Investment & Loan and Fremont General Corp., No. 074373 (Mass. Super. Ct.) (the Fremont Complaint). According to the Massachusetts Attorney Generals complaint, Fremont approve[ed] borrowers without considering or verifying the relevant documentation related to the borrowers credit qualifications, including the borrowers income; approv[ed] borrowers for loans with inadequate debt-to-income analyses that do not properly consider the borrowers ability to meet their overall level of indebtedness and common housing expenses; failed to meaningfully account for [ARM] payment adjustments in approving and selling loans; approved borrowers for these ARM loans based only on the initial fixed teaser rate, without regard for borrowers ability to pay after the initial two year period; consistently failed to monitor or supervise brokers practices or to independently verify the information provided to Fremont by brokers; and ma[de] loans based on information that Fremont knew or should have known was inaccurate or false, including, but not limited to, borrowers income, property appraisals, and credit scores. See Fremont Complaint. 114. On December 9, 2008, the Supreme Judicial Court of Massachusetts affirmed a
preliminary injunction that prevented Fremont from foreclosing on thousands of its loans issued to Massachusetts residents. As a basis for its unanimous ruling, the Supreme Judicial Court found that the record supported the lower courts conclusions that Fremont made no effort to determine whether borrowers could make the scheduled payments under the terms of the loan, and that Fremont knew or should have known that [its lending practices and loan terms] would operate in concert essentially to guarantee that the borrower would be unable to pay and default
69
would follow. Commonwealth v. Fremont Inv. & Loan, 897 N.E.2d 548, 556 (Mass. 2008). The terms of the preliminary injunction were made permanent by a settlement reached on June 9, 2009. 115. IndyMac, which originated the loans for six of the Securitizations, was the subject
of a February 26, 2009 report issued by the Office of Inspector General (OIG) of the U.S. Department of Treasury entitled Safety and Soundness: Material Loss Review of IndyMac Bank, FSB (the OIG Report). The OIG Report found that IndyMac Bank had embarked on a path of aggressive growth that was supported by its high risk business strategy of originating Alt-A loans on a large scale and then packag[ing] them together in securities and selling them on the secondary market to investors. OIG Report at 2, 6, 7. The OIG Report further stated that: To facilitate this level of [loan] production IndyMac often did not perform adequate underwriting. Id. at 2. 116. A June 30, 2008 report issued by the Center for Responsible Lending (CRL)
also found that IndyMac Bank often ignored its stated underwriting and appraisal standards and encouraged its employees to approve loans regardless of the borrowers ability to repay them. See IndyMac: What Went Wrong? How an Alt-A Leader Fueled its Growth with Unsound and Abusive Mortgage Lending (the CRL Report). For example, the CRL Report noted that IndyMac Bank engaged in unsound and abusive lending practices and allowed outside mortgage brokers and in-house sales staffers to inflate applicants [financial information] [to] make them look like better credit risks. See CRL Report at 2, 8. 117. WMC, which originated the loans for two of the Securitizations, employed
reckless underwriting standards and practices, as described more fully below, that resulted in a huge amount of foreclosures, ranking WMC fourth in the report presented to the FCIC in April
70
2010 identifying the Worst Ten mortgage originators in the Worst Ten metropolitan areas. See Worst Ten in the Worst Ten, Office of the Comptroller of the Currency Press Release, November 13, 2008. General Electric, which had purchased WMC in 2004, closed down operations at WMC in late 2007 and took a $1.4 billion charge in the third quarter of that year. See, e.g., Diane Brady, Adventures of a Subprime Survivor, Bloomberg Businessweek, Oct. 29, 2007 (available at http://www.businessweek.com/magazine/content/07_44/b4056074.htm). 118. WMCs reckless loan originating practices were noticed by regulatory authorities.
In June 2008, the Washington State Department of Financial Institutions, Division of Consumer Services filed a Statement of Charges and Notice of Intention to Enter an Order to Revoke License, Prohibit From Industry, Impose Fine, Order Restitution and Collect Investigation Fees (the Statement of Charges) against WMC Mortgage and its principal owners individually. See Statement of Charges, No. C-07-557-08-SC01, Jun. 4, 2008. The Statement of Charges included 86 loan files, which revealed that at least 76 loans were defective or otherwise in violation of Washington state law. Id. Among other things, the investigation uncovered that WMC had originated loans with unlicensed or unregistered mortgage brokers, understated amounts of finance charges on loans, understated amounts of payments made to escrow companies, understated annual percentage rates to borrowers and committed many other violations of Washington State deceptive and unfair practices laws. Id. 119. GreenPoint, which originated the loans for four of the Securitizations,
systematically disregarded its underwriting standards, granted exceptions in the absence of compensating factors, required less documentation, and granted no-documentation or limiteddocumentation loans to individuals without sound credit histories. In November 2008, Business Week Magazine reported that GreenPoints employees and independent mortgage brokers
71
targeted borrowers who were less able to afford the loan payments they were required to make, and many had no realistic ability to pay back the loans. GreenPoints parent corporation, Capital One Financial Corp., eventually liquidated GreenPoint in December 2008, taking an $850 million write-down due to mortgage-related losses associated with GreenPoints origination business. 120. GreenPoints pervasive disregard of underwriting standards resulted in its
regarding the quality of the loans GreenPoint underwrote and originated. For example, in U.S. Bank Natl Assn v. GreenPoint Mortgage Funding, Inc., No. 09-600352 (N.Y. Sup. Ct. filed Apr. 22, 2009), a consultants investigation concluded that 93 percent of the loans that GreenPoint sold contained errors, omissions, misrepresentations, and negligence related to origination and underwriting. The investigation found that GreenPoint loans suffered from serious defects including: Pervasive misrepresentations and/or negligence with respect to the statement of the income, assets or employment of the borrower. Violations of GreenPoints own underwriting guidelines and prudent mortgage lending practices, including loans made to borrowers (i) who made unreasonable claims as to their income, (ii) with multiple, unverified social security numbers, (iii) with credit scores below the required minimum, (iv) with debt-to-income and/or loan-to-value ratios above the allowed maximum, or (v) with relationships to GreenPoint or other non-arms-length relationships.
72
122.
Misrepresentations of the borrowers intent to occupy the property as the borrowers residence and subsequent failure to so occupy the property. Inflated appraisal values. On March 3, 2010, the court denied GreenPoints motion to dismiss this claim,
holding that discovery would be required to determine whether GreenPoint would be required under the parties contract to repurchase all 30,000 loans based on the deficiencies in individual loans identified by U.S. Bank. 123. The originators of the mortgage loans underlying the Securitizations went beyond
the systematic disregard of their own underwriting guidelines. Indeed, as the FCIC has confirmed, mortgage loan originators throughout the industry pressured appraisers, during the period of the Securitizations, to issue inflated appraisals that met or exceeded the amount needed for the subject loans to be approved, regardless of the accuracy of such appraisals, and especially when the originators aimed at putting the mortgages into a package of mortgages that would be sold for securitization. This resulted in lower LTV ratios, discussed supra, which in turn made the loans appear to the investors less risky than they were. 124. As described by Patricia Lindsay, a former wholesale lender who testified before
the FCIC in April 2010, appraisers fear[ed] for their livelihoods, and therefore cherry-picked data that would help support the needed value rather than finding the best comparables to come up with the most accurate value. See Written Testimony of Patricia Lindsay to the FCIC, April 7, 2010, at 5. Likewise, Jim Amorin, President of the Appraisal Institute, confirmed in his testimony that [i]n many cases, appraisers are ordered or severely pressured to doctor their reports and to convey a particular, higher value for a property, or else never see work for those parties again. . . [T]oo often state licensed and certified appraisers are forced into making a Hobsons Choice. See Testimony of Jim Amorin to the FCIC, available at 73
www.appraisalinstitute.org/newsadvocacy/downloads/ltrs_tstmny/2009/AI-ASA-ASFMRANAIFATestimonyonMortgageReform042309final.pdf. Faced with this choice, appraisers systematically abandoned applicable guidelines and over-valued properties in order to facilitate the issuance of mortgages that could then be collateralized into mortgage-backed securitizations. 2. The Collapse of the Certificates Credit Ratings Further Indicates that the Mortgage Loans were not Originated in Adherence to the Stated Underwriting Guidelines
125.
AAA or its equivalent to non-investment grade is further evidence of the originators systematic disregard of underwriting guidelines, indicating that the GSE Certificates were impaired from the start. 126. A significant number of the GSE Certificates that Fannie Mae and Freddie Mac
purchased were originally assigned credit ratings of AAA, or its equivalent, which purportedly reflected the description of the mortgage loan collateral and underwriting practices set forth in the Registration Statements. The rest of the GSE Certificates were rated investment grade, with a minimum rating of A1 or its equivalent. These ratings were artificially inflated, however, as a result of the very same misrepresentations that the Defendants made to investors in the Prospectus Supplements. 127. Merrill Lynch provided or caused to be provided loan level information to the
rating agencies that they relied upon in order to calculate the Certificates assigned ratings, including the borrowers LTV ratio, debt-to-income ratio, owner occupancy status, and other loan level information described in aggregation reports in the Prospectus Supplements. Because the information that Merrill Lynch provided or caused to be provided was false, the ratings were inflated, and the level of subordination that the ratings agencies required for the sale of certificates rated between AAA and A1 (or their equivalents) was inadequate to provide 74
investors with the level of protection that those ratings signified. As a result, the GSEs paid Defendants inflated prices for Certificates that, in almost all cases, were sold and marketed as AAA (or their equivalents), unaware that those certificates actually carried a severe risk of loss and carried inadequate credit enhancement. 128. Since the issuance of the Certificates, the ratings agencies have
dramatically downgraded their ratings to reflect the revelations regarding the true underwriting practices used to originate the mortgage loans, and the true value and credit quality of the mortgage loans. Table 10 details the extent of the downgrades.15 Table 10
Transaction ARSI 2005-W4 ARSI 2005-W4 ARSI 2005-W4 ARSI 2006-M1 CBASS 2006-CB8 FFMER 2007-1 FFMER 2007-2 FFMER 2007-3 FFMER 2007-3 FFMER 2007-3 FFMER 2007-3 FFMER 2007-3 FFMER 2007-3 FFMER 2007-3 FFMER 2007-4 FFMER 2007-4 FFMER 2007-4 FFMER 2007-4 FFMER 2007-5 FFMER 2007-H1 Tranche A1B A1A2 A1A3 A1 A1 A1 A1 A1A A1C A1D M11 M21 M31 M41 1A 1M1 1M2 1M3 1A 1A1 Ratings at Issuance (Moodys/S&P/Fitch) -/AAA/AAA -/AAA/AAA -/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aa1/AA+/Aa2/AA/Aa3/AA-/A1/A+/Aaa/AAA/Aa1/AA+/Aa2/AA/Aa3/AA-/Aaa/AAA/Aaa/AAA/AAA Ratings as of 7/31/2011 (Moodys/S&P/Fitch) -/CCC/C -/BB+/BB -/CCC/CC Caa2/CCC/C Caa3/CCC/CC Ca/CCC/Ca/CCC/Caa1/B+/Ca/CCC/Ca/CCC/C/CCC/C/D/C/D/C/D/Caa3/CCC/C/D/C/D/C/D/Caa3/CCC/Caa1/BB-/CCC
15
Transaction FFML 2005-FF12 FFML 2006-FF18 FFML 2007-FF1 FFML 2007-FF2 FMIC 2006-3 INDX 2005-AR33 INDX 2006-AR5 INDX 2006-AR7 INDX 2007-FLX4 INDX 2007-FLX5 INDX 2007-FLX6 MANA 2007-A1 MANA 2007-A2 MANA 2007-A2 MANA 2007-A3 MLMI 2005-A8 MLMI 2005-A8 MLMI 2005-AR1 MLMI 2005-HE2 MLMI 2005-HE2 MLMI 2005-HE3 MLMI 2006-A3 MLMI 2006-AF2 MLMI 2006-AHL1 MLMI 2006-AR1 MLMI 2006-FF1 MLMI 2006-FM1 MLMI 2006-HE1 MLMI 2006-HE4 MLMI 2006-HE5 MLMI 2006-HE6 MLMI 2006-MLN1 MLMI 2006-OPT1 MLMI 2006-RM1 MLMI 2006-RM2 MLMI 2006-RM3 MLMI 2006-RM4 MLMI 2006-RM5 MLMI 2006-WMC1 MLMI 2006-WMC2
Tranche A1 A1 A1 A1 1A 2A1 1A1 2A1 1A1 1A1 1A1 A1 A1 A2A A1 A2A A2B1 A2 A1A A1B A1A IIA1 AV1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1A A1A A1 A1 A1A A1
Ratings at Issuance (Moodys/S&P/Fitch) Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/-/AAA/AAA -/AAA/AAA -/AAA/AAA Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/-
Ratings as of 7/31/2011 (Moodys/S&P/Fitch) Ba2/AAA/Caa3/CCC/Caa3/CCC/Ca/CCC/B3/BBB-/Ca/D/Caa3/CCC/Ca/D/Caa3/CCC/Caa3/CC/Caa2/CC/Ca/CCC/Ca/CCC/Ca/CCC/Ca/CCC/Caa1/AA/Caa1/AA/A1/AAA/-/A+/AA -/A+/A -/BB/BB Ca/CC/Caa3/CCC/Ca/CCC/Ca/CCC/Baa3/AAA/Ca/CCC/Ba1/BB+/Ca/CCC/Ca/CCC/Ca/CCC/Ca/CCC/Caa3/BBB-/Ca/CC/Ca/CCC/Ca/CCC/Ca/CC/C/CCC/Caa3/CCC/Ca/CCC/-
76
Transaction MLMI 2007-HE1 MLMI 2007-HE2 MLMI 2007-MLN1 OOMLT 2007-1 OOMLT 2007-1 OWNIT 2005-4 OWNIT 2005-5 OWNIT 2006-1 OWNIT 2006-2 OWNIT 2006-3 OWNIT 2006-4 OWNIT 2006-5 OWNIT 2006-5 OWNIT 2006-6 OWNIT 2006-7 SURF 2005-AB3 SURF 2005-BC3 SURF 2005-BC4 SURF 2006-AB2 SURF 2006-AB3 SURF 2006-BC1 SURF 2006-BC2 SURF 2006-BC3 SURF 2006-BC4 SURF 2006-BC5 SURF 2007-AB1 SURF 2007-BC1 SURF 2007-BC2
Tranche A1 A1 A1 IA2 IA1 A1 A1 AV A1 A1 A1 A1B A1A A1 A1 A1A A1A A1A A1 A1 A1 A1 A1 A1 A1 A1 A1 A1
Ratings at Issuance (Moodys/S&P/Fitch) Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/Aaa/AAA/-
Ratings as of 7/31/2011 (Moodys/S&P/Fitch) Ca/CCC/Ca/CCC/Ca/CCC/Caa3/CCC/Caa3/CCC/Aaa/AAA/Aa2/AAA/Caa2/CCC/Caa2/BBB+/Caa2/AA-/Caa3/BB/C/B-/Caa1/BBB-/Caa3/B-/Ca/CCC/Caa2/BBB/Aaa/AAA/Baa3/AA+/Ca/CCC/Ca/CCC/Ba1/AA+/Ca/CCC/Caa3/CCC/Caa3/CCC/Ca/CCC/Ca/CCC/Ca/CCC/Ca/CCC/-
3.
129.
77
mortgage loans is a direct consequence of the fact that they were not underwritten in accordance with applicable underwriting guidelines as represented in the Registration Statements. 130. Loan groups that were properly underwritten and contained loans with the
Transaction ARSI 2005-W4 ARSI 2005-W4 ARSI 2005-W4 ARSI 2006-M1 CBASS 2006-CB8 FFMER 2007-1 FFMER 2007-2 FFMER 2007-3 FFMER 2007-3 FFMER 2007-3 FFMER 2007-3 FFMER 2007-3 FFMER 2007-3 FFMER 2007-3 FFMER 2007-4 FFMER 2007-4 FFMER 2007-4 FFMER 2007-4 FFMER 2007-5 FFMER 2007-H1 FFML 2005-FF12 FFML 2006-FF18 FFML 2007-FF1 FFML 2007-FF2 FMIC 2006-3 INDX 2005-AR33 INDX 2006-AR5 Tranche A1B A1A2 A1A3 A1 A1 A1 A1 A1A A1C A1D M11 M21 M31 M41 1A 1M1 1M2 1M3 1A 1A1 A1 A1 A1 A1 1A 2A1 1A1 Supporting Loan Group Group 1 Group 1 Group 1 Group 1 Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group 1 Group 2 Group 1 Percentage of Loans that are Delinquent/Defaulted/Foreclosed 38.94 38.94 38.94 41.63 48.01 57.92 57.98 56.97 56.97 56.97 56.97 56.97 56.97 56.97 61.04 61.04 61.04 61.04 57.94 63.21 49.34 51.02 54.82 57.29 46.23 39.98 30.36
78
Transaction INDX 2006-AR7 INDX 2007-FLX4 INDX 2007-FLX5 INDX 2007-FLX6 MANA 2007-A1 MANA 2007-A2 MANA 2007-A2 MANA 2007-A3 MLMI 2005-A8 MLMI 2005-A8 MLMI 2005-AR1 MLMI 2005-HE2 MLMI 2005-HE2 MLMI 2005-HE3 MLMI 2006-A3 MLMI 2006-AF2 MLMI 2006-AHL1 MLMI 2006-AR1 MLMI 2006-FF1 MLMI 2006-FM1 MLMI 2006-HE1 MLMI 2006-HE4 MLMI 2006-HE5 MLMI 2006-HE6 MLMI 2006-MLN1 MLMI 2006-OPT1 MLMI 2006-RM1 MLMI 2006-RM2 MLMI 2006-RM3 MLMI 2006-RM4 MLMI 2006-RM5 MLMI 2006-WMC1 MLMI 2006-WMC2 MLMI 2007-HE1 MLMI 2007-HE2 MLMI 2007-MLN1 OOMLT 2007-1 OOMLT 2007-1 OWNIT 2005-4 OWNIT 2005-5 OWNIT 2006-1 OWNIT 2006-2
Tranche 2A1 1A1 1A1 1A1 A1 A1 A2A A1 A2A A2B1 A2 A1A A1B A1A IIA1 AV1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1A A1A A1 A1 A1A A1 A1 A1 A1 IA2 IA1 A1 A1 AV A1
Supporting Loan Group Group 2 Group 1 Group 1 Group 1 Group I Group I Group 2 Group 1 Group 2 Group 2 Group 2 Group 1 Group 1 Group 1 Group 2 Group 2 Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1
Percentage of Loans that are Delinquent/Defaulted/Foreclosed 35.12 30.91 34.58 40.95 44.90 44.80 46.87 46.63 31.51 31.51 60.09 53.40 53.40 72.59 40.64 34.58 65.89 67.93 31.46 74.70 58.07 66.39 64.85 67.27 67.09 43.39 69.71 74.09 34.30 65.30 67.99 62.85 66.82 66.39 53.16 64.46 46.72 46.72 46.92 42.73 41.51 48.49
79
Transaction OWNIT 2006-3 OWNIT 2006-4 OWNIT 2006-5 OWNIT 2006-5 OWNIT 2006-6 OWNIT 2006-7 SURF 2005-AB3 SURF 2005-BC3 SURF 2005-BC4 SURF 2006-AB2 SURF 2006-AB3 SURF 2006-BC1 SURF 2006-BC2 SURF 2006-BC3 SURF 2006-BC4 SURF 2006-BC5 SURF 2007-AB1 SURF 2007-BC1 SURF 2007-BC2
Tranche A1 A1 A1B A1A A1 A1 A1A A1A A1A A1 A1 A1 A1 A1 A1 A1 A1 A1 A1
Supporting Loan Group Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group I Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1
Percentage of Loans that are Delinquent/Defaulted/Foreclosed 37.37 49.24 48.42 48.42 52.68 45.71 47.05 51.03 61.37 55.29 49.55 65.78 68.24 65.58 66.46 65.62 56.23 63.97 62.42
131.
The confirmed misstatements concerning owner occupancy and LTV ratios; the
confirmed systematic underwriting failures by the originators responsible for the mortgage loans across the Securitizations; and the extraordinary drop in credit rating and rise in delinquencies across those Securitizations all confirm that the mortgage loans in the Supporting Loan Groups, contrary to the representations in the Registration Statements, were not originated in accordance with the stated underwriting guidelines. V. MERRILL LYNCH KNEW THAT ITS REPRESENTATIONS WERE FALSE 132. The allegations in this Section V are made in support of Plaintiffs common law
fraud claim, and not in support of Plaintiffs claims under (i) Sections 11, 12(a)(2), and 15 of the Securities Act, (ii) Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, (iii) Sections 31-5605.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, or (iv) negligent misrepresentation, which are based solely on strict liability and negligence. 80
133.
The same evidence discussed above not only shows that the representations were
untrue, but also that Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch Government Securities knew, or were reckless in not knowing, that they were falsely representing the credit quality of the mortgage loans that collateralized the GSE Certificates. As discussed above, such evidence includes: The pervasive misrepresentations relating to basic information about the underlying mortgage loans, such as owner occupancy and LTV ratios; Third-party due diligence providers such as Clayton and Bohan informed Merrill Lynch that significant percentages of loans in the pools did not adhere to underwriting guidelines. For example, Clayton admitted that in the period from the first quarter of 2006 to the second quarter of 2007, 23 percent of the mortgage loans that Merrill Lynch submitted to Clayton to review in RMBS pools were rejected by Clayton as falling outside the applicable underwriting guidelines. Of the 23 percent of mortgage loans that Clayton found defective, 32 percent were subsequently waived in by Merrill Lynch without proper consideration and analysis of compensating factors and included in securitizations such as the ones in which Fannie Mae and Freddie Mac invested here. Merrill Lynchs waiver of nearly a third of the defective loans shows that Merrill Lynch knew of or recklessly disregarded the systemic failure in underwriting and the fraudulent misrepresentations in the offering materials received by the GSEs. Evidence Regarding Merrill Lynchs Due Diligence 1. 134. Merrill Lynchs Due Diligence Benefitted From a Direct Window Into the Originators Practices
A.
Merrill Lynch acquired the loans underlying the Securitizations through bulk
acquisitions in the secondary market. In connection with its purchase from the loan originators of the underlying mortgage loans in the 60 Securitizations that it sponsored, Merrill Lynch performed due diligence to determine the quality of the loans that it was purchasing. Merrill Lynch also conducted due diligence on the originators from whom it was purchasing loans, and
81
on the loans included in each offering to determine whether such loans complied with the applicable underwriting guidelines. 135. Merrill Lynchs offering materials represented that Merrill Lynch conducted due
diligence on the lender who originated the loans, and that it carefully inspected their underwriting standards: Prior to acquiring any residential mortgage loans, MLML conducts a review of the related mortgage loan seller that is based upon the credit quality of the selling institution. MLMLs review process may include reviewing select financial information for credit and risk assessment and conducting an underwriting guideline review, senior level management discussion and/or background checks. The scope of the mortgage loan due diligence varies based on the credit quality of the mortgage loans. MLMI 2006-HE1 Prospectus Supplement, at S-38 (filed Feb. 7, 2006). 136. The Prospectus Supplements further provided that:
The underwriting guideline review entails a review of the mortgage loan origination processes and systems. In addition, such review may involve a consideration of corporate policy and procedures relating to state and federal predatory lending, origination practices by jurisdiction, historical loan level loss experience, quality control practices, significant litigation and/or material investors. Id. Similar representations are made in the Prospectus Supplements for the other GSE Certificates. 137. The initial step, in many of the Securitizations, was often done with Merrill
Lynchs funds, as Merrill Lynch provided warehouse lines of credit to originators. In other words, Merrill Lynch provided money to originators to fund the mortgages they were originating. Merrill Lynchs warehouse loan was then repaid when the originators loan pool was sold to Merrill Lynch for securitization. As the FCIC Found: In September 2006Merrill announced it would acquire a subprime lender, First Franklin Financial Corp., from National City Corp. for 1.3 billionMerrill already had a 100 million ownership position in Ownit Mortgage Solutions Inc., 82
for which it provided a warehouse line of credit; it also provided a line of credit to Mortgage Lenders Network. FCIC Report, at 204. 138. As a result of Merrill Lynchs longstanding relationships with the problematic
loan originators, and its various roles at each step of the securitization process, Merrill Lynch was uniquely positioned to know that the originators had abandoned their underwriting guidelines. 139. Merrill Lynchs position as a source of warehouse lines of credit gave it unique
knowledge of the conditions under which mortgage loans were originated. The information that was available to Merrill Lynch as a warehouse lender gave Merrill Lynch an inside look into the true credit quality of the loans it was including for securitization. As one industry publication explained, warehouse lenders like Merrill Lynch have detailed knowledge of the lenders operations. Kevin Conner, Wall Street and the Making of the Subprime Disaster, at 11 (2007). 140. These warehouse lines gave Merrill Lynch the inside track on acquiring those
loans that were generated using Merrill Lynchs funds. Because of its financial arrangements with warehouse lenders, Merrill Lynch was essentially committed to buying the loans that secured its warehouse lines regardless of their credit quality and the results of Merrill Lynchs due diligence reviews. Indeed, Merrill Lynch needed to purchase the loans with little or no objection so as to keep the lenders supplied with capital to pay fees and interest owed on the lines of credit. It was also important to Merrill Lynch that it protect its business relationships with warehouse lenders in order to ensure a steady flow of loans for securitization. 141. Therefore, Merrill Lynch was incentivized to allow defective mortgages to be
included in the securitizations because: (1) mortgage originators would not maintain a relationship with a bank that consistently kicked out large numbers of loans; and (2) the 83
securitization became smaller as loans were kicked out, thus decreasing the underwriting fees and other fees. 2. Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch Government Securities Intentionally Misrepresented the Risks Inherent in the Securitizations
142.
As discussed above, all of the GSE Certificates have significantly
underperformed. This underperformance was inevitable given the stated policies and goals of Merrill Lynch as well as the misrepresentations, detailed above, concerning the owneroccupancy statistics, LTV ratios, and underwriting guidelines. In fact, the data review revealed that for the majority of the Securitizations at issue Merrill Lynch overstated both the owneroccupancy and LTV ratios by more than 10 percent The pervasiveness and degree of the overstatement evidences an intentional misrepresentation of the risks inherent in the Securitizations by Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch Government Securities to Fannie Mae and Freddie Mac. 143. Beginning in 2004, Merrill Lynch, at the direction of then Chief Executive Officer
Stanley ONeal, set out to climb from a middling player in residential mortgage backed securitizations to the top of the league tables. Paul Moulo & Matthew Padilla, Chain of Blame: How Wall Street Caused the Mortgage and Credit Crisis, at 189 (2008). Due to the crowded and competitive marketplace, and Merrill Lynchs late entry, it offered more to purchase loans than the other investment banks, used its operations such as warehouse financing as a loss leader,16
16
To entice Bill Dallas and other subprime executives into selling their loans to Merrill, its salesmen offered them a deal: If you agree to sell your loans to us, well offer warehouse financing for next to nothing. Merrills warehouse chief was Jim Cason, who had been with the firm for a couple of years. With ONeals edict to grow the subprime business, 84
eviscerated the rules regarding what loans it would purchase, and exhibited a willingness to purchase loans that did not comply with underwriting guidelines and that were extended to borrowers who were unlikely to be able to repay them. Id, at 189-97. Given their roles as the sponsor, depositor, underwriter, and entity that sold the GSE Certificates to the GSEs, Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch Government Securities were aware of, and participated in, the decision to purchase and repackage loans that should have been, and previously would have been, rejected. 144. As detailed above in paragraph 67, over the course of a few years, Merrill Lynch
was able to ascend toward the top of the league tables. Along with the high prices that Merrill Lynch was willing to pay for questionable loans, its rise was also aided by its vertical integration strategy that ensured it with a steady supply of loans to securitize. First, in 2005 Merrill Lynch acquired a stake in Ownit Mortgage Solutions, Inc. (Ownit), a subprime lender. Then, in late 2006, Merrill Lynch acquired First Franklin Corp. (First Franklin), a second subprime lender. ONeal, Merrill Lynchs former CEO, told the FCIC during a September 2010 interview that First Franklin was purchased in order to control our [own] source of origination. (ONeal Tr. 87:5-21, Sept. 16, 2010). 145. Through these acquisitions, Merrill Lynch controlled each step in the
securitization processorigination of the mortgage loans, securitization of the mortgage loans, and sale of the certificates collateralized by such mortgage loans. By virtue of its control over Casons unit, by 2005, became one of the largest warehouse lenders to nonbank residential lenders in the nation. The idea was to create a one-stop shopping place for subprime lenders, said one warehouse executive familiar with Merrills efforts. Merrill would make no money on the warehouse business, but it would do it to get the securitization business. As George Davies, the head trader later admitted: The idea was to secure product [mortgages]. Chain of Blame, at 190. 85
each step in the securitization process, Merrill had actual knowledge of the true characteristics and credit quality of the mortgage loans. 146. An October 21, 2007 Merrill Lynch presentation to the companys board of
directors, recently published by the FCIC, underscores this model. A flow chart in the presentation shows that Merrill Lynchs Primary Activities in the RMBS market were Whole Loan Origination & Purchase Financing Securitization Distribution Investing. This vertical integration model, which was in place since at least mid-2006, ensured that Merrill Lynch had knowledge of problems in the mortgage market generally, and in the mortgage loans underlying the Securitizations in particular. Despite this knowledge, Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch Government Securities failed to disclose material facts relating to the true characteristics and credit quality of the underlying mortgage loans. 147. As described by former CEO Stanley ONeal in his September 2010 interview
with the FCIC, Merrill Lynch also conducted spot checks of the mortgages that it purchased from third parties to ensure that they complied with the applicable written underwriting guidelines. (ONeal Tr. 84:18, Sept. 16, 2010). Jeff Kronthal, the former head of Merrill Lynchs structured-products division, likewise told the FCIC that Merrill Lynch performed due diligence on the mortgages it purchased from Ownit. (Kronthal Tr. 94:1-5, Sept. 14, 2010). 148. Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin
Financial, Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch Government Securities did not disclose Claytons findings, detailed in paragraphs 70 through 72, to the GSEs, nor did they reveal their knowledge, as part of a vertically integrated
86
loan originator and securitizer, that there were rampant misrepresentations and underwriting failures in the subprime mortgage sector. 149. Unlike Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First
Franklin Financial, Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch Government Securities, the GSEs and other investors did not have access to Claytons analysis or the analysis of other third-party due diligence companies. The GSEs also did not have access to the individual loan files for the defective mortgages. These startling disclosures only came to light in September 2010 through FCIC testimony. By then, Merrill Lynchs executives were willing to admit problems with the mortgage collateral on Merrill Lynchs books. During his September 2010 interview with the FCIC, Jeff Kronthal blamed the credit crisis, in part, on the level of fraud that was being committed . . . in the mortgage origination process. (Kronthal Tr. 91:10-13, Sept. 14, 2010). 150. Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin
Financial, Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch Government Securities misrepresentations concerning the owner-occupancy statistics, LTV ratios, and underwriting guidelines were so extensive, and so uniformly resulted in making the Securitizations appear less risky than they in fact were, that they could not have been the result of human error. Instead, Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch Government Securities were intentionally ignoring sound underwriting methodology by including loans in the Securitizations that they knew would not be repaid, and concealing those risks from investors such as Fannie Mae and Freddie Mac. In their roles as sponsor, depositor, underwriter, and entity that sold the Certificates to the GSEs,
87
Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch Government Securities knew that their inclusion of mortgage loans in the securitizations that failed to conform with underwriting guidelines, and their inclusion of loans with falsely inflated owner-occupancy statistics and falsely suppressed LTV ratios, would result in a much riskier securitization and accompanying certificates than represented to the GSEs. At the very least, such conduct was reckless. 151. Merrill Lynch, however, failed to disclose that the Certificates credit ratings were
false and misleading because Merrill Lynch fed the rating agencies the same false loan level data regarding loan-to-value ratios, owner-occupancy status, home values, and debt-to-income ratios that they provided to investors in aggregate form in the Prospectuses and Prospectus Supplements. The rating agencies then input this false data into their quantitative models to assess the credit risk associated with the RMBS, project likely future defaults, and ultimately, determine the ratings on Merrill Lynchs RMBS products. As a result, the Merrill Lynch essentially pre-determined the ratings by feeding bad data into the ratings system. In testimony before the Senate Permanent Subcommittee on Investigations, Susan Barnes, the North American Practice Leader for RMBS at S&P from 2005 to 2008, confirmed that the rating agencies relied upon investment banks to provide accurate information about the loan pools: The securitization process relies on the quality of the data generated about the loans going into the securitizations. S&P relies on the data produced by others and reports to both S&P and investors about those loansS&P does not receive the original loan files for the loans in the pool. Those files are reviewed by the arranger or sponsor of the transaction, who is also responsible for reporting accurate information about the loans in the deal documents and offering documents to potential investors. Senate Homeland Security and Governmental Affairs Subcommittee on Investigations, Hearings on Wall Street and the Financial Crisis: The Role of Credit Rating Agencies, Apr. 23, 2010 88
(emphasis added). As a result, the ratings themselves failed to reflect accurately the actual risk underlying the Certificates because the ratings agencies were really analyzing a mortgage pool that had no relation to the pool that actually backed the Certificates purchased by the GSEs. 152. This is further supported by the discussion regarding Clayton in paragraphs 70
through 72. As detailed above, Merrill Lynch outsourced the task of performing due diligence on its purchases to third parties such as Clayton and the Bohan group. According to the Clayton Trending Report, detailed above, during the period from the first quarter of 2006 to the second quarter of 2007, 23 percent of the mortgage loans that Merrill Lynch submitted to Clayton to review were rejected by Clayton as falling outside the applicable underwriting guidelines. See Clayton Trending Reports, available at http://fcic.law.stanford.edu/hearings/testimony/theimpact-of-the-financial-crisis-sacramento#documents. Of the mortgage loans that Clayton found defective, 32 percent of the loans were subsequently waived in by Merrill Lynch, without proper consideration and analysis of compensating factors, and included in securitizations such as the ones in which Fannie Mae and Freddie Mac invested. Id. 153. There were also significant problems at Bohan, another third-party due diligence
firm used by Merrill Lynch. One former Bohan loan reviewer has revealed that the pressure was so intense to approve as many loans as quickly as possible that a supervisor would stand on a desk screaming at the loan reviewers. Paul Moulo & Matthew Padilla, Chain of Blame at 197. The same Bohan loan reviewer, in reference to the fraudulent approval and securitization of noncompliant loans, stated that Merrill Lynch perpetuated the whole thing, and that if she identified a loan as failing to comply with the applicable underwriting guidelines, a Merrill supervisor would find a way to get the loan approved. Id. Merrill Lynch failed to disclose to
89
the GSEs its practice of waiving into the securitizations loans that were rejected by the third party due diligence firm and that did not have compensating factors. 154. Merrill Lynch was well aware of the results of the third-party due diligence
reviews. Vicki Beal, the Vice President of Clayton, testified to the FCIC on September 23, 2010 that Claytons exception reports were provided to the sponsor, Merrill Lynch Mortgage Investors, as well as the underwriter, Merrill Lynch, Pierce, Fenner & Smith. (Beal Tr. 43:17-25, 44:1-11). Due to the vertically integrated structure of Merrill Lynch, each Merrill Lynch entityincluding Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch Government Securitieswas fully aware that a significant percentage of the mortgage loans that were included in the Securitizations did not meet the applicable underwriting guidelines. 155. Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin
Financial, Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch Government Securities also incentivized unscrupulous conduct by originators such as Ownit and First Franklin. William Dallas, the Chief Executive Officer of Ownit, told the New York Times that Merrill Lynch, along with other investment banks, paid a higher price for no-income-verification loans [] than[for] full documentation loans. Vikas Baja & Christine Hougheny, Tremors at the Door, New York Times, Jan. 26, 2007. These no-income-verification loans are referred to in the industry as liar loans, because the borrower is not required to provide as much information to support his or her claimed incomes and assets. These liar loans invite fraud from borrowers. By using increased compensation to incentivize Ownit to accept liar loans, Merrill Lynch rewarded Ownit to originate such loans without adequate
90
controls to ensure the borrowers were truthful in their applications. Because Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch Government Securities were aware of, and complicit in, these practices, they knew that loans underlying the Securitizations were riskier than what was represented to the GSEs. 156. Even the very payment structure of Merrill Lynchs relationships with the
originators promoted fraud. The compensation received by the originators was based solely on the quantity of loans that they supplied, and the quality of the loans was ignored. Former Merrill Lynch CEO John Thain accurately described the problem to the FCIC in September 2010: when you have a system where you pay someone for originating mortgages simply on volume and nothing happens to them if the credit quality is bad, and nothing happens to them if the borrower is fraudulent on his loan application, and nothing happens to him if the appraisals fraudulent, then thats probably not a very smart system. Thain Tr. 98:7-14, Sept. 17, 2010. Apart from Thains understanding of how the system incentivized poor credit quality and fraud, Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch Government Securities, in their roles as the sponsor, depositor, underwriter, and entity that sold the Certificates to the GSEs, were particularly well aware of the origination practices employed by entities that it owned such as Ownit, First Franklin, and Specialty Under Writing and Residential Finance. All three of those entities underwrote multiple Securitizations underlying the GSE Certificates. 3. Merrill Lynch Recognized the Problems With Its RMBS and Developed De-Risking and Mitigation Strategies While Marketing Similar Securitizations to the GSEs
157.
Merrill Lynchs headlong rush into the mortgage-related business led the
company to take on an enormous amount of risk. In particular, CEO Stanley ONeal had 91
increased profitability by having Merrill Lynch take on an increasing amount of risk through its CDO and RMBS exposure. In 2007, Merrill Lynchs assets equaled more than 27 times its equity, such that a mere 4 percent decline in the value of its assets would erase all of its capital. During a September 2010 interview with the FCIC, Mr. ONeal admitted that there were no good answers for why the companys exposure to mortgages had grown so large in late 2006 and early 2007. 158. Merrill Lynch eventually came to the conclusion that the enormous pool of
mortgages and CDOs it had collected on its books was becoming a liability. To rid itself of its toxic mortgage inventoryincluding, on information and belief, RMBS similar to the SecuritizationsMerrill Lynch resorted to repackaging the most problematic RMBS and CDO positions in its inventory into new CDOs. As the FCIC reported: To keep its CDO business going, Merrill pursued three strategies, all of which involved repackaging riskier mortgages more attractively or buying its own products when no one else would . . . . Merrill increasingly retained for its own portfolio substantial portions of the CDOs it was creating, mainly the super-senior tranches, and it increasingly repackaged the hard-to-sell BBB-rated and other low-rated tranches of its CDOs into its other CDOs; it used the cash sitting in its synthetic CDOs to purchase other CDO tranches. FCIC Report, at 202. 159. Dow Kim, the former co-president of global markets and investment banking at
Merrill Lynch, told the FCIC that Merrill Lynchs retention of super-senior tranches in its CDO positions was part of a strategy begun in late 2006 to reduce the firms inventory of subprime and Alt-A mortgages. Sell the lower-rated CDO tranches, retain the super-senior tranches: those had been his instructions to his managers at the end of 2006, Kim recalled. FCIC Report, at 257. Merrill Lynch also entered into credit default swaps on CDO notes that it retained to offload the risk of loss on its toxic collateral to unsuspecting counterparties.
92
160.
Merrill Lynchs newly-disclosed October 2007 presentation to its board of
directors revealed that in the second half of 2006, [i]n order to execute deals, [Merrill Lynch] continue[d] to take down senior tranches into inventory. FCIC Report, at 257. In other words, the company was being forced to hold more of its toxic CDO and RMBS collateral on its books, since it was increasingly unable to sell the securities to investors. For example, the presentation reports that during the March to May 2007 time period, Merrill Lynch undertook an [a]ctive risk-mitigation strategy consisting of an [a]ttempt to actively reduce the warehouse by printing deals (emphasis added). Printing deals meant that Merrill Lynch was creating new CDOs to repackage its toxic, fraudulent collateral as quickly as possible 161. This trend began in 2006 and continued into 2007, during the same period in
which Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch Government Securities were marketing the Securitizations to the GSEs. 162. Merrill Lynch recognized and reported internally on the severe risks posed by its
RMBS and CDO collateral, but failed to disclose those risks to the GSEs and other investors. Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch Government Securities sold the GSE Certificates to the GSEs knowing that the underlying mortgages were defective at origination, were deteriorating in value, and were certain to suffer severe losses. VI. THE GSES JUSTIFIABLY RELIED ON MERRILL LYNCHS REPRESENTATIONS 163. Fannie Mae and Freddie Mac purchased the GSE Certificates based upon the
representations by Merrill Lynch as the sponsor, depositor, and lead and selling underwriter in all 93
60 of the Merrill Lynch entity-sponsored Securitizations. Merrill Lynch, Pierce, Fenner & Smith and Merrill Lynch Government Securities provided term sheets to the GSEs that contained critical data as to the Securitizations, including with respect to anticipated credit ratings by the credit rating agencies, loan-to-value and combined loan-to-value ratios for the underlying collateral, and owner occupancy statistics. This data was subsequently incorporated into Prospectus Supplements that were received by the GSEs upon the close of each Securitization. 164. The GSEs relied upon the accuracy of the data transmitted to them and
subsequently reflected in the Prospectus Supplements. In particular, the GSEs relied upon the credit ratings that the credit rating agencies indicated they would bestow on the Certificates based on the information provided by Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Government Securities and Merrill Lynch Mortgage Investors relating to the collateral quality of the underlying loans and the structure of the Securitization. These credit ratings represented a determination by the credit rating agencies that the GSE Certificates, in almost all cases, were AAA quality (or its equivalent) meaning the Certificates had an extremely strong capacity to meet the payment obligations described in the respective PSAs. 165. Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin
Financial, Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch Government Securities, as sponsor, depositor, and lead and selling underwriter in all 60 of the Merrill Lynch entity-sponsored Securitizations, provided detailed information about the underlying collateral and structure of each Securitization they sponsored to the credit rating agencies. The credit rating agencies based their ratings on the information provided to them by Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch
94
Government Securities, and the agencies anticipated ratings of the Certificates were dependent on the accuracy of that information. The GSEs relied on the accuracy of the anticipated credit ratings and the actual credit ratings assigned to the Certificates by the credit rating agencies, and upon the accuracy of the representations in the term sheets and Prospectus Supplements made by Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch Government Securities. 166. In addition, the GSEs relied on the fact that the originators of the mortgage loans
in the Securitizations had acted in conformity with their underwriting guidelines, which were described in the Prospectus Supplements. Compliance with the underwriting guidelines was a precondition to the GSEs purchase of the GSE Certificates in that the GSEs decision to purchase the Certificates was directly premised on their reasonable belief that the originators complied with applicable underwriting guidelines and standards. 167. In purchasing the GSE Certificates, the GSEs justifiably relied on false
purchases or acquired the Certificates as they ultimately did, because those representations and omissions were material to their decision to acquire the GSE Certificates, as described above. VII. FANNIE MAES AND FREDDIE MACS PURCHASES OF THE GSE CERTIFICATES AND THE RESULTING DAMAGES 169. In total, between September 29, 2005 and October 10, 2007, Fannie Mae and
Freddie Mac purchased over $24.853 billion in residential mortgage-backed securities issued in 95
connection with the Securitizations. Table 12 reflects each of Fannie Maes purchases of the Certificates.17 Table 12
Transaction Tranche CUSIP Settlement Date of Purchase by Fannie Mae November 22, 2005 Initial Unpaid Principal Balance $344,465,000.00 Purchase Price (% of Par) 100.0000 Seller to Fannie Mae Merrill Lynch Government Securities, Inc. Merrill Lynch Government Securities, Inc. Merrill Lynch Government Securities, Inc. Merrill Lynch Government Securities, Inc. Merrill Lynch Government Securities, Inc. Merrill Lynch Government Securities, Inc. Merrill Lynch Government Securities, Inc. Merrill Lynch Government Securities, Inc. Merrill Lynch Government Securities, Inc. Merrill Lynch Government Securities, Inc. Merrill Lynch Government Securities, Inc. Merrill Lynch Government Securities, Inc. Merrill Lynch Government Securities, Inc. Merrill Lynch Government Securities, Inc. Merrill Lynch Government Securities, Inc.
ARSI 2005-W4
A1B
040104QJ3
ARSI 2005-W4
A1A2
040104QG9
November 22, 2005
$687,112,000.00
100.0000
ARSI 2005-W4
A1A3
040104QH7
November 22, 2005
$151,807,000.00
100.0000
FFMER 2007-1
A1
59023LAA0
March 27, 2007
$725,544,000.00
100.0000
FFMER 2007-2
A1
59024QAA8
April 26, 2007
$588,366,000.00
100.0000
FFMER 2007-3
A1A
59024VAA7
May 30, 2007
$285,760,000.00
100.0000
FFMER 2007-3
A1C
59024VAC3
May 30, 2007
$205,174,000.00
100.0000
FFMER 2007-3
A1D
59024VAD1
May 30, 2007
$33,199,000.00
100.0000
FFMER 2007-3
M11
59024VAJ8
May 30, 2007
$35,135,000.00
100.0000
FFMER 2007-3
M21
59024VAL3
May 30, 2007
$28,590,000.00
100.0000
FFMER 2007-3
M31
59024VAN9
May 30, 2007
$7,922,000.00
100.0000
FFMER 2007-3
M41
59024VAQ2
May 30, 2007
$9,989,000.00
100.0000
FFMER 2007-4
1A
59025CAA8
June 26, 2007
$509,625,000.00
100.0000
FFMER 2007-4
1M1
59025CAF7
June 26, 2007
$34,062,000.00
100.0000
FFMER 2007-4
1M2
59025CAH3
June 26, 2007
$23,356,000.00
100.0000
Purchases of securities in Table 12 and 13 are stated in terms of unpaid principal balance of the relevant Certificates. Purchase prices are stated in terms of percentage of par. 96
17
Transaction
Tranche
CUSIP
FFMER 2007-4
1M3
59025CAK6
Settlement Date of Purchase by Fannie Mae June 26, 2007
Initial Unpaid Principal Balance $12,327,000.00
Purchase Price (% of Par) 100.0000
Seller to Fannie Mae Merrill Lynch Government Securities, Inc. Merrill Lynch Government Securities, Inc. Merrill Lynch Government Securities, Inc. Merrill Lynch Government Securities, Inc. Merrill Lynch Government Securities, Inc.
FFMER 2007-5
1A
59025RAW7
October 10, 2007
$241,175,000.00
100.0000
FFML 2006-FF18
A1
32029AAA5
December 28, 2006
$689,394,000.00
100.0000
FFML 2007-FF2
A1
32029GAA2
February 28, 2007
$1,021,839,000.00
100.0000
INDX 2005-AR33
2A1
45660L4Y2
December 29, 2005
$191,511,000.00 $43,361,000.00
100.8438 100.9219 101.1094
INDX 2006-AR7
2A1
45661ECY8
March 30, 2006
$341,217,000.00
INDX 2007-FLX4
1A1
456687AA0
May 30, 2007
$127,861,000.00
100.0000
INDX 2007-FLX5
1A1
45669WAA4
June 29, 2007
$96,711,000.00
100.0000
INDX 2007-FLX6
1A1
45670PAA6
July 31, 2007
$94,391,000.00
100.0000
MANA 2007-A1
A1
59023MAA8
February 9, 2007
$68,226,000.00
100.0000
MANA 2007-A2
A2A
59024FAB0
March 30, 2007
$165,226,000.00
99.9766
MLMI 2005-A8
A2B1
59020UP90
November 15, 2005
$175,884,832.29
100.0000
MLMI 2005-HE3
A1A
59020UY66
December 28, 2005
$335,591,000.00
100.0000
MLMI 2006-A3
IIA1
59023CAB8
May 31, 2006
$89,730,000.00
100.1680
MLMI 2006-AHL1
A1
590210AA8
June 29, 2006
$160,748,000.00
100.0000
MLMI 2006-AR1
A1
59020VAS2
April 27, 2006
$333,038,000.00
100.0000
MLMI 2006-FF1
A1
59023WAH1
December 27, 2006
$1,098,020,000.00
100.0000
MLMI 2006-FM1
A1
59021AAP3
June 30, 2006
$204,693,000.00
100.0000
Merrill Lynch Government Securities, Inc. Merrill Lynch Government Securities, Inc. Merrill Lynch Government Securities, Inc. Merrill Lynch Government Securities, Inc. Merrill Lynch Government Securities, Inc. Merrill Lynch Government Securities, Inc. Merrill Lynch Government Securities, Inc. Merrill Lynch Government Securities, Inc. Merrill Lynch Government Securities, Inc. Merrill Lynch Government Securities, Inc. Merrill Lynch Government Securities, Inc. Merrill Lynch Government Securities, Inc. Merrill Lynch Government Securities, Inc.
97
Transaction
Tranche
CUSIP
MLMI 2006-MLN1
A1
59023AAA4
Settlement Date of Purchase by Fannie Mae September 29, 2006
Seller to Fannie Mae Merrill Lynch Government Securities, Inc. Merrill Lynch Government Securities, Inc. Merrill Lynch Government Securities, Inc. Merrill Lynch Government Securities, Inc. Merrill Lynch Government Securities, Inc. Merrill Lynch Government Securities, Inc. Lehman Brothers, Inc.
MLMI 2006-OPT1
A1
59022VAA9
September 26, 2006
$469,721,000.00
100.0000
MLMI 2006-RM2
A1A
590216AA5
May 31, 2006
$411,649,000.00
100.0000
MLMI 2006-RM3
A1A
590217AA3
June 29, 2006
$227,029,000.00
100.0000
MLMI 2006-WMC1
A1A
59020U4L6
February 14, 2006
$419,318,000.00
100.0000
MLMI 2006-WMC2
A1
59020U6H3
March 30, 2006
$493,651,000.00
100.0000
OOMLT 2007-1
IA1
68400DAA2
January 24, 2007
$259,610,000.00
100.0000
170.
Table 13 reflects each of Freddie Macs purchases of the Certificates:
Table 13
Transaction Tranche CUSIP Settlement Date of Purchase by Freddie Mac June 28, 2006 Initial Unpaid Principal Balance $1,401,905,000.00 Purchase Price (% of Par) 100.0000 Seller to Freddie Mac Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith
ARSI 2006-M1
A1
04012MAM1
CBASS 2006-CB8
A1
1248P1AA2
October 30, 2006
$183,951,000.00
100.0000
FFMER 2007-H1
1A1
59025TAA1
October 9, 2007
$295,640,000.00
100.0000
FFML 2005-FF12
A1
32027NXS5
December 28, 2005
$663,543,000.00
100.0000
FFML 2007-FF1
A1
32028TAA5
January 26, 2007
$608,774,000.00
100.0000
FMIC 2006-3
1A
316599AA7
October 27, 2006
$221,277,000.00
100.0000
INDX 2006-AR5
1A1
45661ECK8
March 31, 2006
$111,172,000.00
100.4063
MANA 2007-A2
A1
59024FAA2
March 30, 2007
$180,475,000.00
100.0000
MANA 2007-A3
A1
59024HAA8
April 30, 2007
$189,695,000.00
100.0000
98
Transaction
Tranche
CUSIP
MLMI 2005-A8
A2A
59020UP82
Settlement Date of Purchase by Freddie Mac November 16, 2005
Seller to Freddie Mac Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Lehman Brothers Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith
MLMI 2005-AR1
A2
59020UF67
September 29, 2005
$250,727,000.00
100.0000
MLMI 2005-HE2
A1A
59020UR72
November 30, 2005
$236,060,000.00
100.0000
MLMI 2005-HE2
A1B
59020UR80
November 30, 2005
$59,015,000.00
100.0000
MLMI 2006-AF2
AV1
59023NAA6
October 31, 2006
$125,408,000.00
100.0000
MLMI 2006-HE1
A1
59020U2Z7
February 7, 2006
$355,063,000.00
100.0000
MLMI 2006-HE4
A1
59023EAA6
July 25, 2006
$125,624,000.00
100.0000
MLMI 2006-HE5
A1
59022QAA0
September 28, 2006
$169,018,000.00
100.0000
MLMI 2006-HE6
A1
59023XAA4
December 28, 2006
$250,830,000.00
100.0000
MLMI 2006-RM1
A1
59020U5B7
March 21, 2006
$171,181,000.00
100.0000
MLMI 2006-RM4
A1
59023QAA9
September 27, 2006
$176,227,000.00
100.0000
MLMI 2006-RM5
A1
59023FAS4
October 27, 2006
$138,699,000.00
100.0000
MLMI 2007-HE1
A1
59024EAA5
March 8, 2007
$354,933,000.00
100.0000
MLMI 2007-HE2
A1
59024LAA9
March 30, 2007
$431,956,000.00
100.0000
MLMI 2007-MLN1
A1
59024UAA9
April 26, 2007
$415,943,000.00
100.0000
OOMLT 2007-1 OWNIT 2005-4
IA2 A1
68400DAB0 69121PAT0
January 24, 2007 October 28, 2005
$259,609,000.00 $285,517,000.00
100.0000 100.0000
OWNIT 2005-5
A1
69121PBR3
December 28, 2005
$205,391,000.00
100.0000
OWNIT 2006-1
AV
69121PDB6
January 30, 2006
$225,112,000.00
100.0000
99
Transaction
Tranche
CUSIP
OWNIT 2006-2
A1
69121PDC4
Settlement Date of Purchase by Freddie Mac March 9, 2006
Seller to Freddie Mac Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith Merrill Lynch, Pierce, Fenner & Smith
OWNIT 2006-3
A1
69121PDU4
April 13, 2006
$180,115,000.00
100.0000
OWNIT 2006-4
A1
69121QAA9
June 26, 2006
$243,564,000.00
100.0000
OWNIT 2006-5
A1B
69121EAB4
July 27, 2006
$27,738,000.00
100.0000
OWNIT 2006-5
A1A
69121EAA6
July 27, 2006
$110,953,000.00
100.0000
OWNIT 2006-6
A1
69121TAA3
September 28, 2006
$113,153,000.00
100.0000
OWNIT 2006-7
A1
69121UAA0
November 3, 2006
$184,746,000.00
100.0000
SURF 2005-AB3
A1A
84751PJD2
December 28, 2005
$135,861,000.00
100.0000
SURF 2005-BC3
A1A
84751PGU7
September 29, 2005
$302,990,000.00
100.0000
SURF 2005-BC4
A1A
84751PHR3
December 20, 2005
$470,632,000.00
100.0000
SURF 2006-AB2
A1
84751VAA4
May 31, 2006
$194,773,000.00
100.0000
SURF 2006-AB3
A1
84751XAA0
September 26, 2006
$190,723,000.00
100.0000
SURF 2006-BC1
A1
84751PJX8
February 21, 2006
$583,827,000.00
100.0000
SURF 2006-BC2
A1
84751PLK3
March 31, 2006
$173,248,000.00
100.0000
SURF 2006-BC3
A1
84751WAA2
June 27, 2006
$384,110,000.00
100.0000
SURF 2006-BC4
A1
84751YAA8
September 27, 2006
$439,858,000.00
100.0000
SURF 2006-BC5
A1
84751NAA2
November 28, 2006
$258,105,000.00
100.0000
SURF 2007-AB1
A1
84752CAA5
March 26, 2007
$127,954,000.00
100.0000
SURF 2007-BC1
A1
84752BAA7
January 24, 2007
$294,133,000.00
100.0000
100
Transaction
Tranche
CUSIP
SURF 2007-BC2
A1
84752EAA1
Settlement Date of Purchase by Freddie Mac April 24, 2007
Seller to Freddie Mac Merrill Lynch, Pierce, Fenner & Smith
171.
Registration Statements, including the Prospectuses and Prospectus Supplements, directly caused Fannie Mae and Freddie Mac to suffer billions of dollars in damages, including, without limitation, the depreciation in the value of the securities. The mortgage loans underlying the GSE Certificates experienced defaults and delinquencies at a much higher rate than they would have had the loan originators adhered to the underwriting guidelines set forth in the Registration Statements, and the payments to the trusts were therefore much lower than they would have been had the loans been underwritten as described in the Registration Statements. 173. Fannie Maes and Freddie Macs losses have been much greater than they would
have been if the mortgage loans had the credit quality represented in the Registration Statements. 174. Merrill Lynchs misstatements and omissions in the Registration Statements
regarding the true characteristics of the loans were the proximate cause of Fannie Maes and Freddie Macs losses relating to their purchase of the GSE Certificates.
101
175.
Based upon sales of the Certificates or similar certificates in the secondary
market, Merrill Lynch proximately caused billions of dollars in damages to Fannie Mae and Freddie Mac in an amount to be determined at trial. FIRST CAUSE OF ACTION Violation of Section 11 of the Securities Act of 1933 (Against Defendants Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Government Securities, Matthew Whalen; Brian T. Sullivan; Michael M. McGovern; Donald J. Puglisi; Paul Park; and Donald C. Han) 176. Plaintiff realleges each allegation in paragraphs 1 through 131 above as well as
paragraphs 163 through 175 as if fully set forth herein, except to the extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 177. This claim is brought by Plaintiff pursuant to Section 11 of the Securities Act of
1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements for the securities listed in paragraph 2. 178. This claim is predicated upon Defendants Merrill Lynch, Pierce, Fenner &
Smiths and Merrill Lynch Government Securities strict liability for making false and materially misleading statements in each of the Registration Statements for the Securitizations and for omitting facts necessary to make the facts stated therein not misleading. Defendant Merrill Lynch Mortgage Investors and the Individual Defendants are strictly liable for making false and materially misleading statements in the Registration Statements filed by Defendant Merrill Lynch Mortgage Investors, which are applicable to 62 of the 72 Securitizations (as specified in Table 2, supra at paragraph 37), and for omitting facts necessary to make the facts stated therein not misleading.
102
179.
Defendant Merrill Lynch, Pierce, Fenner & Smith served as underwriter of each
of the Securitizations, and sold 47 of the Certificates to Freddie Mac, and as such, is liable for the misstatements and omissions in the Registration Statements under Section 11 of the Securities Act. 180. Defendant Merrill Lynch Government Securities sold 39 of the Certificates to
Fannie Mae, and as such, is liable for the misstatements and omission in the Registration Statements under Section 11 of the Securities Act. 181. Defendant Merrill Lynch Mortgage Investors filed three Registration Statements
under which 62 of the 72 Securitizations were carried out. As depositor, Defendant Merrill Lynch Mortgage Investors was the issuer of the GSE Certificates issued pursuant to the Registration Statements they filed within the meaning of Section 2(a)(4) of the Securities Act, 15 U.S.C. 77b(a)(4), and in accordance with Section 11(a), 15 U.S.C. 77k(a). As such, they are liable for the misstatements and omissions in those Registration Statements under Section 11 of the Securities Act. 182. At the time Defendant Merrill Lynch Mortgage Investors filed three Registration
Statements applicable to 62 of the Securitizations, the Individual Defendants were officers and/or directors of Merrill Lynch Mortgage Investors. In addition, the Individual Defendants signed those Registration Statements and either signed or authorized another to sign on their behalf the amendments to those Registration Statements. As such, the Individual Defendants are liable for the misstatements and omissions in those Registration Statements under Section 11 of the Securities Act. 183. At the time that they became effective, each of the Registration Statements
contained material misstatements of fact and omitted information necessary to make the facts
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stated therein not misleading, as set forth above. The facts misstated or omitted were material to a reasonable investor reviewing the Registration Statements. 184. The untrue statements of material facts and omissions of material fact in the
Registration Statements are set forth above in Section IV and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and the accuracy of the assigned credit ratings. 185. Fannie Mae and Freddie Mac purchased or otherwise acquired the GSE
Certificates pursuant to the false and misleading Registration Statements. Fannie Mae and Freddie Mac made these purchases in the primary market. At the time they purchased the GSE Certificates, Fannie Mae and Freddie Mac did not know of the facts concerning the false and misleading statements and omissions alleged herein, and if the GSEs would have known those facts, they would not have purchased the GSE Certificates. 186. Merrill Lynch, Pierce, Fenner & Smith and Merrill Lynch Government Securities,
owed to Fannie Mae, Freddie Mac, and other investors a duty to make a reasonable and diligent investigation of the statements contained in the Registration Statements at the time they became effective to ensure that such statements were true and correct and that there were no omissions of material facts required to be stated in order to make the statements contained therein not misleading. Merrill Lynch Mortgage Investors and the Individual Defendants owed the same duty with respect to the three Registration Statements that they signed, which are applicable to 62 of the Securitizations. 187. Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith,
Merrill Lynch Government Securities, and the Individual Defendants did not exercise such due diligence and failed to conduct a reasonable investigation. In the exercise of reasonable care,
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these Defendants should have known of the false statements and omissions contained in or omitted from the Registration Statements filed in connection with the Securitizations, as set forth herein. In addition, Merrill Lynch Mortgage Investors, though subject to strict liability without regard to whether it performed diligence, also failed to take reasonable steps to ensure the accuracy of the representations. 188. Fannie Mae and Freddie Mac sustained substantial damages as a result of the
misstatements and omissions in the Registration Statements. 189. The time period from April 10, 2009 through August 30, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae, Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Mortgage Investors, Merrill Lynch & Co, Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, Bank of America Corporation, and Bank of America, N.A. In addition, this action is brought within three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). 190. By reason of the conduct herein alleged, Merrill Lynch Mortgage Investors,
Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Government Securities, and the Individual Defendants are jointly and severally liable for their wrongdoing in connection with the depositor Defendant Registration Statements.
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SECOND CAUSE OF ACTION Violation of Section 12(a)(2) of the Securities Act of 1933 (Against Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Government Securities, and Merrill Lynch Mortgage Investors) 191. Plaintiff realleges each allegation in paragraphs 1 through 131 above as well as
paragraphs 163 through 175 as if fully set forth herein, except to the extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 192. This claim is brought by Plaintiff pursuant to Section 12(a)(2) of the Securities
Act of 1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements in the Securitizations listed in paragraph 2. 193. This claim is predicated upon Merrill Lynch, Pierce, Fenner & Smiths and
Merrill Lynch Government Securities negligence for making false and materially misleading statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as Prospectuses) for each of the Securitizations listed in paragraph 2, other than the OOMLT 2007-1 Securitization, for which neither Merrill Lynch, Pierce, Fenner & Smith nor Merrill Lynch Government Securities was the entity that sold the Certificates to the GSEs and as to which the allegations in this section do not apply. Defendant Merrill Lynch Mortgage Investors acted negligently in making false and materially misleading statements in the Prospectus for the Securitizations carried out under the Registration Statements they filed, which were applicable to 62 Securitizations. 194. Merrill Lynch, Pierce, Fenner & Smith offered and sold the GSE Certificates to
Freddie Mac, and Merrill Lynch Government Securities offered and sold the GSE Certificates to 106
Fannie Mae by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. Merrill Lynch, Pierce, Fenner & Smith and Merrill Lynch Government Securities reviewed and participated in drafting the Prospectuses. 195. Merrill Lynch, Pierce, Fenner & Smith successfully solicited Freddie Macs
purchases of the GSE Certificates. Merrill Lynch Government Securities successfully solicited Fannie Maes purchases of the GSE Certificates. As the sellers, Merrill Lynch, Pierce, Fenner & Smith and Merrill Lynch Government Securities obtained substantial commissions based upon the amount received from the sale of the Certificates. 196. Merrill Lynch, Pierce, Fenner & Smith and Merrill Lynch Government Securities
offered the GSE Certificates for sale, sold them, and distributed them by the use of means or instruments of transportation and communication in interstate commerce. 197. Merrill Lynch Mortgage Investors is prominently identified in the Prospectuses
for the Securitizations carried out under the Registration Statements that they filed. These Prospectuses were the primary documents each used to sell Certificates for the 62 Securitizations under those Defendant Registration Statements. Merrill Lynch Mortgage Investors offered the Certificates publically and actively solicited their sale, including to Fannie Mae and Freddie Mac the GSE Certificates. 198. With respect to the 62 Securitizations for which they filed Registration
Statements, Merrill Lynch Mortgage Investors offered the GSE Certificates pursuant to Fannie Mae and Freddie Mac by means of the Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the
107
circumstances under which they were made, not misleading. Upon information and belief, Merrill Lynch Mortgage Investors reviewed and participated in drafting the Prospectuses. 199. Merrill Lynch Mortgage Investors offered the GSE Certificates for sale by the use
of means or instruments of transportation and communication in interstate commerce. 200. Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Government Securities,
and Merrill Lynch Mortgage Investors actively participated in the solicitation of the GSEs purchase of the GSE Certificates, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates. 201. Each of the Prospectuses contained material misstatements of fact and omitted
Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and the accuracy of the assigned credit ratings. 203. Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Government Securities,
and Merrill Lynch Mortgage Investors offered and sold the GSE Certificates offered pursuant to the Registration Statements directly to Fannie Mae and Freddie Mac pursuant to the false and misleading Prospectuses. 204. Merrill Lynch, Pierce, Fenner & Smith and Merrill Lynch Government Securities
owed to Fannie Mae and Freddie Mac, as well as to other investors in these trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure
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that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. Merrill Lynch Mortgage Investors owed the same duty with respect to the Prospectuses for the Securitizations carried out under the three Registration Statements filed by them. 205. Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Government Securities,
and Merrill Lynch Mortgage Investors failed to exercise such reasonable care. These defendants in the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above. 206. In contrast, Fannie Mae and Freddie Mac did not know, and in the exercise of
reasonable diligence could not have known, of the untruths and omissions contained in the Prospectuses at the time they purchased the GSE Certificates. If the GSEs would have known of those untruths and omissions, they would not have purchased the GSE Certificates. 207. Fannie Mae and Freddie Mac acquired the GSE Certificates in the primary market
their investments in the GSE Certificates and have the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 209. The time period from April 10, 2009 through August 30, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae, Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Mortgage Investors, Merrill Lynch & Co, Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, Bank of America Corporation, and Bank of America, N.A. In addition, this action is brought
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within three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). THIRD CAUSE OF ACTION Violation of Section 15 of the Securities Act of 1933 (Against Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, Merrill Lynch & Co., and the Individual Defendants) 210. Plaintiff realleges each allegation in paragraphs 1 through 131 above as well as
paragraphs 163 through 175 as if fully set forth herein, except to the extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 211. This claim is brought under Section 15 of the Securities Act of 1933, 15 U.S.C.
77o (Section 15), against Merrill Lynch & Co., Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, and the Individual Defendants for controllingperson liability with regard to the Section 11 and Section 12(a)(2) causes of actions set forth above. 212. The Individual Defendants at all relevant times participated in the operation and
management of Merrill Lynch Mortgage Investors and their related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of Merrill Lynch Mortgage Investors business affairs. Defendant Matthew Whalen was the President and Chairman of the Board of Director of Merrill Lynch Mortgage Investors. Defendant Brian T. Sullivan was the Vice President, Treasurer, and Controller of Merrill Lynch Mortgage Investors. Defendant Michael M. McGovern was a Director of Merrill Lynch Mortgage Investors. Defendant Donald J. Puglisi served as a Director of Merrill Lynch Mortgage Investors. Defendant Paul Park served as President and Chairman of the Board of Directors of Merrill Lynch Mortgage Investors. Defendant Donald C. Han was the Treasurer of Merrill Lynch Mortgage Investors. 110
213.
Defendants Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital,
and First Franklin Financial were the sponsors for 60 of the Securitizations carried out under the three Registration Statements filed by Merrill Lynch Mortgage Investors, and culpably participated in the violations of Sections 11 and 12(a)(2) set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting Merrill Lynch Mortgage Investors as the special purpose vehicle, and selecting Merrill Lynch, Pierce, Fenner & Smith as underwriter. In their roles as sponsor, Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, and First Franklin Financial knew and intended that the mortgage loans they purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 214. Defendants Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital,
and First Franklin Financial also acted as the seller of the mortgage loans for 60 the Securitizations carried out under the three Registration Statements filed by Defendant Merrill Lynch Mortgage Investors, in that they conveyed such mortgage loans to Merrill Lynch Mortgage Investors pursuant to a mortgage loan purchase agreement, mortgage loan sale and assignment agreement, pooling and servicing agreement, or other substantially similar agreement. 215. Defendants Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital,
and First Franklin Financial also controlled all aspects of the business of Merrill Lynch Mortgage Investors, as Merrill Lynch Mortgage Investors was merely a special purpose entity created for the purpose of acting as a pass-through for the issuance of the Certificates. In addition, because
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of their positions as sponsors, Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, and First Franklin Financial were able to, and did in fact, control the contents of the three Registration Statements filed by Merrill Lynch Mortgage Investors, including the Prospectuses and Prospectus Supplements, which pertained to 62 Securitizations and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 216. Defendant Merrill Lynch & Co. controlled the business operations of Merrill
Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch Government Securities. Defendant Merrill Lynch & Co. is the corporate parent of Merrill Lynch Mortgage Investors, Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch Government Securities. As the sole corporate parent of Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Government Securities and Merrill Lynch Mortgage Investors, Merrill Lynch & Co. had the practical ability to direct and control the actions of Merrill Lynch, Pierce, Fenner & Smith, Merrill Government Securities, and Merrill Lynch Mortgage Investors in issuing and selling the Certificates, and in fact, exercised such direction and control over the activities of Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Government Securities, and Merrill Lynch Mortgage Investors in connection with the issuance and sale of the Certificates. 217. Merrill Lynch & Co. expanded its share of the residential mortgage-backed
securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements.
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218.
Merrill Lynch & Co. culpably participated in the violations of Section 11 and
12(a)(2) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as Merrill Lynch Mortgage Investors and the issuing trusts to serve as conduits for the mortgage loans. 219. Merrill Lynch & Co, Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage
Capital, First Franklin Financial, and the Individual Defendants are controlling persons within the meaning of Section 15 by virtue of their actual power over, control of, ownership of, and/or directorship of Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Government Securities, and Merrill Lynch Mortgage Investors at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 220. Fannie Mae and Freddie Mac purchased in the primary market Certificates issued
misstatements and omissions in the Registration Statements, for which they are entitled to compensation.
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223.
The time period from April 10, 2009 through August 30, 2011 has been tolled for
statutes of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae, Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Mortgage Investors, Merrill Lynch & Co, Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, Bank of America Corporation, and Bank of America, N.A. In addition, this action is brought within three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12). FOURTH CAUSE OF ACTION Primary Violations of the Virginia Securities Act (Against Merrill Lynch, Pierce, Fenner & Smith and Merrill Lynch Mortgage Investors) 224. Plaintiff realleges each allegation in paragraphs 1 through 131 above as well as
paragraphs 163 through 175 as if fully set forth herein, except to the extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 225. This claim is brought by Plaintiff pursuant to Section 13.1-522(A)(ii) of the
Virginia Code and is asserted on behalf of Freddie Mac. The allegations set forth below in this cause of action pertain to only those GSE Certificates identified in Table 13 above that were purchased by Freddie Mac on or after September 6, 2006. 226. This claim is predicated upon Merrill Lynch, Pierce, Fenner & Smiths negligence
for making false and materially misleading statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as Prospectuses) for each of the Securitizations listed in paragraph 2, other than the OOMLT 2007-1 Securitization, for which Merrill Lynch, Pierce, Fenner & Smith was not the entity that sold the Certificates to Freddie Mac and as to which the allegations in this section do not apply. Defendant Merrill Lynch Mortgage Investors acted negligently in making false and materially misleading statements in the 114
Prospectus for the Securitizations carried out under the Registration Statements they filed, which were applicable to 62 Securitizations. 227. Merrill Lynch, Pierce, Fenner & Smith offered and sold the GSE Certificates to
Freddie Mac by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. Merrill Lynch, Pierce, Fenner & Smith reviewed and participated in drafting the Prospectuses. 228. Merrill Lynch, Pierce, Fenner & Smith successfully solicited Freddie Macs
purchases of the GSE Certificates. As the seller, Merrill Lynch, Pierce, Fenner & Smith obtained substantial commissions based upon the amount received from the sale of the Certificates. 229. Merrill Lynch, Pierce, Fenner & Smith offered the GSE Certificates for sale, sold
them and distributed them to Freddie Mac in the State of Virginia. 230. Merrill Lynch Mortgage Investors is prominently identified in the Prospectuses
for the Securitizations carried out under the Registration Statements that they filed. These Prospectuses were the primary documents each used to sell Certificates for the 62 Securitizations under those Defendant Registration Statements. Merrill Lynch Mortgage Investors offered the Certificates publically and actively solicited their sale, including to Freddie Mac the GSE Certificates. 231. With respect to the 62 Securitizations for which they filed Registration
Statements, Merrill Lynch Mortgage Investors offered the GSE Certificates pursuant to Freddie Mac by means of the Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances
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under which they were made, not misleading. Upon information and belief, Merrill Lynch Mortgage Investors reviewed and participated in drafting the Prospectuses. 232. Both of Merrill Lynch, Pierce, Fenner & Smith and Merrill Lynch Mortgage
Investors actively participated in the solicitation of Freddie Macs purchase of the GSE Certificates, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates. 233. Each of the Prospectuses contained material misstatements of fact and omitted
Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and the accuracy of the assigned credit ratings. 235. Merrill Lynch, Pierce, Fenner & Smith and Merrill Lynch Mortgage Investors
offered and sold the GSE Certificates offered pursuant to the Registration Statements directly to Freddie Mac, pursuant to the false and misleading Prospectuses. 236. Merrill Lynch, Pierce, Fenner & Smith owed to Freddie Mac, as well as to other
investors in these trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. Merrill Lynch Mortgage Investors owed the same duty with
116
respect to the Prospectuses for the Securitizations carried out under the three Registration Statements it filed. 237. Merrill Lynch, Pierce, Fenner & Smith and Merrill Lynch Mortgage Investors
failed to exercise such reasonable care. These defendants in the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above. 238. In contrast, Freddie Mac did not know, and in the exercise of reasonable diligence
could not have known, of the untruths and omissions contained in the Prospectuses at the time it purchased the GSE Certificates. If Freddie Mac would have known of those untruths and omissions, it would not have purchased the GSE Certificates. 239. Freddie Mac sustained substantial damages in connection with its investments in
the GSE Certificates and has the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 240. This action is brought within three years of the date that FHFA was appointed as
Conservator of Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). FIFTH CAUSE OF ACTION Violation of Section 13.1-522(C) of the Virginia Code (Against Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, Merrill Lynch & Co., and the Individual Defendants) 241. Plaintiff realleges each allegation in paragraphs 1 through 131 above as well as
paragraphs 163 through 175 as if fully set forth herein, except to the extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 242. This claim is brought under Section 13.1-522(C) of the Virginia Code and is
asserted on behalf of Freddie Mac. The allegations set forth below in this cause of action pertain 117
only to those GSE Certificates identified in Table 13 above that were purchased by Freddie Mac on or after September 6, 2006. This claim is brought against Merrill Lynch & Co., Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, and the Individual Defendants for controlling-person liability with regard to the Fourth Cause of Action set forth above. 243. The Individual Defendants at all relevant times participated in the operation and
management of Merrill Lynch Mortgage Investors and its related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of Merrill Lynch Mortgage Investors business affairs. Defendant Matthew Whalen was the President and Chairman of the Board of Director of Merrill Lynch Mortgage Investors. Defendant Brian T. Sullivan was the Vice President, Treasurer, and Controller of Merrill Lynch Mortgage Investors. Defendant Michael M. McGovern was a Director of Merrill Lynch Mortgage Investors. Defendant Donald J. Puglisi served as a Director of Merrill Lynch Mortgage Investors. Defendant Paul Park served as President and Chairman of the Board of Directors of Merrill Lynch Mortgage Investors. Defendant Donald C. Han was the Treasurer of Merrill Lynch Mortgage Investors. 244. Defendants Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital,
and First Franklin Financial were the sponsors for 60 of the Securitizations carried out under the three Registration Statements filed by Merrill Lynch Mortgage Investors, and culpably participated in the violations of Section 13.1-522(A)(ii) set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting Merrill Lynch Mortgage Investors as the special purpose vehicle, and selecting Merrill Lynch, Pierce, Fenner & Smith as underwriter. In their roles as sponsor, Merrill Lynch Mortgage Lending, Merrill Lynch
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Mortgage Capital, and First Franklin Financial knew and intended that the mortgage loans they purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 245. Defendants Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital,
and First Franklin Financial also controlled all aspects of the business of Merrill Lynch Mortgage Investors, as Merrill Lynch Mortgage Investors was merely a special purpose entity created for the purpose of acting as a pass-through for the issuance of the Certificates. In addition, because of their positions as sponsors, Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, and First Franklin Financial were able to, and did in fact, control the contents of the three Registration Statements filed by Merrill Lynch Mortgage Investors, including the Prospectuses and Prospectus Supplements, which pertained to 62 Securitizations and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 247. Defendant Merrill Lynch & Co. controlled the business operations of Merrill
Lynch Mortgage Investors and Merrill Lynch, Pierce, Fenner & Smith. Defendant Merrill Lynch
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& Co. is the corporate parent of Merrill Lynch Mortgage Investors, Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial and Merrill Lynch, Pierce, Fenner & Smith. As the sole corporate parent of Merrill Lynch, Pierce, Fenner & Smith and Merrill Lynch Mortgage Investors, Merrill Lynch & Co. had the practical ability to direct and control the actions of Merrill Lynch, Pierce, Fenner & Smith and Merrill Lynch Mortgage Investors in issuing and selling the Certificates, and in fact, exercised such direction and control over the activities of Merrill Lynch, Pierce, Fenner & Smith and Merrill Lynch Mortgage Investors in connection with the issuance and sale of the Certificates. 248. Merrill Lynch & Co. expanded its share of the residential mortgage-backed
securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 249. Merrill Lynch & Co. culpably participated in the violations of Section 11 and
12(a)(2) set forth above. It oversaw the actions of its subsidiaries and allowed them to misstate the mortgage loans characteristics in the Registration Statements and established specialpurpose financial entities such as Merrill Lynch Mortgage Investors and the issuing trusts to serve as conduits for the mortgage loans. 250. Merrill Lynch & Co, Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage
Capital, First Franklin Financial, and the Individual Defendants are controlling persons within the meaning of Section 13.1-522(C) by virtue of their actual power over, control of, ownership of, and/or directorship of Merrill Lynch, Pierce, Fenner & Smith and Merrill Lynch Mortgage Investors at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements.
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251.
Freddie Mac purchased Certificates issued pursuant to the Registration
omissions in the Registration Statements, for which it is entitled to compensation. 254. This action is brought within three years of the date that FHFA was appointed as
Conservator of Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12). SIXTH CAUSE OF ACTION Violation of Section 31-5606.05(a)(1)(B) of the District of Columbia Code (Against Merrill Lynch Government Securities and Merrill Lynch Mortgage Investors) 255. Plaintiff realleges each allegation in paragraphs 1 through 131 above as well as
paragraphs 163 through 175 as if fully set forth herein, except to the extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 256. This claim is brought by Plaintiff pursuant to Section 31-5606.05(a)(1)(B) of the
121
257.
This claim is predicated upon Merrill Lynch Government Securities negligence
for making false and materially misleading statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as Prospectuses) for each of the Securitizations listed in paragraph 2, other than the OOMLT 2007-1 Securitization, for which Merrill Lynch Government Securities was not the entity that sold the Certificates to Fannie Mae and as to which the allegations in this section do not apply. Defendant Merrill Lynch Mortgage Investors acted negligently in making false and materially misleading statements in the Prospectus for the Securitizations carried out under the Registration Statements they filed, which were applicable to 62 Securitizations. 258. Merrill Lynch Government Securities offered and sold the GSE Certificates to
Fannie Mae by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. Merrill Lynch Government Securities reviewed and participated in drafting the Prospectuses. 259. Merrill Lynch Government Securities successfully solicited Fannie Maes
purchases of the GSE Certificates. As the seller, Merrill Lynch Government Securities obtained substantial commissions based upon the amount received from the sale of the Certificates. 260. Merrill Lynch Government Securities offered the GSE Certificates for sale, sold
them, and distributed them to Fannie Mae in the District of Columbia. 261. Merrill Lynch Mortgage Investors is prominently identified in the Prospectuses
for the Securitizations carried out under the Registration Statements that they filed. These Prospectuses were the primary documents each used to sell Certificates for the 62 Securitizations
122
under those Defendant Registration Statements. Merrill Lynch Mortgage Investors offered the Certificates publically and actively solicited their sale, including to Fannie Mae. 262. With respect to the 62 Securitizations for which they filed Registration
Statements, Merrill Lynch Mortgage Investors offered the GSE Certificates to Fannie Mae by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. Upon information and belief, Merrill Lynch Mortgage Investors reviewed and participated in drafting the Prospectuses. 263. Both of Merrill Lynch Government Securities and Merrill Lynch Mortgage
Investors actively participated in the solicitation of Fannie Maes purchase of the GSE Certificates, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates. 264. Each of the Prospectuses contained material misstatements of fact and omitted
Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and the accuracy of the assigned credit ratings. 266. Merrill Lynch Government Securities and Merrill Lynch Mortgage Investors
offered and sold the GSE Certificates offered pursuant to the Registration Statements directly to Fannie Mae, pursuant to the false and misleading Prospectuses.
123
267.
Merrill Lynch Government Securities owed to Fannie Mae, as well as to other
investors in these trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. Merrill Lynch Mortgage Investors owed the same duty with respect to the Prospectuses for the Securitizations carried out under the three Registration Statements it filed. 268. Merrill Lynch Government Securities and Merrill Lynch Mortgage Investors
failed to exercise such reasonable care. These defendants in the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above. 269. In contrast, Fannie Mae did not know, and in the exercise of reasonable diligence
could not have known, of the untruths and omissions contained in the Prospectuses at the time they purchased the GSE Certificates. If Fannie Mae would have known of those untruths and omissions, it would not have purchased the GSE Certificates. 270. Fannie Mae sustained substantial damages in connection with its investments in
the GSE Certificates and has the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 271. The time period from April 10, 2009 through August 30, 2011 has been tolled for
124
within three years of the date that FHFA was appointed as Conservator of Fannie Mae, and is thus timely under 12 U.S.C. 4617(b)(12). SEVENTH CAUSE OF ACTION Violation of Section 31-5606.05(c) of the District of Columbia (Against Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, Merrill Lynch & Co., and the Individual Defendants) 272. Plaintiff realleges each allegation in paragraphs 1 through 131 above as well as
paragraphs 163 through 175 as if fully set forth herein, except to the extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 273. This claim is brought under Section 31-5606.05(c) of the District of Columbia
and is asserted on behalf of Fannie Mae. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 12 above. This claim is brought against Merrill Lynch & Co., Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, and the Individual Defendants for controlling-person liability with regard to the Sixth Cause of Action set forth above. 274. The Individual Defendants at all relevant times participated in the operation and
management of Merrill Lynch Mortgage Investors and their related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of Merrill Lynch Mortgage Investors business affairs. Defendant Matthew Whalen was the President and Chairman of the Board of Director of Merrill Lynch Mortgage Investors. Defendant Brian T. Sullivan was the Vice President, Treasurer, and Controller of Merrill Lynch Mortgage Investors. Defendant Michael M. McGovern was a Director of Merrill Lynch Mortgage Investors. Defendant Donald J. Puglisi served as a Director of Merrill Lynch Mortgage Investors. Defendant Paul Park served as
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President and Chairman of the Board of Directors of Merrill Lynch Mortgage Investors. Defendant Donald C. Han was the Treasurer of Merrill Lynch Mortgage Investors. 275. Defendants Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital,
and First Franklin Financial were the sponsors for 60 of the Securitizations carried out under the three Registration Statements filed by Merrill Lynch Mortgage Investors, and culpably participated in the violations of Section 31-5606.05(a)(1)(B) set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting Merrill Lynch Mortgage Investors as the special purpose vehicle, and selecting Merrill Lynch, Pierce, Fenner & Smith as underwriter. In their roles as sponsor, Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, and First Franklin Financial knew and intended that the mortgage loans they purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 276. Defendants Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital,
and First Franklin Financial also controlled all aspects of the business of Merrill Lynch Mortgage
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Investors, as Merrill Lynch Mortgage Investors was merely a special purpose entity created for the purpose of acting as a pass-through for the issuance of the Certificates. In addition, because of their positions as sponsors, Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, and First Franklin Financial were able to, and did in fact, control the contents of the three Registration Statements filed by Merrill Lynch Mortgage Investors, including the Prospectuses and Prospectus Supplements, which pertained to 62 Securitizations and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 278. Defendant Merrill Lynch & Co. controlled the business operations of Merrill
Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch Government Securities. Defendant Merrill Lynch & Co. is the corporate parent of Merrill Lynch Mortgage Investors, Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch Government Securities. As the sole corporate parent of Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Government Securities and Merrill Lynch Mortgage Investors, Merrill Lynch & Co. had the practical ability to direct and control the actions of Merrill Lynch, Pierce, Fenner & Smith, Merrill Government Securities, and Merrill Lynch Mortgage Investors in issuing and selling the Certificates, and in fact, exercised such direction and control over the activities of Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Government Securities, and Merrill Lynch Mortgage Investors in connection with the issuance and sale of the Certificates. 279. Merrill Lynch & Co. expanded its share of the residential mortgage-backed
securitization market in order to increase revenue and profits. The push to securitize large
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volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 280. Merrill Lynch & Co. culpably participated in the violations of Section 31-
5606.05(a)(1)(B) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as Merrill Lynch Mortgage Investors and the issuing trusts to serve as conduits for the mortgage loans. 281. Merrill Lynch & Co, Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage
Capital, First Franklin Financial, and the Individual Defendants are controlling persons within the meaning of Section 31-5606.05(c) by virtue of their actual power over, control of, ownership of, and/or directorship of Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Government Securities, and Merrill Lynch Mortgage Investors at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 282. Fannie Mae purchased in the primary market Certificates issued pursuant to the
Registration Statements, including the Prospectuses and Prospectus Supplements, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements. 283. Fannie Mae did not know of the misstatements and omissions in the Registration
in the Registration Statements, for which it is entitled to compensation.
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285.
The time period from April 10, 2009 through August 30, 2011 has been tolled for
statutes of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae, Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Mortgage Investors, Merrill Lynch & Co, Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, Bank of America Corporation, and Bank of America, N.A. In addition, this action is brought within three years of the date that FHFA was appointed as Conservator of Fannie Mae and is thus timely under 12 U.S.C. 4617(b)(12). EIGHTH CAUSE OF ACTION Common Law Negligent Misrepresentation (Against Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Government Securities and Merrill Lynch Mortgage Investors) 286. Plaintiff realleges each allegation in paragraphs 1 through 131 above as well as
paragraphs 163 through 175 as if fully set forth herein, except to the extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 287. This is a claim for common law negligent misrepresentation against Defendants
Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Government Securities and Merrill Lynch Mortgage Investors. 288. Between September 29, 2005 and October 10, 2007, Merrill Lynch, Pierce,
Fenner & Smith, Merrill Lynch Government Securities, and Merrill Lynch Mortgage Investors sold the GSE Certificates to the GSEs as described above. Because Merrill Lynch Mortgage Investors owned and then conveyed the underlying mortgage loans that collateralized the Securitizations for which it served as depositor, Merrill Lynch Mortgage Investors had unique, exclusive, and special knowledge about the mortgage loans in the Securitizations through its possession of the loan files and other documentation.
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289.
Likewise, because Merrill Lynch, Pierce, Fenner & Smith and Merrill Lynch
Government Securities underwrote the Securitizations and/or acted as the entities that sold the GSE Certificates to the GSEs, under the Securities Act they were obligated toand had the opportunity toperform sufficient due diligence to ensure that the Registration Statements, including without limitation the relevant Prospectus Supplements, for which they served as the entities that sold the GSE Certificates to the GSEs, did not contain an untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. As a result of this privileged position as the entities which sold the GSE Certificates to the GSEs, Merrill Lynch, Pierce, Fenner & Smith and Merrill Lynch Government Securities had access to loan file information and were obligated to perform adequate due diligence to ensure the accuracy of the Registration Statements. As such, Merrill Lynch, Pierce, Fenner & Smith and Merrill Lynch Government Securities had unique, exclusive, and special knowledge about the underlying mortgage loans in the Securitizations. 290. Merrill Lynch, Pierce, Fenner & Smith and Merrill Lynch Government Securities
also had unique, exclusive, and special knowledge of the work of third-party due diligence providers, such as Clayton. The GSEs, like other investors, had no access to borrower loan files prior to the closing of the Securitizations and their purchases of the Certificates. Accordingly, when determining whether to purchase the GSE Certificates, the GSEs could not evaluate the underwriting quality or the servicing practices of the mortgage loans in the Securitizations on a loan-by-loan basis. The GSEs therefore reasonably relied on Merrill Lynch, Pierce, Fenner & Smith and Merrill Lynch Government Securities knowledge and their express representations made prior to the closing of the Securitizations regarding the underlying mortgage loans.
130
291.
Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Government Securities,
and Merrill Lynch Mortgage Investors were aware that the GSEs reasonably relied on Merrill Lynch, Pierce, Fenner & Smiths, Merrill Lynch Government Securities, and Merrill Lynch Mortgage Investors reputations and unique, exclusive, and special expertise and experience, as well as their express representations made prior to the closing of the Securitizations, and depended upon these Defendants for complete, accurate, and timely information. The standards under which the underlying mortgage loans were actually originated were known to these Defendants and were not known, and could not be determined, by the GSEs prior to the closing of the Securitizations. In purchasing the GSE Certificates from Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Government Securities, and Merrill Lynch Mortgage Investors, the GSEs relied on their special relationship with those Defendants, and the purchases were made, in part, in reliance on that relationship. 292. Based on their unique, exclusive, and special knowledge and expertise about the
loans held by the trusts in the Securitizations, Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Government Securities, and Merrill Lynch Mortgage Investors had a duty to provide the GSEs complete, accurate, and timely information regarding the mortgage loans and the Securitizations. Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Government Securities, and Merrill Lynch Mortgage Investors negligently breached their duty to provide such information to the GSEs by instead making to the GSEs untrue statements of material facts in the Securitizations, or otherwise misrepresenting to the GSEs material facts about the Securitizations. The misrepresentations are set forth in Section IV above, and include misrepresentations as to compliance with underwriting guidelines, occupancy status, loan-to-
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value ratios, and the accuracy of the assigned credit ratings, as disclosed in the term sheets and Prospectus Supplements. 293. In addition, having made actual representations about the underlying collateral in
the Securitizations and the facts bearing on the riskiness of the Certificates, Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Government Securities, and Merrill Lynch Mortgage Investors had a duty to correct misimpressions left by their statements, including with respect to any half truths. The GSEs were entitled to rely upon these Defendants representations about the Securitizations, and these Defendants failed to correct in a timely manner any of their misstatements or half truths, including misrepresentations as to compliance with underwriting guidelines for the mortgage loans. 294. The GSEs reasonably relied on the information Merrill Lynch, Pierce, Fenner &
Smith, Merrill Lynch Government Securities, and Merrill Lynch Mortgage Investors did provide, and Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Government Securities, and Merrill Lynch Mortgage Investors knew that the GSEs were acting in reliance on such information. The GSEs were damaged in an amount to be determined at trial as a direct, proximate, and foreseeable result of Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Government Securities, and Merrill Lynch Mortgage Investors misrepresentations, including any half truths. 295. The time period from April 10, 2009 through August 30, 2011 has been tolled for
132
within three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12). NINTH CAUSE OF ACTION Common Law Fraud (Against Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, Merrill Lynch Government Securities, Merrill Lynch Mortgage Investors, and Merrill Lynch, Pierce, Fenner & Smith) 296. forth herein. 297. This is a claim for common law fraud against Defendants Merrill Lynch Mortgage Plaintiff realleges each allegation above in paragraphs 1 through 175 as if fully set
Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, Merrill Lynch Government Securities, and Merrill Lynch Mortgage Investors with respect to the Securitizations that Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, and First Franklin Financial sponsored. 298. The material representations set forth above were fraudulent, and Merrill Lynch,
Pierce, Fenner & Smiths representations to the GSEs in the term sheets and Prospectus Supplements falsely and misleadingly misrepresented and omitted material statements of fact. The misrepresentations are set forth in Section IV above, and include misrepresentations as to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and the accuracy of the assigned credit ratings, as disclosed in the term sheets and Prospectus Supplements. The representations on which the GSEs relied were directly communicated to them by Merrill Lynch, Pierce, Fenner & Smith. Merrill Lynch, Pierce, Fenner & Smith knew, or was reckless in not knowing, that its representations and omissions were false and/or misleading at the time they were made. Merrill Lynch, Pierce, Fenner & Smith made the misleading statements for the purpose of inducing the GSEs to purchase the GSE Certificates. 133
299.
The basis for the false representations in the term sheets and Prospectus
Supplements that Merrill Lynch, Pierce, Fenner & Smith made to the GSEs was information that Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, and Merrill Lynch Mortgage Investors provided to Merrill Lynch, Pierce, Fenner & Smith as to the strength of the collateral underlying the GSE Certificates and the structure of the Securitizations. Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, and Merrill Lynch Mortgage Investors communicated this information to Merrill Lynch, Pierce, Fenner & Smith with the knowledge and intent that Merrill Lynch, Pierce, Fenner & Smith would communicate this information to purchases of the GSE Certificates. Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, and Merrill Lynch Mortgage Investors all had reason to expect that the GSEs were among the class of persons who would receive and rely on such representations. 300. Each of Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First
Franklin Financial, Merrill Lynch Government Securities, Merrill Lynch Mortgage Investors, and Merrill Lynch, Pierce, Fenner & Smith intended that the above misleading statements were to be made for the purpose of inducing the GSEs to purchase the GSE Certificates. 301. The GSEs justifiably relied on Merrill Lynch Mortgage Lending, Merrill Lynch
Mortgage Capital, First Franklin Financial, Merrill Lynch Government Securities, Merrill Lynch Mortgage Investors, and Merrill Lynch, Pierce, Fenner & Smiths false representations and misleading omissions. 302. Had the GSEs known the true facts regarding Merrill Lynchs underwriting
practices and quality of the mortgage loans collateralizing the GSE Certificates, they would not have purchased the GSE Certificates.
134
303.
As a result of the foregoing, the GSEs have suffered damages in an amount to be
determined at trial. In the alternative, Plaintiff hereby demands rescission and makes any necessary tender of the GSE Certificates. 304. The misconduct by Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage
Capital, First Franklin Financial, Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch Government Securities was intentional and wanton. The immediate victims of their fraud were Fannie Mae and Freddie Mac, two government-sponsored entities whose primary mission was assuring affordable housing to millions of Americans. Further, the public nature of the harm caused by Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch Government Securities is apparent inand conclusively demonstrated bythe Congressional hearings and federal enforcement actions that have been pursued against them as a direct result of their fraudulent conduct at issue in this Complaint. See, e.g., the Senate PSI Report; the FCIC Report; Prosecutors Widen Probes Into Subprime U.S. Attorneys Office Seeks Merrill Material; SEC Upgrades Inquiry, Wall St. J., Feb. 8, 2008. Punitive damages are therefore warranted for these Defendants actions in order to punish and deter it from future misconduct. 305. The time period from April 10, 2009 through August 30, 2011 has been tolled for
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within three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12). TENTH CAUSE OF ACTION Aiding and Abetting Fraud (Against Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial and Merrill Lynch Mortgage Investors) 306. forth herein. 307. This is a claim for aiding and abetting fraud against Defendants Merrill Lynch Plaintiff realleges each allegation in paragraphs 1 through 175 above as if fully set
Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial and Merrill Lynch Mortgage Investors with respect to the Securitizations that Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, and First Franklin Financial sponsored. 308. Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, and First
Franklin Financial, as the sponsors for 60 of the Securitizations, substantially assisted Merrill Lynch Government Securities and Merrill Lynch, Pierce, Fenner & Smiths fraud by choosing which mortgage loans would be included in those Securitizations. They also extended warehouse lines of credit to mortgage originators that they knew had shoddy standards with the intent of later purchasing and securitizing those loans to purchasers, such as the GSEs. Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, and First Franklin Financials actions in assisting in the origination of, and then purchasing, poorly underwritten loans was an integral part of the Securitizations. 309. Likewise, Merrill Lynch Mortgage Investors, as depositor for 62 of the
Securitizations, substantially assisted Merrill Lynch Government Securities and Merrill Lynch, Pierce, Fenner & Smiths fraud by issuing the Registration Statements that were used to offer 136
publicly the Certificates. As the issuer of the Certificates, Merrill Lynch Mortgage Investors was an integral part of Merrill Lynch, Pierce, Fenner & Smiths and Merrill Lynch Government Securities sale of the Certificates to the GSEs. 310. As described above, Merrill Lynch Government Securities and Merrill Lynch,
Pierce, Fenner & Smith made fraudulent and untrue statements of material fact and omitted to state material facts regarding the true credit quality of the GSE Certificates, the true rate of owner occupancy, the true LTV and CLTV ratio of the underlying mortgage loans, compliance by the originators with applicable underwriting guidelines, and the accuracy of the assigned credit ratings. 311. All of Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First
Franklin Financial and Merrill Lynch Mortgage Investors had unique access to the loan files, and therefore were aware of the extreme weakness of the loans. Accordingly, Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial and Merrill Lynch Mortgage Investors were aware that the representations and omissions of Merrill Lynch Government Securities and Merrill Lynch, Pierce, Fenner & Smith were fraudulent. 312. The central role of Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage
Capital, First Franklin Financial and Merrill Lynch Mortgage Investors in of Merrill Lynch Government Securities and Merrill Lynch, Pierce, Fenner & Smith vertically integrated sales strategy for the Certificates substantially assisted in Merrill Lynch Government Securities and Merrill Lynch, Pierce, Fenner & Smiths fraud. Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, and First Franklin Financial, as the purchasers of the underlying mortgage loans, worked closely with Merrill Lynch Mortgage Investors, as the vehicle for securitizing the mortgage loans, which in turn worked closely with Merrill Lynch Government Securities and
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Merrill Lynch, Pierce, Fenner & Smith, as the distribution arm for the Certificates that were collateralized by those mortgage loans and then sold to the GSEs. All of Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial and Merrill Lynch Mortgage Investors worked hand-in-glove to provide Merrill Lynch Government Securities and Merrill Lynch, Pierce, Fenner & Smith with Certificates that they could fraudulently sell to the GSEs. 313. Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin
Financial and Merrill Lynch Mortgage Investors substantial assistance in Merrill Lynch Government Securities and Merrill Lynch, Pierce, Fenner & Smiths fraud played a significant and material role in inducing the GSEs to purchase the GSE Certificates. As a direct, proximate and foreseeable result of Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial and Merrill Lynch Mortgage Investors aiding and abetting Merrill Lynch Government Securities and Merrill Lynch, Pierce, Fenner & Smith in their fraud against the GSEs, the GSEs have been damaged in an amount to be determined at trial. 314. Because Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First
Franklin Financial and Merrill Lynch Mortgage Investors aided and abetted Merrill Lynch Government Securities and Merrill Lynch, Pierce, Fenner & Smiths fraud willfully and wantonly, and because by their acts Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial and Merrill Lynch Mortgage Investors knowingly affected the general public, including but not limited to all persons with interests in the Certificates, Plaintiff is entitled to recover punitive damages. 315. The time period from April 10, 2009 through August 30, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae,
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Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Mortgage Investors, Merrill Lynch & Co, Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, Bank of America Corporation, and Bank of America, N.A. In addition, this action is brought within three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12). PRAYER FOR RELIEF WHEREFORE Plaintiff prays for relief as follows: 316. An award in favor of Plaintiff against all Defendants, jointly and severally, for all
GSE Certificates, as well as lost principal and lost interest payments thereon; c. d. e. f. Punitive damages; Attorneys fees and costs; Prejudgment interest at the maximum legal rate; and Such other and further relief as the Court may deem just and proper.
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UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK FEDERAL HOUSING FINANCE AGENCY, AS CONSERVATOR FOR THE FEDERAL NATIONAL MORTGAGE ASSOCIATION AND THE FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff, -againstNOMURA HOLDING AMERICA INC., NOMURA ASSET ACCEPTANCE CORPORATION, NOMURA HOME EQUITY LOAN, INC., NOMURA CREDIT & CAPITAL, INC., NOMURA SECURITIES INTERNATIONAL, INC., RBS SECURITIES INC. (f/k/a GREENWICH CAPITAL MARKETS, INC.), DAVID FINDLAY, JOHN MCCARTHY, JOHN P. GRAHAM, NATHAN GORIN, and N. DANTE LAROCCA, Defendants.
___ CIV. ___ (___)
TABLE OF CONTENTS Page NATURE OF ACTION ...................................................................................................................1 PARTIES .........................................................................................................................................5 The Plaintiff and the GSEs ..................................................................................................5 The Defendants ....................................................................................................................6 The Non-Party Originators ..................................................................................................9 JURISDICTION AND VENUE ......................................................................................................9 FACTUAL ALLEGATIONS ........................................................................................................10 I. The Securitizations.............................................................................................................10 A. B. C. Residential Mortgage-Backed Securitizations In General .....................................10 The Securitizations At Issue In This Case .............................................................11 The Securitization Process .....................................................................................12 1. 2. II. Nomura Credit Groups Mortgage Loans in Special Purpose Trusts..........12 The Trusts Issue Securities Backed by the Loans ......................................13
Defendants Participation in the Securitization Process ....................................................16 A. The Role of Each of the Defendants ......................................................................16 1. 2. 3. 4. 5. 6. 7. B. Nomura Credit ...........................................................................................16 NAA ...........................................................................................................17 NHELI........................................................................................................18 Nomura Securities ......................................................................................18 RBS Securities ...........................................................................................19 Nomura Holding ........................................................................................20 The Individual Defendants .........................................................................20
III.
The Registration Statements and the Prospectus Supplements..........................................24 A. B. C. D. Compliance With Underwriting Guidelines ..........................................................24 Statements Regarding Occupancy Status of Borrower ..........................................27 Statements Regarding Loan-to-Value Ratios.........................................................29 Statements Regarding Credit Ratings ....................................................................31
IV.
Falsity of Statements in the Registration Statements and Prospectus Supplements ..........33 A. The Statistical Data Provided in the Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False ....................................33 1. 2. B. Owner-Occupancy Data Was Materially False..........................................33 Loan-to-Value Data Was Materially False ................................................35
The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines .........................................................38 1. Investigations Have Confirmed That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines............................................................................38 The Collapse of the Certificates Credit Ratings Further Indicates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines .................................................................43 The Surge in Mortgage Delinquency and Default Further Demonstrates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines ....................................45
2.
3.
V.
Fannie Maes and Freddie Macs Purchases of the GSE Certificates and the Resulting Damages ............................................................................................................46
FIRST CAUSE OF ACTION ........................................................................................................48 SECOND CAUSE OF ACTION ...................................................................................................51 THIRD CAUSE OF ACTION .......................................................................................................55 FOURTH CAUSE OF ACTION ...................................................................................................58 FIFTH CAUSE OF ACTION ........................................................................................................61 SIXTH CAUSE OF ACTION .......................................................................................................64
ii
SEVENTH CAUSE OF ACTION .................................................................................................67 EIGHTH CAUSE OF ACTION ....................................................................................................70 PRAYER FOR RELIEF ................................................................................................................74 JURY TRIAL DEMANDED .........................................................................................................75
iii
Plaintiff Federal Housing Finance Agency (FHFA), as conservator of The Federal National Mortgage Association (Fannie Mae) and The Federal Home Loan Mortgage Corporation (Freddie Mac), by its attorneys, Quinn Emanuel Urquhart & Sullivan, LLP, for its Complaint herein against Nomura Holding America Inc. (Nomura Holding), Nomura Asset Acceptance Corporation (NAA), Nomura Home Equity Loan, Inc. (NHELI), Nomura Credit & Capital, Inc. (Nomura Credit), Nomura Securities International, Inc. (Nomura Securities) (collectively, Nomura), RBS Securities Inc. (f/k/a Greenwich Capital Markets, Inc.) (RBS Securities), and David Findlay, John McCarthy, John P. Graham, Nathan Gorin, and N. Dante Larocca (the Individual Defendants) (together with Nomura and RBS Securities, Defendants) alleges as follows: NATURE OF ACTION 1. This action arises out of Defendants actionable conduct in connection with the
2.
Between November 30, 2005 and April 30, 2007, Fannie Mae and Freddie Mac
purchased over $2 billion in residential mortgage-backed securities (the GSE Certificates) issued in connection with seven Nomura-sponsored securitizations.1 The GSE Certificates purchased by Freddie Mac, along with date and amount of the purchases, are listed below in Table 10. The GSE Certificates purchased by Fannie Mae, along with date and amount of the purchases, are listed below in Table 11. The securitizations at issue are: i. Nomura Asset Acceptance Corporation, Mortgage Pass-Through Certificates, Series 2005-AR6 (NAA 2005-AR6); Nomura Home Equity Loan, Inc., Asset-Backed Certificates, Series 2006-FM1 (NHELI 2006-FM1); Nomura Home Equity Loan, Inc., Asset-Backed Certificates, Series 2006-FM2 (NHELI 2006-FM2); Nomura Home Equity Loan, Inc., Asset-Backed Certificates, Series 2006-HE3 (NHELI 2006-HE3); Nomura Home Equity Loan, Inc., Asset-Backed Certificates, Series 2007-1 (NHELI 2007-1); Nomura Home Equity Loan, Inc., Asset-Backed Certificates, Series 2007-2 (NHELI 2007-2); and Nomura Home Equity Loan, Inc., Asset-Backed Certificates, Series 2007-3 (NHELI 2007-3);
ii.
iii.
iv.
v.
vi.
vii.
(collectively, the Securitizations). 3. The Certificates were offered for sale pursuant to one of three shelf registration
statements (the Shelf Registration Statements) filed with the Securities and Exchange Commission (the SEC). Defendant NAA filed one Shelf Registration Statement that pertained
For purposes of this Complaint, the securities issued under the Registration Statements (as defined in note 2, below) are referred to as Certificates, while the particular Certificates that Fannie Mae and Freddie Mac purchased are referred to as the GSE Certificates. Holders of Certificates are referred to as Certificateholders.
to one Securitization at issue in this action. Defendant NHELI filed two Shelf Registration Statements that pertained to the remaining six Securitizations at issue in this action. The Individual Defendants signed one or more of the Shelf Registration Statements and the amendments thereto. 4. For each Securitization, a prospectus (Prospectus) and prospectus supplement
(Prospectus Supplement) were filed with the SEC as part of the Registration Statement.2 The GSE Certificates were marketed and sold to Fannie Mae and Freddie Mac pursuant to the Registration Statements, including the Shelf Registration Statements and the corresponding Prospectuses and Prospectus Supplements. 5. The Registration Statements contained statements about the characteristics and
credit quality of the mortgage loans underlying the Securitizations, and the origination and underwriting practices used to make and approve the loans. These statements were material to a reasonable investors decision to invest in mortgage-backed securities by purchasing the Certificates, and specifically to Fannie Maes and Freddie Macs investment decisions. Unbeknownst to Fannie Mae and Freddie Mac, these statements were materially false, as significant percentages of the underlying mortgage loans were not originated in accordance with the represented underwriting standards and origination practices, and had materially poorer credit quality than what was represented in the Registration Statements. 6. The Registration Statements also contained statistical summaries of the groups of
mortgage loans in each Securitization, such as the percentage of loans secured by owneroccupied properties and the percentage of the loan groups aggregate principal balance with
The term Registration Statement as used herein incorporates the Shelf Registration Statement, the Prospectus and the Prospectus Supplement for each referenced Securitization, except where otherwise indicated.
loan-to-value ratios within specified ranges. This information also was material to reasonable investors. However, a loan-level analysis of a sample of loans for each Securitizationa review that encompassed thousands of mortgages across all of the Securitizationshas revealed that these statistics also were false and omitted material facts due to inflated property values and misstatements of other key characteristics of the mortgage loans. 7. For example, the percentage of owner-occupied properties is a material risk factor
to the purchasers of Certificates, such as Fannie Mae and Freddie Mac, since a borrower who lives in a mortgaged property is generally less likely to stop paying his or her mortgage and more likely to take better care of the property. The loan-level review reveals that the true percentage of owner-occupied properties for the loans supporting the GSE Certificates was materially lower than what was stated in the Prospectus Supplements. Likewise, the Prospectus Supplements misrepresented other material factors, including the true value of the mortgaged properties relative to the amount of the underlying loans. 8. Defendants Nomura Securities (which was the lead underwriter and sold some of
the GSE Certificates to the GSEs), RBS Securities (which was the lead underwriter and sold some of the GSE Certificates to Freddie Mac), NAA (which acted as the depositor in one of the Securitizations), NHELI (which acted as the depositor in six of the Securitizations), and the Individual Defendants (who signed the Registration Statements) are directly responsible for the misstatements and omissions of material fact contained in the Registration Statements because they prepared, signed, filed and/or used these documents to market and sell the Certificates to Fannie Mae and Freddie Mac. 9. Defendants Nomura Holding and Nomura Credit also are responsible for the
misstatements and omissions of material fact contained in the Registration Statements by virtue
of their direction and control over Defendants Nomura Securities, NAA, and NHELI. Nomura Holding directly participated in and exercised dominion and control over the business operations of its wholly owned subsidiaries, Defendants Nomura Securities, NAA, and NHELI. Nomura Credit (the seller or sponsor) directly participated in and exercised dominion and control over the business operations of the depositors, Defendants NAA and NHELI. 10. Fannie Mae and Freddie Mac purchased over $2 billion of the Certificates
pursuant to the Registration Statements filed with the SEC. The Registration Statements contained misstatements and omissions of material facts concerning the quality of the underlying mortgage loans, and the practices used to originate and underwrite such loans. As a result of Defendants misstatements and omissions of material fact, Fannie Mae and Freddie Mac have suffered substantial losses as the value of their holdings has significantly deteriorated. 11. FHFA, as Conservator of Fannie Mae and Freddie Mac, brings this action against
Defendants for violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77k, 77l(a)(2), 77o, Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, Sections 31-5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, and for common law negligent misrepresentation. PARTIES The Plaintiff and the GSEs 12. The Federal Housing Finance Agency is a federal agency located at 1700 G
Street, NW in Washington, D.C. FHFA was created on July 30, 2008 pursuant to the Housing and Economic Recovery Act of 2008 (HERA), Pub. L. No. 110-289, 122 Stat. 2654 (2008) (codified at 12 U.S.C. 4617), to oversee Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. On September 6, 2008, under HERA, the Director of FHFA placed Fannie Mae and Freddie Mac into conservatorship and appointed FHFA as conservator. In that capacity, FHFA
has the authority to exercise all rights and remedies of the GSEs, including but not limited to, the authority to bring suits on behalf of and/or for the benefit of Fannie Mae and Freddie Mac. 12 U.S.C. 4617(b)(12). 13. Fannie Mae and Freddie Mac are government-sponsored enterprises chartered by
Congress with a mission to provide liquidity, stability, and affordability to the United States housing and mortgage markets. As part of this mission, Fannie Mae and Freddie Mac invested in residential mortgage-backed securities. Fannie Mae is located at 3900 Wisconsin Avenue, NW in Washington, D.C. Freddie Mac is located at 8200 Jones Branch Drive in McLean, Virginia. The Defendants 14. Defendant Nomura Holding is a Delaware corporation with its principal place of
business at 2 World Financial Center, New York, New York 10281. Nomura Holding is the American branch of the Japanese investment banking and securities firm Nomura Securities Co., Ltd. Nomura Holdings wholly owned subsidiaries include Defendants Nomura Credit, NAA, NHELI, and Nomura Securities. 15. Defendant Nomura Credit is a Delaware corporation with its principal place of
business at 2 World Financial Center, New York, New York 10281. Nomura Credit is a wholly owned subsidiary of Nomura Holding. Nomura Credit acted as the seller/sponsor for all seven Securitizations. 16. Defendant NAA is a Delaware corporation with its principal place of business at 2
World Financial Center, New York, New York 10281. NAA is a wholly owned subsidiary of Nomura Holding and an affiliate of Nomura Credit. NAA was the depositor for one Securitization. As depositor, NAA was responsible for preparing and filing reports required under the Securities Exchange Act of 1934.
17.
Defendant NHELI is a Delaware corporation with its principal place of business
at 2 World Financial Center, New York, New York 10281. NHELI is a wholly owned subsidiary of Nomura Holding and an affiliate of Nomura Credit. NHELI was the depositor for the remaining six Securitizations. As depositor, NHELI was responsible for preparing and filing reports required under the Securities Exchange Act of 1934. 18. Defendant Nomura Securities is a New York corporation with its principal place
of business at 2 World Financial Center, New York, New York 10281. It is registered with the SEC as a broker-dealer. Nomura Securities is a wholly owned subsidiary of Nomura Holding and an affiliate of NAA and NHELI. Nomura Securities was the lead or co-lead underwriter for three Securitizations (NAA 2005-AR6, NHELI 2006-FM1, and NHELI 2006-FM2), and was intimately involved in the offerings. Fannie Mae and Freddie Mac purchased the GSE Certificates from Nomura Securities in its capacity as underwriter for two Securitizations. 19. Defendant RBS Securities is a Delaware corporation with its principal place of
business at 600 Washington Boulevard, Stanford, Connecticut 06901. It is registered with the SEC as a broker-dealer. Prior to April 2009, RBS Securities was known as Greenwich Capital Markets, Inc. (Greenwich). Operating as Greenwich, RBS Securities was the lead or co-lead underwriter for four Securitizations (NHELI 2006-FM2, NHELI 2006-HE3, NHELI 2007-1, and NHELI 2007-2), and was intimately involved in the offerings. Freddie Mac purchased the GSE Certificates from Greenwich (now RBS Securities) in its capacity as underwriter for these four Securitizations. 20. Defendant N. Dante Larocca is an individual residing in Manhasset, New York.
From 2001 to 2008, he was a Managing Director at Nomura Securities. Mr. Larocca also was President and Chief Executive Officer of NHELI. Mr. Larocca signed two Shelf Registration
Statements (applicable to six Securitizations) and the amendments thereto, and, upon information and belief, did so in New York. 21. Defendant David Findlay is an individual residing in Greenwich, Connecticut and
working in New York, New York. Mr. Findlay was a Senior Managing Director and the Chief Legal Officer of Nomura Holding and Nomura Securities. Mr. Findlay served as a Director of both NAA and NHELI. He signed or authorized another to sign on his behalf all three Shelf Registration Statements and the amendments thereto, and, upon information and belief, did so in New York. 22. Defendant Nathan Gorin is an individual residing in Syosset, New York and
working in New York, New York. Mr. Gorin was Controller and Chief Financial Officer of Nomura Securities from 2004 to 2009. He also was the Controller and Chief Financial Officer of both NAA and NHELI. Mr. Gorin signed or authorized another to sign on his behalf all three Shelf Registration Statements and the amendments thereto, and, upon information and belief, did so in New York. 23. Defendant John P. Graham is an individual residing and working in New York,
New York. Mr. Graham was a Managing Director at Nomura Credit. Mr. Graham also was the President and Chief Executive Officer of NAA. Mr. Graham signed or authorized another to sign on his behalf one Shelf Registration Statement (applicable to one Securitization) and the amendment thereto, and, upon information and belief, did so in New York. 24. Defendant John McCarthy was a Director of both NAA and NHELI. Mr.
McCarthy signed or authorized another to sign on his behalf all three Shelf Registration Statements and the amendments thereto, and, upon information and belief, did so in New York.
The Non-Party Originators 25. For each Securitization, the loans underlying the Certificates were acquired by
Nomura Credit (the sponsor) from non-party mortgage originators. The non-party originators principally responsible for the loans underlying the Certificates include Fremont Investment & Loan (Fremont), Ownit Mortgage Solutions, Inc. (Ownit), ResMAE Mortgage Corp. (ResMAE), Peoples Choice Home Loan, Inc. (Peoples Choice), and Silver State Mortgage and Silver State Financial Services (d/b/a Silver State Mortgage) (Silver State). JURISDICTION AND VENUE 26. Jurisdiction of this Court is founded upon 28 U.S.C. 1345, which gives federal
courts original jurisdiction over claims brought by FHFA in its capacity as conservator of Fannie Mae and Freddie Mac. 27. Jurisdiction of this Court also is founded upon 28 U.S.C. 1331 because the
13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code and Sections 31-5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, pursuant to this Courts supplemental jurisdiction under 28 U.S.C. 1367(a). This Court also has jurisdiction over the common law claim of negligent misrepresentation pursuant to this Courts supplemental jurisdiction under 28 U.S.C. 1367(a). 29. Venue is proper in this district pursuant to Section 22 of the Securities Act of
1933, 15 U.S.C. 77v, and 28 U.S.C. 1391(b). The Nomura Defendants are all located in this district, most of the Individual Defendants reside and/or work in this district, and many of the
acts and transactions alleged herein, including the preparation and dissemination of the Registration Statements, occurred in substantial part within this district. Additionally, the GSE Certificates were actively marketed and sold from this district. Defendants also are subject to personal jurisdiction in this district. FACTUAL ALLEGATIONS I. The Securitizations A. 30. Residential Mortgage-Backed Securitizations In General Asset-backed securitization distributes risk by pooling cash-producing financial
loans. Some residential mortgage-backed securitizations are created from more than one cohort of loans called collateral groups, in which case the trust issues securities backed by different groups. For example, a securitization may involve two groups of mortgages, with some
10
securities backed primarily by the first group, and others primarily by the second group. Purchasers of the securities acquire an ownership interest in the assets of the trust, which in turn owns the loans. Within this framework, the purchasers of the securities acquire rights to the cashflows from the designated mortgage group, such as homeowners payments of principal and interest on the mortgage loans, held by the related trust. 33. Residential mortgage-backed securities are issued pursuant to registration
mortgage loans. The servicer is responsible for collecting homeowners mortgage loan payments, which the servicer remits to the trustee after deducting a monthly servicing fee. The servicers duties include making collection efforts on delinquent loans, initiating foreclosure proceedings, and determining when to charge off a loan by writing down its balance. The servicer is required to report key information about the loans to the trustee. The trustee (or trust administrator) administers the trusts funds and delivers payments due each month on the certificates to the investors. B. 35. The Securitizations At Issue In This Case This case involves the seven Securitizations listed in Table 1 below. Nomura
served as the depositor and therefore the issuer and offeror of the Certificates for the seven Securitizations. Nomura also served as the sponsor for the seven Securitizations. In two of the Securitizations, Nomura served as the lead underwriter and sold the GSE Certificates to the
11
GSEs. For each GSE Certificate, Table 1 identifies: (1) the sponsor; (2) the depositor; (3) the lead underwriter; (4) the principal amount issued for the tranches3 purchased by the GSEs; (5) the date of issuance; and (6) the loan group backing the GSE Certificate for that Securitization (referred to as the Supporting Loan Groups). Table 1
Transaction
NAA 2005AR6 NHELI 2006FM1 NHELI 2006FM2 NHELI 2006HE3
Tranche
IIIA1 IA IA1
Sponsor
Nomura Credit Nomura Credit Nomura Credit Nomura Credit Nomura Credit Nomura Credit Nomura Credit
Depositor
NAA NHELI. NHELI
Lead Underwriter
Nomura Securities Nomura Securities Greenwich (now RBS Securities) Greenwich (now RBS Securities), Nomura Securities Greenwich (now RBS Securities) Greenwich (now RBS Securities) Lehman Brothers Inc.

$64,943,000 $309,550,000 $525,197,000
Date of Issuance
11/30/2005 1/30/2006 10/31/2006

Group III Group I Group I
IA1
NHELI
$441,739,000
8/31/2006
Group I
NHELI 2007-1
II1A
NHELI
$100,548,000
1/31/2007
Group II-1
NHELI 2007-2 NHELI 2007-3
IA1 IA1
NHELI NHELI
$358,847,000 $245,105,000
1/31/2007 4/30/2007
Group I Group I
C.
The Securitization Process 1. Nomura Credit Groups Mortgage Loans in Special Purpose Trusts
36.
As the sponsor for the Securitizations, Nomura Credit purchased the mortgage
loans underlying the Certificates after the loans were originated, either directly from the originators or through affiliates of the originators. 37. Nomura Credit then sold the mortgage loans to one of two depositors, both of
which are Nomura-affiliated entities: NAA and NHELI.
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38.
NAA and NHELI were wholly owned, limited-purpose, indirect subsidiaries of
Nomura Holding, and affiliates of Nomura Credit. The sole purpose of NAA and NHELI as depositors was to act as conduits through which loans acquired by the sponsor could be securitized and sold to investors. 39. As depositors for the Securitizations, NAA and NHELI transferred the relevant
mortgage loans to the trusts, pursuant to Pooling and Servicing Agreements (the PSAs) that contained various representations and warranties regarding the mortgage loans for the Securitizations. 40. As part of each of the Securitizations, the trustee, on behalf of the
Certificateholders, executed the PSA with the relevant depositor and the parties responsible for monitoring and servicing the mortgage loans in that Securitization. The trust, administered by the trustee, held the mortgage loans pursuant to the related PSA and issued Certificates, including the GSE Certificates, backed by such loans. The GSEs purchased the GSE Certificates, through which they obtained an ownership interest in the assets of the trust, including the mortgage loans. 2. 41. The Trusts Issue Securities Backed by the Loans
PSAs, each trust issued Certificates backed by the underlying mortgage loans. The Certificates were then sold to investors like Fannie Mae and Freddie Mac, which thereby acquired an ownership interest in the assets of the corresponding trust. Each Certificate entitles its holder to a specified portion of the cashflows from the underlying mortgages in the Supporting Loan Group. The level of risk inherent in the Certificates was a function of the capital structure of the related transaction and the credit quality of the underlying mortgages.
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42.
The Certificates were issued pursuant to one of three Shelf Registration
Statements filed with the SEC on a Form S-3 and amended by one or more Forms S-3/A filed with the SEC. Each Individual Defendant signed, or authorized another to sign on his behalf, one or more of the Shelf Registration Statements, including any amendments thereto, which were filed by NAA or NHELI. The SEC filing number, registrants, signatories, and filing dates for the three Shelf Registration Statements and amendments thereto, as well as the Certificates covered by each Shelf Registration Statement, are reflected in Table 2 below. Table 2
Date Registration Statement Filed Date(s) Amended Registration Statements Filed
8/8/2005
SEC File Number
Registrant(s)

David Findlay, Shunichi Ito, John McCarthy, John P. Graham, Nathan Gorin David Findlay, Shunichi Ito, John McCarthy, N. Dante Larocca, Nathan Gorin David Findlay, Shunichi Ito, John McCarthy, N. Dante Larocca, Nathan Gorin
David Findlay, Shunichi Ito, John McCarthy, John P. Graham, Nathan Gorin David Findlay, Shunichi Ito, John McCarthy, N. Dante Larocca, Nathan Gorin David Findlay, Shunichi Ito, John McCarthy, N. Dante Larocca, Nathan Gorin
333-126812
7/22/2005
NAA
NAA 2005-AR6
333-126435
7/7/2005
7/8/2005
NHELI
NHELI 2006-FM1
333-132109
2/28/2006
4/6/2006; 4/13/2006
NHELI
NHELI 2006FM2; NHELI 2006-HE3; NHELI 2007-1; NHELI 2007-2; NHELI 2007-3
43.
guidelines that purportedly were used in connection with the origination of the underlying mortgage loans. In addition, the Prospectus Supplement purports to provide accurate statistics regarding the mortgage loans in each group, including the ranges of and weighted average FICO credit scores of the borrowers, the ranges of and weighted average loan-to-value ratios of the loans, the ranges of and weighted average outstanding principal balances of the loans, the debt-
14
to-income ratios, the geographic distribution of the loans, the extent to which the loans were for purchase or refinance purposes, information concerning whether the loans were secured by a property to be used as a primary residence, second home, or investment property, and information concerning whether the loans were delinquent. 44. The Prospectus Supplement associated with each Securitization was filed with the
SEC as part of the Registration Statement. A Form 8-K attaching the PSA for each Securitization also was filed with the SEC. The date on which the Prospectus Supplement and Form 8-K were filed for each Securitization, as well as the filing number of the Shelf Registration Statement related to each, are set forth in Table 3 below. Table 3
11/30/2005 1/31/2006 10/31/2006 8/30/2006 1/31/2007 2/1/2007 5/1/2007
Transaction
NAA 2005-AR6 NHELI 2006-FM1 NHELI 2006-FM2 NHELI 2006-HE3 NHELI 2007-1 NHELI 2007-2 NHELI 2007-3
Date Form 8-K Attaching PSA Filed

12/20/2005 4/11/2006 12/8/2006 9/12/2006 3/9/2007 4/13/2007 5/31/2007

333-126812 333-126435 333-132109 333-132109 333-132109 333-132109 333-132109
45.
The Certificates were issued pursuant to the PSAs, and Defendants Nomura
Securities and Greenwich (now RBS Securities) offered and sold the GSE Certificates to Fannie Mae and Freddie Mac pursuant to the Registration Statements, which, as noted previously, included the Prospectuses and Prospectus Supplements.4
Nomura Securities was the selling underwriter for two of the Securitizations, and Greenwich was the selling underwriter for four of the Securitizations. For the remaining Securitization, the selling underwriter was a non-party. The selling underwriter for each Securitization is reflected in Tables 10 and 11, below at paragraphs 129 and 130.
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II.
Defendants Participation in the Securitization Process A. 46. The Role of Each of the Defendants Each of the Defendants, including the Individual Defendants, had a role in the
Defendants who signed the Registration Statement, as well as the Defendants who exercised control over their activities, are liable, jointly and severally, as participants in the registration, issuance, and offering of the Certificates, including issuing, causing, or making materially misleading statements in the Registration Statement, and omitting material facts required to be stated therein or necessary to make the statements contained therein not misleading. 1. 48. Nomura Credit
Defendant Nomura Credit was formed in June 1998 as a subsidiary of Nomura
Holding. As stated in the Prospectus Supplement for the NHELI 2007-3 Securitization, Nomura Credit began purchasing residential loans in 2002 and began actively securitizing residential mortgage loans in April 2003. According to the Prospectus Supplement for the NHELI 2007-3 Securitization, as of February 2007, Nomura Credit had purchased in excess of $33.35 billion in residential mortgage loans. 49. Defendant Nomura Credit was the sponsor for each of the Securitizations. In that
capacity, Nomura Credit determined the structure of the Securitizations, initiated the
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Securitizations, purchased the mortgage loans to be securitized, determined distribution of principal and interest, and provided data to the credit rating agencies to secure ratings for the GSE Certificates. Nomura Credit also selected NAA or NHELI as the special purpose vehicles that would be used to transfer the mortgage loans from Nomura Credit to the trusts, and selected Nomura Securities or Greenwich (now RBS Securities) as the underwriter for the Securitizations. In its role as sponsor, Nomura Credit knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing such loans would be issued by the relevant trusts. 50. Nomura Credit also conveyed the mortgage loans to NAA or NHELI, to serve as
depositor, pursuant to a Mortgage Loan Purchase Agreement. In these agreements, Nomura Credit made certain representations and warranties to NAA and NHELI regarding the groups of loans collateralizing the Certificates. These representations and warranties were assigned by NAA and NHELI to the trustees for the benefit of the Certificateholders. 2. 51. NAA
Defendant NAA has been engaged in the purchase of mortgage loans since its
incorporation in 1992. It is a special purpose entity formed solely for the purposes of purchasing mortgage loans, filing registration statements with the SEC, forming issuing trusts, assigning mortgage loans and all of its rights and interests in such mortgage loans to the trustee for the benefit of the certificateholders, and depositing the underlying mortgage loans into the issuing trusts. It is an affiliate of Nomura Credit. 52. NAA was the depositor for the NAA 2005-AR6 Securitization. In its capacity as
depositor, NAA purchased the mortgage loans collateralizing that Securitization from Nomura Credit (as sponsor) pursuant to a Mortgage Loan Purchase Agreement. NAA then sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trust. NAA,
17
together with the other Defendants, also was responsible for preparing and filing the Registration Statement pursuant to which the Certificates were offered for sale. The trust in turn held the mortgage loans for the benefit of the Certificateholders, and issued the Certificates in public offerings for sale to investors such as Fannie Mae. 3. 53. NHELI
Defendant NHELI has been engaged in the purchase of mortgage loans since its
incorporation in 2005. Like NAA, NHELI is a special-purpose entity formed for the sole purposes of purchasing mortgage loans, filing registration statements with the SEC, forming issuing trusts, assigning mortgage loans and all of its rights and interests in such mortgage loans to the trustee for the benefit of the certificateholders, and depositing the underlying mortgage loans into the issuing trusts. It is an affiliate of Nomura Credit. 54. NHELI was the depositor for six of the seven Securitizations. In its capacity as
depositor, NHELI purchased the mortgage loans from Nomura Credit (as sponsor) pursuant to a Mortgage Loan Purchase Agreement. NHELI then sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trusts. NHELI, together with the other Defendants, also was responsible for preparing and filing the Registration Statements pursuant to which the Certificates were offered for sale. The trusts in turn held the mortgage loans for the sole benefit of the Certificateholders, and issued the Certificates in public offerings for sale to investors such as Fannie Mae and Freddie Mac. 4. 55. Nomura Securities
Defendant Nomura Securities was founded in 1969 and is a subsidiary of Nomura
Holding. Nomura Securities is an SEC-registered broker-dealer. 56. Defendant Nomura Securities was the lead or co-lead underwriter for three of the
Securitizations, and the selling underwriter for two of those Securitizations. It was responsible
18
for underwriting and managing the offer and sale of the Certificates to Fannie Mae and Freddie Mac and other investors. Nomura Securities also was obligated to conduct meaningful due diligence to ensure that the Registration Statements did not contain any material misstatements or omissions, including as to the manner in which the underlying mortgage loans were originated, transferred, and underwritten. 5. 57. RBS Securities
Defendant RBS Securities, known as Greenwich prior to April 2009, was founded
in 1981 and was acquired by The Royal Bank of Scotland Group PLC in 2000. At all relevant times, Greenwich was a registered broker-dealer and one of the leading underwriters of mortgage and other asset-backed securities in the United States. 58. Greenwich was one of the nations largest underwriters of asset-backed securities.
In 2006, Inside Mortgage Finance ranked Greenwich as the fourth largest non-agency mortgagebacked securities underwriter, underwriting over $102 billion of mortgage-backed securities.5 In 2007, Greenwich remained a strong force as the third largest subprime underwriter of nonagency mortgage-backed securities, underwriting over $19 billion of mortgage-backed securities. 59. Greenwich was the lead or co-lead underwriter for four of the Securitizations, and
the selling underwriter for those Securitizations. It was responsible for underwriting and managing the offer and sale of the Certificates to Fannie Mae and Freddie Mac and other investors. Greenwich also was obligated to conduct meaningful due diligence to ensure that the Registration Statements did not contain any material misstatements or omissions, including as to
Agency mortgage-backed securities are guaranteed by a government agency or government-sponsored enterprise such as Fannie Mae or Freddie Mac, while non-agency mortgage-backed securities are issued by banks and financial companies not associated with a government agency or government-sponsored enterprise.
19
the manner in which the underlying mortgage loans were originated, transferred, and underwritten. 6. 60. Nomura Holding
Nomura Holding employed its wholly owned subsidiaries, Nomura Credit, NAA,
NHELI, and Nomura Securities, in the key steps of the securitization process. Unlike typical arms length transactions, the Securitizations here involved various Nomura subsidiaries and affiliates at virtually each step in the chain. For all seven Securitizations, the sponsor was Nomura Credit, and the depositor was NAA or NHELI. In addition, for three Securitizations, the lead or co-lead underwriter was Nomura Securities. Nomura Holding profited substantially from this vertically integrated approach to mortgage-backed securitization. 61. As the corporate parent of Nomura Credit, NAA, NHELI, and Nomura Securities,
Nomura Holding had the practical ability to direct and control the actions of Nomura Credit, NAA, NHELI, and Nomura Securities related to the Securitizations, and in fact exercised such direction and control over the activities of these entities related to the issuance and sale of the Certificates. 7. 62. The Individual Defendants
Defendant N. Dante Larocca was a Managing Director at Nomura Securities and
the President and Chief Executive Officer of NHELI. Mr. Larocca signed or authorized another to sign on his behalf two Shelf Registration Statements (applicable to six Securitizations) and the amendments thereto. 63. Defendant David Findlay was a Senior Managing Director and the Chief Legal
Officer of Nomura Holding and Nomura Securities. Mr. Findlay also served as a Director of both NAA and NHELI. Mr. Findlay signed or authorized another to sign on his behalf all three Shelf Registration Statements and the amendments thereto.
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64.
Defendant Nathan Gorin was Controller and Chief Financial Officer of Nomura
Securities, NAA, and NHELI. Mr. Gorin signed or authorized another to sign on his behalf all three Shelf Registration Statements and the amendments thereto. 65. Defendant John P. Graham was a Managing Director at Nomura Credit and the
President and Chief Executive Officer of NAA. Mr. Graham signed or authorized another to sign on his behalf one Shelf Registration Statement (applicable to one Securitization) and the amendment thereto. 66. Defendant John McCarthy was a Director of both NAA and NHELI. Mr.
McCarthy signed or authorized another to sign on his behalf all three Shelf Registration Statements and the amendments thereto. B. 67. Defendants Failure To Conduct Proper Due Diligence The Defendants failed to conduct adequate and sufficient due diligence to ensure
2005 through 2007 Nomuras involvement in the mortgage-backed securitization market was rapidly expanding. In an effort to increase revenue and profits, Nomura vastly expanded the volume of mortgage-backed securities it issued as compared to prior years. According to the Prospectus Supplement for the NHELI 2007-2 Securitization, Nomura Credit initially securitized a relatively small volume of mortgage loansabout $687 million in 2003. In 2004, however, the volume of mortgage loans that Nomura Credit securitized nearly tripled to $2.4 billion. In 2005, the volume tripled again to $7.2 billion. In 2006, Nomura Credit securitized its largest volume of mortgage loans $10 billion.
21
69.
Defendants had enormous financial incentives to complete as many offerings as
quickly as possible without regard to ensuring the accuracy or completeness of the Registration Statements, or conducting adequate and reasonable due diligence. For example, NAA and NHELI, as the depositors, were paid a percentage of the total dollar amount of the offerings upon completion of the Securitizations, and Nomura Securities and Greenwich (now RBS Securities), as the underwriters, were paid a commission based on the amount they received from the sale of the Certificates to the public. 70. The push to securitize large volumes of mortgage loans contributed to the absence
of controls needed to prevent the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. In particular, Defendants failed to conduct adequate diligence or otherwise to ensure the accuracy of the statements in the Registration Statements pertaining to the Securitizations. 71. For instance, Nomura retained third-parties, including Clayton Holdings, Inc.
(Clayton), to analyze the loans it was considering placing in its securitizations, but waived a significant number of loans into the Securitizations that these firms had recommended for exclusion, and did so without taking adequate steps to ensure that these loans had in fact been underwritten in accordance with applicable guidelines or had compensating factors that excused the loans non-compliance with those guidelines. On January 27, 2008, Clayton revealed that it had entered into an agreement with the New York Attorney General (the NYAG) to provide documents and testimony regarding its due diligence reports, including copies of the actual reports provided to its clients. According to The New York Times, as reported on January 27, 2008, Clayton told the NYAG that starting in 2005, it saw a significant deterioration of lending
22
standards and a parallel jump in lending expectations and some investment banks directed Clayton to halve the sample of loans it evaluated in each portfolio. 72. Nomura was negligent in allowing into the Securitizations a substantial number of
mortgage loans that, as reported to Nomura by third-party due diligence firms, did not conform to the underwriting standards stated in the Registration Statements, including the Prospectuses and Prospectus Supplements. Even upon learning from the third-party due diligence firms that there were high percentages of defective or at least questionable loans in the sample of loans reviewed by the third-party due diligence firms, Nomura failed to take any additional steps to verify that the population of loans in the Securitizations did not include a similar percentage of defective and/or questionable loans. 73. Claytons trending reports revealed that in the period from the first quarter of
2006 to the first quarter of 2007, 37.85 percent of the mortgage loans Nomura submitted to Clayton to review in residential mortgage-backed securities groups were rejected by Clayton as falling outside the applicable underwriting guidelines. Of the mortgage loans that Clayton found defective, 58 percent of the loans were subsequently waived in by Nomura without proper consideration and analysis of compensating factors and included in securitizations such as the ones in which Fannie Mae and Freddie Mac invested here. See Clayton Trending Reports, available at http://fcic.law.stanford.edu/hearings/testimony/the-impact-of-the-financial-crisissacramento#documents. 74. Defendant NHELI is presently defending an action in the U.S. District Court for
the District of Kansas brought in June 2011 by the National Credit Union Administration Board, as Liquidating Agent of U.S. Central Federal Credit Union, against it and a number of other defendants. The plaintiffs have asserted claims under Sections 11 and 12(a)(2) of the Securities
23
Act of 1933 for misrepresentations made in connection with various securitizations, including the NHELI 2007-1 Securitization at issue here. National Credit Union Administration Board v. RBS Securities, Inc., No. 11-cv-2340 (D. Kan.). 75. On or about March 13, 2008, after a seven-month investigation requested by the
President of the United States, a working group led by the Secretary of Treasury and including the chairmen of the Federal Reserve Board, the SEC, and the Commodities Futures Trading Commission, issued a report finding: (i) a significant erosion of market discipline by those involved in the securitization process, including originators, underwriters, and credit rating agencies, related in part to failures to provide or obtain adequate risk disclosures; and that (ii) the turmoil in financial markets clearly was triggered by a dramatic weakening of underwriting standards for United States subprime mortgages. See Policy Statement on Financial Market Developments, The Presidents Working Group on Financial Markets, March 2008, available at http://www.treasury.gov/resource-center/finmkts/Documents/pwgpolicystatemktturmoil_03122008.pdf. III. The Registration Statements and the Prospectus Supplements A. 76. Compliance With Underwriting Guidelines The Prospectus Supplement for each Securitization describes the mortgage loan
underwriting guidelines pursuant to which the mortgage loans underlying the related Securitization were to have been originated. These guidelines were intended to assess the creditworthiness of the borrower, the ability of the borrower to repay the loan, and the adequacy of the mortgaged property as security for the loan. 77. The statements made in the Prospectus Supplements, which, as discussed, formed
part of the Registration Statement for each Securitization, were material to a reasonable investors decision to purchase and invest in the Certificates because the failure to originate a
24
mortgage loan in accordance with the applicable guidelines creates a higher risk of delinquency and default by the borrower, as well as a risk that losses upon liquidation will be higher, thus resulting in a greater economic risk to an investor. 78. The Prospectus Supplements for the Securitizations contained several key
statements with respect to the underwriting standards of the entities that originated the loans in the Securitizations. For example, the Prospectus Supplement for the NHELI 2006-FM1 Securitization, for which Fremont was the originator, Nomura Credit was the Sponsor, NHELI was the depositor, and Nomura Securities was the underwriter, stated that, All of the mortgage loans were originated or acquired by Fremont, generally in accordance with the underwriting criteria described in this section, and that Fremonts underwriting guidelines are primarily intended to assess the ability and willingness of the borrower to repay the debt and to evaluate the adequacy of the mortgaged property as collateral for the mortgage loan. 79. The NHELI 2006-FM1 Prospectus Supplement stated that underwriting
exception[s] might be made on a case by case basis, but emphasized that exceptions would be based upon compensating factors, which included low loan-to-value ratio, low debt to income ratio, substantial liquid assets, good credit history, stable employment and time in residence at the applicants current address. 80. The Prospectus Supplement also emphasized Fremonts quality control
procedures: Fremont conducts a number of quality control procedures, including a cost-funding review as well as a full re-underwriting of a random selection of loans to assure asset quality. Under the funding review, all loans are reviewed to verify credit grading, documentation compliance and data accuracy. Under the asset quality procedure, a random selection of each months originations is reviewed. The loan review confirms the existence and accuracy of legal
25
documents, credit documentation, appraisal analysis and underwriting decision. A report detailing review findings and level of error is sent monthly to each loan production office for response. 81. The Prospectus and Prospectus Supplement for each of the remaining
Securitizations had similar representations to those quoted above. The relevant statements in the Prospectus and Prospectus Supplement pertaining to originating entity underwriting standards for each Securitization are reflected in Appendix A to this Complaint. As discussed below at paragraphs 110 through 128, in fact, the originators of the mortgage loans in the Supporting Loan Group for the Securitizations did not adhere to their stated underwriting guidelines, thus rendering the description of those guidelines in the Prospectuses and Prospectus Supplements false and misleading. 82. Further, the Prospectuses and Prospectus Supplements included additional
representations by the sponsor regarding the purported quality of the mortgage loans that collateralized the Certificates. 83. For example, the NHELI 2006-FM2 Prospectus Supplement stated, The sponsor
will make certain representations and warranties as to the accuracy in all material respects of certain information furnished to the trustee with respect to each Mortgage Loan. In addition, the sponsor will represent and warrant, as of the Closing Date, that, among other things: (i) at the time of transfer to the depositor, the sponsor has transferred or assigned all of its right, title and interest in each Mortgage Loan and the Related Documents, free of any lien; (ii) each Mortgage Loan complied, at the time of origination, in all material respects with applicable local, state, and federal laws . . . These representations are described for each Securitization in Appendix A.
26
84.
the occupancy status of the borrowers of the loans in the Securitizations. Occupancy status refers to whether the property securing a mortgage is to be the primary residence of the borrower, a second home, or an investment property. The Prospectus Supplement for each of the Securitizations presented this information in tabular form, in a table entitled Occupancy Status of the Mortgage Loans. This table divided all the loans in the collateral group by occupancy status into the following categories: (i) Primary, or Owner Occupied; (ii) Second Home; and (iii) Investor. For each category, the table stated the number of loans in that category. Occupancy statistics for the Supporting Loan Groups for each Securitization were reported in the Prospectus Supplements as follows:6 Table 4
Transaction
NAA 2005-AR6 NHELI 2006-FM1 NHELI 2006-FM2

Group III Group I Group I

50.00% 88.78% 93.24%
Second Home
8.78% 0.95% 0.41%
Investor
41.22% 10.27% 6.35%
Each Prospectus Supplement provides the total number of loans and the number of loans in the following categories: owner occupied, investor, and second home. These numbers have been converted to percentages.
27
Transaction
NHELI 2006-HE3 NHELI 2007-1 NHELI 2007-2 NHELI 2007-3

Group I Group II-1 Group I Group I

89.52% 45.78% 91.00% 90.03%
Second Home
1.22% 8.23% 1.40% 2.64%
Investor
9.26% 45.99% 7.60% 7.33%
86.
As Table 4 makes clear, the Prospectus Supplements for all of the Securitizations
reported that 45 percent or more of the mortgage loans in the Supporting Loan Groups were owner occupied. Indeed, for all but two of the Securitizations, 85 percent or more of the mortgage loans in the Supporting Loan Groups were reported to be owner occupied, while only a small percentage of the loans were reported to be non-owner occupied (i.e. a second home or investment property). 87. The statements about occupancy status were material to a reasonable investors
decision to invest in the Certificates. Information about occupancy status is an important factor in determining the credit risk associated with a mortgage loan and, therefore, the securitization that it collateralizes. Because borrowers who reside in mortgaged properties are more likely to care for their primary residence and less likely to default than borrowers who purchase homes as second homes or investments and live elsewhere, the percentage of loans in the collateral group of a securitization that are secured by mortgage loans on owner-occupied residences is an important measure of the risk of the certificates sold in that securitization. 88. Other things being equal, the higher the percentage of loans not secured by
owner-occupied residences, the greater the risk of loss to the certificateholders. Even small differences in the percentages of primary/owner-occupied, second home, and investment properties in the collateral group of a securitization can have a significant effect on the risk of each certificate sold in that securitization, and thus, are important to the decision of a reasonable
28
investor whether to purchase any such certificate. As discussed below at paragraphs 100 through 103, the Registration Statement for each Securitization materially overstated the percentage of loans in the Supporting Loan Groups that were owner occupied, thereby misrepresenting the degree of risk of the GSE Certificates. C. 89. Statements Regarding Loan-to-Value Ratios The loan-to-value ratio of a mortgage loan, or LTV ratio, is the ratio of the
generally the lower of the purchase price or the appraised value of the property. In a refinancing or home-equity loan, there is no purchase price to use as the denominator, so the denominator is often equal to the appraised value at the time of the origination of the refinanced loan. Accordingly, an accurate appraisal is essential to an accurate LTV ratio. In particular, an inflated appraisal will understate, sometimes greatly, the credit risk associated with a given loan. 91. The Prospectus Supplement for each Securitization also contained group-level
29
Table 5
99.08% 63.00% 68.40% 58.81% 93.04% 56.59% 59.31%
Transaction
Percentage of loans, by aggregate principal balance, with LTV greater than 100% as stated in Prospectus Supplement
0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Group III Group I Group I Group I Group II-1 Group I Group I
92.
reported that the majority of the mortgage loans in the Supporting Loan Groups had an LTV ratio of 80 percent or less and that zero mortgage loans in the Supporting Loan Group had an LTV ratio over 100 percent. 93. The LTV ratio is among the most important measures of the risk of a mortgage
loan, and thus, it is one of the most important indicators of the default risk of the mortgage loans underlying the Certificates. The lower the ratio, the less likely that a decline in the value of the property will wipe out an owners equity, and thereby give an owner an incentive to stop making mortgage payments and abandon the property. This ratio also predicts the severity of loss in the event of default. The lower the LTV ratio, the greater the equity cushion, so the greater the likelihood that the proceeds of foreclosure will cover the unpaid balance of the mortgage loan. 94. Thus, LTV ratio is a material consideration to a reasonable investor in deciding
whether to purchase a certificate in a securitization of mortgage loans. Even small differences in the LTV ratios of the mortgage loans in the collateral group of a securitization have a significant effect on the likelihood that the collateral groups will generate sufficient funds to pay
30
certificateholders in that securitization, and thus are material to the decision of a reasonable investor whether to purchase any such certificate. As discussed below at paragraphs 104 through 109, the Registration Statements for the Securitizations materially overstated the percentage of loans in the Supporting Loan Groups with an LTV ratio at or less than 80 percent, and/or materially understated the percentage of loans in the Supporting Loan Groups with an LTV ratio over 100 percent, thereby misrepresenting the degree of risk of the GSE Certificates. D. 95. Statements Regarding Credit Ratings Credit ratings are assigned to the tranches of mortgage-backed securitizations by
securitization by comparing the likelihood of contractual principal and interest repayment to the credit enhancements available to protect investors. Rating agencies determine the likelihood of repayment by estimating cashflows based on the quality of the underlying mortgages by using sponsor-provided loan-level data. Credit enhancements, such as subordination, represent the
31
amount of cushion or protection from loss incorporated into a given securitization.8 This cushion is intended to improve the likelihood that holders of highly rated certificates receive the interest and principal to which they are contractually entitled. The level of credit enhancement offered is based on the make-up of the loans in the underlying collateral group and entire securitization. Riskier loans underlying the securitization necessitate higher levels of credit enhancement to insure payment to senior certificateholders. If the collateral within the deal is of a higher quality, then rating agencies require less credit enhancement for AAA or its equivalent rating. 97. Credit ratings have been an important tool to gauge risk when making investment
decisions. For almost a hundred years, investors like pension funds, municipalities, insurance companies, and university endowments have relied heavily on credit ratings to assist them in distinguishing between safe and risky investments. Fannie Mae and Freddie Macs respective internal policies limited their purchases of private label residential mortgage-backed securities to those rated AAA (or its equivalent), and in very limited instances, AA or A bonds (or their equivalent). 98. Each tranche of the Securitizations received a credit rating upon issuance, which
purported to describe the riskiness of that tranche. The Defendants reported the credit ratings for each tranche in the Prospectus Supplements. The credit rating provided for each of the GSE Certificates was investment grade, always AAA or its equivalent. The accuracy of these ratings was material to a reasonable investors decision to purchase the Certificates. As set forth
Subordination refers to the fact that the certificates for a mortgage-backed securitization are issued in a hierarchical structure, from senior to junior. The junior certificates are subordinate to the senior certificates in that, should the underlying mortgage loans become delinquent or default, the junior certificates suffer losses first. These subordinate securities thus provide a degree of protection to the senior certificates from losses on the underlying loans.
32
in Table 8 below, the ratings for the Securitizations were inflated as a result of Defendants provision of incorrect data concerning the attributes of the underlying mortgage collateral to the rating agencies, and, as a result, Defendants sold and marketed the GSE Certificates as AAA (or its equivalent) when, in fact, they were not. IV. Falsity of Statements in the Registration Statements and Prospectus Supplements A. 99. The Statistical Data Provided in the Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False A review of loan-level data was conducted in order to assess whether the
statistical information provided in the Prospectus Supplements was true and accurate. For each Securitization, the sample consisted of 1,000 randomly selected loans per Supporting Loan Group, or all of the loans in the group if there were fewer than 1,000 loans in the Supporting Loan Group. The sample data confirms, on a statistically significant basis, material misrepresentations of underwriting standards and of certain key characteristics of the mortgage loans across the Securitizations. The data review demonstrates that the data concerning owner occupancy and LTV ratios was materially false and misleading. 1. 100. Owner-Occupancy Data Was Materially False
claimed, a number of tests were conducted, including, inter alia, whether, months after the loan closed, the borrowers tax bill was being mailed to the property or to a different address; whether the borrower had claimed a tax exemption on the property; and whether the mailing address of
33
the property was reflected in the borrowers credit reports, tax records, or lien records. Failing two or more of these tests is a strong indication that the borrower did not live at the mortgaged property and instead used it as a second home or an investment property, both of which make it much more likely that a borrower will not repay the loan. 102. A significant number of the loans failed two or more of these tests, indicating that
the owner-occupancy statistics provided to Fannie Mae and Freddie Mac were materially false and misleading. For example, for the NHELI 2006-FM2 Securitization, for which Nomura Credit was the sponsor, Greenwich (now RBS Securities) the underwriter, and NHELI the depositor, the Prospectus Supplement stated that 6.76 percent of the underlying properties by loan count in the Supporting Loan Group were not owner occupied. But the data review revealed that, for 12.55 percent of the properties represented as owner occupied, the owners lived elsewhere, indicating that the true percentage of non-owner-occupied properties was 18.46 percent, nearly triple the percentage reported in the Prospectus Supplement.9 103. The data review revealed that for each Securitization, the Prospectus Supplement
misrepresented the percentage of non-owner-occupied properties. The true percentage of nonowner-occupied properties, as determined by the data review, versus the percentage stated in the Prospectus Supplement for each Securitization, is reflected in Table 6 below. Table 6 demonstrates that the Prospectus Supplements for each Securitization understated the percentage of non-owner-occupied properties by more than 5 percent, and for some Securitizations by more than 10 percent.
This conclusion is arrived at by summing (a) the stated non-owner-occupied percentage in the Prospectus Supplement (here, 6.76 percent), and (b) the product of (i) the stated owner-occupied percentage (here, 93.24 percent) and (ii) the percentage of the properties represented as owner occupied in the sample that showed strong indications that their owners in fact lived elsewhere (here, 12.55 percent).
34
Table 6
Percentage of Properties Reported as Owner Occupied With Strong Indication of Non-Owner Occupancy10
14.49% 15.76% 12.55% 12.45% 12.92% 10.21% 9.15%
Transaction
Reported Percentage of NonOwner Occupied
Prospectus Understatement of Non-OwnerOccupied Properties
50.00% 11.22% 6.76% 10.48% 54.22% 9.00% 9.97%
57.25% 25.21% 18.46% 21.62% 60.13% 18.29% 18.20%
7.25% 13.99% 11.70% 11.14% 5.92% 9.29% 8.23%
2. 104.
Prospectus Supplements were materially false and understated, as more specifically set out below. For each of the sampled loans, an industry standard automated valuation model (AVM) was used to calculate the value of the underlying property at the time the mortgage loan was originated. AVMs are routinely used in the industry as a way of valuing properties during prequalification, origination, portfolio review and servicing. AVMs rely upon similar data as appraisersprimarily county assessor records, tax rolls, and data on comparable properties. AVMs produce independent, statistically-derived valuation estimates by applying modeling techniques to this data.
As described more fully in paragraph 101, failing two or more tests of owner occupancy is a strong indication that the borrower did not live at the mortgaged property and instead used it as a second home or an investment property.
10
35
105.
loans shows that the appraised value given to such properties was significantly higher than the actual value of such properties. The result of this overstatement of property values is a material understatement of LTV. That is, if a propertys true value is significantly less than the value used in the loan underwriting, then the loan represents a significantly higher percentage of the propertys value. This, of course, increases the risk a borrower will not repay the loan and the risk of greater losses in the event of a default. 106. For example, for the NHELI 2007-1 Securitization, which was sponsored by
Nomura Credit and underwritten by Greenwich (now RBS Securities), with NHELI as the depositor, the Prospectus Supplement stated that no LTV ratios for the Supporting Loan Group were above 100 percent. In fact, 12.19 percent of the sample of loans included in the data review had LTV ratios above 100 percent. In addition, the Prospectus Supplement stated that 93.04 percent of the loans had LTV ratios at or below 80 percent. The data review indicated, however, that only 46.94 percent of the loans had LTV ratios at or below 80 percent. 107. The data review revealed that for each Securitization, the Prospectus Supplement
misrepresented the percentage of loans with an LTV ratio that was above 100 percent and the percentage of loans that had an LTV ratio at or below 80 percent. Table 7 reflects (i) the true percentage of mortgages in each Supporting Loan Group with an LTV ratio above 100 percent, versus the percentage reported in the Prospectus Supplement; and (ii) the true percentage of mortgages in each Supporting Loan Group with an LTV ratio at or below 80 percent, versus the percentage reported in the Prospectus Supplement. The percentages listed in Table 7 were calculated by aggregated principal balance.
36
Table 7
PROSPECTUS Percentage of Loans Reported to Have LTV Ratio At Or Under 80%
99.08% 63.00% 68.40% 58.81% 93.04% 56.59% 59.31%
Transaction
DATA REVIEW True Percentage of Loans With LTV Ratio At Or Under 80%
63.83% 40.32% 38.73% 40.02% 46.94% 33.83% 37.62%

0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
3.84% 15.26% 18.23% 15.36% 12.19% 19.58% 20.16%
108.
Securitizations reported that none of the mortgage loans in the Supporting Loan Groups had an LTV ratio over 100 percent. In fact, the data review revealed that all of the Securitizations had mortgage loans in the Supporting Loan Groups with an LTV ratio over 100 percent. Indeed, the percentage of mortgage loans with an LTV ratio over 100 percent was over ten percent in all but one of the Securitizations, and over 19 percent in two of the Securitizations. 109. These inaccuracies with respect to reported LTV ratios also indicate that the
representations in the Registration Statements relating to appraisal practices were false, and that the appraisers themselves, in many instances, furnished appraisals that they understood were inaccurate and that they knew bore no reasonable relationship to the actual value of the underlying properties. Indeed, independent appraisers following proper practices, and providing genuine estimates as to valuation, would not systematically generate appraisals that deviate so significantly (and so consistently upward) from the true values of the appraised properties. This conclusion is further confirmed by the findings of the Financial Crisis Inquiry Commission (the
37
FCIC), which identified inflated appraisals as a pervasive problem during the period of the Securitizations, and determined through its investigation that appraisers were often pressured by mortgage originators, among others, to produce inflated results. See FCIC, Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (January 2011). B. 110. The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines The Registration Statements contained material misstatements and omissions
regarding compliance with underwriting guidelines. Indeed, the originators for the loans underlying the Securitizations systematically disregarded their respective underwriting guidelines in order to increase production and profits derived from their mortgage lending businesses. This is confirmed by the systematically misreported owner-occupancy and LTV statistics, discussed above, and by (1) investigations into originators underwriting practices, which have revealed widespread abandonment of originators reported underwriting guidelines during the relevant period; (2) the collapse of the Certificates credit ratings; and (3) the surge in delinquency and default in the mortgages in the Securitizations. 1. Investigations Have Confirmed That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines
111.
The abandonment of underwriting guidelines is confirmed by several reports and
investigations that have described rampant underwriting failures throughout the period of the Securitizations, and, more specifically, have described underwriting failures by the very originators whose loans were included by Defendants in the Securitizations. 112. For instance, in November 2008, the Office of the Comptroller of the Currency,
an office within the United States Department of the Treasury, issued a report identifying the
38
Worst Ten mortgage originators in the Worst Ten metropolitan areas. The worst originators were defined as those with the largest number of non-prime mortgage foreclosures for 20052007 originations. Ownit, Fremont, and ResMAE, which originated many of the loans for the Securitizations at issue here, were all on that list. See Worst Ten in the Worst Ten, Office of the Comptroller of the Currency Press Release, November 13, 2008. 113. Ownit, which originated many of the loans for the NHELI 2007-2 Securitization,
was a mortgage lender based in Agoura Hills, California. In September 2005, the investment bank Merrill Lynch & Co. (Merrill Lynch) acquired a 20 percent stake in the company. According to Ownits founder and chief executive, William D. Dallas, shortly after Merrill Lynch acquired that stake, it instructed Ownit to loosen underwriting standards. Andrews, Edmund L., Busted: Life Inside the Great Mortgage Meltdown, W.W. Norton & Company, New York: 2009, at 158. Ownit thus abandoned its underwriting standards in order to originate more loans. 114. On October 4, 2007, the Commonwealth of Massachusetts, through its Attorney
General, brought an enforcement action against Fremont, which originated all the loans for the NHELI 2006-FM1 and NHELI 2006-FM2 Securitizations, for an array of unfair and deceptive business conduct, on a broad scale. See Complaint, Commonwealth v. Fremont Investment & Loan and Fremont General Corp., No. 07-4373 (Mass. Super. Ct.) (the Fremont Complaint). According to the Massachusetts Attorney Generals complaint, Fremont approve[ed] borrowers without considering or verifying the relevant documentation related to the borrowers credit qualifications, including the borrowers income; approv[ed] borrowers for loans with inadequate debt-to-income analyses that do not properly consider the borrowers ability to meet their overall level of indebtedness and common housing expenses; failed to meaningfully
39
account for [ARM] payment adjustments in approving and selling loans; approved borrowers for these ARM loans based only on the initial fixed teaser rate, without regard for borrowers ability to pay after the initial two year period; consistently failed to monitor or supervise brokers practices or to independently verify the information provided to Fremont by brokers; and ma[de] loans based on information that Fremont knew or should have known was inaccurate or false, including, but not limited to, borrowers income, property appraisals, and credit scores. See Fremont Complaint. 115. On December 9, 2008, the Supreme Judicial Court of Massachusetts affirmed a
preliminary injunction that prevented Fremont from foreclosing on thousands of its loans issued to Massachusetts residents. As a basis for its unanimous ruling, the Supreme Judicial Court found that the record supported the lower courts conclusions that Fremont made no effort to determine whether borrowers could make the scheduled payments under the terms of the loan, and that Fremont knew or should have known that [its lending practices and loan terms] would operate in concert essentially to guarantee that the borrower would be unable to pay and default would follow. Commonwealth v. Fremont Inv. & Loan, 897 N.E.2d 548, 556 (Mass. 2008). The terms of the preliminary injunction were made permanent by a settlement reached on June 9, 2009. 116. Peoples Choice originated many of the loans in the NHELI 2006-3
Securitization. In 2004 and 2005, Peoples Choice originated more than $5 billion in mortgages per year. There have been numerous reports indicating failures by Peoples Choice to adhere to its underwriting practices, including: (i) a lack of quality control, which led mortgage brokers to manipulate documents and allowed borrowers to get away with lying on their loan applications; (ii) borrowers missing one or more of their first three payments, indicating poor underwriting;
40
and (iii) approving borrowers without the income levels required by Peoples Choices own guidelines, because mortgage brokers forged borrowers bank statements, signatures, and income. For instance, an investigation by NBC in 2009 revealed that borrowers included a massage therapist who claimed an income of $180,000 a year and a manicurist who claimed an income of over $200,000 a year. See Richard Greenberg and Chris Hanson, If You Had A Pulse, We Gave You A Loan, (Dateline NBC March 22, 2009), available at http://www.msnbc.msn.com/id/29827248/ns/dateline_nbcthe_hansen_files_with_chris_hansen/t/if-you-had-pulse-we-gave-you-loan/. 117. Former Peoples Choice COO James LaLiberte has stated that he tried to
implement more controls over the loan origination process, but ran into resistance. According to NBCs investigation, other former Peoples Choice employees have stated that: i) underwriters felt pressured by sales staff to approve questionable applications; ii) underwriters would challenge some loansin one case, as many as one-third of all loansbut would be overruled by company executives the vast majority of the time; and iii) there was a lot of keep your mouth shut going on, meaning you just didnt ask questions about things you knew were wrong. See Greenberg and Hanson, above. 118. As part of a plan to take Peoples Choice public, in 2005 the company hired
auditors to conduct an Ethical Climate Survey. Id. Nearly three-quarters of respondents said that they were expected to do what they were told no matter what. Id. Nearly half stated that while they cared about ethics, they act differently. Id. One-third said they had witnessed breaches of applicable laws and regulations. Id. In 2009, former CEO Neil Kornswiet admitted to NBC through a spokesperson that management and the Board were dismayed by what they read. Id.
41
119.
Silver State, which originated many of the loans in the NAA 2005-AR6 and the
NHELI 2007-1 Securitizations, was a wholesale and residential mortgage lender based in Las Vegas, Nevada. In a 2008 episode of the National Public Radio program This American Life, Mike Garner, a former employee of Silver State, described the loosening of underwriting standards in 2005 and 2006: To obtain a loan, a borrower just [had] to have a credit score and a pulse. Alex Blumberg & Adam Davidson, The Giant Pool of Money (This American Life Episode Transcript, Program #355, broadcast May 9, 2008), transcript available at http://www.thisamericanlife.org/sites/default/files/355_transcript.pdf. Garner reported that mortgage brokers would pressure him to allow them to offer loans with loose guidelines so they could earn commissions, and that Garner would oblige if he could find a Wall Street firm to purchase the loans: Id get on the phone and start calling these street firms . . . and once I got a hit, Id call back and say, Hey, Bear Stearns is buying this loan. Id like to give you the opportunity to buy it too. Once one person buys them, all the rest of them follow suit. Garner also described the reaction of his boss, a 25-year veteran of the industry: He hated those loans. He hated them and used to rant and say, It makes me sick to my stomach the kind of loans that we do. He fought the owners and sales force tooth and neck about these guidelines. He got [the] same answer. Nope, other people are offering it. Were going to offer them too. Were going to get more market share this way. House prices are booming, everythings gonna be good. And . . . the company was just rolling in the cash. In September 2008, the Nevada Financial Institutions division closed Silver State, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. 120. The originators of the mortgage loans underlying the Securitizations went beyond
the systematic disregard of their own underwriting guidelines. Indeed, as the FCIC has
42
confirmed, mortgage loan originators throughout the industry pressured appraisers, during the period of the Securitizations, to issue inflated appraisals that met or exceeded the amount needed for the subject loans to be approved, regardless of the accuracy of such appraisals, and especially when the originators aimed at putting the mortgages into a package of mortgages that would be sold for securitization. This resulted in lower LTV ratios, discussed above, which in turn made the loans appear to the investors less risky than they were. 121. As described by Patricia Lindsay, a former wholesale lender who testified before
the FCIC in April 2010, appraisers fear[ed] for their livelihoods, and therefore cherry-picked data that would help support the needed value rather than finding the best comparables to come up with the most accurate value. See Written Testimony of Patricia Lindsay to the FCIC, April 7, 2010, at 5. Likewise, Jim Amorin, President of the Appraisal Institute, confirmed in his testimony that [i]n many cases, appraisers are ordered or severely pressured to doctor their reports and to convey a particular, higher value for a property, or else never see work from those parties again . . . . [T]oo often state licensed and certified appraisers are forced into making a Hobsons Choice. See Testimony of Jim Amorin to the FCIC, available at www.appraisalinstitute.org/newsadvocacy/downloads/ltrs_tstmny/2009/AI-ASA-ASFMRANAIFATestimonyonMortgageReform042309final.pdf. Faced with this choice, appraisers systematically abandoned applicable guidelines and over-valued properties in order to facilitate the issuance of mortgages that could then be collateralized into mortgage-backed securitizations. 2. The Collapse of the Certificates Credit Ratings Further Indicates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines
122.
AAA or its equivalent to non-investment speculative grade, is further evidence of the originators
43
systematic disregard of underwriting guidelines, amplifying that the GSE Certificates were impaired from the start. 123. The GSE Certificates that Fannie Mae and Freddie Mac purchased were originally
assigned credit ratings of AAA or its equivalent, which purportedly reflected the description of the mortgage loan collateral and underwriting practices set forth in the Registration Statements. These ratings were artificially inflated, however, as a result of the very same misrepresentations that the Defendants made to investors in the Prospectus Supplements. 124. Nomura provided or caused to be provided loan-level information to the rating
agencies that they relied upon in order to calculate the Certificates assigned ratings, including the borrowers LTV ratio, owner-occupancy status, and other loan-level information described in aggregation reports in the Prospectus Supplements. Because the information that Nomura provided or caused to be provided was false, the ratings were inflated and the level of subordination that the rating agencies required for the sale of AAA (or its equivalent) certificates was inadequate to provide investors with the level of protection that those ratings signified. As a result, the GSEs paid Defendants inflated prices for purported AAA (or its equivalent) Certificates, unaware that those Certificates actually carried a severe risk of loss and carried inadequate credit enhancement. 125. Since the issuance of the Certificates, the rating agencies have dramatically
Applicable ratings are shown in sequential order separated by forward slashes: Moodys/S&P/Fitch. A hyphen after a forward slash indicates that the relevant agency did not provide a rating at issuance.
11
44
Table 8
Transaction
Tranche
IIIA1 IA IA1 IA1 II1A IA1 IA1
Ratings at Issuance (Moodys/S&P/Fitch)

Aaa/AAA/-Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/-Aaa/AAA/-Aaa/AAA/--
Ratings as of July 2011 (Moodys/S&P/Fitch)

Caa3/CCC/-B3/BBB-/-Ca/CCC/C Caa2/B-/CC Ca/D/-Caa3/CCC/-Ca/CC/--
3.
126.
characteristics represented in the Registration Statements would have experienced substantially fewer payment problems and substantially lower percentages of defaults, foreclosures, and delinquencies than occurred here. Table 9 sets forth the percentage of loans in the Supporting Loan Groups that are in default, have been foreclosed upon, or are delinquent as of July 2011. Table 9
Transaction
NAA 2005-AR6 NHELI 2006-FM1

Group III Group I
Percentage of Delinquent/Defaulted/Foreclosed Loans as of July 2011

32.1% 52.1%
45
Transaction
NHELI 2006-FM2 NHELI 2006-HE3 NHELI 2007-1 NHELI 2007-2 NHELI 2007-3

Group I Group I Group II-1 Group I Group I
Percentage of Delinquent/Defaulted/Foreclosed Loans as of July 2011

58.9% 40.4% 44.0% 38.3% 44.7%
128.
confirmed systematic underwriting failures by the originators responsible for the mortgage loans across the Securitizations, and the extraordinary drop in credit rating and rise in delinquencies across those Securitizations, all confirm that the mortgage loans in the Supporting Loan Groups, contrary to the representations in the Registration Statements, were not originated in accordance with the stated underwriting guidelines. V. Fannie Maes and Freddie Macs Purchases of the GSE Certificates and the Resulting Damages 129. In total, between November 30, 2005 and April 30, 2007, Fannie Mae and Freddie
Mac purchased over $2 billion in residential mortgage-backed securities issued in connection with the Securitizations. Table 10 reflects each of Freddie Macs purchases of the Certificates.12 Table 10
1/31/2006 10/31/2006 8/31/2006 1/31/2007 1/31/2007
Transaction
NHELI 2006-FM1 NHELI 2006-FM2 NHELI 2006-HE3 NHELI 2007-1 NHELI 2007-2
Tranche
IA IA1 IA1 II1A IA1
CUSIP
65536HBT4 65537FAA9 65536QAA6 65537KAA8 65537MAA4

309,550,000 525,197,000 441,739,000 100,548,000 358,847,000

100.00% 100.00% 100.00% 100.00% 100.00%

Nomura Securities Greenwich (now RBS Securities) Greenwich (now RBS Securities) Greenwich (now RBS Securities) Greenwich (now RBS Securities)
12
46
Transaction
NHELI 2007-3
Tranche
IA1
CUSIP
65537NAA2

4/30/2007

245,105,000

100.00%

Lehman Brothers, Inc.
130.
Table 11 reflects Fannie Maes purchase of the Certificates: Table 11

11/30/2005
Transaction
Tranche
CUSIP

64,943,000

101.11%

Nomura Securities
NAA 2005-AR6
IIIA1
65535VRJ9
131.
quality and characteristics of the mortgage loans underlying the GSE Certificates, and the origination and underwriting practices pursuant to which the mortgage loans were originated, which were summarized in such documents, were material to a reasonable investors decision to purchase the Certificates. 132. The false statements of material facts and omissions of material facts in the
Registration Statements, including the Prospectuses and Prospectus Supplements, directly caused Fannie Mae and Freddie Mac to suffer hundreds of millions of dollars in damages, including without limitation depreciation in the value of the securities. The mortgage loans underlying the GSE Certificates experienced defaults and delinquencies at a much higher rate than they would have had the loan originators adhered to the underwriting guidelines set forth in the Registration Statements, and the payments to the trusts were therefore much lower than they would have been had the loans been underwritten as described in the Registration Statements. 133. Fannie Maes and Freddie Macs losses have been much greater than they would
have been if the mortgage loans had the credit quality represented in the Registration Statements.
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134.
Defendants misstatements and omissions in the Registration Statements
regarding the true characteristics of the loans were the proximate cause of Fannie Maes and Freddie Macs losses relating to their purchase of the GSE Certificates. Defendants proximately caused hundreds of millions of dollars in damages to Fannie Mae and Freddie Mac in an amount to be determined at trial. FIRST CAUSE OF ACTION Violation of Section 11 of the Securities Act of 1933 (Against Defendants Nomura Securities, RBS Securities, NHELI, David Findlay, John McCarthy, N. Dante Larocca, and Nathan Gorin) 135. Plaintiff realleges each allegation above as if fully set forth herein, except to the
1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements. This claim is brought against Defendants Nomura Securities and RBS Securities (formerly known as Greenwich) with respect to each of the Registration Statements corresponding to the Securitizations they underwrote. This claim is also brought against (i) Defendant NHELI and (ii) Defendants David Findlay, John McCarthy, N. Dante Larocca, and Nathan Gorin (the foregoing Individual Defendants collectively referred to as the Section 11 Individual Defendants), with respect to the Registration Statements filed by NHELI that registered securities that were bona fide offered to the public on or after September 6, 2005. 137. This claim is predicated upon the strict liability of Defendants Nomura Securities
and RBS Securities for making false and materially misleading statements in the Registration Statements applicable to one or more Securitizations and for omitting facts necessary to make the facts stated therein not misleading. Defendants NHELI and the Section 11 Individual
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Defendants are strictly liable for making false and materially misleading misstatements in the Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005, including the related Prospectus Supplements, and for omitting facts necessary to make the facts stated therein not misleading. 138. Defendants Nomura Securities and RBS Securities (formerly known as
Greenwich) served as underwriters for six of the Securitizations, and as such, are liable for the misstatements and omissions in the corresponding Registration Statements under Section 11 of the Securities Act. 139. Defendant NHELI filed two Registration Statements under which six of the
Securitizations were carried out. As depositor, Defendant NHELI is issuer of the GSE Certificates pursuant to the Registration Statements it filed within the meaning of Section 2(a)(4) of the Securities Act, 15 U.S.C. 77b(a)(4), and in accordance with Section 11(a), 15 U.S.C. 77k(a). As such, it is liable for the misstatements and omissions in the Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005. 140. At the time Defendant NHELI filed the Registration Statements, the Section 11
Individual Defendants who signed the Registration Statement were officers and/or directors of NHELI. In addition, the Section 11 Individual Defendants signed or authorized another to sign on their behalf the Registration Statements and the amendments thereto. As such, the Section 11 Individual Defendants are liable under Section 11 of the Securities Act for the misstatements and omissions in the Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005. 141. At the time that they became effective, the Registration Statements contained
material misstatements of fact and omitted information necessary to make the facts stated therein
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not misleading, as set forth above. The facts misstated or omitted were material to a reasonable investor reviewing the Registration Statements. 142. The untrue statements of material facts and omissions of material fact in the
Certificates pursuant to the false and misleading Registration Statements. Fannie Mae and Freddie Mac made these purchases in the primary market. At the time they purchased the GSE Certificates, Fannie Mae and Freddie Mac did not know of the facts concerning the false and misleading statements and omissions alleged herein, and if the GSEs would have known those facts, they would not have purchased the GSE Certificates. 144. Nomura Securities and RBS Securities (formerly known as Greenwich) owed to
Fannie Mae, Freddie Mac, and other investors a duty to make a reasonable and diligent investigation of the statements contained in the Registration Statements applicable to the Securitizations they underwrote at the time they became effective to ensure that such statements were true and correct and that there were no omissions of material facts required to be stated in order to make the statements contained therein not misleading. The Section 11 Individual Defendants owed the same duty with respect to the Registration Statements that they signed that registered securities that were bona fide offered to the public on or after September 6, 2005. 145. Nomura Securities, RBS Securities (formerly known as Greenwich), and the
Section 11 Individual Defendants did not exercise such due diligence and failed to conduct a reasonable investigation. In the exercise of reasonable care, these Defendants should have known of the false statements and omissions contained in or omitted from the Registration
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Statements filed in connection with the Securitizations, as set forth herein. In addition, NHELI, though subject to strict liability without regard to whether it performed diligence, also failed to take reasonable steps to ensure the accuracy of the representations. 146. Fannie Mae and Freddie Mac sustained substantial damages as a result of the
misstatements and omissions in the Registration Statements. 147. This action is brought within three years of the date that the FHFA was appointed
as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). 148. By reason of the conduct herein alleged, Nomura Securities, RBS Securities
(formerly known as Greenwich), NHELI, and the Section 11 Individual Defendants are jointly and severally liable for their wrongdoing. SECOND CAUSE OF ACTION Violation of Section 12(a)(2) of the Securities Act of 1933 (Against Nomura Securities, RBS Securities, NAA, and NHELI) 149. Plaintiff realleges each allegation above as if fully set forth herein, except to the
Act of 1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements in the Securitizations listed in paragraph 2. 151. This claim is predicated upon the negligence of Nomura Securities, RBS
Securities (formerly known as Greenwich), NAA and NHELI for making false and materially misleading statements in the Prospectuses (as supplemented by the Prospectus Supplements,
51
hereinafter referred to in this Section as Prospectuses) for one or more Securitizations (as specified in Table 1, above at paragraph 35). 152. Nomura Securities and RBS Securities (formerly known as Greenwich) are
prominently identified in the Prospectuses, the primary documents that they used to sell the GSE Certificates. Nomura Securities and RBS Securities offered the Certificates publicly, including selling to Fannie Mae and Freddie Mac their GSE Certificates, as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. 153. Nomura Securities and RBS Securities (formerly known as Greenwich) offered
and sold the GSE Certificates to Fannie Mae and Freddie Mac by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. Nomura Securities and RBS Securities reviewed and participated in drafting the Prospectuses. 154. Nomura Securities and RBS Securities (formerly known as Greenwich)
successfully solicited Fannie Maes and Freddie Macs purchases of the GSE Certificates. As underwriters, Nomura Securities and RBS Securities obtained substantial commissions based on the amount received from the sale of the Certificates to the public. 155. Nomura Securities and RBS Securities (formerly known as Greenwich) offered
the GSE Certificates for sale, sold them, and distributed them by the use of means or instruments of transportation and communication in interstate commerce. 156. NAA is prominently identified in the Prospectus for one of the Securitizations,
NAA 2005-AR6, and NHELI is prominently identified in the Prospectuses for the remaining six
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Securitizations. NAA and NHELI offered the Certificates publicly and actively solicited their sale, including to Fannie Mae and Freddie Mac. 157. NAA and NHELI offered the GSE Certificates to Fannie Mae and Freddie Mac
by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. NAA and NHELI reviewed and participated in drafting the Prospectuses. 158. NAA and NHELI offered the GSE Certificates for sale by the use of means or
instruments of transportation and communication in interstate commerce. 159. Each of Nomura Securities, RBS Securities (formerly known as Greenwich),
NAA, and NHELI actively participated in the solicitation of the GSEs purchase of the GSE Certificates, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates. 160. Each of the Prospectuses contained material misstatements of fact and omitted
Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, and loan-to-value ratios. 162. Nomura Securities, RBS Securities (formerly known as Greenwich), NAA, and
NHELI offered and sold the GSE Certificates offered pursuant to the Registration Statements directly to Fannie Mae and Freddie Mac, pursuant to the false and misleading Prospectuses.
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163.
Nomura Securities and RBS Securities (formerly known as Greenwich) owed to
Fannie Mae and Freddie Mac, as well as to other investors in these trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses for the Securitizations they underwrote, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. NAA and NHELI owed the same duty with respect to the Prospectuses carried out under the Registration Statements they filed. 164. Nomura Securities, RBS Securities (formerly known as Greenwich), NAA, and
NHELI failed to exercise such reasonable care. These Defendants in the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above. 165. In contrast, Fannie Mae and Freddie Mac did not know of the untruths and
as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12).
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THIRD CAUSE OF ACTION Violation of Section 15 of the Securities Act of 1933 (Against Nomura Credit, Nomura Holding, and the Individual Defendants) 169. Plaintiff realleges each allegation above as if fully set forth herein, except to the
77o (Section 15), against Nomura Credit, Nomura Holding, and the Individual Defendants for controlling-person liability with regard to the Section 11 and Section 12(a)(2) causes of actions set forth above. 171. The Individual Defendants at all relevant times participated in the operation and
management of NAA, NHELI, and/or Nomura Securities, and conducted and participated, directly and indirectly, in the conduct of NAA, NHELI, and/or Nomura Securities business affairs. Defendant N. Dante Larocca was President and Chief Executive Officer of NHELI and a Managing Director of Nomura Securities. Defendant David Findlay was a Director of NAA and NHELI and a Senior Managing Director and Chief Legal Officer of Nomura Securities. Defendant Nathan Gorin was Controller and Chief Financial Officer of NAA, NHELI, and Nomura Securities. Defendant John P. Graham was President and Chief Executive Officer of NAA. Defendant John McCarthy was a Director of NAA and NHELI. 172. Defendant Nomura Credit was the sponsor for the Securitizations, and culpably
participated in the violations of Sections 11 and 12(a)(2) set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting NAA and NHELI as the special purpose vehicles, and selecting Nomura Securities or RBS Securities (formerly known as Greenwich) as underwriter. In its role as sponsor, Nomura Credit knew and
55
intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 173. Defendant Nomura Credit also acted as the seller of the mortgage loans for the
Securitizations, in that it conveyed such mortgage loans to Defendants NAA and NHELI pursuant to a Mortgage Loan Purchase Agreement. 174. Defendant Nomura Credit also controlled the business of NAA and NHELI, as
NAA and NHELI were merely special purpose entities created for the purpose of acting as a pass-through for the issuance of the Certificates. Upon information and belief, there was some overlap between the officers and directors of Nomura Credit, NAA, NHELI, and Nomura Securities. In addition, because of its position as sponsor, Nomura Credit was able to, and did in fact, control the contents of the Registration Statements, including the Prospectuses and Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 175. Defendant Nomura Holding controlled the business operations of Nomura Credit,
Nomura Securities, NAA, and NHELI. Defendant Nomura Holding is the corporate parent of Nomura Credit, Nomura Securities, NAA, and NHELI. As the corporate parent, Nomura Holding had the practical ability to direct and control the actions of Nomura Credit, Nomura Securities, NAA, and NHELI in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of Nomura Credit, Nomura Securities, NAA, and NHELI in connection with the issuance and sale of the Certificates. 176. Nomura Holding expanded its share of the residential mortgage-backed
56
volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 177. Nomura Holding culpably participated in the violations of Section 11 and
12(a)(2) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and establish special-purpose financial entities such as NAA, NHELI, and the issuing trusts to serve as conduits for the mortgage loans. 178. Nomura Credit, Nomura Holding, and the Individual Defendants are controlling
persons within the meaning of Section 15 by virtue of their actual power over, control of, ownership of, and/or directorship of NAA, NHELI, and Nomura Securities at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 179. Fannie Mae and Freddie Mac purchased in the primary market Certificates issued
misstatements and omissions in the Registration Statements, for which they are entitled to compensation.
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182.
as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12). FOURTH CAUSE OF ACTION Violation of Section 13.1-522(A)(ii) of the Virginia Code (Against RBS Securities and NHELI) 183. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 184. This claim is brought by Plaintiff pursuant to 13.1-522(A)(ii) of the Virginia Code
and is asserted on behalf of Freddie Mac. The allegations set forth below in this cause of action pertain to only those GSE Certificates identified in Table 10 above that were purchased by Freddie Mac on or after September 6, 2006. 185. This claim is predicated upon RBS Securities (formerly known as Greenwich)
negligence for making false and materially misleading statements in the Prospectuses for the Securitizations for which it served as the selling underwriter and which were purchased by Freddie Mac on or after September 6, 2006. Defendant NHELI acted negligently in making false and materially misleading statements in the Prospectuses for the Securitizations carried out under the Registration Statements it filed. 186. RBS Securities (formerly known as Greenwich) is prominently identified in the
Prospectuses, the primary documents that it used to sell the GSE Certificates. RBS Securities offered the Certificates publicly, including selling to Freddie Mac its GSE Certificates, as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. 187. RBS Securities (formerly known as Greenwich) offered and sold the GSE
Certificates to Freddie Mac by means of the Prospectuses, which contained untrue statements of
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material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. RBS Securities reviewed and participated in drafting the Prospectuses. 188. RBS Securities (formerly known as Greenwich) successfully solicited Freddie
Macs purchases of the GSE Certificates. As underwriter, RBS Securities obtained substantial commissions based upon the amount received from the sale of the Certificates to the public. 189. RBS Securities (formerly known as Greenwich) offered the GSE Certificates for
sale, sold them, and distributed them to Freddie Mac in the State of Virginia. 190. NHELI is prominently identified in the Prospectuses for the Securitizations
carried out under the Registration Statements it filed. NHELI offered the Certificates publicly and actively solicited their sale, including to Freddie Mac. 191. NHELI offered the GSE Certificates to Freddie Mac by means of Prospectuses
which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. NHELI reviewed and participated in drafting the Prospectuses. 192. RBS Securities (formerly known as Greenwich) and NHELI actively participated
in the solicitation of Freddie Macs purchase of the GSE Certificates, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates. 193. Each of the Prospectuses contained material misstatements of fact and omitted
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194.
Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, and loan-to-value ratios. 195. RBS Securities (formerly known as Greenwich) and NHELI offered and sold the
GSE Certificates offered pursuant to the Registration Statements directly to Freddie Mac, pursuant to the false and misleading Prospectuses. 196. RBS Securities (formerly known as Greenwich) owed to Freddie Mac, as well as
to other investors in these trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses for the Securitizations they underwrote, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. NHELI owed the same duty with respect to the Prospectuses carried out under the Registration Statements it filed. 197. RBS Securities (formerly known as Greenwich) and NHELI failed to exercise
such reasonable care. These Defendants in the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above. 198. In contrast, Freddie Mac did not know of the untruths and omissions contained in
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200.
as Conservator of Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). FIFTH CAUSE OF ACTION Violation of Section 13.1-522(C) of the Virginia Code (Against Nomura Credit, Nomura Holding, David Findlay, John McCarthy, N. Dante Larocca, and Nathan Gorin) 201. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 202. This claim is brought under Section 13.1-522(C) of the Virginia Code and is
asserted on behalf of Freddie Mac. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 10 above that were purchased on or after September 6, 2006. This claim is brought against Nomura Credit, Nomura Holding, David Findlay, John McCarthy, N. Dante Larocca, and Nathan Gorin (the foregoing Individual Defendants collectively referred to as the Section 13 Individual Defendants) for controllingperson liability with regard to the Fourth Cause of Action set forth above. 203. The Section 13 Individual Defendants at all relevant times participated in the
operation and management of NHELI, and conducted and participated, directly and indirectly, in the conduct of NHELIs business affairs. Defendants David Findlay and John McCarthy were Directors of NHELI. Defendant N. Dante Larocca was President and Chief Executive Officer of NHELI. Defendant Nathan Gorin was Controller and Chief Financial Officer of NHELI. 204. Defendant Nomura Credit was the sponsor for the Securitizations, and culpably
participated in the violations of Section 13.1-522(A)(ii) set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting NHELI as the special purpose vehicle, and selecting RBS Securities (formerly known as Greenwich) as
61
underwriter. In its role as sponsor, Nomura Credit knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 205. Defendant Nomura Credit also acted as the seller of the mortgage loans for the
Securitizations, in that it conveyed such mortgage loans to Defendant NHELI pursuant to a Mortgage Loan Purchase Agreement. 206. Defendant Nomura Credit also controlled the business of NHELI, as NHELI was
merely a special purpose entity created for the purpose of acting as a pass-through for the issuance of the Certificates. In addition, because of its position as sponsor, Nomura Credit was able to, and did in fact, control the contents of the Registration Statements, including the Prospectuses and Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 207. Defendant Nomura Holding controlled the business operations of Nomura Credit
and NHELI. Defendant Nomura Holding is the corporate parent of Nomura Credit and NHELI. As the corporate parent, Nomura Holding had the practical ability to direct and control the actions of Nomura Credit and NHELI in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of Nomura Credit and NHELI in connection with the issuance and sale of the Certificates. 208. Nomura Holding expanded its share of the residential mortgage-backed
securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements.
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209.
Nomura Holding culpably participated in the violations of
Section 13.1-522(A)(ii) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and establish special-purpose financial entities such as NHELI and the issuing trusts to serve as conduits for the mortgage loans. 210. Nomura Credit, Nomura Holding, and the Section 13 Individual Defendants are
controlling persons within the meaning of Section 13.1-522(C) by virtue of their actual power over, control of, ownership of, and/or directorship of NHELI at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 211. Freddie Mac purchased Certificates issued pursuant to the Registration
as Conservator of Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12).
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SIXTH CAUSE OF ACTION Violation of Section 31-5606.05(a)(1)(B) of the District of Columbia Code (Against Nomura Securities and NAA) 215. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 216. This claim is brought by Plaintiff pursuant to Section 31-5606.05(a)(1)(B) and is
asserted on behalf of Fannie Mae. The allegations set forth below in this cause of action pertain only to the GSE Certificate for the NAA 2005-AR6 Securitization. 217. This claim is predicated upon Nomura Securities negligence for making false and
materially misleading statements in the Prospectus for the NAA 2005-AR6 Securitization. Defendant NAA also acted negligently in making false and materially misleading statements in this Prospectus. 218. Nomura Securities is prominently identified in the Prospectus, the primary
document it used to sell the Certificates for the NAA 2005-AR6 Securitization. Nomura Securities offered the Certificates publicly, including selling the GSE Certificate to Fannie Mae. 219. Nomura Securities offered and sold the GSE Certificate to Fannie Mae by means
of the Prospectus, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. Nomura Securities reviewed and participated in drafting the Prospectus. 220. Nomura Securities successfully solicited Fannie Maes purchase of the GSE
Certificate for the NAA 2005-AR6 Securitization. As underwriter, Nomura Securities obtained substantial commissions based upon the amount received from the sale of the Certificates to the public.
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221.
Nomura Securities offered the GSE Certificate for sale, sold it, and distributed it
to Fannie Mae in the District of Columbia. 222. NAA is prominently identified in the Prospectus for the NAA 2005-AR6
Securitization, which was carried out under a Registration Statement it filed. This Prospectus was the primary document used to sell the Certificates for the NAA 2005-AR6 Securitization. NAA offered the Certificates publicly and actively solicited their sale, including the sale of the GSE Certificate to Fannie Mae. 223. NAA offered the GSE Certificate for the NAA 2005-AR6 Securitization to Fannie
Mae by means of a Prospectus which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. NAA reviewed and participated in drafting the Prospectus. 224. Nomura Securities and NAA actively participated in the solicitation of the Fannie
Maes purchase of the GSE Certificate for the NAA 2005-AR6 Securitization, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statement, filing the Registration Statement, and assisting in marketing the GSE Certificate. 225. The Prospectus contained material misstatements of fact and omitted information
necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectus. 226. The untrue statements of material facts and omissions of material fact in the
Registration Statement, which includes the Prospectus, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, and loan-to-value ratios.
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227.
Nomura Securities and NAA offered and sold the GSE Certificate for the NAA
2005-AR6 Securitization offered pursuant to the Registration Statement directly to Fannie Mae, pursuant to the false and misleading Prospectus. 228. Nomura Securities owed to Fannie Mae, as well as to other investors in this trust,
a duty to make a reasonable and diligent investigation of the statements contained in the Prospectus for the Securitization that it underwrote, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. NAA, which filed the Registration Statement, owed the same duty with respect to the Prospectus for the Securitization. 229. Nomura Securities and NAA failed to exercise such reasonable care. These
Defendants in the exercise of reasonable care should have known that the Prospectus contained untrue statements of material facts and omissions of material facts at the time of the Securitization as set forth above. 230. In contrast, Fannie Mae did not know of the untruths and omissions contained in
the Prospectus at the time it purchased the GSE Certificate for the NAA 2005-AR6 Securitization. If Fannie Mae would have known of those untruths and omissions, it would not have purchased the GSE Certificate. 231. Fannie Mae sustained substantial damages in connection with its investment in
the GSE Certificate for the NAA 2005-AR6 Securitization and has the right to rescind and recover the consideration paid for the GSE Certificate, with interest thereon. 232. This action is brought within three years of the date that the FHFA was appointed
as Conservator of Fannie Mae, and is thus timely under 12 U.S.C. 4617(b)(12).
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SEVENTH CAUSE OF ACTION Violation of Section 31-5606.05(c) of the District of Columbia Code (Against Nomura Credit, Nomura Holding, David Findlay, John McCarthy, John P. Graham, and Nathan Gorin) 233. Plaintiff realleges each allegation above as if fully set forth herein, except to the
Code and is asserted on behalf of Fannie Mae. The allegations set forth below in this cause of action pertain only to the GSE Certificate for the NAA 2005-AR6 Securitization. This claim is brought against Nomura Credit, Nomura Holding, David Findlay, John McCarthy, John P. Graham, and Nathan Gorin (the foregoing Individual Defendants collectively referred to as the Section 31 Individual Defendants) for controlling-person liability with regard to the Sixth Cause of Action set forth above. 235. The Section 31 Individual Defendants at all relevant times participated in the
operation and management of NAA and/or Nomura Securities, and conducted and participated, directly and indirectly, in the conduct of NAA and/or Nomura Securities business affairs. Defendant David Findlay was a Director of NAA and a Senior Managing Director and Chief Legal Officer of Nomura Securities. Defendant John McCarthy was a Director of NAA. Defendant John P. Graham was President and Chief Executive Officer of NAA. Defendant Nathan Gorin was Controller and Chief Financial Officer of NAA and Nomura Securities. 236. Defendant Nomura Credit was the sponsor for the Securitizations, and culpably
participated in the violations of Section 31-5606.05(a)(1)(B) set forth above with respect to the offering of the GSE Certificate for the NAA 2005-AR6 Securitization by initiating this Securitization, purchasing the mortgage loans to be securitized, determining the structure of the Securitization, selecting NAA as the special purpose vehicle, and selecting Nomura Securities as
67
underwriter. In its role as sponsor, Nomura Credit knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 237. Defendant Nomura Credit also acted as the seller of the mortgage loans for the
NAA 2005-AR6 Securitization, in that it conveyed such mortgage loans to Defendant NAA pursuant to a mortgage loan purchase agreement. 238. Defendant Nomura Credit also controlled the business of NAA, as NAA was
merely a special purpose entity created for the purpose of acting as a pass-through for the issuance of the Certificates. In addition, because of its position as sponsor, Nomura Credit was able to, and did in fact, control the contents of the Registration Statement, including the Prospectus and Prospectus Supplement, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 239. Defendant Nomura Holding controlled the business operations of Nomura Credit,
Nomura Securities, and NAA. Defendant Nomura Holding is the corporate parent of Nomura Credit, Nomura Securities, and NAA. As the corporate parent, Nomura Holding had the practical ability to direct and control the actions of Nomura Credit, Nomura Securities, and NAA in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of Nomura Credit, Nomura Securities, and NAA in connection with the issuance and sale of the GSE Certificate for the NAA 2005-AR6 Securitization. 240. Nomura Holding expanded its share of the residential mortgage-backed
68
volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statement. 241. Nomura Holding culpably participated in the violations of Section 31-
5606.05(a)(1)(B) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statement and establish special-purpose financial entities such as NAA and the issuing trusts to serve as conduits for the mortgage loans. 242. Nomura Credit, Nomura Holding, and the Section 31 Individual Defendants are
controlling persons within the meaning of Section 31-5606.05(c) by virtue of their actual power over, control of, ownership of, and/or directorship of NAA and Nomura Securities at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statement. 243. Fannie Mae purchased the GSE Certificate for the NAA 2005-AR6 Securitization,
issued pursuant to the Registration Statement, including the Prospectus and Prospectus Supplement, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements. 244. Fannie Mae did not know of the misstatements and omissions in the Registration
Statement; had Fannie Mae known of those misstatements and omissions, it would not have purchased the GSE Certificate. 245. Fannie Mae has sustained damages as a result of the misstatements and omissions
in the Registration Statement, for which it is entitled to compensation.
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246.
as Conservator of Fannie Mae and is thus timely under 12 U.S.C. 4617(b)(12). EIGHTH CAUSE OF ACTION Common Law Negligent Misrepresentation (Against Nomura Securities, RBS Securities, NAA, and NHELI) 247. Plaintiff realleges each allegation above as if fully set forth herein, except to the
Nomura Securities, RBS Securities (formerly known as Greenwich), NAA, and NHELI. 249. Between November 30, 2005 and April 30, 2007, Nomura Securities, RBS
Securities (formerly known as Greenwich), NAA, and NHELI sold the GSE Certificates to the GSEs as described above. Because NAA and NHELI, as depositors, owned and then conveyed the underlying mortgage loans that collateralized the Securitizations, NAA and NHELI had unique, exclusive, and special knowledge about the mortgage loans in the Securitizations through their possession of the loan files and other documentation. 250. Likewise, as lead underwriter for three of the Securitizations and selling
underwriter for two, Nomura Securities was obligated toand had the opportunity toperform sufficient due diligence to ensure that the Registration Statements for those Securitizations, including without limitation the corresponding Prospectus Supplements, did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. As lead and selling underwriter for four of the Securitizations, RBS Securities (formerly known as Greenwich) had the same obligation and opportunity. As a result of this privileged position as underwriterswhich gave them access to loan file information and obligated them to perform adequate due diligence to
70
ensure the accuracy of the Registration StatementsNomura Securities and RBS Securities had unique, exclusive, and special knowledge about the underlying mortgage loans in the Securitizations. 251. Nomura Securities and RBS Securities (formerly known as Greenwich) also had
unique, exclusive, and special knowledge of the work of third-party due diligence providers, such as Clayton, who identified significant failures of originators to adhere to the underwriting standards represented in the Registration Statements. The GSEs, like other investors, had no access to borrower loan files prior to the closing of the Securitizations and their purchase of the Certificates. Accordingly, when determining whether to purchase the GSE Certificates, the GSEs could not evaluate the underwriting quality or the servicing practices of the mortgage loans in the Securitizations on a loan-by-loan basis. The GSEs therefore reasonably relied on Nomura Securities and RBS Securities knowledge and their express representations made prior to the closing of the Securitizations regarding the underlying mortgage loans. 252. Nomura Securities, RBS Securities (formerly known as Greenwich), NAA, and
NHELI were aware that the GSEs reasonably relied on their reputations and unique, exclusive, and special expertise and experience, as well as their express representations made prior to the closing of the Securitizations, and that the GSEs depended upon these Defendants for complete, accurate, and timely information. The standards under which the underlying mortgage loans were actually originated were known to these Defendants and were not known, and could not be determined, by the GSEs prior to the closing of the Securitizations. In purchasing the GSE Certificates from these Defendants, the GSEs relied on their special relationships with these Defendants, and the purchases were made, in part, in reliance on that special relationship.
71
253.
Based upon their unique, exclusive, and special knowledge and expertise about
the loans held by the trusts in the Securitizations, Nomura Securities, RBS Securities (formerly known as Greenwich), NAA, and NHELI had a duty to provide the GSEs complete, accurate, and timely information regarding the mortgage loans and the Securitizations. Nomura Securities, RBS Securities, NAA, and NHELI negligently breached their duty to provide such information to the GSEs by instead making to the GSEs untrue statements of material facts in the Securitizations, or otherwise misrepresenting to the GSEs material facts about the Securitizations. The misrepresentations are set forth in Section IV above, and include misrepresentations as to the accuracy of the represented credit ratings, compliance with underwriting guidelines for the mortgage loans, and the accuracy of the owner-occupancy statistics and the loan-to-value ratios applicable to the Securitizations, as disclosed in the term sheets and Prospectus Supplements. 254. In addition, having made actual representations about the underlying collateral in
the Securitizations and the facts bearing on the riskiness of the Certificates, Nomura Securities, RBS Securities (formerly known as Greenwich), NAA, and NHELI had a duty to correct misimpressions left by their statements, including with respect to any half truths. The GSEs were entitled to rely upon these Defendants representations about the Securitizations, and these Defendants failed to correct in a timely manner any of their misstatements or half truths, including misrepresentations as to compliance with underwriting guidelines for the mortgage loans. 255. Fannie Mae and Freddie Mac purchased the GSE Certificates based upon the
representations by Nomura as the sponsor and depositor for the seven Securitizations and as the selling underwriter for two of these Securitizations. Freddie Mac also purchased the GSE
72
Certificates based upon the representations by RBS Securities (formerly known as Greenwich), as the lead and selling underwriter for four Securitizations. The GSEs received term sheets containing critical data as to the Securitizations, including with respect to anticipated credit ratings by the credit rating agencies, loan-to-value and combined loan-to-value ratios for the underlying collateral, and owner-occupancy statistics, which term sheets were delivered, upon information and belief, by Nomura and RBS Securities. This data was subsequently incorporated into Prospectus Supplements that were received by the GSEs upon the close of each Securitization. 256. The GSEs relied upon the accuracy of the data transmitted to them and
subsequently reflected in the Prospectus Supplements. In particular, the GSEs relied upon the credit ratings that the credit rating agencies indicated they would bestow on the Certificates based on the information provided by Nomura Securities, RBS Securities (formerly known as Greenwich), NAA, and NHELI relating to the collateral quality of the underlying loans and the structure of the Securitizations. These credit ratings represented a determination by the credit rating agencies that the GSE Certificates were AAA quality (or its equivalent)meaning the Certificates had an extremely strong capacity to meet the payment obligations described in the respective PSAs. 257. Nomura, as sponsor and depositor for the seven Securitizations and selling
underwriter for two, provided detailed information about the underlying collateral and structure of each Securitization it sponsored to the credit rating agencies. The credit rating agencies based their ratings on the information provided to them by Nomura, and the agencies anticipated ratings of the Certificates were dependent on the accuracy of that information. The GSEs relied on the accuracy of the anticipated credit ratings and the actual credit ratings assigned to the
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Certificates by the credit rating agencies, and upon the accuracy of Nomuras and RBS Securities representations in the term sheets and Prospectus Supplements. 258. In addition, the GSEs relied on the fact that the originators of the mortgage loans
in the Securitizations had acted in conformity with their underwriting guidelines, which were described in the Prospectus Supplements. Compliance with underwriting guidelines was a precondition to the GSEs purchase of the GSE Certificates in that the GSEs decision to purchase the Certificates was directly premised on their reasonable belief that the originators complied with applicable underwriting guidelines and standards. 259. In purchasing the GSE Certificates, the GSEs justifiably relied on Nomuras and
RBS Securities (formerly known as Greenwich) false representations and omissions of material fact detailed above, including the misstatements and omissions in the term sheets about the underlying collateral, which were reflected in the Prospectus Supplements. 260. But for the above misrepresentations and omissions, the GSEs would not have
proximate, and foreseeable result of these Defendants misrepresentations, including any half truths. 262. This action is brought within three years of the date that the FHFA was appointed
as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12). PRAYER FOR RELIEF WHEREFORE Plaintiff prays for relief as follows:
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SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK FEDERAL HOUSING FINANCE AGENCY, AS CONSERVATOR FOR THE FEDERAL NATIONAL MORTGAGE ASSOCIATION AND THE FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff, -againstCOUNTRYWIDE FINANCIAL CORPORATION; COUNTRYWIDE HOME LOANS, INC.; COUNTRYWIDE CAPITAL MARKETS, LLC; COUNTRYWIDE SECURITIES CORPORATION; CWALT INC.; CWABS, INC.; CWMBS, INC; BANK OF AMERICA CORPORATION; BANK OF AMERICA, N.A.; NB HOLDINGS CORPORATION; BANC OF AMERICA SECURITIES LLC; CITIGROUP GLOBAL MARKETS, INC.; DEUTSCHE BANK SECURITIES INC.; RBS SECURITIES, INC. (f/k/a GREENWICH CAPITAL MARKETS, INC.); UBS SECURITIES, LLC; N. JOSHUA ADLER; THOMAS H. BOONE; JEFFREY P. GROGIN; RANJIT KRIPALANI; STANFORD KURLAND; THOMAS KEITH MCLAUGHLIN; JENNIFER S. SANDEFUR; ERIC SIERACKI; DAVID A. SPECTOR; Defendants.
Index No. _______
TABLE OF CONTENTS Page NATURE OF ACTION ...................................................................................................................1 PARTIES .........................................................................................................................................9 A. B. C. D. The Countrywide Defendants ................................................................................10 The Bank of America Defendants..........................................................................11 The Underwriter Defendants..................................................................................12 The Individual Defendants .....................................................................................14
JURISDICTION AND VENUE ....................................................................................................16 FACTUAL ALLEGATIONS ........................................................................................................17 I. THE SECURITIZATIONS................................................................................................17 A. B. C. Residential Mortgage-Backed Securitizations In General .....................................17 The Securitizations At Issue In This Case .............................................................18 The Securitization Process .....................................................................................25 1. 2. II. Countrywide Home Loans Groups Mortgage Loans in Special Purpose Trusts ............................................................................................25 The Trusts Issue Securities Backed by the Loans ......................................26
THE DEFENDANTS PARTICIPATION IN THE SECURITIZATION PROCESS ..........................................................................................................................32 A. The Role of Each of the Countrywide, Underwriter, and Individual Defendants .............................................................................................................32 1. 2. 3. 4. 5. Countrywide Home Loans .........................................................................32 The Depositor Defendants CWALT, CWABS, and CWMBS ..................34 Countrywide Securities ..............................................................................34 Countrywide Capital Markets ....................................................................35 Countrywide Financial ...............................................................................36
6. 7. B. III.
The Underwriter Defendants......................................................................36 The Individual Defendants .........................................................................38
IV.
FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS......................................................................................58 A. The Statistical Data Provided in the Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False ....................................58 1. 2. B. Owner-Occupancy Data Was Materially False..........................................59 Loan-to-Value Data Was Materially False ................................................63
Countrywide Systematically Disregarded Its Underwriting Guidelines ................69 1. Government Investigations Have Confirmed That Countrywide Routinely Failed to Adhere to Its Underwriting Guidelines ......................70 a. b. c. 2. Investigations and Actions of Federal Authorities.........................70 Admissions in Countrywides Internal Reporting and Emails ............................................................................................75 Deposition Testimony of Countrywides Top Executives .............78
Actions Brought by State Enforcement Authorities and Private Litigants Have Corroborated that Countrywide Systematically Failed to Adhere to Its Underwriting Guidelines .......................................81 a. b. State Enforcement Actions ............................................................82 Civil Litigation and Settlements ....................................................84
ii
3.
The Collapse of the GSE Certificates Credit Ratings Further Indicates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines ....................................91 The Surge in Mortgage Delinquency and Default Further Demonstrates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines ....................................95
4.
V.
COUNTRYWIDE KNEW ITS REPRESENTATIONS WERE FALSE AND THE GSEs JUSTIFIABLY RELIED ON COUNTRYWIDES REPRESENTATIONS ..........98 A. The Countrywide Defendants Knew Their Representations Were False ..............99 1. 2. 3. 4. 5. 6. 7. B. Countrywide Pursued a Dominant Market Share at All Costs ................100 Countrywides Own Documents Reveal It Knew the Falsity of Its Representations ........................................................................................102 Countrywide Purposefully Abused Its Documentation Programs and Falsified Loan Applications ..............................................................106 Countrywide Cherry Picked the Best Loans While Selling Riskier Loans to Investors .......................................................................109 Countrywide Had Knowledge from Due Diligence Firms that Loans Failed to Comply with Underwriting Guidelines ..........................110 Countrywide Knew The GSE Certificates Ratings Were False .............113 The District Court in the SEC Civil Action Found Triable Issues of Fact as to the Countrywide Executives Knowledge ...............................114
The GSEs Justifiably Relied on Countrywides Representations ........................114
VI. VII.
FANNIE MAES AND FREDDIE MACS PURCHASES OF THE GSE CERTIFICATES AND THE RESULTING DAMAGES ...............................................116 THE SUCCESSOR LIABILITY OF THE BANK OF AMERICA DEFENDANTS ...............................................................................................................121 A. B. C. The Structuring of Bank of Americas Merger with Countrywide ......................123 Countrywide Ceases Doing Business and Is Rebranded as Bank of America ................................................................................................................127 Bank of America Takes Steps To Expressly and Impliedly Assume Countrywide Financials Liabilities.....................................................................131
FIRST CAUSE OF ACTION ......................................................................................................137
iii
SECOND CAUSE OF ACTION .................................................................................................141 THIRD CAUSE OF ACTION .....................................................................................................145 FOURTH CAUSE OF ACTION .................................................................................................149 FIFTH CAUSE OF ACTION ......................................................................................................152 SIXTH CAUSE OF ACTION .....................................................................................................156 SEVENTH CAUSE OF ACTION ...............................................................................................159 EIGHTH CAUSE OF ACTION ..................................................................................................163 NINTH CAUSE OF ACTION .....................................................................................................166 TENTH CAUSE OF ACTION ....................................................................................................169 ELEVENTH CAUSE OF ACTION ............................................................................................171 PRAYER FOR RELIEF ..............................................................................................................172
iv
Plaintiff Federal Housing Finance Agency (FHFA), as conservator of The Federal National Mortgage Association (Fannie Mae) and The Federal Home Loan Mortgage Corporation (Freddie Mac), by its attorneys, Quinn Emanuel Urquhart & Sullivan, LLP, for its Complaint herein against Countrywide Financial Corporation (Countrywide Financial), Countrywide Home Loans, Inc. (Countrywide Home Loans), Countrywide Capital Markets, LLC (Countrywide Capital Markets), Countrywide Securities Corporation (Countrywide Securities); and CWALT, Inc. (CWALT), CWABS, Inc. (CWABS) and CWMBS, Inc. (CWMBS) (the Depositor Defendants) (all collectively, Countrywide or the Countrywide Defendants); Bank of America Corporation (Bank of America), Bank of America, N.A., and NB Holdings Corporation (NB Holdings) (together, the Bank of America Defendants); Banc of America Securities LLC (BOA Securities), CitiGroup Global Markets, Inc. (CGMI), Deutsche Bank Securities, Inc. (DB Securities), RBS Securities, Inc. (RBS Securities), UBS Securities, LLC (UBS Securities) (collectively, with Countrywide Securities, the Underwriter Defendants); and N. Joshua Adler, Thomas H. Boone, Jeffrey P. Grogin, Ranjit Kripalani, Stanford Kurland, Thomas Keith McLaughlin, Jennifer S. Sandefur, Eric Sieracki, and David A. Spector (the Individual Defendants), alleges as follows: NATURE OF ACTION 1. This action arises out of Defendants actionable conduct in connection with the
offer and sale of certain residential mortgage-backed securities to Fannie Mae and Freddie Mac (collectively, the Government Sponsored Enterprises or GSEs). These securities were sold pursuant to registration statements, including prospectuses and prospectus supplements that formed part of those registration statements, which contained materially false or misleading statements and omissions. Defendants falsely represented that the underlying mortgage loans complied with certain underwriting guidelines and standards, including representations that
significantly overstated the ability of the borrower to repay their mortgage loans. These representations were material to the GSEs, as reasonable investors, and their falsity violates Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77a et seq., Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, Sections 31-5606.05(a)(1)(B) and 315606.05(c) of the District of Columbia Code, and constitutes negligent misrepresentation, common law fraud, and aiding and abetting fraud. 2. Between August 30, 2005 and January 23, 2008, Fannie Mae and Freddie Mac
purchased approximately $26.6 billion in residential mortgage-backed securities (the GSE Certificates) issued in connection with 86 Countrywide-sponsored and/or Countrywideunderwritten securitizations (the Certificates).1 The GSE Certificates purchased by Freddie Mac, along with date and amount of the purchases, are listed below in Table 11. The GSE Certificates purchased by Fannie Mae, along with date and amount of the purchases, are listed below in Table 12. The 86 securitizations at issue (collectively, the Securitizations) are2: Table 1 Transaction
Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2005-57CB Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2005-63 Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2005-67CB Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2005-73CB Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2005-80CB
Short Name
CWALT 2005-57CB CWALT 2005-63 CWALT 2005-67CB CWALT 2005-73CB CWALT 2005-80CB
For purposes of this Complaint, the securities issued under the Registration Statements (as defined in paragraph 4 n.3 below) are referred to as Certificates, while the particular Certificates that Fannie Mae and Freddie Mac purchased are referred to as the GSE Certificates. Holders of Certificates are referred to as Certificateholders. CHL Mortgage Pass-Through Trust, Series 2005-HYB10, is listed on Bloomberg as CWHL 2005-HY10. Thus, we refer to it by its Bloomberg name, CWHL 2005-HY10.
2
Transaction
Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2005-83CB Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2005-84 Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2005-85CB Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2005-AR1 Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2006-11CB Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2006-14CB Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2006-19CB Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2006-23CB Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2006-33CB Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2006-OA14 Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2006-OC1 Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2006-OC10 Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2006-OC11 Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2006-OC3 Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2006-OC4 Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2006-OC5 Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2006-OC6 Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2006-OC7 Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2006-OC8 Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2007-5CB Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2007-HY2 Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2007-OA10 Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2007-OA3 Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2007-OA8 CHL Mortgage Pass-Through Trust Mortgage Pass-Through Certificates, Series 2005-HYB10 CHL Mortgage Pass-Through Trust Mortgage Pass-Through Certificates, Series 2006-HYB1
Short Name
CWALT 2005-83CB CWALT 2005-84 CWALT 2005-85CB CWALT 2005-AR1 CWALT 2006-11CB CWALT 2006-14CB CWALT 2006-19CB CWALT 2006-23CB CWALT 2006-33CB CWALT 2006-OA14 CWALT 2006-OC1 CWALT 2006-OC10 CWALT 2006-OC11 CWALT 2006-OC3 CWALT 2006-OC4 CWALT 2006-OC5 CWALT 2006-OC6 CWALT 2006-OC7 CWALT 2006-OC8 CWALT 2007-5CB CWALT 2007-HY2 CWALT 2007-OA10 CWALT 2007-OA3 CWALT 2007-OA8 CWHL 2005-HY10 CWHL 2006-HYB1
Transaction
CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2005-11 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2005-12 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2005-13 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2005-14 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2005-16 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2005-17 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2005-8 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2005-9 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2005-AB3 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2005-AB4 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2005-AB5 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2005-BC5 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-10 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-11 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-12 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-13 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-14 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-16 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-17 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-18 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-19 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-2 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-20 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-21 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-22 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-23
Short Name
CWL 2005-11 CWL 2005-12 CWL 2005-13 CWL 2005-14 CWL 2005-16 CWL 2005-17 CWL 2005-8 CWL 2005-9 CWL 2005-AB3 CWL 2005-AB4 CWL 2005-AB5 CWL 2005-BC5 CWL 2006-10 CWL 2006-11 CWL 2006-12 CWL 2006-13 CWL 2006-14 CWL 2006-16 CWL 2006-17 CWL 2006-18 CWL 2006-19 CWL 2006-2 CWL 2006-20 CWL 2006-21 CWL 2006-22 CWL 2006-23
Transaction
CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-24 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-25 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-26 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-3 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-4 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-5 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-6 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-7 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-8 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-9 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-BC2 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-BC3 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-BC4 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-BC5 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2007-1 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2007-10 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2007-11 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2007-12 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2007-13 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2007-2 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2007-3 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2007-5 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2007-6 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2007-7 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2007-8 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2007-9
Short Name
CWL 2006-24 CWL 2006-25 CWL 2006-26 CWL 2006-3 CWL 2006-4 CWL 2006-5 CWL 2006-6 CWL 2006-7 CWL 2006-8 CWL 2006-9 CWL 2006-BC2 CWL 2006-BC3 CWL 2006-BC4 CWL 2006-BC5 CWL 2007-1 CWL 2007-10 CWL 2007-11 CWL 2007-12 CWL 2007-13 CWL 2007-2 CWL 2007-3 CWL 2007-5 CWL 2007-6 CWL 2007-7 CWL 2007-8 CWL 2007-9
Transaction
CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2007-BC1 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2007-BC2 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2007-BC3
Short Name
CWL 2007-BC1 CWL 2007-BC2 CWL 2007-BC3
3.
The Certificates were offered for sale pursuant to one of nine shelf registration
statements (the Shelf Registration Statements) filed with the Securities and Exchange Commission (the SEC) by CWABS, CWALT, and CWMBS. The nine Shelf Registration Statements and amendments thereto filed by the Depositor Defendants were signed by or on behalf of the Individual Defendants. With respect to 70 of the Securitizations, Countrywide Securities was a lead underwriter and with respect to 69 of the Securitizations, Countrywide Securities was also the underwriter who sold the GSE Certificates to the GSEs. 4. For each Securitization, a prospectus (Prospectus) and prospectus supplement
credit quality of the mortgage loans underlying the Securitizations, the creditworthiness of the borrowers of those underlying mortgage loans, and the origination and underwriting practices used to make and approve the loans. Such statements were material to a reasonable investors decision to invest in mortgage-backed securities by purchasing the Certificates. Unbeknownst to
The term Registration Statement, as used herein, incorporates the Shelf Registration Statement, the Prospectus and the Prospectus Supplement for each referenced Securitization, except where otherwise indicated.
Fannie Mae and Freddie Mac, these statements were materially false, as significant percentages of the underlying mortgage loans were not originated in accordance with the represented underwriting standards and origination practices and had materially poorer credit quality than what was represented in the Registration Statements. 6. The Registration Statements also contained statistical summaries of the groups of
mortgage loans in each Securitization, such as the percentage of loans secured by owneroccupied properties and the percentage of the loan groups aggregate principal balance with loan-to-value ratios within specified ranges. This information was also material to reasonable investors. However, a loan level analysis of a sample of loans for each Securitization a review that encompassed thousands of mortgages across all of the Securitizations has revealed that these statistics were also false and omitted material facts due to inflated property values and misstatements of other key characteristics of the mortgage loans. 7. For example, the percentage of owner-occupied properties is a material risk factor
to the purchasers of Certificates, such as Fannie Mae and Freddie Mac, since a borrower who lives in mortgaged property is generally less likely to stop paying his or her mortgage and more likely to take better care of the property. The loan level review reveals that the true percentage of owner-occupied properties for the loans supporting the GSE Certificates was materially lower than what was stated in the Prospectus Supplements. Likewise, the Prospectus Supplements misrepresented other material factors, including the true value of the mortgaged properties relative to the amount of the underlying loans, and the actual ability of the individual mortgage holders to satisfy their debts. 8. Depositor Defendants CWABS, CWALT, and CWMBS (as depositors), and
certain of the Individual Defendants are directly responsible for the misstatements and omissions
of material fact contained in the Registration Statements because they prepared, signed, filed and/or used these documents to market and sell the Certificates to Fannie Mae and Freddie Mac. Underwriter Defendants Countrywide Securities, BOA Securities, CGMI, DB Securities, RBS Securities, and UBS Securities are also directly responsible for the misstatements and omissions of material fact contained in the Registration Statements for the Securitizations for which they served as underwriters (as reflected in Table 2, below) because they prepared and/or used the Registration Statements to market and sell the Certificates to Fannie Mae and Freddie Mac. 9. Defendants Countrywide Home Loans, Countrywide Financial, and Countrywide
Capital Markets are also responsible for the misstatements and omissions of material fact contained in the Registration Statements by virtue of their direction and control over Countrywide Securities and the Depositor Defendants. Countrywide Home Loans participated in and exercised dominion and control over the business operations of the Depositor Defendants. Countrywide Capital Markets participated in and exercised dominion and control over the business operations of Countrywide Securities. Countrywide Financial participated in and exercised dominion and control over the business operations of Countrywide Securities and the Depositor Defendants. 10. Bank of America, Bank of America, N.A., and NB Holdings are liable for the
exercise of dominion and control over the business operations of Countrywide Securities and the Depositor Defendants by virtue of being Countrywide Financials successor. 11. Fannie Mae and Freddie Mac purchased approximately $26.6 billion of the
Certificates pursuant to the Shelf Registration Statements filed with the SEC. These documents contained misstatements and omissions of material facts concerning the quality of the underlying mortgage loans, the creditworthiness of the borrowers, and the practices used to originate and
underwrite such loans. As a result of Defendants misstatements and omissions of material fact, Fannie Mae and Freddie Mac have suffered substantial losses as the value of their holdings has significantly deteriorated. 12. FHFA, as Conservator of Fannie Mae and Freddie Mac, brings this action against
the Defendants for violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77k, 77l(a)(2), 77o, Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, Sections 31-5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, and for negligent misrepresentation, common law fraud, and aiding and abetting fraud. PARTIES The Plaintiff and the GSEs 13. The Federal Housing Finance Agency is a federal agency located at 1700 G Street
NW in Washington, D.C. FHFA was created on July 30, 2008 pursuant to the Housing and Economic Recovery Act of 2008 (HERA), Pub. L. No. 110-289, 122 Stat. 2654 (2008) (codified at 12 U.S.C. 4617) to oversee Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. On September 6, 2008, under HERA, the Director of FHFA placed Fannie Mae and Freddie Mac into conservatorship and appointed FHFA as conservator. In that capacity, FHFA has the authority to exercise all rights and remedies of the GSEs, including but not limited to, the authority to bring suits on behalf of and/or for the benefit of Fannie Mae and Freddie Mac. 12 U.S.C. 4617(b)(2). 14. Fannie Mae and Freddie Mac are government-sponsored enterprises chartered by
Congress with a mission to provide liquidity, stability and affordability to the United States housing and mortgage markets. As part of this mission, Fannie Mae and Freddie Mac invested in residential mortgage-backed securities. Fannie Mae is located at 3900 Wisconsin Avenue, NW in Washington, D.C. Freddie Mac is located at 8200 Jones Branch Drive in McLean, Virginia.
The Defendants A. 15. The Countrywide Defendants Defendant Countrywide Financial is a Delaware corporation with its principal
place of business in Calabasas, California. Countrywide Financial, itself or through its subsidiaries Countrywide Home Loans, Countrywide Capital Markets, and the Depositor Defendants, is engaged in mortgage lending and other real estate finance-related businesses, including mortgage banking, securities dealing, and insurance underwriting. Pursuant to a merger completed on July 1, 2008, Countrywide Financial has been merged into and is now part of Bank of America. 16. Defendant Countrywide Home Loans, a wholly-owned subsidiary of Countrywide
Financial, is a New York corporation with its principal place of business in Calabasas, California. Countrywide Home Loans originates and services residential home mortgage loans through itself or its subsidiaries, non-parties Countrywide GP, Inc. and Countrywide LP, Inc., and in turn through their subsidiary, Countrywide Home Loans Servicing LP. Countrywide Home Loans was acquired by Bank of America on July 1, 2008 and operates under the trade name Bank of America Home Loans. Countrywide Home Loans was the sponsor of all 86 of the Securitizations. 17. Defendant Countrywide Capital Markets, a wholly-owned subsidiary of
Countrywide Financial, is a California corporation with its principal place of business in Calabasas, California. Countrywide Capital Markets, which is also now part of Bank of America by virtue of the merger of Countrywide Financial into Bank of America, operates through its two main wholly-owned subsidiaries, Defendant Countrywide Securities and non-party Countrywide Servicing Exchange.
10
18.
Defendant Countrywide Securities, a wholly-owned subsidiary of Countrywide
Capital Markets, which in turn is a wholly-owned subsidiary of Countrywide Financial, is a California corporation with its principal places of business in Calabasas, California and in New York, New York. Countrywide Securities is an SEC-registered broker-dealer and underwrites offerings of mortgage-backed securities. Countrywide Securities was a lead underwriter for 70 of the Securitizations, and was intimately involved in those offerings. Countrywide Securities also sold Certificates in 69 of the 86 Securitizations to Fannie Mae or Freddie Mac in its capacity as underwriter. Countrywide Securities was acquired by Bank of America on July 1, 2008. 19. Defendant CWALT is a Delaware corporation and a limited purpose subsidiary of
Countrywide Financial with its principal place of business in Calabasas, California. CWALT was the depositor for 29 of the Securitizations. CWALT, as depositor, was also responsible for preparing and filing reports required under the Securities Exchange Act of 1934. 20. Defendant CWABS is a Delaware corporation and a limited purpose subsidiary of
Countrywide Financial with its principal place of business in Calabasas, California. CWABS was the depositor for 55 of the Securitizations. CWABS, as depositor, was also responsible for preparing and filing reports required under the Securities Exchange Act of 1934. 21. Defendant CWMBS is a Delaware corporation and a limited purpose subsidiary
of Countrywide Financial with its principal place of business in Calabasas, California. CWMBS was the depositor for two of the Securitizations. CWMBS, as depositor, was also responsible for preparing and filing reports required under the Securities Exchange Act of 1934. B. 22. The Bank of America Defendants Defendant Bank of America is a Delaware corporation with its principal place of
business in Charlotte, North Carolina and offices and branches in New York, New York. Bank of America is one of the worlds largest financial institutions, serving individual consumers,
11
small- and middle-market businesses and large corporations with a full range of banking, investing, asset-management and other financial and risk-management products and services. Countrywide Financial merged with Bank of America on July 1, 2008. As explained more fully below in Section VII, Bank of America is a successor-in-interest to the Countrywide Defendants. It is thus vicariously liable for the conduct of the Countrywide Defendants alleged herein. 23. Defendant Bank of America, N.A., is a nationally chartered U.S. bank with
substantial business operations and offices in New York, New York. As explained more fully below in Section VII, Bank of America, N.A. participated in Bank of Americas acquisition of substantially all of Countrywide Financial through a series of acquisitions and shares that commenced on July 1, 2008. Together with Bank of America, it is a successor-in-interest to the Countrywide Defendants. 24. NB Holdings is a Delaware corporation with its principal place of business in
Charlotte, North Carolina. As explained more fully below in Section VII, NB Holdings participated in Bank of Americas acquisition of substantially all of Countrywide Financial through a series of acquisitions and shares that commenced on July 1, 2008. Together with Bank of America, it is a successor-in-interest to the Countrywide Defendants. C. 25. The Underwriter Defendants As described above at paragraph 18, Defendant Countrywide Securities was a
lead underwriter for 70 of the Securitizations and also sold Certificates in 69 of the 86 Securitizations to Fannie Mae or Freddie Mac in its capacity as underwriter. 26. BOA Securities has its principal place of business in New York, New York.
BOA Securities was the lead underwriter for the CWALT 2006-OA14 and CWALT 2007-OA10 Securitizations, among others, and was intimately involved in those offerings. Fannie Mae
12
purchased the GSE Certificates for the CWALT 2006-OA14 and CWALT 2007-OA10 Securitizations from BOA Securities in its capacity as underwriter. 27. Defendant CGMI, formerly known as Salomon Smith Barney or Smith Barney, is
a New York corporation and an SEC-registered broker-dealer, with its principal place of business in New York, New York. CGMI was the lead underwriter for the CWALT 2006-33CB and CWALT 2007-5CB Securitizations and was intimately involved in those offerings. Freddie Mac purchased the GSE Certificates for the CWALT 2006-33CB and CWALT 2007-5CB Securitizations from CGMI in its capacity as underwriter. 28. Defendant DB Securities is a Delaware corporation and an SEC-registered broker-
dealer with its principal place of business in New York, New York. DB Securities acted as a broker-dealer in the issuance and underwriting of residential and commercial mortgage backed securities. DB Securities was the lead underwriter for the CWALT 2005-84, CWALT 200585CB, CWALT 2006-14CB, and CWALT 2006-19CB Securitizations, among others, and was intimately involved in those offerings. Fannie Mae purchased the GSE Certificates for the CWALT 2005-84 and CWALT 2005-85CB Securitizations and Freddie Mac purchased the GSE Certificates for the CWALT 2006-14CB and CWALT 2006-19CB Securitizations from DB Securities in its capacity as underwriter. 29. Defendant RBS Securities is a Delaware corporation and an SEC-registered
broker-dealer with its principal place of business in Greenwich, Connecticut and offices in New York, New York. Prior to April 2009, RBS Securities was known as Greenwich Capital Markets, Inc. RBS Securities was a lead underwriter for the CWALT 2005-73CB, CWALT 2006-11CB, and CWALT 2005-80CB Securitizations and was intimately involved in those offerings. Fannie Mae purchased the GSE Certificate for the CWALT 2005-80CB Securitization
13
and Freddie Mac purchased the GSE Certificates for the CWALT 2005-73CB and CWALT 2006-11CB Securitizations from RBS Securities in its capacity as underwriter. 30. Defendant UBS Securities is a limited liability company incorporated in Delaware
with its principal places of business in Stamford, Connecticut and New York, New York. UBS Securities is an SEC-registered broker-dealer. It was the lead underwriter in the CWALT 200563 Securitization, among others, and was intimately involved in that offering. Fannie Mae purchased the GSE Certificate for the CWALT 2005-63 Securitization from UBS Securities, in its capacity as underwriter. D. 31. The Individual Defendants Defendant N. Joshua Adler served as President, CEO, and member of the Board
of Directors for CWALT and CWABS. Mr. Adler resides in Calabasas, California. Mr. Adler signed two of the Shelf Registration Statements and the amendments thereto. 32. Defendant Thomas H. Boone served as Executive Vice President as well as the
Principal Financial and Accounting Officer for CWMBS. Mr. Boone resides in Westlake Village, California. Mr. Boone signed one of the Shelf Registration Statements and the amendments thereto. 33. Defendant Jeffrey P. Grogin served as Director of CWMBS. Mr. Grogin resides
in Hidden Hills, California. Mr. Grogin signed one of the Shelf Registration Statements and the amendments thereto. 34. Defendant Ranjit Kripalani joined Countrywide Financial and its subsidiary
Countrywide Securities in 1998, as Countrywide Financials Executive Vice President and Countrywide Securities National Sales Manager. He served as a Director of CWALT, CWABS, and CWMBS. Mr. Kripalani resides in Manhattan Beach, California. Mr. Kripalani signed two of the Shelf Registration Statements and the amendments thereto.
14
35.
Defendant Stanford Kurland was President and COO of Countrywide Financial
from 1988 until he ceased working for Countrywide Financial on September 7, 2006. At all relevant times up to that date, Mr. Kurland was also the CEO, President, and Chairman of the Board of CWABS, CWALT, and CWMBS. Mr. Kurland resides in Calabasas, California. Mr. Kurland signed seven of the Shelf Registration Statements and the amendments thereto. 36. Defendant Thomas Keith McLaughlin served as Executive Vice President as well
as Principal Financial and Accounting Officer for CWMBS and CWALT. Mr. McLaughlin resides in Thousand Oaks, California. Mr. McLaughlin signed one of the Shelf Registration Statements and the amendments thereto. 37. Defendant Jennifer S. Sandefur joined Countrywide Financial in 1994 as Vice
President and Assistant Treasurer and was shortly thereafter promoted to Treasurer of Countrywide Home Loans. She was serving as Senior Managing Director and Treasurer of Countrywide Financial at the time of her departure in 2008. She also served as Director of CWALT, CWABS, and CWMBS. Ms. Sandefur resides in Calabasas, California. Ms. Sandefur signed two of the Shelf Registration Statements and the amendments thereto. 38. Defendant Eric Sieracki served as Countrywide Financials Executive Managing
Director and Chief Financial Officer from April 2005 through Countrywides merger with Bank of America in 2008. Prior to his appointment as CFO, Mr. Sieracki occupied other high-level positions within Countrywide, including as Executive Managing Director, Chief Financial Officer, and Treasurer of CWALT, CWABS, and CWMBS. Mr. Sieracki resides in Lake Sherwood, California. Mr. Sieracki signed eight of the Shelf Registration Statements and the amendments thereto.
15
39.
Defendant David A. Spector joined Countrywide in 1990. He was subsequently
promoted to Managing Director in 2001 and served as Senior Managing Director of Secondary Marketing at Countrywide Financial from 2004 to 2006, as well as Managing Director of Secondary Markets at Countrywide Home Loans. He was also a member of the Board of Directors and a Vice President for CWALT, CWABS, and CWMBS. Mr. Spector resides in Tarzana, California. Mr. Spector signed seven of the Shelf Registration Statements and the amendments thereto. JURISDICTION AND VENUE 40. This Court has jurisdiction over the claims herein which arise under Sections 11,
12(a)(2), and 15 of the Securities Act of 1933 pursuant to CPLR 301, 302 and Section 22 of the Securities Act of 1933, 15 U.S.C. 77v. This Court has further jurisdiction over the statutory claims of violations of Section 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code and Section 31-5605(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, pursuant to this Courts general jurisdiction. Most of the Underwriter Defendants, including Countrywide Securities, are principally located in New York, other Defendants, including Countrywide Home Loans and Bank of America, can be found or transact business in New York, and many of the acts and transactions alleged herein occurred in substantial part in New York. 41. Venue is proper in this Court pursuant to CPLR 503. Many of the defendants,
including Countrywide Home Loans and Countrywide Securities, have their principal offices in this County, and many of the acts and transactions alleged herein, including the preparation and dissemination of the Shelf Registration Statements and the marketing and selling of Certificates, occurred in substantial part in this County.
16
FACTUAL ALLEGATIONS I. THE SECURITIZATIONS A. 42. Residential Mortgage-Backed Securitizations In General Asset-backed securitization distributes risk by pooling cash-producing financial
seller the entity that acquires or originates the mortgage loans and initiates the securitization and the creation of a trust, to which the sponsor directly or indirectly transfers a portfolio of mortgage loans. The trust is established pursuant to a Pooling and Servicing Agreement entered into by, among others, the depositor for that securitization. In many instances, the transfer of assets to a trust is a two-step process: the financial assets are transferred by the sponsor first to an intermediate entity, often a limited purpose entity created by the sponsor . . . and commonly called a depositor, and then the depositor will transfer the assets to the [trust] for the particular asset-backed transactions. Asset-Backed Securities, Securities Act Release No. 33-8518, Exchange Act Release No. 34-50905, 84 SEC Docket 1624 (Dec. 22, 2004). 44. Residential mortgage-backed securities are backed by the underlying mortgage
loans. Some residential mortgage-backed securitizations are created from more than one cohort of loans called collateral groups, in which case the trust issues securities backed by different groups. For example, a securitization may involve two groups of mortgages, with some securities backed primarily by the first group, and others primarily by the second group. Purchasers of the securities acquire an ownership interest in the assets of the trust, which in turn owns the loans. Within this framework, the purchasers of the securities acquire rights to the
17
cash-flows from the designated mortgage group, such as homeowners payments of principal and interest on the mortgage loans held by the related trust. 45. Residential mortgage-backed securities are issued pursuant to registration
mortgage loans. The servicer is responsible for collecting homeowners mortgage loan payments, which the servicer remits to the trustee after deducting a monthly servicing fee. The servicers duties include making collection efforts on delinquent loans, initiating foreclosure proceedings, and determining when to charge off a loan by writing down its balance. The servicer is required to report key information about the loans to the trustee. The trustee (or trust administrator) administers the trusts funds and delivers payments due each month on the certificates to the investors. B. 47. The Securitizations At Issue In This Case This case involves the 86 Securitizations listed in Table 1, above, which were
sponsored and structured by Countrywide Home Loans. The vast majority of the Securitizations were underwritten by Countrywide Securities. For each of the 86 Securitizations, Table 2 identifies the (1) sponsor; (2) depositor; (3) lead underwriters (and in parentheses, the defendant underwriter who sold securities to Fannie Mae or Freddie Mac, when the defendant underwriter
18
was not Countrywide Securities); (4) the principal amount issued for the tranches4 purchased by the GSEs; (5) the date of issuance; and (6) the loan group or groups backing the GSE Certificate for that Securitization (referred to as the Supporting Loan Groups). Table 2
Transaction Tranche Sponsor Depositor Lead Underwriters and Selling Underwriter When Not CW Securities (in parentheses) Countrywide Securities, JP Morgan UBS Securities (UBS Securities) Countrywide Securities, Lehman Brothers Bear Stearns, RBS Securities (RBS Securities5) RBS Securities, Countrywide Securities (RBS Securities) RBS Securities, Countrywide Securities (RBS Securities) Countrywide Securities Countrywide Securities DB Securities (DB Securities) DB Securities, Lehman Brothers, JP Morgan (DB Securities) Countrywide Securities RBS Securities, Countrywide Securities (RBS Securities) DB Securities, JP Morgan (DB Securities) DB Securities, JP Morgan (DB Securities) Principal Amount Issued ($) Date of Issuance Supporting Loan Group(s)
CWALT 2005-57CB
1A1
Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans
CWALT
$199,860,000
10/28/05
Loan Group 1
CWALT 2005-63 CWALT 2005-67CB
1A1 A1
CWALT CWALT
$186,908,000 $199,756,000
10/28/05 11/29/05
Loan Group 1 Single-Group Transaction Loan Group 2
CWALT 2005-73CB
2A2
CWALT
$123,415,000
11/29/05
CWALT 2005-80CB
3A1
CWALT
$220,446,000
12/28/05
Loan Group 3
4A1
Countrywide Home Loans
CWALT
$247,196,000
12/28/05
Loan Group 4
CWALT 2005-83CB
A1 A2
2A1 1A1
Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans
CWALT CWALT CWALT CWALT
$312,847,000 $34,761,000 $403,111,000 $358,968,000
12/30/05 12/30/05 12/28/05 12/28/05
Single-Group Transaction Single-Group Transaction Loan Group 2 Loan Group 1
CWALT 2005-AR1 CWALT 2006-11CB
1A 1A1
Countrywide Home Loans Countrywide Home Loans
CWALT CWALT
$152,002,000 $45,796,000
12/29/05 3/30/06
CWALT 2006-14CB
A1
CWALT
$194,097,000
4/27/06
Single-Group Transaction Single-Group Transaction
A6
CWALT
$48,524,000
4/27/06
5
RBS Securities in this table refers to RBS Greenwich Capital, its predecessor.
19
Transaction
Tranche
Sponsor
Depositor
CWALT 2006-19CB
A11
CWALT
A30
CWALT
CWALT 2006-23CB
1A7
Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans
CWALT
2A1
CWALT
CWALT 2006-33CB
2A1
CWALT
CWALT 2006-OA14 CWALT 2006-OC1 CWALT 2006-OC10 CWALT 2006-OC11 CWALT 2006-OC3 CWALT 2006-OC4 CWALT 2006-OC5 CWALT 2006-OC6 CWALT 2006-OC7 CWALT 2006-OC8 CWALT 2007-5CB
1A1 1A1 1A 1A 1A1 1A 1A 1A 1A 1A1 2A3
Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans
CWALT CWALT CWALT CWALT CWALT CWALT CWALT CWALT CWALT CWALT CWALT
CWALT 2007-HY2
1A 2A
CWALT 2007-OA10
1A1 1A2
CWALT 2007-OA3 CWALT 2007-OA8 CWHL 2005-HY10 CWHL 2006-HYB1
2A1 1A1 2A1 1A1
Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans
CWALT CWALT CWALT CWALT CWALT
Lead Underwriters and Selling Underwriter When Not CW Securities (in parentheses) DB Securities, Countrywide Securities (DB Securities) DB Securities, Countrywide Securities (DB Securities) UBS Securities, Countrywide Securities UBS Securities, Countrywide Securities CGMI, Countrywide Securities (CGMI) BOA Securities (BOA Securities) Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities CGMI, Countrywide Securities (CGMI) Countrywide Securities Countrywide Securities BOA Securities (BOA Securities) BOA Securities (BOA Securities) BOA Securities
Date of Issuance
$201,815,000
6/29/06
Single-Group Transaction
$22,424,000
6/29/06
Single-Group Transaction
$171,694,000
6/30/06
Loan Group 1
$154,973,000
6/30/06
Loan Group 2
$347,668,000
9/29/06
Loan Group 2
$164,097,000 $373,442,000 $165,209,000 $224,171,000 $231,143,000 $165,807,000 $229,217,000 $102,510,000 $139,441,000 $138,111,000 $27,882,000
9/29/06 1/30/06 11/30/06 12/29/06 4/28/06 5/30/06 6/29/06 7/28/06 8/30/06 9/29/06 2/27/07
Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 2
$367,128,000 $117,725,000 $112,645,000 $75,097,000 $208,417,000 $127,393,000
1/31/07 1/31/07 7/30/07 7/30/07 2/28/07 6/28/07 12/29/05 1/31/06
Loan Group 1 Loan Group 2 Loan Group 1 Loan Group 1 Loan Group 2 Loan Group 1 Loan Group 2 Loan Group 1
CWALT CWMBS CWMBS BOA Securities Countrywide Securities Countrywide Securities
$167,974,000 $471,207,000
20
Transaction
Tranche
Sponsor
Depositor
CWL 2005-11
2AV1
CWABS
CWL 2005-12
3A
CWABS
CWL 2005-13
2AV1
CWABS
CWL 2005-14
1A1
CWABS
2A1
CWABS
CWL 2005-16
1AF
CWABS
3AV
CWABS
CWL 2005-17
2AV
CWABS
3AV1
CWABS
CWL 2005-8
1A1
CWABS
CWL 2005-9
1A1
CWABS
CWL 2005-AB3
1A1
CWABS
CWL 2005-AB4
1A
CWABS
CWL 2005-AB5
1A1
CWABS
CWL 2005-BC5
1A
CWABS
2A1
CWABS
Lead Underwriters and Selling Underwriter When Not CW Securities (in parentheses) Countrywide Securities, Morgan Stanley, RBS Securities Countrywide Securities, DB Securities, RBS Securities Countrywide Securities, BOA Securities, Barclays Capital Countrywide Securities, Bear Stearns, RBS Securities Countrywide Securities, Bear Stearns, RBS Securities Countrywide Securities, RBS Securities Countrywide Securities, RBS Securities Countrywide Securities, BNP Paribas Securities, RBS Securities Countrywide Securities, BNP Paribas Securities, RBS Securities Countrywide Securities, Lehman Brothers Countrywide Securities, Merrill Lynch, RBS Securities Countrywide Securities, BOA Securities, Barclays Capital Countrywide Securities, DB Securities, J.P. Morgan Securities Countrywide Securities, RBS Securities Countrywide Securities, RBS Securities Countrywide Securities, RBS Securities
Date of Issuance
$552,682,000
9/28/05
Loan Group 2
$167,374,000
9/30/05
Loan Group 3
$711,872,000
11/21/05
Loan Group 2
$29,264,000
12/21/05
Loan Group 1
$386,093,000
12/21/05
Loan Group 2
$388,648,000
12/28/05
Loan Group 1
$487,320,000
12/28/05
Loan Group 3
$111,720,000
12/29/05
Loan Group 2
$407,938,000
12/29/05
Loan Group 3
$243,773,000
8/30/05
Loan Group 1
$529,470,000
9/28/05
Loan Group 1
$324,864,000
9/27/05
Loan Group 1
$553,455,000
11/29/05
Loan Group 1
$202,082,000
12/29/05
Loan Group 1
$279,136,000
12/28/05
Loan Group 1
$246,227,000
12/28/05
Loan Group 2
21
Transaction
Tranche
Sponsor
Depositor
2A2
CWABS
CWL 2006-10 CWL 2006-11
2AV 2AV
CWABS CWABS
CWL 2006-12
1A
CWABS
CWL 2006-13
2AV
CWABS
CWL 2006-14
1A
CWABS
CWL 2006-16 CWL 2006-17
1A 1A
CWABS CWABS
CWL 2006-18
1A
CWABS
CWL 2006-19
1A
CWABS
CWL 2006-2
1A1
CWABS
CWL 2006-20
1A
CWABS
CWL 2006-21
1A
CWABS
CWL 2006-22
1A
CWABS
CWL 2006-23
1A
CWABS
CWL 2006-24
1A
CWABS
Lead Underwriters and Selling Underwriter When Not CW Securities (in parentheses) Countrywide Securities, RBS Securities Countrywide Securities Countrywide Securities, UBS Securities, Barclays Capital Countrywide Securities, BNP Paribas Securities, Lehman Brothers Countrywide Securities, Bear Stearns, Lehman Brothers Countrywide Securities, DB Securities, HSBC Securities Countrywide Securities Countrywide Securities, DB Securities, Lehman Brothers Countrywide Securities, Bear Stearns, DB Securities Countrywide Securities, Bear Stearns Countrywide Securities, BOA Securities, J.P. Morgan Securities Countrywide Securities, Bear Stearns, HSBC Securities Countrywide Securities, RBS Securities, J.P. Morgan Securities Countrywide Securities, RBS Securities, Barclays Capital Countrywide Securities, RBS Securities, J.P. Morgan Securities Countrywide Securities, RBS Securities
Date of Issuance
$27,358,000
12/28/05
Loan Group 2
$118,696,000 $460,174,000
6/30/06 6/29/06
$492,030,000
6/30/06
Loan Group 1
$399,884,000
7/28/06
Loan Group 2
$447,914,000
9/8/06
Loan Group 1
$140,766,000 $220,938,000
9/28/06 9/25/06
$495,558,000
9/28/06
Loan Group 1
$259,807,000
9/29/06
Loan Group 1
$281,750,000
2/27/06
Loan Group 1
$292,425,000
11/8/06
Loan Group 1
$328,048,000
11/30/06
Loan Group 1
$608,250,000
11/30/06
Loan Group 1
$465,514,000
12/8/06
Loan Group 1
$423,724,000
12/29/06
Loan Group 1
22
Transaction
Tranche
Sponsor
Depositor
CWL 2006-25
1A
CWABS
CWL 2006-26
1A
CWABS
CWL 2006-3
1A
CWABS
CWL 2006-4
1A1
CWABS
CWL 2006-5
1A
CWABS
CWL 2006-6 CWL 2006-7 CWL 2006-8 CWL 2006-9 CWL 2006-BC2 CWL 2006-BC3 CWL 2006-BC4 CWL 2006-BC5 CWL 2007-1
1A1 1A 1A 2AV 1A 1A 1A 1A 1A
Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans
CWABS CWABS CWABS CWABS CWABS CWABS CWABS CWABS CWABS
CWL 2007-10
1A1
CWABS
1A2
CWABS
1M1
CWABS
1M2
CWABS
1M3
CWABS
Lead Underwriters and Selling Underwriter When Not CW Securities (in parentheses) Countrywide Securities, RBS Securities Countrywide Securities, RBS Securities Countrywide Securities, DB Securities, Barclays Capital Countrywide Securities, Lehman Brothers, J.P. Morgan Securities Countrywide Securities, Bear Stearns, Lehman Brothers Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities, RBS Securities Countrywide Securities, DB Securities, Barclays Capital Countrywide Securities, DB Securities, Barclays Capital Countrywide Securities, DB Securities, Barclays Capital Countrywide Securities, DB Securities, Barclays Capital Countrywide Securities, DB Securities, Barclays Capital
Date of Issuance
$495,720,000
12/29/06
Loan Group 1
$449,571,000
12/29/06
Loan Group 1
$508,785,000
2/27/06
Loan Group 1
$131,072,000
3/17/06
Loan Group 1
$251,100,000
3/28/06
Loan Group 1
$501,329,000 $313,365,000 $330,630,000 $118,400,000 $237,900,000 $173,003,000 $200,970,000 $258,862,000 $540,940,000
3/29/06 6/28/06 6/28/06 6/30/06 5/30/06 8/30/06 9/29/06 12/29/06 2/9/07
Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 2 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1
$291,060,000
6/29/07
Loan Group 1
$32,340,000
6/29/07
Loan Group 1
$20,800,000
6/29/07
Loan Group 1
$14,800,000
6/29/07
Loan Group 1
$6,200,000
6/29/07
Loan Group 1
23
Transaction
Tranche
Sponsor
Depositor
CWL 2007-11
1M1
CWABS
1M2
CWABS
1M3
CWABS
1A1
CWABS
1A2
CWABS
CWL 2007-12
1A1 1A2 1M1
CWL 2007-13
1A 1M1
CWL 2007-2
1A
Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans
CWABS CWABS CWABS CWABS CWABS CWABS
CWL 2007-3
1A
CWABS
CWL 2007-5
1A
CWABS
CWL 2007-6
1A
CWABS
CWL 2007-7
1A
CWABS
CWL 2007-8
1A1
CWABS
1A2
CWABS
CWL 2007-9
1A
CWABS
CWL 2007-BC1
1A
CWABS
Lead Underwriters and Selling Underwriter When Not CW Securities (in parentheses) Countrywide Securities, Merrill Lynch, HSBC Securities Countrywide Securities, Merrill Lynch, HSBC Securities Countrywide Securities, Merrill Lynch, HSBC Securities Countrywide Securities, Merrill Lynch, HSBC Securities Countrywide Securities, Merrill Lynch, HSBC Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities, RBS Securities Countrywide Securities, RBS Securities Countrywide Securities, RBS Securities Countrywide Securities, RBS Securities Countrywide Securities, RBS Securities Countrywide Securities, Lehman Brothers, RBS Securities Countrywide Securities, Lehman Brothers, RBS Securities Countrywide Securities, Lehman Brothers, RBS Securities Countrywide Securities
Date of Issuance
$13,600,000
6/29/07
Loan Group 1
$10,880,000
6/29/07
Loan Group 1
$2,992,000
6/29/07
Loan Group 1
$199,022,000
6/29/07
Loan Group 1
$22,114,000
6/29/07
Loan Group 1
$501,417,000 $55,713,000 $17,953,000 $218,300,000 $9,916,000 $513,888,000
8/13/07 8/13/07 8/13/07 10/30/07 10/30/07 2/28/07
Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1
$237,450,000
3/29/07
Loan Group 1
$372,609,000
3/30/07
Loan Group 1
$272,850,000
3/30/07
Loan Group 1
$276,930,000
5/4/07
Loan Group 1
$424,293,000
5/31/07
Loan Group 1
$47,144,000
5/31/07
Loan Group 1
$443,360,000
6/8/07
Loan Group 1
$113,153,000
2/28/07
Loan Group 1
24
Transaction
Tranche
Sponsor
Depositor
CWL 2007-BC2 CWL 2007-BC3
1A 1A
CWABS CWABS
Lead Underwriters and Selling Underwriter When Not CW Securities (in parentheses) Countrywide Securities Countrywide Securities
Date of Issuance
$205,140,000 $185,759,000
4/27/07 6/29/07
C.
The Securitization Process 1. Countrywide Home Loans Groups Mortgage Loans in Special Purpose Trusts
48.
Countrywide Home Loans acted as the sponsor for each of the 86 Securitizations.
It originated the Mortgage Loans that were pooled together in the securitizations or, in some cases, acquired the Mortgage Loans from other originators or through affiliates of the originators. 49. Countrywide Home Loans then sold the mortgage loans for each of the
Securitizations that it sponsored to one of the three Depositor Defendants, each of which are Countrywide-affiliated entities: CWABS, CWALT, and CWMBS. 50. CWABS, CWALT, and CWMBS were each limited-purpose subsidiaries of
Countrywide Financial. The sole purpose of the Depositor Defendants was to act as a conduit through which loans originated or acquired by Countrywide could be securitized and sold to investors. 51. As depositors for the 86 Securitizations, the Depositor Defendants transferred the
relevant mortgage loans to the trusts pursuant to a Pooling and Servicing Agreement (PSA) that contained various representations and warranties regarding the mortgage loans for the Securitizations. 52. As part of each of the Securitizations, the trustee, on behalf of the
Certificateholders, executed the PSA with the relevant depositor and the parties responsible for
25
monitoring and servicing the mortgage loans in that Securitization. The trust, administered by the trustee, held the mortgage loans pursuant to the related PSA and issued Certificates, including the GSE Certificates, backed by such loans. The GSEs purchased the GSE Certificates, through which they obtained an ownership interest in the assets of the trust, including the mortgage loans. 2. 53. The Trusts Issue Securities Backed by the Loans
PSAs, each trust issued Certificates backed by the underlying mortgage loans. The Certificates were then sold to investors like Fannie Mae and Freddie Mac, which thereby acquired an ownership interest in the assets of the corresponding trust. Each Certificate entitles its holder to a specified portion of the cashflows from the underlying mortgages in the Supporting Loan Group. The level of risk inherent in the Certificates was a function of the capital structure of the related transaction and the credit quality of the underlying mortgages. 54. The Certificates were issued pursuant to one of nine Shelf Registration
Statements, filed with the SEC on a Form S-3. The Registration Statements were amended by one or more Forms S-3/A filed with the SEC (the Amendments). Each Individual Defendant signed one or more of the Shelf Registration Statements and the Amendments that were filed by the Depositor Defendants. The SEC filing number, registrants, signatories and filing dates of the Shelf Registration Statements and Amendments, as well as the Certificates covered by each Shelf Registration Statement, are set forth in Table 3 below.
26
Table 3
SEC File No. Date Shelf Registration Statement Filed 10/8/2002 Date(s) Amended Shelf Registration Statement Filed 10/28/2002 Registrant Covered Certificates Signatories of Shelf Registration Statement Stanford L. Kurland; Thomas Keith McLaughlin; Thomas H. Boone; David Spector; Jeffrey P. Grogin Stanford L. Kurland; Eric P. Sieracki; David A. Spector Signatories of Amendments
333-100418
CWMBS
CWHL 2005-HY10
333-125164
5/23/2005
6/10/2005
CWABS
333-125902
6/17/2005
7/25/2005
CWALT
333-125963
6/20/2005
7/25/2005
CWMBS
CWL 2005-8 CWL 2005-9 CWL 2005-11 CWL 2005-12 CWL 2005-13 CWL 2005-14 CWL 2005-16 CWL 2005-17 CWL 2005-AB3 CWL 2005-AB4 CWL 2005-AB5 CWL 2005-BC5 CWALT 2005-57CB CWALT 2005-63 CWALT 2005-67CB CWALT 2005-73CB CWALT 2005-80CB CWALT 2005-83CB CWALT 2005-84 CWALT 2005-85CB CWALT 2005-AR CWALT 2006-OC1 CWHL 2006-HYB1
Stanford L. Kurland; Thomas Keith McLaughlin; Thomas H. Boone; David Spector; Jeffrey P. Grogin Stanford L. Kurland; Eric P. Sieracki; David A. Spector
Stanford L. Kurland; Eric P. Sieracki; David A. Spector
333-131591
2/6/2006
2/21/2006
CWABS
CWL 2006-2 CWL 2006-3 CWL 2006-4 CWL 2006-5 CWL 2006-6 CWL 2006-7 CWL 2006-8 CWL 2006-9 CWL 2006-10 CWL 2006-11 CWL 2006-12 CWL 2006-13 CWL 2006-BC2
Stanford L. Kurland; Eric P. Sieracki; David A. Spector Stanford L. Kurland; Eric P. Sieracki; David A. Spector
Stanford L. Kurland; Eric P. Sieracki; David A. Spector Stanford L. Kurland; Eric P. Sieracki; David A. Spector
27
SEC File No.
333-131630
Date Shelf Registration Statement Filed 2/7/2006
Date(s) Amended Shelf Registration Statement Filed 3/6/2006
Registrant
CWALT
333-135846
7/18/2006
8/8/2006
CWABS
333-140960
2/28/2007
4/24/2007
CWABS
333-140962
2/28/2007
4/24/2007
CWALT
CWALT 2006-11CB CWALT 2006-14CB CWALT 2006-19CB CWALT 2006-23CB CWALT 2006-33CB CWALT 2006-OA14 CWALT 2006-OC3 CWALT 2006-OC4 CWALT 2006-OC5 CWALT 2006-OC6 CWALT 2006-OC7 CWALT 2006-OC8 CWALT 2006-OC10 CWALT 2006-OC11 CWALT 2007-5CB CWALT 2007-HY2 CWALT 2007-OA3 CWL 2006-14 CWL 2006-16 CWL 2006-17 CWL 2006-18 CWL 2006-19 CWL 2006-20 CWL 2006-21 CWL 2006-22 CWL 2006-23 CWL 2006-24 CWL 2006-25 CWL 2006-26 CWL 2006-BC3 CWL 2006-BC4 CWL 2006-BC5 CWL 2007-1 CWL 2007-2 CWL 2007-3 CWL 2007-5 CWL 2007-6 CWL 2007-BC1 CWL 2007-7 CWL 2007-8 CWL 2007-9 CWL 2007-10 CWL 2007-11 CWL 2007-12 CWL 2007-13 CWL 2007-BC2 CWL 2007-BC3 CWALT 2007-OA8 CWALT 2007-OA10
Signatories of Shelf Registration Statement Stanford L. Kurland; Eric P. Sieracki; David A. Spector
N. Joshua Adler; Eric P. Sieracki; Ranjit Kripalani; Jennifer S. Sandefur
28
55.
guidelines that purportedly were used in connection with the origination of the underlying mortgage loans. In addition, the Prospectus Supplements purport to provide accurate statistics regarding the mortgage loans in each group, including the ranges of and weighted average FICO credit scores of the borrowers, the ranges of and weighted average loan-to-value ratios of the loans, the ranges of and weighted average outstanding principal balances of the loans, the debtto-income ratios, the geographic distribution of the loans, the extent to which the loans were for purchase or refinance purposes; information concerning whether the loans were secured by a property to be used as a primary residence, second home, or investment property; and information concerning whether the loans were delinquent. 56. The Prospectus Supplements associated with each Securitization were filed with
Transaction CWALT 2005-57CB CWALT 2005-63 CWALT 2005-67CB CWALT 2005-73CB CWALT 2005-80CB CWALT 2005-83CB CWALT 2005-84 CWALT 2005-85CB CWALT 2005-AR1 CWALT 2006-11CB CWALT 2006-14CB CWALT 2006-19CB Date Prospectus Supplement Filed 11/2/05 10/31/05 11/30/05 12/1/05 1/3/06 1/3/06 12/29/05 12/30/05 12/30/05 3/30/06 5/1/06 6/30/06 Date of Filing Form 8-K Attaching PSA Filed 1/18/06 1/10/06 1/12/06 1/12/06 1/17/06 1/17/06 1/17/06 1/23/06 1/17/06 4/14/06 5/12/06 7/14/06 Filing No. of Related Registration Statement 333-125902 333-125902 333-125902 333-125902 333-125902 333-125902 333-125902 333-125902 333-125902 333-131630 333-131630 333-131630
29
Transaction CWALT 2006-23CB CWALT 2006-33CB CWALT 2006-OA14 CWALT 2006-OC1 CWALT 2006-OC10 CWALT 2006-OC11 CWALT 2006-OC3 CWALT 2006-OC4 CWALT 2006-OC5 CWALT 2006-OC6 CWALT 2006-OC7 CWALT 2006-OC8 CWALT 2007-5CB CWALT 2007-HY2 CWALT 2007-OA10 CWALT 2007-OA3 CWALT 2007-OA8 CWHL 2005-HY10 CWHL 2006-HYB1 CWL 2005-11 CWL 2005-12 CWL 2005-13 CWL 2005-14 CWL 2005-16 CWL 2005-17 CWL 2005-8 CWL 2005-9 CWL 2005-AB3 CWL 2005-AB4 CWL 2005-AB5 CWL 2005-BC5 CWL 2006-10 CWL 2006-11 CWL 2006-12 CWL 2006-13 CWL 2006-14 CWL 2006-16 CWL 2006-17 CWL 2006-18 CWL 2006-19 CWL 2006-2
Date Prospectus Supplement Filed 6/30/06 10/3/06 10/4/06 2/1/06 12/4/06 1/3/07 5/2/06 6/1/06 7/3/06 8/1/06 9/1/06 10/3/06 3/1/07 2/1/07 8/1/07 3/5/07 7/2/07 12/29/05 1/31/06 9/29/05 10/4/05 11/21/05 12/23/05 12/29/05 12/30/05 9/6/05 9/26/05 9/30/05 11/29/05 12/30/05 12/28/05 7/5/06 7/3/06 7/5/06 8/1/06 9/12/06 10/2/06 9/28/06 10/2/06 10/3/06 2/28/06
Date of Filing Form 8-K Attaching PSA Filed 7/13/06 10/13/06 10/20/06 2/14/06 12/15/06 1/10/07 5/12/06 6/14/06 7/14/06 8/10/06 10/23/06 10/23/06 3/16/07 5/24/07 8/17/07 4/2/07 7/13/07 1/24/06 2/13/06 10/13/05 11/4/05 12/7/05 1/30/06 1/27/06 1/27/06 11/4/05 11/4/05 10/12/05 1/27/06 1/27/06 1/17/06 8/8/06 8/8/06 8/7/06 8/11/06 11/20/06 11/20/06 11/17/06 11/17/06 11/17/06 3/13/06
Filing No. of Related Registration Statement 333-131630 333-131630 333-131630 333-125902 333-131630 333-131630 333-131630 333-131630 333-131630 333-131630 333-131630 333-131630 333-131630 333-131630 333-140962 333-131630 333-140962 333-100418 333-125963 333-125164 333-125164 333-125164 333-125164 333-125164 333-125164 333-125164 333-125164 333-125164 333-125164 333-125164 333-125164 333-131591 333-131591 333-131591 333-131591 333-135846 333-135846 333-135846 333-135846 333-135846 333-131591
30
Transaction CWL 2006-20 CWL 2006-21 CWL 2006-22 CWL 2006-23 CWL 2006-24 CWL 2006-25 CWL 2006-26 CWL 2006-3 CWL 2006-4 CWL 2006-5 CWL 2006-6 CWL 2006-7 CWL 2006-8 CWL 2006-9 CWL 2006-BC2 CWL 2006-BC3 CWL 2006-BC4 CWL 2006-BC5 CWL 2007-1 CWL 2007-10 CWL 2007-11 CWL 2007-12 CWL 2007-13 CWL 2007-2 CWL 2007-3 CWL 2007-5 CWL 2007-6 CWL 2007-7 CWL 2007-8 CWL 2007-9 CWL 2007-BC1 CWL 2007-BC2 CWL 2007-BC3
Date Prospectus Supplement Filed 11/13/06 12/4/06 12/4/06 12/13/06 1/4/07 1/4/07 1/4/07 2/28/06 3/20/06 3/28/06 3/30/06 6/30/06 6/30/06 7/5/06 5/31/06 8/31/06 9/28/06 1/3/07 2/12/07 7/3/07 7/3/07 8/15/07 11/1/07 3/2/07 4/2/07 4/3/07 4/3/07 5/8/07 6/4/07 6/12/07 3/1/07 4/30/07 6/29/07
Date of Filing Form 8-K Attaching PSA Filed 11/22/06 12/15/06 12/29/06 12/22/06 1/12/07 1/12/07 1/12/07 3/14/06 4/3/06 4/12/06 4/14/06 8/3/06 8/3/06 8/8/06 6/15/06 9/19/06 12/20/06 1/30/07 2/23/07 7/16/07 7/16/07 8/28/07 11/14/07 5/10/07 4/13/07 5/11/07 4/16/07 6/20/07 6/15/07 6/25/07 5/2/07 6/26/07 8/8/07
Filing No. of Related Registration Statement 333-135846 333-135846 333-135846 333-135846 333-135846 333-135846 333-135846 333-131591 333-131591 333-131591 333-131591 333-131591 333-131591 333-131591 333-131591 333-131591 333-135846 333-135846 333-135846 333-140960 333-140960 333-140960 333-140960 333-135846 333-135846 333-135846 333-135846 333-140960 333-140960 333-140960 333-135846 333-140960 333-140960
57.
The Certificates were issued pursuant to the PSAs, and the Underwriter
Defendants offered and sold the GSE Certificates to Fannie Mae and Freddie Mac pursuant to
31
the Registration Statements, which, as noted previously, included the Prospectuses and Prospectus Supplements.6 II. THE DEFENDANTS PARTICIPATION IN THE SECURITIZATION PROCESS A. 58. The Role of Each of the Countrywide, Underwriter, and Individual Defendants Each of the Countrywide Defendants, including the Individual Defendants, had a
role in the securitization process and the marketing for most or all of the Certificates, which included purchasing the mortgage loans from the originators, arranging the Securitizations, selling the mortgage loans to the depositor, transferring the mortgage loans to the trustee on behalf of the Certificateholders, underwriting the public offering of the Certificates, structuring and issuing the Certificates, and marketing and selling the Certificates to investors such as Fannie Mae and Freddie Mac. 59. With respect to each Securitization, the Depositor Defendants, the Underwriting
Defendants, and the Individual Defendants who signed the Registration Statement, as well as the Defendants who exercised control over their activities, are liable, jointly and severally, as participants in the registration, issuance, and offering of the Certificates, including issuing, causing, or making materially misleading statements in the Registration Statements, and omitting material facts required to be stated therein or necessary to make the statements contained therein not misleading. 1. 60. Countrywide Home Loans
Defendant Countrywide Home Loans, which has been involved in the
securitization of home loans since 1969, was at all times relevant to this Complaint a leading Countrywide Securities was a selling underwriter for 69 of the Securitizations; the selling underwriter for each Securitization is reflected at Tables 11 and 12, below at paragraphs 248 and 249.
6
32
sponsor of mortgage-backed securities and loan originator. The volume of loans originated and aggregated by Countrywide Home Loans made it possible for Countrywide Financial to [take] the crown as the biggest mortgage originator from 2004 until 2007. See Financial Crisis Inquiry Commission (FCIC), Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States at 105 (Jan. 2011) (hereinafter FCIC Report). According to the SEC, by 2005, Countrywide was the largest mortgage lender in the United States, originating over $490 billion in mortgage loans in 2005, over $450 billion in 2006, and over $408 billion in 2007. See Complaint, SEC v. Mozilo, No. 09-03994, Docket Entry 1 (C.D. Cal, filed June 4, 2009) (hereinafter SEC Complaint). Countrywide achieved a 16.8 percent market share by 2007. Goldstein & Fligstein, The Rise and Fall of the Nonconventional Mortgage Industry at Table 1 (July 2010). 61. In its capacity as sponsor of all 86 Securitizations, Countrywide Home Loans
determined the structure of the Securitizations, initiated the Securitizations, determined distribution of principal and interest, and provided data to the rating agencies to secure investment grade ratings for the Certificates. Countrywide Home Loans originated most of the mortgage loans that were pooled together before being sold or transferred to the Depositor Defendants in anticipation of securitization. Countrywide Home Loans also selected the Depositor Defendants as the special purpose vehicles that would be used to transfer the mortgage loans from Countrywide Home Loans to the trusts, and selected Countrywide Securities as the underwriter for most of the Securitizations. In its role as sponsor, Countrywide Home Loans knew and intended that the mortgage loans it originated or acquired would be sold in connection with the securitization process, and that certificates representing such loans would be issued by the relevant trusts.
33
62.
For the 86 Securitizations that it sponsored, Countrywide Home Loans also
conveyed the mortgage loans to the Depositor Defendants pursuant to the PSAs. In these agreements, Countrywide Home Loans made certain representations and warranties to the Depositor Defendants regarding the groups of loans collateralizing the Certificates. These representations and warranties were assigned by the Depositor Defendants to the trustees for the benefit of the Certificateholders. 2. 63. The Depositor Defendants CWALT, CWABS, and CWMBS
Each of the Depositor Defendants CWALT, CWABS, and CWMBS was a
special purpose entity formed solely for the purpose of purchasing mortgage loans, filing registration statements with the SEC, forming issuing trusts, assigning mortgage loans and all of its rights and interests in such mortgage loans to the trustee for the benefit of the certificateholders, and depositing the underlying mortgage loans into the issuing trusts. 64. The Securitizations in which each Depositor Defendant participated are identified
in Table 2, above. Acting as depositor, each Depositor Defendant purchased mortgage loans from Countrywide Home Loans (as sponsor), pursuant to the PSAs. Each Depositor Defendant then sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trust. The Depositor Defendants were also responsible for preparing and filing the Registration Statements pursuant to which the Certificates were offered for sale. 65. The trusts in turn held the mortgage loans for the benefit of the Certificateholders,
and issued the Certificates in public offerings for sale to investors such as Fannie Mae and Freddie Mac. 3. 66. Countrywide Securities
Defendant Countrywide Securities was, at all relevant times, an investment bank
and registered broker-dealer and one of the leading underwriters of mortgage and other asset-
34
backed securities in the United States. In 2007, Inside Mortgage Finance ranked Countrywide as one of the top non-agency mortgage-backed securities issuers, with 13.6 percent of the market share.7 Goldstein & Fligstein, The Rise and Fall of the Nonconventional Mortgage Industry at Table 1 (July 2010). Countrywide ranked number one in issuance of securities backed by subprime mortgages for the years 2005 to 2007, generating almost $86 billion in such issuances over those three years. Mortgage Repurchases Part II: Private Label RMBS Investors Take Aim Quantifying the Risks, Mortgage Finance at 8 (Aug. 17, 2010). 67. Defendant Countrywide Securities was the lead underwriter for the vast majority
of the Securitizations. In that role, it was responsible for underwriting and managing the offer and sale of the Certificates to Fannie Mae and Freddie Mac and other investors. Countrywide Securities was also obligated to conduct meaningful due diligence to ensure that the Registration Statements did not contain any material misstatements or omissions, including as to the manner in which the underlying mortgage loans were originated, transferred, and underwritten. 4. 68. Countrywide Capital Markets
Defendant Countrywide Capital Markets was the sole parent of Countrywide
Securities. As such, it had the practical ability to direct and control the actions of Countrywide Securities related to the Securitizations in which its wholly-owned subsidiary participated as underwriter and in fact exercised such control over the activities of its subsidiary related to the issuance and sale of the Certificates.
Agency mortgage-backed securities are guaranteed by a government agency or government-sponsored enterprise such as Fannie Mae or Freddie Mac, while non-agency mortgage-backed securities are issued by banks and financial companies not associated with a government agency or government sponsored enterprise.
35
5. 69.
Countrywide Financial
Countrywide Financial employed its wholly-owned subsidiaries, Countrywide
Home Loans, Countrywide Securities, and each of the Depositor Defendants, in the key steps of the securitization process. Unlike typical arms length transactions, the Securitizations here involved various Countrywide subsidiaries and affiliates at virtually each step in the chain with few exceptions, the sponsor was Countrywide Home Loans, the depositors were CWABS, CWALT, or CWMBS, and the lead or co-lead underwriter was Countrywide Securities. 70. As the sole corporate parent of these entities, Countrywide Financial had the
practical ability to direct and control the actions of Countrywide Home Loans, Countrywide Securities, and the Depositor Defendants related to the Securitizations, and in fact exercised such direction and control over their activities related to the issuance and sale of the Certificates. 6. 71. The Underwriter Defendants
Like Underwriter Defendant Countrywide Securities, the remaining Underwriter
Defendants BOA Securities, CGMI, DB Securities, RBS Securities, and UBS Securities were all registered broker-dealers, participated in underwriting one or more Securitizations, and in those capacities sold Certificates to Fannie Mae and Freddie Mac and other investors. The Securitizations in which each Underwriter Defendant sold GSE Certificates to Fannie Mae and Freddie Mac are identified below at Tables 11 and 12. 72. Defendant BOA Securities was the lead underwriter for the CWALT 2006-OA14
and CWALT 2007-OA10 Securitizations, among other Securitizations. In that role, BOA Securities was responsible for underwriting and managing the offer and sale of the Certificates issued in those Securitizations. BOA Securities managed the offer and sale of GSE Certificates to Fannie Mae in the CWALT 2006-OA14 and CWALT 2007-OA10 Securitizations.
36
73.
Defendant CGMI was at all relevant times CitiGroup Inc.s private label securities
arm, specializing in nonconforming and alternative pools of loans. Mortgage Banking Magazine, CitiMortgage on the Move, December 2006. CGMI was the lead underwriter for the CWALT 2006-33CB, and CWALT 2007-5CB Securitizations and in that role was responsible for underwriting and managing the offer and sale of the Certificates issued in those Securitizations. CGMI managed the offer and sale of GSE Certificates to Freddie Mac in the CWALT 2006-33CB and CWALT 2007-5CB Securitizations. 74. Defendant DB Securities was at all relevant times one of the leading underwriters
of mortgage and other asset-backed securities in the United States. DB Securities was the lead underwriter for the CWALT 2005-84, CWALT 2005-85CB, CWALT 2006-14CB, and CWALT 2006-19CB Securitizations, among other Securitizations. In that role, DB Securities was responsible for underwriting and managing the offer and sale of the Certificates issued in those Securitizations. DB Securities managed the offer and sale of GSE Certificates to Fannie Mae in the CWALT 2005-84 and CWALT 2005-85CB Securitizations and to Freddie Mac in the CWALT 2006-14CB and CWALT 2006-19CB Securitizations. 75. Defendant RBS Securities was at all relevant times one of the leading
underwriters of mortgage and other asset-backed securities in the United States. RBS Securities was a lead underwriter for the CWALT 2005-73CB, CWALT 2006-11CB, and CWALT 200580CB Securitizations, among other Securitizations. In that role, RBS Securities was responsible for underwriting and managing the offer and sale of the Certificates issued in those Securitizations. RBS Securities also managed the offer and sale of the GSE Certificates to Fannie Mae in the CWALT 2005-80CB Securitization and to Freddie Mac in the CWALT 200573CB and CWALT 2006-11CB Securitizations.
37
76.
Defendant UBS Securities was at all relevant times one of the leading
underwriters of mortgage and other asset-backed securities in the United States. UBS Securities was the lead underwriter for the CWALT 2005-63 Securitization, among other Securitizations. In that role, UBS Securities was responsible for underwriting and managing the offer and sale of the Certificates issued in those Securitizations. UBS Securities also managed the offer and sale of the GSE Certificate to Fannie Mae in the CWALT 2005-63 Securitization. 77. Each of the Underwriter Defendants was obligated to conduct meaningful due
diligence to ensure that the Registration Statements for the Securitizations they underwrote did not contain any material misstatements or omissions, including the manner in which the underlying mortgage loans were originated, transferred, and underwritten. 7. 78. The Individual Defendants
Defendant N. Joshua Adler served as President, CEO, and member of the Board
of Directors for CWALT and CWABS. Mr. Adler signed two of the Shelf Registration Statements and the amendments thereto. 79. Defendant Thomas H. Boone served as Executive Vice President as well as the
Principal Financial and Accounting Officer for CWMBS. Mr. Boone signed one of the Shelf Registration Statements and the amendments thereto. 80. Defendant Jeffrey P. Grogin served as Director of CWMBS. Mr. Grogin signed
one of the Shelf Registration Statements and the amendments thereto. 81. Defendant Ranjit Kripalani served as Countrywide Financials Executive Vice
President and Countrywide Securities National Sales Manager. He also served as Director of CWALT, CWABS, and CWMBS. Mr. Kripalani signed two of the Shelf Registration Statements and the amendments thereto.
38
82.
Defendant Stanford Kurland was President and COO of Countrywide Financial
and also the CEO, President, and Chairman of the Board of CWABS, CWALT, and CWMBS. Mr. Kurland signed seven of the Shelf Registration Statements and the amendments thereto. 83. Defendant Thomas Keith McLaughlin served as Executive Vice President as well
as Principal Financial and Accounting Officer for CWMBS and CWALT. Mr. McLaughlin signed one of the Shelf Registration Statements and the amendments thereto. 84. Defendant Jennifer S. Sandefur served as Vice-President and Assistant Treasurer
of Countrywide Financial and Treasurer of Countrywide Home Loans. She served as Director of CWALT, CWABS, and CWMBS. Ms. Sandefur signed two of the Shelf Registration Statements and the amendments thereto. 85. Defendant Eric Sieracki served as Countrywide Financials Executive Managing
Director and Chief Financial Officer. Prior to becoming CFO of Countrywide Financial, Mr. Sieracki occupied other high-level positions within Countrywide, including as Executive Managing Director, Chief Financial Officer, and Treasurer of CWALT, CWABS, and CWMBS. Mr. Sieracki signed eight of the Shelf Registration Statements and the amendments thereto. 86. Defendant David A. Spector joined Countrywide in 1990. He served as
Managing and Senior Managing Director at Countrywide Financial from 2004 to 2006, as well as Managing Director of Secondary Markets at Countrywide Home Loans. He was also a member of the Board of Directors and a Vice President for CWALT, CWABS, and CWMBS. Mr. Spector signed seven of the Shelf Registration Statements and the amendments thereto. B. 87. The Defendants Failure To Conduct Proper Due Diligence The Defendants failed to conduct adequate and sufficient due diligence to ensure
that the mortgage loans underlying the Securitizations complied with the representations in the
39
Registration Statements, and failed to abide by their own stated underwriting standards in originating and underwriting loans. 88. During the time period in which the Certificates were issued approximately
2005 through 2007 Countrywides involvement in the mortgage-backed securitization market was rapidly expanding. Countrywides CEO, Angelo Mozilo, stated on a conference call with analysts in 2003 that his goal for Countrywide Financial was to dominate the mortgage market and to get our market share to the ultimate 30% by 2006, 2007. Q2 2003 Countrywide Financial Corporation Earnings Conference Call (July 22, 2003). As described below, in the drive to achieve this objective, Countrywide abandoned its underwriting guidelines and failed to perform the due diligence necessary to ensure the accuracy of the Registration Statements. 89. Defendants had enormous financial incentives to complete as many offerings as
quickly as possible without regard to ensuring the accuracy or completeness of the Registration Statements, or conducting adequate and reasonable due diligence. For example, the Depositor Defendants were paid a percentage of the total dollar amount of the offerings upon completion of the Securitizations, and the Underwriting Defendants, including but not limited to Countrywide Securities, were paid a commission based on the amount received from the sale of the Certificates to the public. 90. The push to securitize large volumes of mortgage loans contributed to the absence
of controls needed to prevent the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. In particular, Defendants failed to conduct adequate diligence or otherwise to ensure the accuracy of the statements in the Registrations Statements pertaining to the Securitizations.
40
91.
For instance, Countrywide retained third-parties, including Clayton Holdings, Inc.
(Clayton), to analyze the loans it was considering placing in its securitizations, but waived a significant number of loans into the Securitizations that these firms had recommended for exclusion, and did so without taking adequate steps to ensure that these loans had in fact been underwritten in accordance with applicable guidelines or had compensating factors that excused the loans non-compliance with those guidelines. On January 27, 2008, Clayton revealed that it had entered into an agreement with the New York Attorney General (the NYAG) to provide documents and testimony regarding its due diligence reports, including copies of the actual reports provided to its clients. According to The New York Times, as reported on January 27, 2008, Clayton told the NYAG that starting in 2005, it saw a significant deterioration of lending standards and a parallel jump in lending expectations and some investment banks directed Clayton to halve the sample of loans it evaluated in each portfolio. 92. Countrywide was negligent in allowing into the Securitizations a substantial
number of mortgage loans that, as reported to Countrywide by third-party due diligence firms, did not conform to the underwriting standards stated in the Registration Statements, including the Prospectuses and Prospectus Supplements. Even upon learning from the third-party due diligence firms that there were high percentages of defective or at least questionable loans in the sample of loans reviewed by the third-party due diligence firms, Countrywide failed to take any additional steps to verify that the population of loans in the Securitizations did not include a similar percentage of defective and/or questionable loans. 93. Claytons trending reports reveal that from the fourth quarter of 2006 to the first
quarter of 2007, 26 percent of the mortgages Countrywide submitted to Clayton to review in residential mortgage-backed securities groups were rejected by Clayton as falling outside of the
41
applicable underwriting guidelines. Of the mortgages that Clayton found defective, twelve percent were subsequently waived in by Countrywide and included in securitizations like the ones in which Fannie Mae and Freddie Mac invested. See All Clayton Trending Reports Q1 2006-Q2 2007, at 3 (Clayton Services Inc. 2007). 94. Clayton also produced a report containing the rejection and waiver rates for loans
originated by Countrywide. This report stated that between thirteen and 24 percent of the loans Countrywide originated during the same time frame did not comply with applicable underwriting guidelines. Clayton Originator Trending Report (Clayton Services Inc. 2007). 95. The Underwriting Defendants other than Countrywide also failed to perform
adequate due diligence when underwriting securitizations of mortgage-backed securities. These Defendants were negligent in allowing into their securitizations a substantial number of mortgage loans that, as reported to them by third-party due diligence firms, did not conform to the underwriting standards stated in the registration statements pursuant to which they made offerings, including the prospectuses and prospectus supplements that formed part of those registration statements. Claytons trending reports revealed that, in the period from the first quarter of 2006 to the second quarter of 2007, the non-Countrywide Underwriter Defendants, and their affiliates, routinely waived into pools for securitizations loans that had been recommended for exclusion, without taking adequate steps to ensure that these loans had in fact been underwritten in accordance with applicable guidelines. These reports are described below:
Bank of America: Clayton rejected 30 percent of the total pool of loans it reviewed for Bank of America. Nonetheless, Bank of America waived in 27 percent of those rejected loans. Citigroup: Clayton rejected 42 percent of the total pool of loans it reviewed for Citigroup. Nonetheless, Citigroup waived in nearly a third of those rejected loans.
42
Deutsche Bank: Clayton rejected 35 percent of the total pool of loans it reviewed for Deutsche Bank. Nonetheless, Deutsche Bank waived in seventeen percent of these rejected loans. RBS: Clayton rejected eighteen percent of the total pool of loans it reviewed for RBS. Nonetheless, RBS waived in 53 percent of these rejected loans. UBS: Clayton rejected 20 percent of the total pool of loans it reviewed for UBS. Nonetheless, UBS waived in thirteen percent of these loans.
See All Clayton Trending Reports Q1 2006-Q2 2007, at 3 (Clayton Services Inc. 2007). 96. Based on the information provided to them by the third-party due diligence firms,
the Underwriter Defendants should have known that a substantial number of the mortgage loans did not conform to the underwriting standards stated in the Registration Statements, including the Prospectuses and Prospectus Supplements, and that the mortgage loans did not have the characteristics represented in those documents. III. THE REGISTRATION STATEMENTS AND THE PROSPECTUS SUPPLEMENTS A. 97. Compliance With Underwriting Guidelines The Prospectuses and Prospectus Supplements for each Securitization describe
the mortgage loan underwriting guidelines pursuant to which the mortgage loans underlying the related Securitizations were to have been originated. These guidelines were intended to assess the creditworthiness of the borrower, the ability of the borrower to repay the loan, and the adequacy of the mortgaged property as security for the loan. 98. The statements made in the Prospectuses and Prospectus Supplements, which, as
discussed, formed part of the Registration Statement for each Securitization, were material to a reasonable investors decision to purchase and invest in the Certificates because the failure to originate a mortgage loan in accordance with the applicable guidelines creates a higher risk of
43
delinquency and default by the borrower, as well as a risk that losses upon liquidation will be higher, thus resulting in a greater economic risk to an investor. 99. The Prospectuses and Prospectus Supplements for the Securitizations contained
several key statements with respect to the underwriting standards of the entities that originated the loans in the Securitizations. 100. For example, the Prospectus Supplement for the CWALT 2007-OA10
Securitization, for which Countrywide Home Loans was the sponsor, CWALT was the depositor, and BOA Securities was the underwriter, stated that all mortgage loans had been originated under Countrywide Home Loans underwriting guidelines. The Prospectus Supplement set forth that Countrywide Home Loans underwriting standards are applied by or on behalf of Countrywide Home Loans to evaluate the prospective borrowers credit standing and repayment ability and the value and adequacy of the mortgaged property as collateral. 101. Further, according to the Prospectus Supplement, the same underwriting standards
applied regardless of whether the loan was originated or acquired by Countrywide Home Loans. The Prospectus Supplement represented that all loans will have been originated or acquired by Countrywide Home Loans in accordance with its credit, appraisal and underwriting process. 102. With respect to the information evaluated by the originator, the Prospectus to
which the Prospectus Supplement refers stated that, In general, a prospective borrower applying for a loan is required to fill out a detailed application designed to provide to the underwriting officer pertinent credit information. As part of the description of the borrowers financial condition, the borrower generally is required to provide a current list of assets and liabilities and a statement of income and expenses, as well as an authorization to apply for a
44
credit report which summarizes the borrowers credit history with local merchants and lenders and any record of bankruptcy. 103. The central purpose of the collection of information regarding each mortgage loan
was to assess the borrowers ability to repay the loan. As the Prospectus Supplement stated: Once all applicable employment, credit and property information is received, a determination generally is made as to whether the prospective borrower has sufficient monthly income available to meet monthly housing expenses and other financial obligations and monthly living expenses . . . . 104. The Prospectus Supplement specified that although exceptions could be made to
Countrywide Home Loans underwriting guidelines, in each instance there must be compensating factors . . . demonstrated by a prospective borrower. 105. Additionally, the Prospectus Supplement claimed that to assess the adequacy of
the value of the mortgaged property as collateral, Countrywide Home Loans obtained independent appraisals of the subject property. According to the Prospectus Supplement, the appraisers inspect and appraise the proposed mortgaged property and verify that the property is in acceptable condition. 106. With respect to approximately 60 percent of the Securitizations, the Prospectus
Supplement specified that substantially all of the mortgage loans had been made to borrowers with blemished credit histories. The Prospectus Supplement applicable to the CWL 2007-10 Securitization, for example, stated that all of the mortgage loans in the loan group supporting the Certificate purchased by the GSEs were originated by Countrywide Home Loans in accordance with its underwriting standards for credit-blemished mortgage loans.
45
107.
The guidelines applied for the credit-blemished mortgage loans nonetheless
required a determination that the borrower was able to repay the loan. The Prospectus Supplement for the CWL 2007-10 Securitization stated: While more flexible, Countrywide Home Loans underwriting guidelines [for credit-blemished mortgage loans] still place primary reliance on a borrowers ability to repay; however Countrywide Home Loans may require lower loan-to-value ratios than for loans underwritten to more traditional standards. The Prospectus Supplement for the CWL 2007-10 Securitization represented that that through use of an internal credit grading system for credit-blemished mortgage loans, Countrywide Home Loans was able to grade the likelihood that the mortgagor will satisfy the repayment conditions of the mortgage loans. 108. The Prospectus Supplement for the CWL 2007-10 Securitization stated, as did the
Prospectuses and Prospectus Supplements for Securitizations involving non-blemished mortgage loans: Countrywide Home Loans underwriting standards are primarily intended to evaluate the value and adequacy of the mortgaged property as collateral for the proposed mortgage loan and the borrowers credit standing and repayment ability. 109. The Prospectus Supplement for the CWL 2007-10 Securitization stated that loans
were evaluated on a case-by-case basis, and that compensating factors must exist for an exception. The compensating factors enumerated in the Prospectus Supplement included: low loan-to-value ratio or combined loan-to-value ratio, as applicable, low debt-to-income ratio, stable employment, time in the same residence or other factors. 110. As in the case of non-blemished loans, moreover, the Prospectus Supplement for
the CWL 2007-10 Securitization represented that every property had been subjected to an independent appraisal. The Prospectus Statement also stated that before the mortgage loans were
46
funded, a representative of Countrywide Home Loans had reviewed the appraisal and that generally Countrywide Home Loans required an additional appraisal in connection with appraisals not provided by Landsafe Appraisals, Inc., a wholly-owned subsidiary of Countrywide Home Loans. 111. The Prospectuses and Prospectus Supplements for each of the Securitizations had
similar representations to those quoted above. The relevant representations in the Prospectuses and Prospectus Supplements pertaining to originating entity underwriting standards for each Securitization are reflected in Appendix A to this Complaint. As discussed below in Section IV, in fact, Countrywide Home Loans and the other originators of the mortgage loans in the Supporting Loan Group for the Securitizations did not adhere to their stated underwriting guidelines, thus rendering the description of those guidelines in the Prospectuses and Prospectus Supplements false and misleading. 112. Further, for many of the Securitizations, the Prospectuses and Prospectus
Supplements described additional representations and warranties concerning the mortgage loans backing the Securitizations that were made by the originator to the depositor in the PSA. The Prospectus Supplement for the CWALT 2007-OA10 Securitization, for example, stated that Under the [PSA], Countrywide Home Loans will make certain representations, warranties and covenants to the depositor relating to, among other things . . . certain characteristics of the Mortgage Loans, including that the originator was the sole owner of those Mortgage Loans free and clear of any pledge, lien, encumbrance or other security interest . . . . The representations and warranties in the PSAs for additional Securitizations are described in greater detail in Appendix A.
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113.
the occupancy status of the borrowers of the loans in the Securitizations. Occupancy status refers to whether the property securing a mortgage is to be the primary residence of the borrower, a second home, or an investment property. The Prospectus Supplements for each of the Securitizations presented this information in tabular form, usually in a table entitled Occupancy Types for the . . . Mortgage Loans. This table divided all the loans in the collateral group by occupancy status, e.g., into the following categories: (i) Primary, or OwnerOccupied; (ii) Second Home, or Secondary; and (iii) Investment or Non-Owner. For each category, the table stated the number of loans in that category. Occupancy statistics for the Supporting Loan Groups for each Securitization were reported in the Prospectus Supplements as follows:8 Table 5
Transaction Supporting Loan Group Group 1 Primary or Owner-Occupied (%) 100.00 Second Home/Secondary (%) 0.00 Investor (%) 0.00
CWALT 2005-57CB
Each Prospectus Supplement provides the total number of loans and the number of loans in the following categories: owner occupied, investor, and second home. These numbers have then been converted to percentages.
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Transaction
Supporting Loan Group Group 1 Single-Group Transaction Group 2 Group 3 Group 4 Single-Group Transaction Group 2 Group 1 Group 1 Group 1 Single-Group Transaction Single-Group Transaction Group 1 Group 2 Group 2 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 3 Group 2 Group 1
CWALT 2005-63 CWALT 2005-67CB CWALT 2005-73CB CWALT 2005-80CB CWALT 2005-83CB CWALT 2005-84 CWALT 2005-85CB CWALT 2005-AR1 CWALT 2006-11CB CWALT 2006-14CB CWALT 2006-19CB CWALT 2006-23CB CWALT 2006-33CB CWALT 2006-OA14 CWALT 2006-OC1 CWALT 2006-OC10 CWALT 2006-OC11 CWALT 2006-OC3 CWALT 2006-OC4 CWALT 2006-OC5 CWALT 2006-OC6 CWALT 2006-OC7 CWALT 2006-OC8 CWALT 2007-5CB CWALT 2007-HY2 CWALT 2007-OA10 CWALT 2007-OA3 CWALT 2007-OA8 CWHL 2005-HY10 CWHL 2006-HYB1 CWL 2005-11 CWL 2005-12 CWL 2005-13 CWL 2005-14
Primary or Owner-Occupied (%) 82.90 100.00 76.79 60.65 82.44 100.00 80.49 77.57 92.41 83.46 88.28 90.08 89.70 80.23 88.92 71.87 79.82 76.50 53.67 75.93 63.33 78.18 71.25 81.21 81.52 79.57 68.94 74.68 73.97 69.24 74.86 79.47 75.15 98.49 100.00 95.01 95.59
Second Home/Secondary (%) 11.37 0.00 5.83 5.19 4.90 0.00 12.78 5.46 1.72 5.38 4.37 4.09 4.23 6.74 5.26 9.17 2.36 9.28 9.78 3.71 9.69 1.76 8.97 4.34 6.13 4.80 9.80 6.87 5.01 8.71 8.53 8.28 6.53 0.46 0.00 1.35 1.08
Investor (%) 5.73 0.00 17.38 34.17 12.67 0.00 6.73 16.97 5.86 11.15 7.36 5.82 6.08 13.04 5.82 18.96 17.82 14.22 36.55 20.36 26.98 20.07 19.78 14.45 12.35 15.63 21.26 18.45 21.03 22.05 16.61 12.24 18.31 1.06 0.00 3.64 3.32
49
Transaction
Primary or Owner-Occupied (%) 96.85 97.62 96.50 100.00 95.98 96.66 97.49 92.19 92.23 92.63 95.47 98.34 92.42 97.10 92.69 97.99 97.49 95.87 95.64 97.48 96.81 92.42 93.91 95.70 93.98 95.69 94.84 94.60 92.18 94.34 94.59 92.92 97.65 96.47 97.55 94.57 95.75 96.22 97.44
Investor (%) 2.14 2.01 2.87 0.00 3.21 2.83 2.12 6.40 6.70 5.10 3.94 1.22 6.24 2.47 5.95 1.86 2.16 3.23 3.37 1.82 2.65 5.41 5.10 3.59 4.67 3.41 4.38 4.49 6.43 4.83 4.32 5.57 1.87 2.65 2.00 3.99 3.75 3.18 1.76
CWL 2005-16 CWL 2005-17 CWL 2005-8 CWL 2005-9 CWL 2005-AB3 CWL 2005-AB4 CWL 2005-AB5 CWL 2005-BC5 CWL 2006-10 CWL 2006-11 CWL 2006-12 CWL 2006-13 CWL 2006-14 CWL 2006-16 CWL 2006-17 CWL 2006-18 CWL 2006-19 CWL 2006-2 CWL 2006-20 CWL 2006-21 CWL 2006-22 CWL 2006-23 CWL 2006-24 CWL 2006-25 CWL 2006-26 CWL 2006-3 CWL 2006-4 CWL 2006-5 CWL 2006-6 CWL 2006-7 CWL 2006-8 CWL 2006-9 CWL 2006-BC2 CWL 2006-BC3 CWL 2006-BC4
Group 1 Group 3 Group 2 Group 3 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 2 Group 2 Group 2 Group 1 Group 2 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 2 Group 1 Group 1 Group 1
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Transaction
Supporting Loan Group Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1
CWL 2006-BC5 CWL 2007-1 CWL 2007-10 CWL 2007-11 CWL 2007-12 CWL 2007-13 CWL 2007-2 CWL 2007-3 CWL 2007-5 CWL 2007-6 CWL 2007-7 CWL 2007-8 CWL 2007-9 CWL 2007-BC1 CWL 2007-BC2 CWL 2007-BC3
Primary or Owner-Occupied (%) 97.62 95.22 96.39 96.71 94.89 95.95 92.52 91.76 90.27 93.90 90.55 96.28 95.09 95.44 93.26 90.10
Second Home/Secondary (%) 0.53 1.49 0.99 0.58 0.55 0.67 2.08 2.09 2.24 1.84 1.87 0.54 0.90 1.85 1.54 0.67
Investor (%) 1.84 3.29 2.62 2.71 4.55 3.37 5.40 6.15 7.50 4.26 7.58 3.18 4.01 2.71 5.19 9.23
115.
Securitizations reported that an overwhelming majority of the mortgage loans in the Supporting Loan Groups were owner-occupied, while a small percentage were reported to be non-owneroccupied (i.e., a second home or investor property). 116. The statements about occupancy status were material to a reasonable investors
decision to invest in the Certificates. Information about occupancy status is an important factor in determining the credit risk associated with a mortgage loan and, therefore, the securitization that it collateralizes. Because borrowers who reside in mortgaged properties are less likely to default and more likely to care for their primary residence than borrowers who purchase homes as second homes or investments and live elsewhere, the percentage of loans in the collateral group of a securitization that are not secured by mortgage loans on owner-occupied residences is an important measure of the risk of the certificates sold in that securitization.
51
117.
Other things being equal, the higher the percentage of loans not secured by
owner-occupied residences, the greater the risk of loss to the certificateholders. Even small differences in the percentages of primary/owner-occupied, second home/secondary, and investment properties in the collateral group of a securitization can have a significant effect on the risk of each certificate sold in that securitization, and thus, are important to the decision of a reasonable investor whether to purchase any such certificate. As discussed below at paragraphs 129 through 132, the Registration Statement for each Securitization materially overstated the percentage of loans in the Supporting Loan Groups that were owner-occupied, thereby misrepresenting the degree of risk of the GSE Certificates. C. 118. Statements Regarding Loan-to-Value Ratios The loan-to-value ratio of a mortgage loan, or LTV ratio, is the ratio of the
balance of the mortgage loan to the value of the mortgaged property when the loan is made. 119. The denominator in the LTV ratio is the value of the mortgaged property and is
52
greater than 100 percent as reported in the Prospectus Supplements for the Supporting Loan Groups are reflected in Table 6 below.9 Table 6
Transaction Supporting Loan Group Percentage of loans, by aggregate principal balance, with LTV less than or equal to 80 87.26 88.73 85.83 90.70 78.89 88.10 88.06 90.80 90.56 99.09 91.37 94.73 93.34 90.60 90.23 96.60 92.22 94.75 89.61 92.05 92.09 92.63 Percentage of loans, by aggregate principal balance, with LTV greater than 100 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
CWALT 2005-57CB CWALT 2005-63 CWALT 2005-67CB CWALT 2005-73CB CWALT 2005-80CB CWALT 2005-83CB CWALT 2005-84 CWALT 2005-85CB CWALT 2005-AR1 CWALT 2006-11CB CWALT 2006-14CB CWALT 2006-19CB CWALT 2006-23CB CWALT 2006-33CB CWALT 2006-OA14 CWALT 2006-OC1 CWALT 2006-OC10 CWALT 2006-OC11 CWALT 2006-OC3 CWALT 2006-OC4
Group 1 Group 1 Single-group transaction Group 2 Group 3 Group 4 Single-group transaction Group 2 Group 1 Group 1 Group 1 Single-group transaction Single-group transaction Group 1 Group 2 Group 2 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1
53
Transaction
Percentage of loans, by aggregate principal balance, with LTV less than or equal to 80 93.97 88.51 85.61 87.48 91.47 92.52 87.31 81.69 85.81 71.37 95.06 96.56 55.80 47.70 66.49 58.90 61.93 70.02 69.38 70.73 71.77 61.35 90.93 38.27 57.85 54.46 62.95 73.00 67.67 63.09 61.09 66.62 64.04 58.85 62.95 63.15 61.32 63.55 59.83
Percentage of loans, by aggregate principal balance, with LTV greater than 100 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
CWALT 2006-OC5 CWALT 2006-OC6 CWALT 2006-OC7 CWALT 2006-OC8 CWALT 2007-5CB CWALT 2007-HY2 CWALT 2007-OA10 CWALT 2007-OA3 CWALT 2007-OA8 CWHL 2005-HY10 CWHL 2006-HYB1 CWL 2005-11 CWL 2005-12 CWL 2005-13 CWL 2005-14 CWL 2005-16 CWL 2005-17 CWL 2005-8 CWL 2005-9 CWL 2005-AB3 CWL 2005-AB4 CWL 2005-AB5 CWL 2005-BC5 CWL 2006-10 CWL 2006-11 CWL 2006-12 CWL 2006-13 CWL 2006-14 CWL 2006-16 CWL 2006-17 CWL 2006-18 CWL 2006-19 CWL 2006-2 CWL 2006-20
Group 1 Group 1 Group 1 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 3 Group 2 Group 1 Group 2 Group 1 Group 3 Group 2 Group 3 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 2 Group 2 Group 2 Group 1 Group 2 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1
54
Transaction
Percentage of loans, by aggregate principal balance, with LTV less than or equal to 80 63.28 62.53 50.04 55.15 49.52 51.88 65.74 74.72 67.88 65.25 60.78 63.41 58.37 54.52 62.50 66.48 56.64 55.26 60.53 62.32 61.06 69.15 52.22 48.78 44.97 59.09 53.60 60.62 60.00 62.12 46.38 56.21
Percentage of loans, by aggregate principal balance, with LTV greater than 100 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
CWL 2006-21 CWL 2006-22 CWL 2006-23 CWL 2006-24 CWL 2006-25 CWL 2006-26 CWL 2006-3 CWL 2006-4 CWL 2006-5 CWL 2006-6 CWL 2006-7 CWL 2006-8 CWL 2006-9 CWL 2006-BC2 CWL 2006-BC3 CWL 2006-BC4 CWL 2006-BC5 CWL 2007-1 CWL 2007-10 CWL 2007-11 CWL 2007-12 CWL 2007-13 CWL 2007-2 CWL 2007-3 CWL 2007-5 CWL 2007-6 CWL 2007-7 CWL 2007-8 CWL 2007-9 CWL 2007-BC1 CWL 2007-BC2 CWL 2007-BC3
Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 2 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1
121.
Securitizations reported that the majority of the mortgage loans in most of the Supporting Loan Groups had an LTV ratio of 80 percent or less, and the Prospectus Supplement for all of the
55
Securitizations reported that zero mortgage loans in the Supporting Loan Group had an LTV over 100 percent. 122. The LTV ratio is among the most important measures of the risk of a mortgage
loan, and thus, it is one of the most important indicators of the default risk of the mortgage loans underlying the Certificates. The lower the ratio, the less likely that a decline in the value of the property will wipe out an owners equity, and thereby give an owner an incentive to stop making mortgage payments and abandon the property. This ratio also predicts the severity of loss in the event of default. The lower the LTV, the greater the equity cushion, so the greater the likelihood that the proceeds of foreclosure will cover the unpaid balance of the mortgage loan. 123. Thus, the LTV ratio is a material consideration to a reasonable investor in
deciding whether to purchase a certificate in a securitization of mortgage loans. Even small differences in the LTV ratios of the mortgage loans in the collateral group of a securitization have a significant effect on the likelihood that the collateral groups will generate sufficient funds to pay certificateholders in that securitization, and thus are material to the decision of a reasonable investor whether to purchase any such certificate. As discussed below at paragraphs 133 through 138, the Registration Statements for the Securitizations materially overstated the percentage of loans in the Supporting Loan Groups with an LTV ratio at or less than 80 percent, and materially understated the percentage of loans in the Supporting Loan Groups with an LTV ratio over 100 percent, thereby misrepresenting the degree of risk of the GSE Certificates. D. 124. Statements Regarding Credit Ratings Credit ratings are assigned to the tranches of mortgage-backed securitizations by
the credit rating agencies, including Standard & Poors, Moodys Investors Service, and Fitch Ratings. Each credit rating agency uses its own scale with letter designations to describe various levels of risk. In general, AAA or its equivalent ratings are at the top of the credit rating scale
56
and are intended to designate the safest investments. C and D ratings are at the bottom of the scale and refer to investments that are currently in default and exhibit little or no prospect for recovery. At the time the GSEs purchased the GSE Certificates, investments with AAA or its equivalent ratings historically experienced a loss rate of less than .05 percent. Investments with a BBB rating, or its equivalent, historically experienced a loss rate of less than one percent. As a result, securities with credit ratings between AAA or its equivalent through BBB- or its equivalent were generally referred to as investment grade. 125. Rating agencies determine the credit rating for each tranche of a mortgage-backed
securitization by comparing the likelihood of contractual principal and interest repayment to the credit enhancements available to protect investors. Rating agencies determine the likelihood of repayment by estimating cashflows based on the quality of the underlying mortgages by using sponsor-provided loan level data. Credit enhancements, such as subordination, represent the amount of cushion or protection from loss incorporated into a given deal.10 This cushion is intended to improve the likelihood that holders of highly rated certificates receive the interest and principal to which they are contractually entitled. The level of credit enhancement offered is based on the make-up of the loans in the underlying collateral group and entire securitization. Riskier loans underlying the securitization necessitate higher levels of credit enhancement to insure payment to senior certificate holders. If the collateral within the deal is of a higher quality, then rating agencies require less credit enhancement for AAA or its equivalent rating.
Subordination refers to the fact that the certificates for a mortgage-backed securitization are issued in a hierarchical structure, from senior to junior. The junior certificates are subordinate to the senior notes in that, should the underlying mortgage loans become delinquent or default, the junior certificates suffer losses first. These subordinate certificates thus provide a degree of protection to the senior certificates from losses on the underlying loans.
10
57
126.
Credit ratings have been an important tool to gauge risk when making investment
decisions. For almost a hundred years, investors like pension funds, municipalities, insurance companies, and university endowments have relied heavily on credit ratings to assist them in distinguishing between safe and risky investments. Fannie Maes and Freddie Macs respective internal policies limited their purchases of private label residential mortgage-backed securities to those rated AAA (or its equivalent) and in very limited instances, AA or A bonds (or their equivalent). 127. Each tranche of the Securitizations received a credit rating upon issuance, which
purported to describe the riskiness of that tranche. The Defendants reported the credit ratings for each tranche in the Prospectus Supplements. The credit rating provided for each of the GSE Certificates was investment grade, almost always AAA or its equivalent. The accuracy of these ratings was material to a reasonable investors decision to purchase the GSE Certificates. As set forth in Table 9, below at paragraph 196, the ratings for the Securitizations were inflated as a result of Defendants provision of incorrect data concerning the attributes of the underlying mortgage collateral to the ratings agencies, and, as a result, Defendants sold and marketed the GSE Certificates in almost all cases as AAA (or its equivalent), when, in fact, they were not. IV. FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS A. 128. The Statistical Data Provided in the Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False A review of loan-level data was conducted in order to assess whether the
statistical information provided in the Prospectus Supplements was true and accurate. For each Securitization, the sample consisted of 1,000 randomly selected loans per Supporting Loan Group, or all the loans in the group if there were fewer than 1,000 loans in the Supporting Loan Group. The sample data confirms, on a statistically significant basis, material misrepresentations
58
of underwriting standards and of certain key characteristics of the mortgage loans across the Securitizations. The data review demonstrates that the data concerning owner occupancy and LTV ratios was materially false and misleading. 1. 129. Owner-Occupancy Data Was Materially False
The data review has revealed that the owner-occupancy statistics were materially
false and inflated. In fact, far fewer underlying properties were occupied by their owners than disclosed in the Prospectus Supplements, and more correspondingly were held as second homes or investment properties. 130. To determine whether a given borrower actually occupied the property as
claimed, a number of tests were conducted, including, inter alia, whether, months after the loan closed, the borrowers tax bill was being mailed to the property or to a different address; whether the borrower had claimed a tax exemption on the property; and whether the mailing address of the property was reflected in the borrowers credit reports, tax records, or lien records. Failing two or more of these tests is a strong indication that the borrower did not live at the mortgaged property and instead used it as a second home or an investment property, both of which make it much more likely that a borrower will not repay the loan. 131. A significant number of the loans failed two or more of these tests, indicating that
the owner-occupancy statistics provided to Fannie Mae and Freddie Mac were materially false and misleading. For example, the CWALT 2007-HY2 Securitization, for which Countrywide Home Loans was the sponsor and Countrywide Securities was the underwriter, the Prospectus Supplement stated that 25.32 percent of the underlying properties by loan count in the Supporting Loan Group 2 were not owner-occupied. But the data review revealed that, for 26.09 percent of the properties represented as owner-occupied, the owners lived elsewhere, indicating
59
that the true percentage of non-owner occupied properties was 44.80 percent, approximately 1.75 times the percentage reported in the Prospectus Supplement.11 132. The data review revealed that for each Securitization, the Prospectus Supplement
misrepresented the percentage of non-owner occupied properties. The true percentage of nonowner-occupied properties, as determined by the data review, versus the percentage stated in the Prospectus Supplement for each Securitization is reflected in Table 7 below. Table 7 demonstrates that the Prospectus Supplements for each Securitization understated the percentage of non-owner-occupied properties by at least 6.27 percent, and for nearly two-thirds of the Securitizations by 10 percent or more. Table 7
Transaction Supporting Loan Group Reported Percentage of NonOwner Occupied Properties Percentage of Properties Reported as OwnerOccupied With Strong Indication of Non-Owner Occupancy12 10.79 16.20 11.43 14.86 17.99 18.02 14.90 16.10 Actual Percentage of NonOwner Occupied Properties Prospectus Percentage Understate ment of NonOwner Occupied Properties 10.79 13.43 11.43 11.41 10.91 14.85 14.90 12.96
CWALT 2005-57CB CWALT 2005-63 CWALT 2005-67CB CWALT 2005-73CB CWALT 2005-80CB CWALT 2005-83CB CWALT 2005-84
11
Group 1 Group 1 Single-group transaction Group 2 Group 3 Group 4 Single-group transaction Group 2
0.00 17.10 0.00 23.21 39.35 17.56 0.00 19.51
10.79 30.53 11.43 34.62 50.26 32.41 14.90 32.47
This conclusion is arrived at by summing (a) the stated non-owner-occupied percentage in the Prospectus Supplement (here, 25.32 percent), and (b) the product of (i) the stated owneroccupied percentage (here, 74.68 percent) and (ii) the percentage of the properties represented as owner-occupied in the sample that showed strong indications that their owners in fact lived elsewhere (here, 26.09 percent). Strong indication is defined for purposes of this Complaint as failing two or more owner occupancy tests, as explained in paragraph 131.
12
60
Transaction
CWALT 2005-85CB CWALT 2005-AR1 CWALT 2006-11CB CWALT 2006-14CB CWALT 2006-19CB CWALT 2006-23CB CWALT 2006-33CB CWALT 2006-OA14 CWALT 2006-OC1 CWALT 2006-OC10 CWALT 2006-OC11 CWALT 2006-OC3 CWALT 2006-OC4 CWALT 2006-OC5 CWALT 2006-OC6 CWALT 2006-OC7 CWALT 2006-OC8 CWALT 2007-5CB CWALT 2007-HY2 CWALT 2007-OA10 CWALT 2007-OA3 CWALT 2007-OA8 CWHL 2005-HY10 CWHL 2006-HYB1 CWL 2005-11 CWL 2005-12 CWL 2005-13 CWL 2005-14 CWL 2005-16 CWL 2005-17
Group 1 Group 1 Group 1 Single-group transaction Single-group transaction Group 1 Group 2 Group 2 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 3 Group 2 Group 1 Group 2 Group 1 Group 3 Group 2
22.43 7.59 16.54 11.72 9.92 10.30 19.77 11.08 28.13 20.18 23.50 46.33 24.07 36.67 21.82 28.75 18.79 18.48 20.43 31.06 25.32 26.03 30.76 25.14 20.53 24.85 1.51 0.00 4.99 4.41 3.15 2.38 3.50 0.00
Percentage of Properties Reported as OwnerOccupied With Strong Indication of Non-Owner Occupancy12 15.80 9.68 17.72 14.50 14.95 13.06 16.31 12.33 17.54 12.17 10.88 13.91 16.52 16.92 14.23 13.85 13.88 14.84 16.63 21.94 26.09 24.68 22.01 18.48 11.36 18.87 12.48 11.51 10.09 11.82 10.36 7.74 10.26 11.64
Prospectus Percentage Understate ment of NonOwner Occupied Properties 12.25 8.95 14.79 12.80 13.47 11.71 13.09 10.96 12.60 9.71 8.32 7.46 12.54 10.72 11.12 9.86 11.27 12.10 13.23 15.12 19.48 18.26 15.24 13.84 9.03 14.18 12.29 11.51 9.59 11.30 10.03 7.56 9.90 11.64
34.68 16.54 31.33 24.52 23.39 22.01 32.86 22.04 40.74 29.89 31.82 53.80 36.62 47.39 32.95 38.62 30.06 30.58 33.67 46.19 44.80 44.29 46.00 38.98 29.55 39.03 13.81 11.51 14.58 15.71 13.18 9.94 13.40 11.64
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Transaction
Group 3 CWL 2005-8 CWL 2005-9 CWL 2005-AB3 CWL 2005-AB4 CWL 2005-AB5 CWL 2005-BC5 CWL 2006-10 CWL 2006-11 CWL 2006-12 CWL 2006-13 CWL 2006-14 CWL 2006-16 CWL 2006-17 CWL 2006-18 CWL 2006-19 CWL 2006-2 CWL 2006-20 CWL 2006-21 CWL 2006-22 CWL 2006-23 CWL 2006-24 CWL 2006-25 CWL 2006-26 CWL 2006-3 CWL 2006-4 CWL 2006-5 CWL 2006-6 CWL 2006-7 CWL 2006-8 CWL 2006-9 CWL 2006-BC2 CWL 2006-BC3 CWL 2006-BC4 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 2 Group 2 Group 2 Group 1 Group 2 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 2 Group 1 Group 1 Group 1
4.02 3.34 2.51 7.81 7.77 7.37 4.53 1.66 7.58 2.90 7.31 2.01 2.51 4.13 4.36 2.52 3.19 7.58 6.09 4.30 6.02 4.31 5.16 5.40 7.82 5.66 5.41 7.08 2.35 3.53 2.45 5.43 4.25 3.78 2.56
Percentage of Properties Reported as OwnerOccupied With Strong Indication of Non-Owner Occupancy12 13.73 12.23 12.84 14.27 14.27 14.34 10.25 14.02 9.09 10.47 11.08 9.98 10.93 10.98 10.90 12.09 11.61 10.93 10.43 10.86 12.56 11.31 10.67 11.37 10.42 10.39 11.92 10.64 9.63 9.35 10.46 10.48 9.33 9.14 8.93
Prospectus Percentage Understate ment of NonOwner Occupied Properties 13.18 11.82 12.52 13.15 13.16 13.28 9.79 13.78 8.40 10.17 10.27 9.77 10.66 10.53 10.43 11.79 11.24 10.10 9.80 10.40 11.81 10.82 10.12 10.76 9.61 9.81 11.28 9.88 9.41 9.02 10.21 9.91 8.94 8.79 8.70
17.20 15.16 15.03 20.96 20.93 20.65 14.31 15.44 15.98 13.07 17.58 11.79 13.17 14.65 14.79 14.31 14.43 17.68 15.88 14.70 17.83 15.13 15.28 16.16 17.43 15.47 16.68 16.97 11.76 12.55 12.65 15.35 13.18 12.57 11.26
62
Transaction
CWL 2006-BC5 CWL 2007-1 CWL 2007-10 CWL 2007-11 CWL 2007-12 CWL 2007-13 CWL 2007-2 CWL 2007-3 CWL 2007-5 CWL 2007-6 CWL 2007-7 CWL 2007-8 CWL 2007-9 CWL 2007-BC1 CWL 2007-BC2 CWL 2007-BC3
Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1
2.38 4.78 3.61 3.29 5.11 4.05 7.48 8.24 9.73 6.10 9.45 3.72 4.91 4.56 6.74 9.90
Percentage of Properties Reported as OwnerOccupied With Strong Indication of Non-Owner Occupancy12 11.23 9.68 10.29 9.81 10.86 9.65 12.47 9.53 9.66 12.05 9.11 12.41 12.40 6.57 8.44 7.92
Prospectus Percentage Understate ment of NonOwner Occupied Properties 10.96 9.21 9.92 9.49 10.30 9.26 11.54 8.74 8.72 11.32 8.25 11.95 11.79 6.27 7.87 7.14
13.34 14.00 13.53 12.78 15.41 13.31 19.02 16.99 18.45 17.42 17.70 15.67 16.70 10.83 14.60 17.04
2. 133.
Prospectus Supplements were materially false and understated as more specifically set out below. For each of the sampled loans, an industry standard automated valuation model (AVM) was used to calculate the value of the underlying property at the time the mortgage loan was originated. AVMs are routinely used in the industry as a way of valuing properties during prequalification, origination, portfolio review and servicing. AVMs rely upon similar data as appraisers primarily county assessor records, tax rolls, and data on comparable properties. AVMs produce independent, statistically-derived valuation estimates by applying modeling techniques to this data.
63
134.
loans shows that the appraised value given to such properties was significantly higher than the actual value of such properties. The result of this overstatement of property values is a material understatement of LTV. That is, if a propertys true value is significantly less than the value used in the loan underwriting, then the loan represents a significantly higher percentage of the propertys value. This, of course, increases the risk a borrower will not repay the loan as well as the risk of greater losses in the event of a default. Mortgage loans with higher loan-to-value ratios present a greater risk of loss than mortgage loans with loan-to-value ratios of 80 percent or below. 135. For example, for the CWALT 2007-OA10 Securitization, which was sponsored
by Countrywide Home Loans and underwritten by Countrywide Securities, the Prospectus Supplement stated that no LTV ratios for the Supporting Loan Group were above 100 percent. In fact, 26.25 percent of the sample of loans included in the data review had LTV ratios above 100 percent. In addition, the Prospectus Supplement stated that 81.69 percent of the loans had LTV ratios at or below 80 percent. The data review indicated that only 42.14 percent of the loans had LTV ratios at or below 80 percent. 136. The data review revealed that for each Securitization, the Prospectus Supplement
misrepresented the percentage of loans with an LTV ratio above 100 percent, as well as the percentage of loans that had an LTV ratio at or below 80 percent. Table 8 reflects (i) the true percentage of mortgages in the Supporting Loan Group with LTV ratios above 100 percent, versus the percentage reported in the Prospectus Supplement; and (ii) the true percentage of mortgages in the Supporting Loan Group with LTV ratios at or below 80 percent, versus the
64
PROSPECTUS Transaction Supporting Loan Group(s) Percentage of Loans Reported to Have LTV Ratio At Or Less Than 80 DATA REVIEW Percentage of Loans in Data Review With LTV Ratio At Or Less Than 80 PROSPECTUS Percentage of Loans Represented in Prospectus to Have LTV Ratio Over 100 DATA REVIEW Percentage of Loans in Data Review With LTV Ratio Over 100
CWALT 200557CB CWALT 2005-63 CWALT 200567CB CWALT 200573CB CWALT 200580CB CWALT 200583CB CWALT 2005-84 CWALT 200585CB CWALT 2005-AR1 CWALT 200611CB CWALT 200614CB CWALT 200619CB CWALT 200623CB CWALT 200633CB CWALT 2006OA14 CWALT 2006-OC1 CWALT 2006OC10 CWALT 2006OC11 CWALT 2006-OC3 CWALT 2006-OC4
Group 1 Group 1 Singlegroup transaction Group 2 Group 3 Group 4 Singlegroup transaction Group 2 Group 1 Group 1 Group 1 Singlegroup transaction Singlegroup transaction Group 1 Group 2 Group 2 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1
87.26 88.73 85.83 90.70 78.89 88.10 88.06 90.80 90.56 99.09 91.37 94.73
57.31 51.63 56.13 64.85 48.30 50.78 51.38 52.12 64.75 45.06 62.65 62.99
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
3.98 5.76 4.91 6.97 9.98 8.16 8.30 6.56 5.02 6.97 6.65 6.76
93.34 90.60 90.23 96.60 92.22 94.75 89.61 92.05 92.09 92.63
67.91 64.28 58.73 69.90 48.39 48.06 44.53 47.12 43.72 50.29
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
5.34 5.69 7.75 3.17 11.93 7.59 14.34 14.18 8.35 7.87
65
PROSPECTUS Transaction Supporting Loan Group(s) Percentage of Loans Reported to Have LTV Ratio At Or Less Than 80
DATA REVIEW Percentage of Loans in Data Review With LTV Ratio At Or Less Than 80
PROSPECTUS Percentage of Loans Represented in Prospectus to Have LTV Ratio Over 100
DATA REVIEW Percentage of Loans in Data Review With LTV Ratio Over 100
CWALT 2006-OC5 CWALT 2006-OC6 CWALT 2006-OC7 CWALT 2006-OC8 CWALT 2007-5CB CWALT 2007-HY2 CWALT 2007OA10 CWALT 2007-OA3 CWALT 2007-OA8 CWHL 2005-HY10 CWHL 2006HYB1 CWL 2005-11 CWL 2005-12 CWL 2005-13 CWL 2005-14
Group 1 Group 1 Group 1 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 3 Group 2 Group 1 Group 2 Group 1 Group 3 Group 2 Group 3 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 2 Group 2 Group 2 Group 1 Group 2 Group 1 Group 1
93.97 88.51 85.61 87.48 91.47 92.52 87.31 81.69 85.81 71.37 95.06 96.56 55.80 47.70 66.49 58.90 61.93 70.02 69.38 70.73 71.77 61.35 90.93 38.27 57.85 54.46 62.95 73.00 67.67 63.09 61.09 66.62 64.04 58.85
44.62 46.33 49.39 47.75 63.09 56.72 62.86 42.14 48.89 33.93 52.70 53.46 38.29 38.27 48.98 41.70 45.43 55.75 48.15 45.96 47.71 42.42 63.66 23.22 31.99 35.58 45.37 46.46 42.05 44.07 40.62 43.87 45.48 31.33
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
8.53 10.91 13.38 7.78 8.36 9.35 7.58 26.25 14.48 24.50 2.97 6.14 15.23 14.55 11.20 14.25 12.36 8.17 10.15 10.16 12.23 13.34 5.94 22.96 13.04 14.54 12.33 9.94 9.69 9.89 17.87 14.40 13.02 17.58
CWL 2005-16
CWL 2005-17 CWL 2005-8 CWL 2005-9 CWL 2005-AB3 CWL 2005-AB4 CWL 2005-AB5 CWL 2005-BC5 CWL 2006-10 CWL 2006-11 CWL 2006-12 CWL 2006-13 CWL 2006-14 CWL 2006-16
66
CWL 2006-17 CWL 2006-18 CWL 2006-19 CWL 2006-2 CWL 2006-20 CWL 2006-21 CWL 2006-22 CWL 2006-23 CWL 2006-24 CWL 2006-25 CWL 2006-26 CWL 2006-3 CWL 2006-4 CWL 2006-5 CWL 2006-6 CWL 2006-7 CWL 2006-8 CWL 2006-9 CWL 2006-BC2 CWL 2006-BC3 CWL 2006-BC4 CWL 2006-BC5 CWL 2007-1 CWL 2007-10 CWL 2007-11 CWL 2007-12 CWL 2007-13 CWL 2007-2 CWL 2007-3 CWL 2007-5 CWL 2007-6 CWL 2007-7 CWL 2007-8 CWL 2007-9 CWL 2007-BC1
Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 2 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1
62.95 63.15 61.32 63.55 59.83 63.28 62.53 50.04 55.15 49.52 51.88 65.74 74.72 67.88 65.25 60.78 63.41 58.37 54.52 62.50 66.48 56.64 55.26 60.53 62.32 61.06 69.15 52.22 48.78 44.97 59.09 53.60 60.62 60.00 62.12
44.35 44.46 39.05 45.68 44.40 44.63 42.10 36.57 33.49 36.62 35.10 44.82 47.58 43.81 42.09 37.48 46.40 40.94 34.63 45.22 49.06 42.07 39.12 44.60 41.58 42.46 48.11 36.25 31.52 28.56 43.37 41.42 44.94 43.17 36.97
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
14.66 15.18 15.53 11.48 15.32 15.01 16.98 15.29 17.37 18.16 17.55 11.96 10.10 14.62 15.11 14.28 12.02 14.83 18.03 14.71 14.96 15.18 21.11 17.94 18.41 20.05 17.38 20.19 24.33 25.78 18.76 20.05 17.26 18.99 18.96
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CWL 2007-BC2 CWL 2007-BC3
Group 1 Group 1
46.38 56.21
28.36 33.55
0.00 0.00
27.12 23.70
137.
As Table 8 demonstrates, the Prospectus Supplements for each Securitization
reported that none of the mortgage loans in the Supporting Loan Groups had an LTV ratio over 100 percent. In contrast, the data review revealed that at least 2.97 percent of the mortgage loans for each Securitization had an LTV ratio over 100 percent, and for most Securitizations this figure was much larger. Indeed, for 58 of the 86 Securitizations, the data review revealed that more than ten percent of the mortgages in the Supporting Loan Groups had a true LTV ratio of over 100 percent. For 33 Securitizations, the data review revealed that more than fifteen percent of the mortgages in the Supporting Loan Groups had a true LTV ratio over 100 percent. The Prospectus Supplements also routinely overstated the percentage of loans with LTV ratios of 80 percent or less in fact, for all but one Securitization, the difference between the representation in the Prospectus Supplement and the percentage revealed by the data review was over ten percent. 138. These inaccuracies with respect to reported LTV ratios also indicate that the
representations in the Registration Statements relating to appraisal practices were false, and that the appraisers themselves, in many instances, furnished appraisals that they understood were inaccurate and that they knew bore no reasonable relationship to the actual value of the underlying properties. Indeed, independent appraisers following proper practices, and providing genuine estimates as to valuation, would not systematically generate appraisals that deviate so
68
significantly (and so consistently upward) from the true values of the appraised properties. This conclusion is further confirmed by the findings of the FCIC, which identified inflated appraisals as a pervasive problem during the period of the Securitizations, and determined through its investigation that appraisers were often pressured by mortgage originators, among others, to produce inflated results. See FCIC Report at 91. B. 139. Countrywide Systematically Disregarded Its Underwriting Guidelines A vast majority of the loans at issue in the Securitizations were stated in the
Registration Statements to have been originated in accordance with Countrywide Home Loans underwriting guidelines. Countrywide Home Loans originated, or acquired according to its own guidelines, all the mortgage loans in 62 of the 86 Securitizations. For these 62 Securitizations, no other originators than Countrywide Home Loans were identified. Prospectus Supplements for two of the Securitizations state that the sum total of loans acquired from other originators was less than ten percent. The Prospectus Supplements relating to approximately 22 more Securitizations identify at least one originator other than Countrywide Home Loans. Based on the Prospectus Supplements, however, it appears that no identifiable non-Countrywide Home Loans entity originated more than three percent of the total number of loans at issue in this Complaint. 140. The Registration Statements contained material misstatements and omissions
regarding compliance with underwriting guidelines. Indeed, Countrywide Home Loans systematically disregarded its underwriting guidelines during the relevant period in order to increase production and profits derived from its mortgage lending businesses. 141. This is confirmed by the systematically misreported owner-occupancy and LTV
statistics, discussed above, and by (1) government investigations into Countrywides underwriting practices, which have documented widespread abandonment of Countrywides
69
reported underwriting guidelines during the relevant period; (2) information disclosed as a result of additional investigations and actions by state enforcement authorities and private actors; (3) the collapse of the Certificates credit ratings; and (4) the surge in delinquency and default in the mortgages in the Securitizations. 1. 142. Government Investigations Have Confirmed That Countrywide Routinely Failed to Adhere to Its Underwriting Guidelines
Numerous government reports and investigations have described rampant
underwriting failures at Countrywide throughout the period of the Securitizations. In addition, in the case of Countrywide, those reports and investigations have led to disclosures of admissions and acknowledgments made by top Countrywide executives of the abandonment of adherence to underwriting guidelines. Courts including the federal court that presided over a civil action brought by the SEC against Countrywides former leaders have found that allegations of Countrywides failure to comply with underwriting guidelines, and lack of diligence regarding the accuracy of representations made in registration statements relating to offerings of securitizations of mortgage loans, are facially valid and raise genuine issues of material fact. a. 143. Investigations and Actions of Federal Authorities
In November 2008, the Office of the Comptroller of the Currency, an office
within the United States Department of the Treasury, issued a report identifying Countrywide as one of the Worst Ten mortgage originators in the Worst Ten metropolitan areas. The worst originators were defined as those with the largest number of non-prime mortgage foreclosures for 2005-2007 originations. Countrywide, which the report defined to include Countrywide Home Loans and Countrywide Bank, another Countrywide origination entity, was on that list. See Press Release, Office of the Comptroller of the Currency, Comptroller Dugan Testifies before the FCIC, Appendix B, Attachment 2 at 1 (Apr. 8, 2010).
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144.
In January 2011, the FCIC issued its final report, which detailed, among other
things, the collapse of mortgage underwriting standards and subsequent collapse of the mortgage market and wider economy. Created to examine the causes of the current financial and economic crisis in the United States, the FCIC reviewed millions of pages of documents, interviewed more than 700 witnesses, and held 19 days of public hearings in New York, Washington, D.C., and communities across the country. FCIC Report at xi. The FCIC Report singled out Countrywide for its role, specifically identifying Countrywide in its summary discussions of the Reports conclusions about the systemic breakdown in accountability and ethics. Lenders made loans that they knew borrowers could not afford and that could cause massive losses to investors in mortgage securities. As early as September 2004, Countrywide executives recognized that many of the loans they were originating could result in catastrophic consequences. Less than a year later, they noted that certain high-risk loans they were making could result not only in foreclosures but also in financial and reputational catastrophe for the firm. But they did not stop. Id. at xxii. 145. The SEC and the U.S. Department of Justice investigated potential securities law
violations by Countrywide and its personnel in the securitizations of mortgage loans and offerings of mortgage-backed securities in the secondary market, including allegations that Countrywide made false and misleading disclosures to influence the stock trading price, and allegations of insider trading by the three most senior executives of Countrywide Financial: Angelo Mozilo (Countrywides CEO), David Sambol (Countrywides President and COO), and Individual Defendant Eric Sieracki (Countrywides CFO). 146. On June 4, 2009, the SEC filed a complaint in the U.S. District Court for the
Central District of California against Mozilo, Sambol, and Sieracki for their fraudulent disclosures relating to Countrywides purported adherence to conservative loan origination and
71
underwriting guidelines, as well as insider trading by Mozilo. See SEC Complaint. On September 16, 2010, the District Court rejected the defendants motion for summary judgment, finding that the SEC had raised genuine issues of fact as to, among other things, whether the defendants had misrepresented the quality of its underwriting processes. In its decision, the court stated: The SEC has presented evidence that these statements regarding the quality of Countrywides underwriting guidelines and loan production were misleading in light of Defendants failure to disclose, inter alia, that: (1) As a consequence of Countrywides matching strategy, Countrywides underwriting guidelines would end up as a composite of the most aggressive guidelines in the market . . . and (2) Countrywide routinely ignored its official underwriting guidelines, and in practice, Countrywides only criterion for approving a loan was whether the loan could be sold into the secondary market. For example, Countrywides Chief Risk Officer, John McMurray, explained in his deposition that Countrywide mixed and matched guidelines from various lenders in the industry, which resulted in Countrywides guidelines being a composite of the most aggressive guidelines in the industry . . . . SEC has also presented evidence that Countrywide routinely ignored its official underwriting to such an extent that Countrywide would underwrite any loan it could sell into the secondary mortgage market. According to the evidence presented by the SEC, Countrywide typically made four attempts to approve a loan. . . . As a result of this process, a significant portion (typically in excess of 20%) of Countrywides loans were issued as exceptions to its official underwriting guidelines. . . . In light of this evidence, a reasonable jury could conclude that Countrywide all but abandoned managing credit risk through its underwriting guidelines, that Countrywide would originate any loan it could sell, and therefore that the statements regarding the quality of Countrywides underwriting and loan production were misleading. SEC v. Mozilo, No. 09-03994, 2010 WL 3656068, at *10, 12-14 (C.D. Cal. Sept. 16, 2010) (hereinafter SEC Order). After this decision was rendered, Messrs. Mozilo, Sambol, and Sieracki settled with SEC, agreeing to pay substantial fines. See Press Release, SEC, Former
72
Countrywide CEO Angelo Mozilo to Pay SECs Largest Ever Financial Penalty Against a Public Companys Senior Executive (Oct. 15, 2010). 147. The matching strategy described in the Courts decision in the SEC action, by
which Countrywide mixed and matched the least demanding guideline requirements of other lenders, led Countrywide to deliberately abandon its guidelines and instead to apply the most lax underwriting guidelines in the market. The SECs allegations, based on information that came to light during discovery, were deemed to create a genuine issue of material fact that Countrywide, in its drive to increase market share, created an underwriting process in which repeated attempts were made to approve loans in circumvention of Countrywides established guidelines. SEC Order at *19. 148. First, loans were processed by an automated system that would either approve the
loan or refer it to manual underwriting. The manual underwriter would then seek to determine if the loan could be approved under his or her exception authority. If the loan exceeded the underwriters exception authority, it was then referred to the Structured Lending Desk, where underwriters with broader exception authority attempted to get the loan approved. Finally, if all prior attempts to find an exception failed, it would be referred to the Secondary Markets Structured Lending Desk, where the sole criterion for approving was whether it could be sold, not whether it complied with applicable guidelines. Id. at *11. These steps were what the court in the SEC action found to be Countrywides four attempts at approving a loan, a methodology that led to in excess of 20 percent of mortgage loans typically being approved as exceptions to Countrywides guidelines. Id. At one point, nearly a quarter of Countrywides subprime firstlien loans 23 percent were generated as exceptions. Id. at *17.
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149.
To apply its matching strategy effectively, Countrywide expanded the number
of employees who were authorized to grant exceptions. A wide range of employees were given authority to grant exceptions and to change the terms of a loan, including underwriters, their superiors, branch managers, and regional vice presidents. If Countrywides automated system recommended denying a loan, for example, an underwriter could override that denial by obtaining permission from his or her supervisor. SEC Complaint at 11-12. 150. The SEC action established that it was openly known at Countrywide that loans
were being approved for securitization based solely on Countrywides ability to sell the loan in the market, rather than on compliance with underwriting criteria. Countrywides high-volume computer system, called the Exception Processing System, was known to approve virtually every borrower and loan profile, albeit with a pricing add-on by which Countrywide charged the borrowers extra points and fees. The Exception Processing System was known within Countrywide as the Price Any Loan system. Through the Exception Processing System, Countrywide was able not only to generate enormous profits from these higher fees, but also routinely approve loans that did not satisfy even its weakened theoretical underwriting criteria. 151. According to a class action securities complaint against Countrywide, Amended
Complaint, In re Countrywide Financial Corp. Securities Litigation, No. CV-07-05295 (C.D. Calif. filed Jan. 6, 2009), a former supervising underwriter at Countrywide provided information that up to 15 percent or 20 percent of the loans that Countrywide generated were processed via the Exception Processing System, of which very few were ever rejected. Id. at 64. One former Countrywide employee, also referenced in the complaint, remarked that he could count on one finger the number of loans that his supervisors permitted him to reject as an underwriter with Countrywides Structured Loan Desks. Id. at 68.
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b. 152.
Admissions in Countrywides Internal Reporting and Emails
The SEC action also led to the disclosure of internal Countrywide reports and e-
mails among Countrywide employees that provide contemporaneous documentation of Countrywides routine failure to comply with its underwriting guidelines and abandonment of case-by-case determinations of the borrowers ability to repay the loan. 153. In November 2007, by which time Countrywide was learning of the poor
performance of its loans, Countrywide prepared a lessons learned analysis. See Exs. A-I to Declaration Of Randall S. Luskey in Support of David Sambols Motion In Limine No. 4 To Preclude Evidence Of Countrywides Lessons Learned Analysis, SEC v. Mozilo, No. 0903994, Docket Entry 391-1 (C.D. Cal., filed Sept. 24, 2010) (Luskey Decl.). In these quotes from this internal presentation, Countrywide repeatedly admits that its exclusive focus on market share led it to ignore underwriting guidelines:
We were driven by market share, and wouldnt say no (to guideline expansion). Ex. C at 9 to Luskey Decl. The strategies that could have avoided the situation were not very appealing at the time. Do not produce risky loans in the first place: This strategy would have hurt our production franchise and reduced earnings. Ex. D at 13 to Luskey Decl. Market share, size and dominance were driving themes. . . . Created huge upside in good times, but challenges in todays environment. Id. at 15.
154.
Countrywide also admitted that applying its matching strategy came at the price
of compliance with risk assessment procedures, including application of Countrywides underwriting guidelines. The Lessons Learned Analysis noted:
With riskier products, you need to be exquisite in off-loading the risk. This puts significant pressure on risk management. Our systems never caught up with the risks, or with the pace of change. Ex. D at 16 to Luskey Decl.
75
Risk indicators and internal control systems may not have gotten enough attention in the institutional risk and Board committees. Id. at 13. Not enough people had an incentive to manage risk. Id. at 14. Decentralized and local decision making were another characteristic of our model. . . . The downside was fewer risk controls and less focus on risk, as the local decision makers were not directly measured on risk. Id. Our wide guidelines were not supported by the proper infrastructure (credit, risk management). Id. at 16. [W]e did not put meaningful boundaries around the [broad product] strategy, even when our instincts might have suggested that we do so, and we allowed the model to outrun its critical support infrastructure in investment and credit risk management. . . . Our risk management systems were not able to provide enough counterbalance . . . . Ex. E at 28 to Luskey Decl. The focus of production was volume and margin, not credit risk. There was also massive emphasis on share. Ex. I at 71 to Luskey Decl.
155.
Emails from CEO Mozilo himself admitted Countrywides lack of compliance
with its own underwriting guidelines. See Ex. 28 at 1 to Declaration of Lynn M. Dean in Support of Plaintiff Securities and Exchange Commissions Opposition to Defendants Motion for Summary Judgment or Adjudication (Dean Decl.): Part 4, SEC v. Mozilo, No. 09-03994, Docket Entry 230-2 (C.D. Cal., filed Aug. 16, 2010). In early 2006, HSBC, the global bank based in London, had begun to contractually force Countrywide to buy back loans that did not comply with underwriting guidelines. In an April 13, 2006 e-mail, Mr. Mozilo wrote to Mr. Sieracki and others that he was concerned that his company had originated the HSBC loans with serious disregard for process [and] compliance with guidelines, resulting in the delivery of loans with deficient documentation. Ex. 16 at 2 to Dean Decl.: Part 3, SEC v. Mozilo, No. 09-03994, Docket Entry 227-5 (C.D. Cal., filed Aug. 16, 2010). Mr. Mozilo further stated that,
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I have personally observed a serious lack of compliance within our origination system as it relates to documentation and generally a deterioration in the quality of loans originated versus the pricing of those loan[s]. Id. 156. According to the SEC, in mid-2006 attendees at an internal Countrywide credit
meeting were informed that one-third of the loans referred out of Countrywides automated underwriting system violated major underwriting guidelines, 23 percent of the subprime firstlien loans were generated as exceptions, and that exception loans were performing 2.8 times worse than loans written within guidelines. As the court presiding over the SEC action noted, the circumstance that the loans approved by exceptions were performing so much worse than other similar loans is itself strong evidence that the exceptions were not being granted based on any purported countervailing circumstances in the borrowers credit profile. SEC Order at *12. 157. Nearly a year later, on May 29, 2007, Messrs. Sambol and Sieracki attended a
Credit Risk Committee Meeting, in which they learned that loans continue[d] to be originated outside guidelines, primarily via the Secondary Structured Lending Desk without formal guidance or governance surrounding the approvals. Id. at *17. 158. The SEC complaint also described a December 13, 2007 internal memo from
Countrywides enterprise risk assessment officer to Mr. Mozilo, in which the officer reported that Countrywide had re-reviewed mortgages originated by Countrywide in 2006 and 2007 to get a sense of the quality of file documentation and underwriting practices, and to assess compliance with internal policies and procedures. The memo concluded that borrower repayment capacity was not adequately assessed by the bank during the underwriting process for home equity loans. SEC Complaint at 23.
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159.
Ultimately, Countrywides exception policy was designed to ensure that all loans
were approved. For example, in an April 14, 2005 e-mail chain, various managing directors were discussing what FICO scores Countrywide would accept. One Managing Director wrote that the spirit of the exception policy was to provide flexibility and authority to attempt to approve all loans submitted under an approved program/guideline which are later determined to be outside. He continued: I would argue that the [exception] policy would also contemplate more general exceptions such as . . . to keep pace with fast changing markets prior to submitting a formal product change. Ex. 213 to Declaration Of John M. McCoy III in Support of SECs Opposition To Defendants Motions For Summary Judgment Or Adjudication (McCoy Decl.), Part 1, SEC v. Mozilo, No. 09-03994, Docket Entry 253 (C.D. Cal., filed Aug. 16, 2010). 160. Another internal Countrywide document described the objectives of
Countrywides Exception Processing System to include [a]pprov[ing] virtually every borrower and loan profile, with pricing add on (i.e., additional fees to be charged by Countrywide). The objectives also included providing [p]rocess and price exceptions on standard products for high risk borrowers. See Ex. C to Sentencing Memorandum by Kourosh Partow, United States v. Partow, No. 06-cr-00104, Docket Entry 39 (D. Alaska, filed Aug. 16, 2007). In his testimony in the SEC proceeding, Mr. Sambol identified a February 13, 2005 e-mail in which he stated that the purpose of the [Structured Loan Desk] and our pricing philosophy should be expanded. Mr. Sambol wrote, [W]e should be willing to price virtually any loan that we reasonably believe we can sell/securitize without losing money, even if other lenders cant or wont do the deal. Ex. 276 at 50 to McCoy Decl. c. 161. Deposition Testimony of Countrywides Top Executives
The SEC also annexed to court filings the deposition testimony given by
Countrywides former executives in the civil action. In the testimony, Countrywides top
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executives conceded that Countrywide stopped ensuring compliance with underwriting guidelines as a consequence of attempting to out-do its competitors in increasing its volume of mortgage-backed securitizations. 162. For instance, in his testimony, John McMurray, Countrywides Chief Risk
Officer, admitted that the matching strategy was a corporate principle and practice that had a profound effect on credit policy. Investigative Testimony Relied Upon in Plaintiff SECs Opposition to Defendants Motion for Summary Judgment: Witness John McMurray, SEC v. Mozilo, No. 09-03994, Docket Entry 290, at 80 (C.D. Cal., filed Aug. 16, 2010) (McMurray Investigative Testimony). He testified that it was indeed not possible to understand Countrywides underwriting policies without knowing of and understanding the matching strategy, and that the strategy was rolled out by use of the exception desks. Id. at 81-83. He also testified that exceptions were being made without determinations that sufficient compensating factors existed. Id. at 101-02. 163. Mr. McMurray conceded that the use of exceptions, even as a general matter, was
associated with higher risk of poor loan performance: [a]lmost by definition, you are dealing with a riskier transaction when the loan is approved by an exception, and in fact there were areas in which his group found a big disparity in performance between exception loans and others. Id. at 25, 87. 164. Mr. McMurray also testified that there were composite negative effects of
Countrywides matching strategy. Ex. 266 to McCoy Decl. He explained that when Countrywide matched the guidelines of different lenders on separate products, the match would be more aggressive than either one of those competitor reference points viewed in isolation. Id. at 133-34. Mr. McMurray was concerned that Countrywides competitors imposed additional
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requirements for their loan products not factored into Countrywides system, such as credit history requirements. These standards might enable competitors to use their products safely, whereas Countrywide could be ceding our credit policy to the most aggressive players in the market. Id. at 151-52. 165. The testimony of Frank Aguilera, a Managing Director responsible for risk
management, established that Countrywide even created a large database of products offered by competitors so Countrywide personnel could check the database when a new product was proposed, to see if a competitor had already approved the product. Investigative Testimony Relied Upon in Plaintiff SECs Opposition to Defendants Motions for Summary Judgment: Witness Frank Aguilera, SEC v. Mozilo, No. 09-03994, Docket Entry 219 at 5-7 (C.D. Cal., filed Aug. 16, 2010). Mr. Aguilera also confirmed that the matching strategy was implemented through Countrywides exception processes. Id. at 10. Indeed, Mr. Aguilera testified that 90 percent of his time as the person responsible for Countrywides technical manuals was spent on expansions of the guidelines. Ex. 236 at 40:7 to McCoy Decl. 166. Mr. Aguilera also authored an e-mail regarding the particularly alarming results
of an internal review on June 12, 2006. He reported to others in Countrywide that 23 percent of the subprime loans at the time were generated as exceptions, even taking into account all guidelines, published and not published, approved and not yet approved. Ex. 217 to McCoy Decl. Mr. Aguilera wrote at the time that [t]he results speak towards our inability to adequately impose and monitor controls on production operations. Id. 167. In February 21, 2007 Mr. Aguilera disputed a belief expressed in a prior meeting
that there were adequate controls with regard to exceptions, and stressed that the guidelines were meaningless when so many exceptions were being granted: Our review of January data
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suggests that these controls need to be reviewed. Any Guideline tightening should be considered purely optics with little change in overall execution unless these exceptions can be contained. Ex. 86 to Dean Decl. As an example, Mr. Aguilera provided data on loans that were approved as exceptions despite having high loan-to-value ratios. He found significant levels of exceptions under all high risk programs. Id. 168. In his testimony, CEO Mozilo admitted that Countrywides practice of matching
competitors heightened the risk that the loans would perform poorly. He stated: if the only reason why you offered a product, without any other thought, any other study, any other actuarial work being done is because someone else was doing it, thats a dangerous game to play. Testimony of Angelo Mozilo, SEC Investigation, at 157 (Aug. 8, 2008). 169. Nathan Adler, the President of many of the Depositor Defendants here and also an
Individual Defendant in this action, testified that at Countrywide, the application of guidelines was wholly secondary to selling the loan. He testified that Countrywides exception policy had core guidelines. Deposition Testimony Relied Upon in Plaintiff SECs Opposition to Defendants Motions for Summary Judgment: Witness Nathan Joshua Adler, SEC v. Mozilo, No. 09-03994, Docket Entry 237 at 2 (C.D. Cal., filed Aug. 16, 2010). If those were not met, the company applied what he termed shadow guidelines. Id. If even the shadow guidelines were not met, the loans were given to Secondary Marketing to determine if the loan could be sold given the exception that was being asked for. Id. at 3. Thus, Mr. Adler conceded, saleability was a factor in the determination of whether to make a loan on an exception basis. Id. 2. Actions Brought by State Enforcement Authorities and Private Litigants Have Corroborated that Countrywide Systematically Failed to Adhere to Its Underwriting Guidelines
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170.
Countrywides systematic failure to adhere to its underwriting guidelines,
resulting in the material misstatements in the Registration Statements, has also been revealed in a substantial number of investigations and suits brought by State enforcement authorities and in private suits. Like the SEC, a number of state attorneys general have investigated Countrywides lending practices and commenced enforcement actions in which they have alleged that Countrywide abandoned its underwriting guidelines, which were intended to ensure borrowers ability to repay their loans. Countrywide also faces substantial civil litigation brought by private parties and alleging that Countrywides lending practices were deficient and fraudulent. After initially vowing to fight these cases, Countrywides successor, Bank of America, recently has begun entering into settlements, obligating it to pay the billions of dollars in liabilities arising from Countrywides routinely deficient origination of mortgage loans bound for securitizations like the Securitization at issue here. a. 171. State Enforcement Actions
In People of the State of California v. Countrywide Financial Corp. et al., the
Attorney General for the State of California filed a civil action on behalf of Countrywide borrowers in California against Countrywide and its senior executives, asserting statutory claims for false advertising and unfair competition based on a plan to increase the volume of mortgage loans for securitization without regard to borrower creditworthiness. Complaint, California v. Countrywide Financial Corp. et al., No. LC081846 (Cal Super., L.A. County, filed June 24, 2008). 172. In People of the State of Illinois v. Countrywide Financial Corp. et al., the
Attorney General for the State of Illinois filed a civil suit on behalf of Illinois borrowers against Countrywide and Mozilo, asserting state consumer protection and unfair competition statutory claims, alleging that beginning in or around 2004, Countrywide engaged in unfair and deceptive
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practices, including loosening underwriting standards, structuring unfair loan products with risky features, and engaging in misleading marketing and sales practices. Complaint, Illinois v. Countrywide Financial Corp. et al., No. 08CH22994 (Ill. Cir. Ct. Ch. Div., Cook County, filed June 25, 2008). 173. In State of Connecticut v. Countrywide Financial Corp. et al., the Connecticut
Insurance Commissioner commenced a civil action asserting that Countrywide violated state unfair and deceptive practices law by deceiving consumers into obtaining mortgage loans for which they were not suited and could not afford. Complaint, Connecticut v. Countrywide Financial Corp. et al., No. 1207 (Conn. Super., Hartford, filed July 28, 2008). 174. In Office of the Attorney General for the State of Florida v. Countrywide
Financial Corp. et al., the Florida Attorney General commenced a civil action against Countrywide and Mozilo, asserting state unfair practices statutory claims, and alleging that since January 2004, Countrywide promoted a scheme to originate subprime mortgage loans to unqualified borrowers, and relatedly engaged in securities law violations. The Attorney General alleges that Countrywide violated state statutory lender laws by falsely representing that Countrywide originated each mortgage loan in accordance with its underwriting guidelines and that each borrower had the ability to repay the mortgage loan. Complaint, Florida v. Countrywide Financial Corp. et al., No. 08 30105 (Fla. Cir. Ct. 17th Judicial Circuit, filed June 30, 2008). 175. In State of Indiana v. Countrywide Financial Corp. et al., the State of Indiana
filed a civil action asserting that Countrywide violated the states unfair and deceptive practices law from 2005 through 2008 by deceiving consumers into obtaining mortgage loans for which they were not suited and could not afford. Complaint, State of Indiana, County of Steuben v.
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Countrywide Financial Corp. et al., No. 76C01-0808-PL-0952 (Ind. Cir. Ct., filed Aug. 22, 2008). 176. On October 6, 2008, these states, plus 23 others, all joined in a settlement with
Bank of America, pursuant to which Bank of America (as the successor-in-interest to the Countrywide Defendants) agreed to pay $150 million for state foreclosure relief programs and loan modifications for borrowers totaling $8.4 billion. See Press Release, Securities and Exchange Commission, Bank of America Agrees in Principle to ARS Settlement (Oct. 8, 2008). b. 177. Civil Litigation and Settlements
On June 28, 2011, Bank of America announced an $8.5 billion proposed
settlement with Bank of New York Mellon (BoNY), as Trustee for trusts established in Countrywide-sponsored securitizations of mortgage-backed securities. The proposed settlement applies to claims that could be brought by BoNY, on behalf of major institutional investors, in connection with 530 securitizations of mortgage-backed securities that were underwritten by Countrywide, in the same time period relevant here. Investors claimed that units of Countrywide Financial failed to honor contracts obligating it to repurchase over $400 billion dollars worth of loans that had been originated in violation of underwriting guidelines and thus failed to live up to the represented quality. Under the proposed settlement, Bank of America is responsible for payment of the $8.5 billion settlement, indemnification of the Trustee, and payment of $85 million in legal fees to counsel for the group of investors that negotiated the settlement. See Press Release, Bank of America, Bank of America Announces Agreement on Legacy Countrywide Mortgage Repurchase and Servicing Claims (June 29, 2011). 178. The settlement was widely reported to be Bank of Americas recognition of the
lingering and poisonous issues created by the deficient lending practices of Countrywide for its acquirer, Bank of America. The New York Times, for example, reported in an article published
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on June 29, 2011, that the settlement represents a major acknowledgment of just how flawed the
mortgage process became in the giddy years leading up to the financial crisis of 2008, typified by the excesses at Countrywide Financial, the subprime mortgage lender Bank of America acquired in 2008. CEO Brian Moynihan, who had vowed in November 2010 to engage in hand to hand
combat in litigation arising from Countrywides securitizations of mortgage-backed securities, see Hugh Son & David Mildenberg, Bank of America in Hand-to-Hand Combat Over Mortgage Disputes, CEO Says, Bloomberg (Nov. 16, 2010), conceded in announcing the BoNY settlement that cleaning up Countrywides mortgage issues had become a paramount objective. Press Release, Bank of America, Bank of America Announces Agreement on Legacy Countrywide Mortgage Repurchase and Servicing Claims (June 29, 2011) (This is another important step we are taking in the interest of our shareholders to minimize the impact of future economic uncertainty and put legacy issues behind us . . . . We will continue to act aggressively, and in the best interest of our shareholders, to clean up the mortgage issues largely stemming from our purchase of Countrywide.). 179. Multiple other investors in Countrywide-issued securities have filed suits against
Countrywide for misrepresentations relating to its origination practices and the credit quality of the loans it originated from 2004 to early 2008. Indeed, as Countrywide noted in its motion to consolidate many of these cases in a federal multidistrict litigation, the actions include twelve securities disclosure cases currently pending around the country in connection with equity, debt, and mortgage-backed securities issued by Countrywide or its subsidiaries, the allegations of which include that Countrywide abandoned its loan underwriting standards, that Countrywide made exceptions to its underwriting standards without determining whether compensating factors offset the increased credit risk, and that Countrywide ignored borrowers ability to repay their
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loans. See In re Countrywide Financial Corp. Sec. Litig. Cases, MDL Docket No. 11-59 (C.D. Cal., filed May 23, 2011). 180. The monoline insurers hired by Countrywide to provide financial guaranty
insurance for Countrywide-sponsored securitizations are among those suing Countrywide and Bank of America, its successor. MBIA Insurance Corporation (MBIA) and Syncora Insurance Company (Syncora) have alleged that Countrywide and Bank of America induced them to provide insurance for the securitizations based on false representations and warranties about the quality of the loans originated by Countrywide, and in particular, Countrywides adherence to its own underwriting guidelines. MBIA and Syncora, who gained access to the origination files for the loans underlying the securitizations for which they provided insurance, have publicized in court filings the result of their analyses of those origination files. Their analyses show that Countrywide systematically failed to comply with its stated underwriting guidelines when originating mortgage loans intended for securitization. 181. After paying over $1.4 billion dollars in claims to investors in fifteen
Countrywide-sponsored securitizations because of the poor performance of the underlying Countrywide-originated mortgage loans, MBIA obtained and reviewed nearly five thousand loan origination files for the defaulted and delinquent loans among the tens of thousands of loans in the pools backing the securitizations. MBIAs analysis found an extraordinarily high incidence of material deviations from the underwriting guidelines Countrywide represented it would follow. See Amended Complaint, MBIA Ins. Corp. v. Countrywide et al., No. 602825/08, Docket Entry No. 9 at *24 (Sup. Ct. N.Y. County filed Aug. 24, 2009). 182. The trial court deemed MBIAs claims of fraud and breach of contract sufficient
to withstand a motion to dismiss, a decision that was affirmed on appeal. According to MBIA,
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91 percent of the defaulted or delinquent loans in the pools contained these material deviations. As described in the complaint, the loan applications frequently (i) lack key documentation, such as verification of borrower assets or income; (ii) include an invalid or incomplete appraisal; (iii) demonstrate fraud by the borrower on the face of the application; or (iv) reflect that any of borrower income, FICO score, debt, DTI [debt-to-income,] or CLTV [combined loan-to-value] ratios, fails to meet stated Countrywide guidelines (without any permissible exception). Id. at 24. The defective loans covered Countrywides securitizations from 2004 to 2007, encompassing the same time period that the loans in this case were originated and securitized by Countrywide. 183. Syncora conducted a similar re-review of defaulted loans underlying two
Countrywide-sponsored securitizations that it insured in 2005 and 2006, based on loan origination files it was able to obtain through exercise of contractual rights. Syncora found that 75 percent of the loans it reviewed were . . . materially in breach of Countrywides representations and warranties, representing over $187 million in defective loans. Complaint, Syncora Guarantee Inc. v. Countrywide Home Loans et al., No. 650042/09, at 38 (Sup. Ct. N.Y. County, filed Jan. 28, 2009). The trial court denied Countrywides motion to dismiss Syncoras fraud claims. Syncora Guarantee Inc. v. Countrywide Home Loans, No. 650042/20 (Sup. Ct. N.Y. County Apr. 2, 2010). Through additional information gained in discovery, Syncora identified more than 2,700 loans that were underwritten in violation of Countrywides own lending guidelines, lack any compensating factors that could justify their increased risk, and should never have been made. Amended Complaint, Syncora Guarantee Inc. v. Countrywide Home Loans et al., No. 650042/09, at 6 (Sup. Ct. N.Y. County, filed May 6, 2010).
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184.
Many of the loans, according to Syncora, had DTI and LTV ratios that exceeded
limits set forth in Countrywides underwriting guidelines, without adequate compensating factors to justify the increased risk of default. Loan amounts routinely exceeded the maximum amounts permitted under Countrywides guidelines based on a borrowers credit score, documentation, and the value of the mortgaged property. Syncora found that Countrywide also improperly issued loans to borrowers when their loan files lacked adequate documentation of borrowers income, assets, credit, employment, cash reserves, or property values. Id. at 39-43. Syncora also found that, despite a representation that all loans would be apprised by an independent thirdparty appraiser, the vast majority of appraisals were performed by a Countrywide affiliate, LandSafe, Inc. (LandSafe); and Syncoras review of non-performing loans revealed that LandSafe appraisers consistently and significantly exceeded contemporaneous sale prices for comparable properties in the same location, artificially reducing CLTV ratios. Id. at 43-44. 185. Former Countrywide employees have also stated that Countrywide was not
following its underwriting guidelines insofar as those guidelines represented that independent appraisals, sufficient to assess the adequacy of the collateral underlying the loans, had been carried out. 186. Mark Zachary, a former Regional Vice President of Countrywide, informed
Countrywide executives in 2006 that in the case of appraisals performed on properties built by national home manufacturer KB Home and purchased with mortgage loans originated by Countrywide, appraisers were strongly encouraged to inflate appraisal values by as much as six percent to allow homeowners to roll up all closing costs. According to Mr. Zachary, Countrywide executives had knowledge of this practice, which also resulted in borrowers being
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duped as to the true values of their homes. Complaint, Capitol West Appraisals v. Countrywide Financial Corp., No. 2:08-cv-01520-RAJ (W.D. Wash., filed Dec. 15, 2008). 187. Mr. Zacharys claims have been echoed by allegations made in lawsuits related to
Countrywides appraisal practices. According to Capitol West Appraisals, LLC, a company that has provided real estate appraisals to mortgage brokers and lenders since 2005, and is a review appraiser for many major mortgage lenders, Countrywide Financial and Countrywide Home Loans engaged in a pattern and practice of pressuring even non-affiliated, purportedly independent real estate appraisers to increase appraisal values artificially for properties underlying mortgages Countrywide Home Loans originated. Capitol West has sued, among others, Countrywide Financial and Countrywide Home Loans, alleging that Countrywide Home Loans officers sought to pressure Capitol West to increase appraisal values in three loan transactions. Capitol West has alleged that Countrywide Home Loans retaliated against it when it refused to vary the appraisal values from what it independently determined was appropriate. 188. In particular, according to Capitol West, from at least 2004, and continuing
through at least 2007, Countrywide Home Loans maintained a database titled the Field Review List containing the names of appraisers whose reports Countrywide Home Loans would not accept unless the mortgage broker also submitted a report from a second appraiser. Countrywide Home Loans placed Capitol West on the Field Review List, according to Capitol West, after Capitol West refused to buckle under the pressure to inflate the value of the properties. 189. Countrywide Home Loans created additional procedures to further enforce its
blacklisting of uncooperative appraisers like Capitol West for instance, subjecting properties appraised by an appraiser on the Field Review List to an additional review by its wholly-owned subsidiary, LandSafe. LandSafe then issued another appraisal for the subject designed to shoot
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holes in the appraisal performed by the blacklisted appraiser such that the mortgage transaction could not close based on that appraisal. According to Capitol West, LandSafe found defects in the appraisal from the blacklisted appraiser even if another (and non-blacklisted) appraiser appraised the underlying property at the same value. 190. Capitol West has alleged that given Countrywides significant mortgage lending
business and likelihood that it would be the ultimate lender, brokers had a strong incentive to refrain from using a blacklisted appraiser. 191. Additionally, as the FCIC has confirmed, mortgage loan originators throughout
the industry pressured appraisers, during the period of the Securitizations, to issue inflated appraisals that met or exceeded the amount needed for the subject loans to be approved, regardless of the accuracy of such appraisals, and especially when the originators intended to sell the mortgages for securitization. This resulted in lower LTV ratios, discussed above, which in turn made the loans appear to the investors less risky than they were. 192. As described by Patricia Lindsay, a former wholesale lender who testified before
the FCIC in April 2010, appraisers fear[ed] for their livelihoods, and therefore cherry-picked data that would help support the needed value rather than finding the best comparables to come up with the most accurate value. See Written Testimony of Patricia Lindsay to the FCIC, Apr. 7, 2010, at 5. Likewise, Jim Amorin, President of the Appraisal Institute, confirmed in his testimony that [i]n many cases, appraisers are ordered or severely pressured to doctor their reports and to convey a particular, higher value for a property, or else never see work from those parties again . [T]oo often state licensed and certified appraisers are forced into making a Hobsons Choice. See Testimony of Jim Amorin to the FCIC, Apr. 23, 2009, at 5, available at www.appraisalinstitute.org/newsadvocacy/downloads/ltrs_tstmny/2009/AI-ASA-ASFMRA-
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NAIFATestimonyonMortgageReform042309final.pdf. Faced with this choice, appraisers systematically abandoned applicable guidelines and over-valued properties in order to facilitate the issuance of mortgages that could then be collateralized into mortgage-backed securitizations. 3. The Collapse of the GSE Certificates Credit Ratings Further Indicates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines
193.
AAA or its equivalent to non-investment speculative grade in many instances is further evidence of the originators systematic disregard of underwriting guidelines, amplifying that the GSE Certificates were impaired from the start. 194. Almost all of the GSE Certificates that Fannie Mae and Freddie Mac purchased
were originally assigned credit ratings of AAA or its equivalent, which purportedly reflected the description of the mortgage loan collateral and underwriting practices set forth in the Registration Statements. These ratings were artificially inflated, however, as a result of the very same misrepresentations that the Defendants made to investors in the Prospectus Supplements. 195. Countrywide provided or caused to be provided loan-level information to the
rating agencies that they relied upon in order to calculate the Certificates assigned ratings, including the borrowers LTV ratio, debt-to income ratio, owner-occupancy status, and other loan-level information described in aggregation reports in the Prospectus Supplements. Because the information that Countrywide provided or caused to be provided was false, the ratings were inflated and the level of subordination that the rating agencies required for the sale of the GSE Certificates was inadequate to provide investors with the level of protection that those ratings signified. As a result, the GSEs paid Defendants inflated prices for purported investment grade Certificates, unaware that those Certificates actually carried a severe risk of loss and carried inadequate credit enhancement.
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196.
Since the issuance of the Certificates, the ratings agencies have dramatically
Transaction CWALT 2005-57CB CWALT 2005-63 CWALT 2005-67CB CWALT 2005-73CB CWALT 2005-80CB CWALT 2005-83CB CWALT 2005-84 CWALT 2005-85CB CWALT 2005-AR1 CWALT 2006-11CB CWALT 2006-14CB CWALT 2006-19CB CWALT 2006-23CB CWALT 2006-33CB CWALT 2006-OA14 CWALT 2006-OC1 CWALT 2006-OC10 CWALT 2006-OC11 CWALT 2006-OC3 CWALT 2006-OC4 CWALT 2006-OC5 CWALT 2006-OC6 Tranche 1A1 1A1 A1 2A2 3A1 4A1 A1 A2 2A1 1A1 1A 1A1 A1 A6 A11 A30 1A7 2A1 2A1 1A1 1A1 1A 1A 1A1 1A 1A 1A Rating at Issuance (Moodys/S&P/Fitch) Aaa/---/AAA Aaa/AAA/--Aaa/---/AAA Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/---/AAA Aaa/---/AAA Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/---/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/---/AAA Aaa/---/AAA Aaa/---/AAA Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Rating as of July 31, 2011 (Moodys/S&P/Fitch) Caa2/---/C Caa3/CCC/--Caa2/---/CC Caa3/CCC/--Ca/D/--Ca/D/--Caa2/---/CC C/---/D Ca/D/--Caa3/CCC/--Ca/D/--Ca/---/D Caa2/B-/CC C/D/D Caa2/CCC/CC C/CC/C Caa3/---/D Ca/---/D Caa3/---/C Ca/B-/--Caa3/CCC/--Ca/D/--Ca/D/--Ca/CC/--Ca/D/--Ca/D/--Ca/D/---
Applicable ratings are shown in sequential order separated by forward slashes: Moodys/S&P/Fitch. A hyphen between forward slashes indicates that the relevant agency did not provide a rating at issuance.
13
92
Transaction CWALT 2006-OC7 CWALT 2006-OC8 CWALT 2007-5CB CWALT 2007-HY2 CWALT 2007-OA10 CWALT 2007-OA3 CWALT 2007-OA8 CWHL 2005-HY10 CWHL 2006-HYB1 CWL 2005-11 CWL 2005-12 CWL 2005-13 CWL 2005-14 CWL 2005-16 CWL 2005-17 CWL 2005-8 CWL 2005-9 CWL 2005-AB3 CWL 2005-AB4 CWL 2005-AB5 CWL 2005-BC5
Tranche 1A 1A1 2A3 1A 2A 1A1 1A2 2A1 1A1 2A1 1A1 2AV1 3A 2AV1 1A1 2A1 1AF 3AV 2AV 3AV1 1A1 1A1 1A1 1A 1A1 1A 2A1 2A2
Rating at Issuance (Moodys/S&P/Fitch) Aaa/AAA/--Aaa/AAA/--Aaa/AAA/AAA Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/AAA Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/-----/AAA/AAA Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/---
Rating as of July 31, 2011 (Moodys/S&P/Fitch) Ca/D/--Caa3/D/--Ca/D/D Ca/D/--Ca/D/--Caa3/CCC/--Aa3/AA+/--Caa3/CCC/CC Caa3/CCC/--Ca/CCC/--Ca/CCC/--Aa1/AAA/--Baa1/AAA/--B2/B/--B1/BB+/--Ba3/BBB/--Caa2/CCC/--B1/BBB/--Caa2/CCC/--B1/BB/--Aa1/AAA/-----/AAA/CCC Caa3/AA/--Caa3/CCC/--Ca/CCC/--A2/AAA/--Baa2/AA/--Baa3/AA/--Caa3/CCC/--Caa3/CCC/--Caa3/CCC/--Caa2/CCC/--Caa2/CCC/--Caa3/B-/--Caa2/BB-/--Caa2/BB-/--Caa2/BB+/--Caa1/A/--Caa3/B+/--Caa3/B+/---
CWL 2006-10 CWL 2006-11 CWL 2006-12 CWL 2006-13 CWL 2006-14 CWL 2006-16 CWL 2006-17 CWL 2006-18 CWL 2006-19 CWL 2006-2 CWL 2006-20 CWL 2006-21
2AV 2AV 1A 2AV 1A 1A 1A 1A 1A 1A1 1A 1A
93
Transaction CWL 2006-22 CWL 2006-23 CWL 2006-24 CWL 2006-25 CWL 2006-26 CWL 2006-3 CWL 2006-4 CWL 2006-5 CWL 2006-6 CWL 2006-7 CWL 2006-8 CWL 2006-9 CWL 2006-BC2 CWL 2006-BC3 CWL 2006-BC4 CWL 2006-BC5 CWL 2007-1 CWL 2007-10
Tranche 1A 1A 1A 1A 1A 1A 1A1 1A 1A1 1A 1A 2AV 1A 1A 1A 1A 1A 1A1 1A2 1M1 1M2 1M3
Rating at Issuance (Moodys/S&P/Fitch) Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aa1/AA+/--Aa2/AA/--Aa3/AA-/--Aa1/AA+/--Aa2/AA/--Aa3/AA-/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aa1/AA+/--Aaa/AAA/--Aa1/AA+/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/---
Rating as of July 31, 2011 (Moodys/S&P/Fitch) Caa3/CCC/--Caa3/CCC/--Caa3/CCC/--Caa3/CCC/--Caa3/CCC/--B1/AA+/--Caa2/BBB-/--Caa2/BBB/--Caa2/BB/--Caa3/B-/--Caa2/B/--Caa3/B-/--B1/AA/--Ba2/BB-/--Caa3/BB/--Ca/CCC/--Caa3/B-/--Caa3/CCC/--Ca/CCC/--C/CCC/--C/CCC/--C/CCC/--C/CCC/--C/CCC/--C/CCC/--Caa3/CCC/--Ca/CCC/--Caa2/CCC/--C/CCC/--C/CCC/--Caa3/CCC/--C/CCC/--Caa3/B-/--Caa3/BB/--Ca/CCC/--Caa3/CCC/--Ca/B/--Caa3/BBB/--C/BB/--Ca/B/---
CWL 2007-11
1M1 1M2 1M3 1A1 1A2
CWL 2007-12
1A1 1A2 1M1
CWL 2007-13 CWL 2007-2 CWL 2007-3 CWL 2007-5 CWL 2007-6 CWL 2007-7 CWL 2007-8 CWL 2007-9
1A 1M1 1A 1A 1A 1A 1A 1A1 1A2 1A
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Transaction CWL 2007-BC1 CWL 2007-BC2 CWL 2007-BC3
Tranche 1A 1A 1A
Rating at Issuance (Moodys/S&P/Fitch) Aaa/AAA/--Aaa/AAA/--Aaa/AAA/---
Rating as of July 31, 2011 (Moodys/S&P/Fitch) Ca/B-/--Ca/CCC/--Ca/B-/---
4.
197.
supposed to represent long-term, stable investments, a staggering percentage of the mortgage loans backing the Certificates frequently over half of the supporting loan group have defaulted, have been foreclosed upon, or are delinquent, resulting in massive losses to the Certificateholders. The overall poor performance of the mortgage loans is a direct consequence of the fact that they were not underwritten in accordance with applicable underwriting guidelines as represented in the Registration Statements. 198. Loan groups that were properly underwritten and contained loans with the
Transaction Supporting Loan Group(s) Loan Group 1 Loan Group 1 Single-group transaction Loan Group 2 Loan Group 3 Loan Group 4 CWALT 2005-83CB Single-group transaction Percentage of Delinquent/Defaulted/Foreclosed Loans 20.6 39.6 17.2 28.6 48.7 39.5 27.3
CWALT 2005-57CB CWALT 2005-63 CWALT 2005-67CB CWALT 2005-73CB CWALT 2005-80CB
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Transaction
Supporting Loan Group(s) Loan Group 2 Loan Group 1 Loan Group 1 Loan Group 1 Single-group transaction Single-group transaction Loan Group 1 Loan Group 2 Loan Group 2 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 2 Loan Group 1 Loan Group 2 Loan Group 1 Loan Group 2 Loan Group 1 Loan Group 2 Loan Group 1 Loan Group 2 Loan Group 3 Loan Group 2 Loan Group 1 Loan Group 2 Loan Group 1 Loan Group 3 Loan Group 2 Loan Group 3 Loan Group 1 Loan Group 1 Loan Group 1
CWALT 2005-84 CWALT 2005-85CB CWALT 2005-AR1 CWALT 2006-11CB CWALT 2006-14CB CWALT 2006-19CB CWALT 2006-23CB CWALT 2006-33CB CWALT 2006-OA14 CWALT 2006-OC1 CWALT 2006-OC10 CWALT 2006-OC11 CWALT 2006-OC3 CWALT 2006-OC4 CWALT 2006-OC5 CWALT 2006-OC6 CWALT 2006-OC7 CWALT 2006-OC8 CWALT 2007-5CB CWALT 2007-HY2 CWALT 2007-OA10 CWALT 2007-OA3 CWALT 2007-OA8 CWHL 2005-HY10 CWHL 2006-HYB1 CWL 2005-11 CWL 2005-12 CWL 2005-13 CWL 2005-14 CWL 2005-16 CWL 2005-17 CWL 2005-8 CWL 2005-9 CWL 2005-AB3
Percentage of Delinquent/Defaulted/Foreclosed Loans 45.2 29.5 61.7 36.0 33.1 27.7 29.5 43.6 35.9 56.2 55.6 61.8 57.0 57.9 65.3 58.6 51.5 59.8 54.8 35.5 44.8 38.7 48.2 58.2 58.2 42.3 40.9 71.8 74.2 63.5 64.2 63.7 42.9 63.3 70.0 63.6 59.6 64.2 71.0
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Transaction
Supporting Loan Group(s) Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 2 Loan Group 2 Loan Group 2 Loan Group 1 Loan Group 2 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 2 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1
CWL 2005-AB4 CWL 2005-AB5 CWL 2005-BC5 CWL 2005-BC5 CWL 2006-10 CWL 2006-11 CWL 2006-12 CWL 2006-13 CWL 2006-14 CWL 2006-16 CWL 2006-17 CWL 2006-18 CWL 2006-19 CWL 2006-2 CWL 2006-20 CWL 2006-21 CWL 2006-22 CWL 2006-23 CWL 2006-24 CWL 2006-25 CWL 2006-26 CWL 2006-3 CWL 2006-4 CWL 2006-5 CWL 2006-6 CWL 2006-7 CWL 2006-8 CWL 2006-9 CWL 2006-BC2 CWL 2006-BC3 CWL 2006-BC4 CWL 2006-BC5 CWL 2007-1 CWL 2007-10 CWL 2007-11 CWL 2007-12 CWL 2007-13 CWL 2007-2 CWL 2007-3
Percentage of Delinquent/Defaulted/Foreclosed Loans 66.6 70.2 58.3 59.8 65.9 63.2 73.2 61.4 66.2 72.2 65.3 67.1 69.2 60.9 68.5 66.9 67.1 64.7 65.3 67.9 65.2 61.3 60.8 66.6 70.3 69.5 59.9 56.1 71.0 63.6 71.3 71.3 67.5 59.9 62.8 62.2 58.4 64.1 69.2
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Transaction
Supporting Loan Group(s) Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1
CWL 2007-5 CWL 2007-6 CWL 2007-7 CWL 2007-8 CWL 2007-9 CWL 2007-BC1 CWL 2007-BC2 CWL 2007-BC3
Percentage of Delinquent/Defaulted/Foreclosed Loans 68.0 70.5 63.8 61.4 63.1 64.0 68.5 65.0
199.
confirmed systematic underwriting failures by Countrywide, which was primarily responsible for the mortgage loans across the Securitizations, and the extraordinary drop in credit rating and rise in delinquencies across those Securitizations all confirm that the mortgage loans in the Supporting Loan Groups, contrary to the representations in the Registration Statements, were not originated in accordance with the stated underwriting guidelines. V. COUNTRYWIDE KNEW ITS REPRESENTATIONS WERE FALSE AND THE GSEs JUSTIFIABLY RELIED ON COUNTRYWIDES REPRESENTATIONS 200. The allegations in this Section V are made in support of Plaintiffs common law
fraud claim against Countrywide Securities, Countrywide Home Loans, and the Depositor Defendants (the Countrywide Fraud Defendants), and not in support of Plaintiffs claims under (i) Sections 11, 12(a)(2) and 15 of the Securities Act, (ii) Sections 13.1-522(A)(ii) and 13.1522(C) of the Virginia Code, (iii) Sections 31-5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, which are based solely on strict liability and negligence, or (iv) negligent misrepresentation. See CPLR 3014 (permitting alternative statements of a claim); Raglan Realty Corp. v. Tudor Hotel Corp., 149 A.D.2d 373, 374 (1st Dept 1989) (same).
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A. 201.
The Countrywide Defendants Knew Their Representations Were False The same evidence discussed above not only shows that Countrywides
representations were untrue, but that the Countrywide Fraud Defendants knew, or were reckless in not knowing, that they were falsely representing that the mortgage loans collateralizing the GSE Certificates had been originated in compliance with Countrywides underwriting guidelines. These Defendants also knew, or were reckless in not knowing, that they were falsely representing the fundamental risk characteristics of the mortgage loans. 202. For instance, the incidence of material discrepancies is so high as discussed
above, there were material discrepancies in Countrywides representations about owneroccupancy data and LTV ratios for all 86 Securitizations that it could not have been the result of human error. Instead, Countrywide was clearly ignoring sound underwriting methodology and knew that its failure to follow its underwriting guidelines would result in the origination of loans which the borrower would not be able to repay. Other evidence of Countrywides knowledge of its disregard of underwriting guidelines includes the following: Countrywides post-mortem internal analysis admitted that it did not heed the warnings, and that [l]ots of experienced people were uncomfortable. Countrywides CEOs e-mails showed that he saw errors of both judgment and protocol, massive disregard for the guidelines, and serious lack of compliance within our origination system. Countrywides internal audits discovered that a staggering percentage of loans were being approved as exceptions. For instance, one particularly alarming audit found that over 23 percent of subprime loans were at the time being processed as exceptions, and another found that 52 percent of the subprime divisions 100 percent financings were done with exceptions. The amount of loans approved as exceptions was seen within Countrywide as speak[ing] toward our inability to adequately impose and monitor controls on production operations.
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Other correspondence and testimony confirmed that the exceptions were just a tool being used to keep pace and to implement the matching strategy. Countrywides credit officers viewed the matching strategy as ceding Countrywides policies to the market. Another saw Countrywides underwriting policies as theoretical, and saw it as indefensible that Countrywide continued to use saleability as the sole criterion for approval. Countrywides risk officers wrote that the company basically continued to act as though they never received policies the credit officers circulated, and that it was frustrating to have their judgment overridden with whining and escalations. Countrywides documents referred to several recent examples where products were approved despite explicit rejections by the companys credit risk department. According to former employees, borrowers who could not qualify for a loan were steered into low-documentation products, then coached on how to falsify the application to ensure it would be approved. According to former borrowers, in some instances Countrywides loan officers were the ones to fill out the application with misrepresentations without the borrowers knowledge. Countrywides internal reviews found at one point that 40 percent of the reduced-documentation loans had income overstatements of ten percent or more and a significant percent of those loans would have income overstated by 50% or more. Countrywide Pursued a Dominant Market Share at All Costs
1. 203.
Countrywides fraudulent representations were the means by which it pursued
dominant market share. Around May 2003, Mr. Sambol became particularly close to Mr. Mozilo and emerged as a major force within Countrywide Financial and Countrywide Home Loans, taking complete charge of loan production in 2004. Countrywide executives, and Mr. Sambol in particular, sent a clear message to loan origination and underwriting employees that overall volume was far more important than creditworthiness. Rather than relying on its publicly stated underwriting standards to maintain Countrywides profitability, Mr. Sambol argued that by
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originating and procuring a large volume of loans, regardless of their relative risk, Countrywide would be able to cover any losses incurred on the riskier loans by the profits it generated on other loans. 204. At the same time that Mr. Mozilo issued Countrywides market share mandate
for the ultimate 30% by 2006, 2007, see Q2 2003 Countrywide Financial Corporation Earnings Conference Call (July 22, 2003) Countrywide gave assurances to the public that its growth in originations would not compromise its strict underwriting standards. Indeed, Mr. Mozilo publicly stated that Countrywide would target the safest borrowers in this market in order to maintain its commitment to quality: Going for 30% mortgage share here is totally unrelated to quality of loans we go after. . . . There will be no compromise in that as we grow market share. Nor is there a necessity to do that. Q4 2003 Countrywide Financial Corporation Earnings Conference Call (Jan. 27, 2004). 205. During a March 15, 2005 conference with analysts, Mr. Mozilo responded to a
question about Countrywides strategy for increasing market share, and again assured Countrywides constituents that Countrywide would not sacrifice its strict and disciplined underwriting standards: Your question is 30 percent, is that realistic, the 30 percent goal that we set for ourselves 2008? . . . Is it achievable? Absolutely. . . . But I will say this to you, that under no circumstances will Countrywide ever sacrifice sound lending and margins for the sake of getting to that 30 percent market share. Countrywide Financial Corp. at Piper Jaffray Financial Conference 2005 at 5-6 (Mar. 15, 2005). 206. Contrary to its public assurances, Mr. Mozilos mandate of a 30 percent market
share required Countrywide to systemically depart from its underwriting standards. A former senior regional vice president of Countrywide was quoted in a January 17, 2008 Business Week article as saying that Countrywide approached making loans like making widgets, focusing on
101
cost to produce and not risk or compliance. Chris Palmeri, One Insiders View of Countrywide, Business Week (Jan. 17, 2008). 207. Indeed, in an interview with the FCIC, Mr. Mozilo stated that a gold rush
mentality overtook the housing market during the relevant time frame, and that he was swept up in it. FCIC Staff Interview with Angelo Mozilo, Sept. 24, 2010. Confirming that saleability was the sole criteria for approving a loan, Mr. Sambol stated in his interview with the FCIC that Countrywide was selling virtually all of its production to Wall Street in the form of mortgagebacked securities or in the form of mortgage whole loans and that Countrywides essential business strategy was originating that which was saleable into the secondary market. FCIC Staff Interview with David Sambol, Sept. 27, 2010. 2. 208. Countrywides Own Documents Reveal It Knew the Falsity of Its Representations
The Countrywide Fraud Defendants knowledge of the falsity of their
representations is established by evidence from Countrywides own documents and employees. For example, Countrywides 2007 Lessons Learned analysis (discussed above at paragraphs 153 through 154) showed that Countrywide knew at the time what it was doing was wrong, but proceeded anyway:
We did not fully heed the warnings of our credit models. Delinquencies were rising, and models predicted worse to come. Ex. I at 68 to Luskey Decl. Early indicators of credit risk exposure existed. Internal control systems highlighted many of the risks that eventually transpired. Id. at 69. Lots of experienced people were uncomfortable with underwriting guidelines. Going forward, we need to rely on our experience and instinct when business practices dont make sense. In particular, stated income and high LTV was highly counter-intuitive. Id. at 72.
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209.
These concerns mirrored concerns that Countrywides Credit Risk Committee
raised long before Countrywides problems became public, demonstrating that Countrywides admissions were not mere hindsight. In a February 13, 2007 Board of Directors Credit Risk Committee presentation highlighting areas of concern, alternatively known as a wall of worries, one of the Credit Risk Committees areas of concern was Countrywides loan quality, including increased fraud, exception underwriting, guideline drift, [a]ttribute deterioration, and [a]ppraisal quality. Ex. 142 at 23 to Dean Decl. 210. Mr. McMurray (Countrywides then-Chief Risk Officer) gave repeated, explicit,
and alarming warnings to Messrs. Sambol, Mozilo, and others that the companys matching strategy and use of exceptions resulted in riskier loans with high default rates. Countrywide ignored the risk management departments warnings about the consequences of abandoning underwriting standards and continued with its efforts to increase market share and loan volume. 211. As early as 2005, Mr. McMurray warned Mr. Sambol that loans which were
originated as exceptions to Countrywides stated origination guidelines would likely experience higher default rates. On May 22, 2005, he wrote that exceptions are generally done at terms even more aggressive than our guidelines. Ex. 84 to Dean Decl. In a May 22, 2005 e-mail, McMurray warned Sambol that the company would face liability for its faulty underwriting practices and misrepresentations to investors: Weve sold much of the credit risk associated with high risk transactions away to third parties. Nevertheless, we will see higher rates of default on the riskier transactions and third parties coming back to us seeking a repurchase or indemnification based on an alleged R&W breach as the rationale. Ex. 84 to Dean Decl. 212. Mr. McMurray continued to express concern throughout 2006 and 2007. Indeed,
in a November 2, 2006 e-mail to Kevin Bartlett, Countrywides Chief Investment Officer, Mr.
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McMurray directly asked whether Countrywide want[ed] to effectively cede its underwriting policies to the market. This email was forwarded to Mr. Sambol. See Ex. 105 to Dean Decl. 213. In a February 11, 2007 e-mail to Mr. Sambol, Mr. McMurray reiterated his
concerns about Countrywides strategy of matching any type of loan product offered by its competitors, which he said could expose the company to the riskiest offerings in the market: I doubt this approach would play well with regulators, investors, rating agencies[,] etc. To some, this approach might seem like weve simply ceded our risk standards . . . to whoever has the most liberal guidelines. E-mail from John McMurray to Dave Sambol (Feb. 11, 2007). 214. Yet when Mr. McMurray attempted to enforce a set of underwriting guidelines,
his efforts were quashed, and his repeated warnings were ignored by Countrywides senior executives. On November 16, 2006, Mr. McMurray wrote to Mr. Sambol regarding the fundamental deficiencies within Countrywide with regard to risk: First, we need to agree on a risk vision and guiding principles that the entire enterprise will follow. I previously created a set of guiding principles, but there hasnt been acceptance from some of the key business units. The most widely held belief is that our guiding principle is simply doing what anyone else in the market is doing; if its in the market, we have to do it. Second, we should require everyone to follow established risk guidance and policies[;] a product cannot be rolled out or transactions closed without required approvals. There are several recent examples where products or transactions proceeded without the required risk approvals or in contradiction of established policy. Ex. 94 to Dean Decl. 215. On September 7, 2007, over a year after circulating his proposed policy, Mr.
McMurray concluded in an e-mail: I was never supported on this and Secondary [Marketing], [the] Production [Division], and [Countrywide Capital Markets] basically continued to operate as though they never received this policy. Ex. 187 to Dean Decl.
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216.
Mr. McMurray identified during his SEC testimony his own notes from
November 3, 2006, wherein he indicated that he had discussed with Mr. Sambol that he was concerned that he would be personally blamed for products that he never advocated and often recommended against. Id. at 16-17. His testimony also indicates he raised concerns about inadequate controls, infrastructure, etc. Id. 217. Mr. Aguilera, who also managed the risk management department, testified that
he did not think investors were aware of Countrywides internal matching strategy. Ex. 236 at 21 to McCoy Decl. He stated that the use of this strategy to originate riskier subprime loans was not a tolerable process and that he had raised his concerns formally with at least two other managers at Countrywide. Id. at 13-14. 218. Christian Ingerslev, Countrywides Executive Vice President of Credit Risk
Management, also warned Mr. Sambol and others about the consequences of Countrywides failure to adhere to underwriting guidelines. In his testimony, Mr. Ingerslev confirmed that internal documentation from November 2006 showed that products and transactions were going forward without the required risk approvals or in contradiction of established policy. Mr. Ingerslev said it was part of the culture to have pressure to [] move things along and say yes to things, and you felt that pressure. He also testified that he thought the companys guidelines had gone too far given the additional layers of risk in the product mix and changing interest rates. 219. He also testified there was no consequence or penalty for originating loans that
had not been approved by Mr. McMurray. Testimony of Christian Ingerslev (Ingerslev Test.) at 151-53, SEC Investigation (Aug. 19, 2008). Instead, the sales team ruled at Countrywide. In a March 7, 2005 e-mail, Mr. Ingerslev complained:
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[S]ounds like they got on the line with the traders, and long story short, they now think they can sell them . . . . [I]ts frustrating to try and hold the line and then just be overridden with whining and escalations . . . . [J]ust reinforces that sales can have anything they want if they yell loud enough to [D]rew [Gissinger, President of Countrywide Home Loans]. Exhibit 303 to Declaration of Spencer E. Bendell in Opposition to Motion for Summary Judgment (Bendell Decl.), SEC v. Mozilo, No. 09-03994, Docket Entry 305-10 (C.D. Cal., filed Aug. 16, 2010). 220. Mr. Ingerslev also confirmed that Countrywide was made aware internally of the
risks that its shoddy procedures were creating: In an organization like Countrywide, sales, the strategy of the company was predominantly, you know, a sales-oriented one because of our history as a mortgage banker and, you know, being able to sell off a lot of credit risk, that was one instant, one probability factor that contributes to the culture that we have. So that - and ultimately, you know, disagreements or ties were broken, you know, to the - you know, to the side of erring on, well, we dont want to lose volume, we want to keep up the volume and keep up our market share. That was a strategy that the company had. But, you know, John [McMurray] and I and those of us in credit still felt like it was our obligation to make sure that there was perspective, and we were doing it with eyes wide open. In other words, in that environment, there was conflict. Some of it youd expect, and some of it went beyond what you would expect and was tough. Ingerslev Test. at 132-33. 221. As stated above, the top Countrywide executive, Mr. Mozilo himself, admitted
that he saw a serious lack of compliance within our origination system. Ex. 16 to Dean Decl. 3. 222. Countrywide Purposefully Abused Its Documentation Programs and Falsified Loan Applications
Countrywide used low-documentation loan programs as a tool to get around
Countrywides theoretical underwriting standards. When a loan officer knew an application would not be approved on the basis of the applicants actual financial condition, the officer often steered applicants into low-documentation products. Once in those programs, Countrywide
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coached borrowers on how to falsify the application to ensure it would be approved, and in some instances would even fill out the required misrepresentations without the borrowers knowledge. 223. According to Mr. Zachary, a former Regional Vice President of Countrywide, a
high executive at Countrywide KB Home Loans sanctioned the falsification of information. In an October 25, 2006 e-mail, Mr. Zachary posed to the executive a situation in which a loan officer confessed that a potential borrower did not have a job in the local area, when that is a requirement of the mortgage for which the borrower was applying. Even more drastically, Mr. Zachary wondered what would happen if the loan officer mentioned that the borrower was applying for a stated-income loan because he was unemployed. Mr. Zachary asked for confirmation that in those circumstances, when there was evidence that the borrower and/or loan officer were falsifying the borrowers information, the company would reject the loan. Shockingly, the senior executive wrote back that I wouldnt deny it [the loan] because I didnt hear anything. I would definitely tell the [loan officer] to shut up or shoot him! Second Amended Complaint, Zachary v. Countrywide Financial Corp., No. 08 Civ. 00214, at 5-6 (S.D. Tex., filed Apr. 9, 2008). 224. According to Mr. Zachary, he refused to unconditionally approve borrowers that
did not meet Countrywides stated guidelines, at which point he was taken out of the approval process and the loans were approved anyway, by his supervisor. Id. 225. A former Countrywide loan officer described in the California Attorney Generals
complaint against Countrywide reiterated the fact that borrowers were coached on how to lie. He explained that a loan officer might say, with your credit score of X, for this payment, and to make X payment, X is the income you need to make. Complaint, California v. Countrywide Fin. Corp. et al., No. LC081846, at 21 (Cal. Super. Ct. N.W. Dist., filed June 24, 2008). And
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NBC News reported that it spoke to six other former Countrywide employees, who worked in different parts of the country, who described the same anything goes corrupt culture and practices. Some of those employees even said that borrowers W-2 forms and other documents were falsified to allow for loan approval. One employee stated that Ive seen supervisors stand over employees shoulders and watch them . . . change incomes and things like that to make the loan work. Lisa Myers, Countrywide Whistleblower Reports Liar Loans, NBC News (July 1, 2008). 226. Borrowers have confirmed that Countrywide falsified loan applications and
encouraged them to falsify their loan applications. Julie Santoboni, who took out a Countrywide mortgage on her familys home in Washington, D.C., was interviewed on National Public Radio. Ms. Santoboni stated a Countrywide loan officer pressured her to lie about her income to obtain a more attractive loan, and that he wanted her to write a letter stating she made $60,000 during each of the past two years and get her accountant to sign it, even though that would have been fraudulent, since she had no income. See Chris Arnold, Woman: Countrywide Proposed Fibbing to Get Loan, NPR (May 6, 2008). Another Countrywide borrower, Bruce Rose, described obtaining a mortgage loan from Countrywide that stated his monthly income as $12,166, as he realized only later, even though his income at the time was only around $16,000 a year. See Nick Carey, Option ARMs, Next Chapter in Housing Crisis, Reuters (Feb. 1, 2008). Yet another borrower told NBC News that her Countrywide loan officer told her to claim she made more than twice her actual income in order to gain approval for her loan. See Lisa Myers, Countrywide Whistleblower Reports Liar Loans, NBC News (July 1, 2008). 227. In a June 2006 e-mail chain that included both Mr. McMurray and Mr. Sambol,
Countrywide circulated the results of an audit it had conducted. Among the findings were that
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approximately 40% of the Banks reduced documentation loans . . . could potentially have income overstated by more than 10% and a significant percent of those loans would have income overstated by 50% or more. Ex. 117 to Dean Decl. Mr. McMurray stated that was obviously the case that perhaps many of these overstatements were the result of misrepresentations. Id. Another Countrywide Risk Officer, Clifford Rossi, agreed, testifying to the SEC that the vast majority of the overstated income amounts was likely due to misrepresentations. Deposition Testimony Relied Upon in Plaintiff SECs Opposition to Defendants' Motions for Summary Judgment: Witness Clifford Rossi, SEC v. Mozilo, No. 09-03994, Docket Entry 278 at 8-9 (C.D. Cal., filed Aug. 16, 2010). 4. 228. Countrywide Cherry Picked the Best Loans While Selling Riskier Loans to Investors
Additionally, Countrywide knowingly offloaded its high-risk assets onto investors
by selectively cherry picking high quality loans to keep on its own balance sheet, while securitizing the riskier loans and selling them on the secondary market. 229. On August 2, 2005, Mr. Sambol openly acknowledged and questioned the
companys policy of cherry picking the best loans for itself while leaving the higher-risk leftovers for securitization: While it makes sense for us to be selective as to the loans which the Bank retains, we need to analyze the securitization implications on what remains if the bank is only cherry-picking and what remains to be securitized/sold is overly concentrated with higher risk loans. This concern and issue gets magnified as we put a bigger percentage of our pay option production into the Bank because the remaining production then increasingly looks like an adversely selected pool. Ex. 297 to Bendell Decl. 230. practice: Mr. Mozilo responded the same day, expressing his preference to continue the
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I absolutely understand your position however there is a price we will pay no matter what we do. The difference being that by placing less attractive loans in the secondary market we know exactly the economic price we will pay when the sales settle. By placing, even at 50%, into the Bank we have no idea what economic and reputational losses we will suffer not to say anything about restrictions placed upon us by the regulators. Id. 231. Mr. McMurray testified that he also raised concerns about Countrywides policy
of picking the best loans to keep on its balance sheet: [T]heres another element that we need to bring in here thats important with respect to securities performance. Countrywides bank tended to - on - on some of the key products, tended to select the best loans out of the ones that were originated. By best - Im talking about from a credit risk standpoint, so let me clarify that. So as - as those loans are drawn out of the population, whats left to put into the securities were not - are not as good as what you started out with, and then that can have an adverse effect on securities performance. Ex. 266-1 to McCoy Decl. 232. That Countrywide was cherry-picking the loans it would keep for itself was also
confirmed by the testimony of Clifford Rossi, a Countrywide Risk Officer, who testified that the general strategy of the bank was to originate and to cherry pick the better quality assets. Deposition Testimony Relied Upon in Plaintiff SECs Opposition to Defendants Motions for Summary Judgment: Witness Clifford Rossi, SEC v. Mozilo, No. 09-03994, Docket Entry 278 at 30 (C.D. Ca. Aug. 16, 2010). 5. 233. Countrywide Had Knowledge from Due Diligence Firms that Loans Failed to Comply with Underwriting Guidelines
The Countrywide Fraud Defendants also knew that the loans Countrywide placed
in investments like the Securitizations failed to comply with Countrywides underwriting standards because of due diligence performed by firms like Clayton and the Bohan Group
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(Bohan), who were routinely hired by investment banks, and Countrywide, to perform due diligence on mortgage loans intended for securitization. 234. Due to strong demand, originators such as Countrywide gained bargaining power
over investment banks seeking to purchase mortgage loans and sponsor securitizations. One way originators exercised this bargaining power was to insist that investment banks limit their due diligence to smaller percentages of loan pools prior to purchase. If an investment bank chose to kick out a large number of loans from a pool (e.g., because the loans failed to conform to the mortgage originators guidelines or did not contain adequate documentation), it risked being excluded from future loan purchases. As a result, investment banks performed increasingly cursory due diligence on the loans they securitized. 235. As reported by the Los Angeles Times, Clayton and Bohan employees (including
eight former loan reviewers who were cited in the article) raised plenty of red flags about flaws so serious that mortgages should have been rejected outright such as borrowers incomes that seemed inflated or documents that looked fake but the problems were glossed over, ignored, or stricken from reports. E. Scott Reckard, Sub-Prime Mortgage Watchdogs Kept On Leash, Los Angeles Times, March 17, 2008. Ironically, while the investment banks pressured third-party reviewers to make exceptions for defective loans, they often utilized information about bad loans to negotiate for themselves a lower price for the pool of loans from the seller (i.e., the originator). Indeed, according to September 2010 testimony before the FCIC by Claytons former president, D. Keith Johnson, this was one of the primary purposes of the due diligence review. 236. Countrywide knew of the red flags raised by the due diligence conducted by
Clayton and Bohan. As an originator, Countrywide was aware of the pressure on investment
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banks to scale back their due diligence and limit the number of loans kicked out of a securitization. In addition, Countrywide itself retained third-party due diligence firms such as Clayton to perform due diligence with respect to the securitizations it sponsored. 237. Clayton provided the FCIC with documents showing the defect and waiver rates
for some of the investment banks that retained Clayton to conduct loan pool due diligence. Clayton produced a report containing the rejection and waiver rates for loans originated by Countrywide. Clayton Originator Trending Report (Clayton Services Inc. 2007). Those rates are as follows: 1Q 2006 24% 8% 2Q 2006 23% 14% 3Q 2006 13% 16% 4Q 2006 14% 11% 1Q 2007 16% 14%
Rejection rate Waiver rate 238.
The Clayton documents also include statistics on the rejection and waiver rates for
loans Countrywide submitted to Clayton for review and that Countrywide was considering including in its own securitizations. Claytons report reveals that from the fourth quarter of 2006 to the first quarter of 2007, 26 percent of the mortgages Countrywide submitted for potential inclusion in its securitizations were rejected, which included a finding by Clayton that the loans had been granted despite the lack of any purported compensating factors justifying an exception. Of the mortgages that Clayton rejected, twelve percent were subsequently waived in by Countrywide and included in securitizations like the ones in which Fannie Mae and Freddie Mac invested. See All Clayton Trending Reports Q1 2006-Q2 2007, at 3 (Clayton Services Inc. 2007). 239. Countrywide never disclosed to Fannie Mae and Freddie Mac that the due
diligence conducted by Clayton and Bohan demonstrated that a substantial number of the loans in the pools backing Countrywides securities were defective, that Countrywide had waived the
112
defects as to a substantial number of the loans, or that the underwriters were using this information to negotiate a lower price for the loan pools. 6. 240. Countrywide Knew The GSE Certificates Ratings Were False
Countrywide also failed to disclose that the GSE Certificates credit ratings were
false and misleading because Countrywide fed the same misinformation found in the Registration Statements to the ratings agencies in an attempt to manufacture predetermined ratings. In testimony before the Senate Permanent Subcommittee on Investigations, Susan Barnes, the North American Practice Leader for RMBS at S&P from 2005 to 2008, confirmed that the rating agencies relied upon investment banks to provide accurate information about the loan pools: The securitization process relies on the quality of the data generated about the loans going into the securitizations. S&P relies on the data produced by others and reported to both S&P and investors about those loans. S&P relies on the data produced by others and reported to both S&P and investors about those loans. S&P does not receive the original loan files for the loans in the pool. Those files are reviewed by the arranger or sponsor of the transaction, who is also responsible for reporting accurate information about the loans in the deal documents and offering documents to potential investors. Senate Homeland Security and Governmental Affairs Subcommittee on Investigations, Hearings on Wall Street and the Financial Crisis: The Role of Credit Rating Agencies, Apr. 23, 2010 (emphasis added). The ratings obtained for the Securitizations themselves failed to reflect accurately the actual risk underlying the GSE Certificates because the ratings agencies were in fact analyzing a mortgage pool that had no relation to the pool that actually backed the Certificates marketed to investors, like the GSEs.
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7. 241.
The District Court in the SEC Civil Action Found Triable Issues of Fact as to the Countrywide Executives Knowledge
In the SEC civil action, in the course of rejecting Messrs. Mozilos, Sambols, and
Sierackis motions for summary judgment, the court found that a triable issue of fact existed on the question of scienter based on evidence presented in that case, and discussed above: Here, the SEC has presented evidence from which a reasonable jury could conclude that Defendants possessed the requisite scienter. For example, the SEC has demonstrated that Defendants were aware that Countrywide routinely ignored its underwriting guidelines and that Defendants understood the accompanying risks. The SEC has also presented evidence that Sambol was aware that Countrywides matching strategy resulted in Countrywides composite guidelines being the most aggressive guidelines in the industry. Moreover, in addition to demonstrating that Defendants were aware of the facts which made their statements misleading, the SEC has presented evidence that Sambol and Sieracki knew that Countrywides Chief Risk Officer John McMurray firmly believed that Countrywide should include greater credit risk disclosures in its SEC filings. Accordingly, the SECs evidence is sufficient to raise a genuine issue of material fact with respect to Defendants scienter, and summary judgment is inappropriate. SEC Order at *16-20 (emphasis added). B. 242. The GSEs Justifiably Relied on Countrywides Representations Fannie Mae and Freddie Mac purchased the GSE Certificates based upon the
representations by the Countrywide Fraud Defendants as the sponsor, depositors, and lead and selling underwriter in the Securitizations (as set forth in Tables 2, 11, and 12). Countrywide provided term sheets to the GSEs that contained critical data as to the Securitizations, including with respect to anticipated credit ratings by the credit rating agencies, loan-to-value and combined loan-to-value ratios for the underlying collateral, and owner-occupancy statistics. This data was subsequently incorporated into Prospectus Supplements that were received by the GSEs upon the close of each Securitization.
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243.
The GSEs relied upon the accuracy of the data transmitted to them and
subsequently reflected in the Prospectus Supplements. In particular, the GSEs relied upon the credit ratings that the credit rating agencies indicated they would bestow on the Certificates. These credit ratings represented a determination by the credit rating agencies that the GSE Certificates were AAA quality (or its equivalent) meaning the Certificates had an extremely strong capacity to meet the payment obligations described in the respective PSAs. 244. The Countrywide Fraud Defendants, as the sponsor, depositors, and lead and
selling underwriter in the vast majority of the Securitizations (as set forth in tables 2, 11, and 12), provided detailed information about the underlying collateral and structure of each Securitization to the credit rating agencies. The credit rating agencies based their ratings on the information provided to them by these Defendants, and the agencies anticipated ratings of the Certificates were dependant on the accuracy of that information. The GSEs relied on the accuracy of the anticipated credit ratings and the actual credit ratings assigned to the Certificates by the credit rating agencies, and upon the accuracy of the representations of the Countrywide Fraud Defendants in the term sheets and Prospectus Supplements as to the strength of the Securitizations. 245. In addition, the GSEs relied on the fact that the originators of the mortgage loans
in the Securitizations had acted in conformity with their underwriting guidelines, which were described in the Prospectus Supplements. Compliance with underwriting guidelines was a sine qua non to agreeing to purchase the Certificates, since the strength of the mortgage loan collateral and the GSEs decision to purchase the Certificates was directly premised on the GSEs reasonable belief that applicable underwriting standards had been observed.
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246.
In purchasing the GSE Certificates, the GSEs justifiably relied on Countrywides
false representations and omissions of material fact detailed above, including the misstatements and omissions in the term sheets about the underlying collateral, which were reflected in the Prospectus Supplements. These representations materially altered the total mix of information upon which the GSEs made their purchasing decisions. 247. But for the above misrepresentations and omissions, the GSEs would not have
purchased or acquired the Certificates as they ultimately did, because those representations and omissions were material to their decision to acquire the GSE Certificates, as described above. VI. FANNIE MAES AND FREDDIE MACS PURCHASES OF THE GSE CERTIFICATES AND THE RESULTING DAMAGES 248. In total, between August 30, 2005 and January 23, 2008, Fannie Mae and Freddie
Mac purchased approximately $26.6 billion in residential mortgage-backed securities issued in connection with the Securitizations. Table 11 reflects each of Freddie Macs purchases of the Certificates.14 Table 11
Transaction Tranche CUSIP Settlement Date of Purchase by Freddie Mac 10/31/2005 11/30/2005 10/15/2007 10/31/2007 CWALT 2005-83CB A1 A2 CWALT 2005-AR1 CWALT 2006-11CB 1A 1A1 12668BGX5 12668BGY3 12668A4P7 12668BVY6 12/30/2005 12/30/2005 12/29/2005 9/10/2007 Initial Unpaid Principal Balance $199,860,000 $199,756,000 $13,800,000 $100,000,000 $312,847,000 $34,761,000 $152,002,000 $44,446,000 Purchase Price (% of Par) Seller to Freddie Mac
CWALT 2005-57CB CWALT 2005-67CB CWALT 2005-73CB
1A1 A1 2A2
12668AYE9 12668AJ89 12668AV44
99.96875 99.8515625 97.59375 97.96875 98.0625 98.0625 100 97.9140625
Countrywide Securities Countrywide Securities RBS Securities N/A Countrywide Securities Countrywide Securities Countrywide Securities RBS Securities
Purchased securities in Tables 11 and 12 are stated in terms of the unpaid principal balance of the relevant Certificates. Purchase prices are stated in terms of percentage of par.
14
116
Transaction
Tranche
CUSIP
CWALT 2006-14CB
A1 A6
021468AA1 021468AF0 02147QAL6 02147QBF8 02147RAG5 02147RAN0 02148BAC8 23245FAA1 23244JAA4 021455AA8 02147HAA0 23243DAA8 23243VAA8 232434AA8 02150ECA9 02148LAA0 02148LAB8 02150TAD2 02148GAA1 126670CW6 126670EX2 126670HD3 126670LH9 126670NV6 126670PC6 126670QX9 1266735Q1 1266736A5
Settlement Date of Purchase by Freddie Mac 4/28/2006 4/28/2006 6/30/2006 6/30/2006 9/28/2007 9/14/2007 9/28/2007 11/30/2006 12/29/2006 5/30/2006 6/29/2006 7/28/2006 8/30/2006 9/29/2006 9/14/2007 1/31/2007 1/31/2007 1/23/2008 1/23/2008 9/28/2005 9/30/2005 11/21/2005 12/21/2005 12/28/2005 12/28/2005 12/29/2005 8/30/2005 9/28/2005
Initial Unpaid Principal Balance $194,097,000 $48,524,000 $201,815,000 $22,424,000 $44,085,000 $100,473,000 $73,910,000 $165,209,000 $224,171,000 $165,807,000 $229,217,000 $102,510,000 $139,441,000 $138,111,000 $27,882,000 $367,128,000 $117,725,000 $208,417,000 $127,393,000 $552,682,000 $167,374,000 $711,872,000 $429,264,000 $388,648,000 $487,320,000 $111,720,000 $243,773,000 $529,470,000
100.1679688 100.1679688 98.7109375 98.7109375 98.125 100.125 98.140625 100 100 100 100 100 100 100 98.19140625 101.2765 101.3989 93.75 93.75 100 100 100 100 99.77192 100 100 100 100
DB Securities DB Securities DB Securities DB Securities N/A15 N/A CGMI Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities CGMI Countrywide Securities Countrywide Securities N/A N/A Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities N/A Countrywide Securities
CWALT 2006-19CB
A11 A30
CWALT 2006-23CB
1A7 2A1
CWALT 2006-33CB CWALT 2006-OC10 CWALT 2006-OC11 CWALT 2006-OC4 CWALT 2006-OC5 CWALT 2006-OC6 CWALT 2006-OC7 CWALT 2006-OC8 CWALT 2007-5CB CWALT 2007-HY2
2A1 1A 1A 1A 1A 1A 1A 1A1 2A3 1A 2A
CWALT 2007-OA3 CWALT 2007-OA8 CWL 2005-11 CWL 2005-12 CWL 2005-13 CWL 2005-14 CWL 2005-16
2A1 1A1 2AV1 3A 2AV1 1A1 1AF 3AV
CWL 2005-17 CWL 2005-8 CWL 2005-9
2AV 1A1 1A1
N/A in Tables 11 and 12 indicates that there is no claim for purposes of Section 12 (and relatedly, Section 15) against the entity which sold the Certificate to Freddie Mac or Fannie Mae.
15
117
Transaction
Tranche
CUSIP
CWL 2005-AB3 CWL 2005-AB4 CWL 2005-BC5 CWL 2006-10 CWL 2006-12 CWL 2006-16 CWL 2006-19 CWL 2006-2 CWL 2006-20 CWL 2006-22 CWL 2006-24 CWL 2006-26 CWL 2006-3 CWL 2006-5 CWL 2006-7 CWL 2006-9 CWL 2006-BC2 CWL 2006-BC3 CWL 2006-BC4 CWL 2006-BC5 CWL 2007-2 CWL 2007-5 CWL 2007-7 CWL 2007-9 CWL 2007-BC1 CWL 2007-BC2 CWL 2007-BC3
1A1 1A 1A 2AV 1A 1A 1A 1A1 1A 1A 1A 1A 1A 1A 1A 2AV 1A 1A 1A 1A 1A 1A 1A 1A 1A 1A 1A
126670BM9 126670KJ6 126670MY1 12666PAR5 12667AAA4 23242FAA4 12667CAA0 126670UR7 12667HAA9 12666BAA3 23243HAA9 12668HAA8 126670VW5 126670YE2 232422AA3 12666RAR1 22237JAA5 23242HAA0 12667NAA6 12666SAA6 12668NAA5 12668KAA1 12669VAA6 12670FAA8 12668TAA2 12669QAA7 23246LAA7
Settlement Date of Purchase by Freddie Mac 9/27/2005 11/29/2005 12/28/2005 6/30/2006 6/30/2006 9/28/2006 9/29/2006 2/27/2006 11/8/2006 11/30/2006 12/29/2006 12/29/2006 2/27/2006 3/28/2006 6/28/2006 6/30/2006 5/30/2006 8/30/2006 9/29/2006 12/29/2006 2/28/2007 3/30/2007 5/4/2007 6/8/2007 2/28/2007 4/27/2007 6/29/2007
Initial Unpaid Principal Balance $324,864,000 $553,455,000 $279,136,000 $118,696,000 $492,030,000 $140,766,000 $259,807,000 $281,750,000 $292,425,000 $608,250,000 $423,724,000 $449,571,000 $508,785,000 $251,100,000 $313,365,000 $118,400,000 $237,900,000 $173,003,000 $200,970,000 $258,862,000 $513,888,000 $372,609,000 $276,930,000 $443,360,000 $113,153,000 $205,140,000 $185,759,000
100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities
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249.
Table 12
Transaction Tranche CUSIP Settlement Date of Purchase by Fannie Mae 31-Oct-05 30-Dec-05 30-Dec-05 30-Dec-05 30-Dec-05 3-Oct-06 30-Jan-06 28-Apr-06 30-Jul-07 30-Jul-07 29-Dec-05 29-Jun-07 21-Dec-05 29-Dec-05 29-Dec-05 28-Dec-05 28-Dec-05 29-Jun-06 28-Jul-06 8-Sep-06 25-Sep-06 28-Sep-06 30-Nov-06 8-Dec-06 29-Dec-06 17-Mar-06 29-Mar-06 Initial Unpaid Principal Balance Purchase Price (% of Par) Seller to Fannie Mae
1A1 3A1 4A1
CWALT 2005-84 CWALT 2005-85CB CWALT 2006-OA14 CWALT 2006-OC1 CWALT 2006-OC3 CWALT 2007-OA10
2A1 1A1 1A1 1A1 1A1 1A1 1A2
12668AXB 6 12668BGE 7 12668BGF 4 12668BAV 5 12668BEE9 02146SAA 7 12668BJD6 021464AA 0 02149QAA 8 02149QAB 6 126694VK 1 126694WE 4 126670LJ5 126670QY 7 126670PZ5 126670MZ 8 126670NA 2 12666TAG 1 23242EAG 4 23243LAA 0 12666VAA 9 23243WAA 6 12667LAA 0 12666CAA 1 12667TAA 3 126670WQ 7 126670ZH4
$27,224,000 $220,446,000 $247,196,000 $303,111,000 $358,968,000 $163,435,236 $373,442,000 $231,143,000 $112,645,000 $75,097,000 $167,974,000 $58,787,215 $386,093,000 $407,938,000 $202,082,000 $246,227,000 $27,358,000 $460,174,000 $399,884,000 $447,914,000 $220,938,000 $495,558,000 $328,048,000 $465,514,000 $495,720,000 $131,072,000 $501,329,000
100.3991 101.3750 99.6563 100.5287 99.6406 102.0000 100.0000 100.0000 99.7225 99.7225 100.0938 99.1445 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000
UBS Securities RBS Securities RBS Securities DB Securities DB Securities BOA Securities Countrywide Securities Countrywide Securities BOA Securities BOA Securities Countrywide Securities N/A Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities
CWHL 2005-HY10 CWHL 2006-HYB1 CWL 2005-14 CWL 2005-17 CWL 2005-AB5 CWL 2005-BC5
2A1 1A1 2A1 3AV1 1A1 2A1 2A2
CWL 2006-11 CWL 2006-13 CWL 2006-14 CWL 2006-17 CWL 2006-18 CWL 2006-21 CWL 2006-23 CWL 2006-25 CWL 2006-4 CWL 2006-6
2AV 2AV 1A 1A 1A 1A 1A 1A 1A1 1A1
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Transaction
Tranche
CUSIP
CWL 2006-8 CWL 2007-1 CWL 2007-10
1A 1A 1A1 1A2 1M1 1M2 1M3
045427AS0 23245CAA 8 23246BAE 1 23246BAF 8 23246BAL 5 23246BAN 1 23246BAQ 4 23247LAE 8 23247LAG 3 23247LAJ7 23247LAW 8 23247LAX 6 126697AA 9 126697AB7 126697AG 6 126698AA 7 126698AG 4 12668UAD 3 12669LAA 8 12669WAA 4 12669WAB 2
Settlement Date of Purchase by Fannie Mae 28-Jun-06 9-Feb-07 29-Jun-07 29-Jun-07 29-Jun-07 29-Jun-07 29-Jun-07 29-Jun-07 29-Jun-07 29-Jun-07 29-Jun-07 29-Jun-07 16-Aug-07 16-Aug-07 8/29 & 9/7/07 30-Oct-07 30-Oct-07 29-Mar-07 30-Mar-07 31-May-07 31-May-07
$330,630,000 $540,940,000 $291,060,000 $32,340,000 $20,800,000 $14,800,000 $6,200,000 $13,600,000 $10,880,000 $2,992,000 $199,022,000 $22,114,000 $501,417,000 $55,713,000 $17,953,000 $218,300,000 $9,916,000 $237,450,000 $272,850,000 $424,293,000 $47,144,000
100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 99.6765 99.6771 96.1914/ 93.79 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000
CWL 2007-11
1M1 1M2 1M3 1A1 1A2
CWL 2007-12
1A1 1A2 1M1
CWL 2007-13
1A 1M1
CWL 2007-3 CWL 2007-6 CWL 2007-8
1A 1A 1A1 1A2
Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities
250.
quality and characteristics of the mortgage loans underlying the GSE Certificates, and the origination and underwriting practices pursuant to which the mortgage loans were originated, which were summarized in such documents, were material to a reasonable investors decision to purchase the GSE Certificates.
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251.
Registration Statements, including the Prospectuses and Prospectus Supplements, directly caused Fannie Mae and Freddie Mac to suffer billions of dollars in damages, including without limitation depreciation in the value of the securities. The mortgage loans underlying the GSE Certificates experienced defaults and delinquencies at a much higher rate than they would have had the loan originators adhered to the underwriting guidelines set forth in the Registration Statements, and the payments to the trusts were therefore much lower than they would have been had the loans been underwritten as described in the Registration Statements. 252. Fannie Maes and Freddie Macs losses have been much greater than they would
have been if the mortgage loans had the credit quality represented in the Registration Statements. 253. Countrywides misstatements and omissions in the Registration Statements
regarding the true characteristics of the loans were the proximate cause of Fannie Maes and Freddie Macs losses relating to their purchases of the GSE Certificates. Based upon sales of the Certificates or similar certificates in the secondary market, Countrywide proximately caused billions of dollars in damages to Fannie Mae and Freddie Mac in an amount to be determined at trial. VII. THE SUCCESSOR LIABILITY OF THE BANK OF AMERICA DEFENDANTS 254. In 2008, Bank of America de facto merged with Countrywide Financial,
consolidating and merging with the Countrywide Defendants and acquiring substantially all of the assets of all the Countrywide Defendants. Because of the manner in which this merger was carried out, Bank of America, Bank of America, N.A., and NB Holdings are the successors in liability to Countrywide and are jointly and severally liable for the wrongful conduct alleged herein of the Countrywide Defendants.
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255.
Under New York law, where an acquiring corporation has purchased another
corporation not merely to hold it as a subsidiary, but has effectively merged with the acquired corporation, the de facto merger doctrine applies to hold the acquiring corporation liable as a successor-in-interest. Fitzgerald v. Fahnestock & Co., 286 A.D.2d 573, 574 (N.Y. App. Div. 1st Dept 2001). Based on the same facts set forth below, the Supreme Court of the State of New York in MBIA Ins. Corp. v. Countrywide Home Loans, et al., Index No. 602825/08, held that MBIA sufficiently alleged a de facto merger in which Bank of America intended to absorb and continue the operation of Countrywide. Order on Motion to Dismiss, MBIA Ins. Corp. v. Countrywide Home Loans, Inc. et al., No. 602825/08, Docket Entry No. 108 at *15 (Sup. Ct. N.Y. County filed Apr. 29, 2010). 256. On January 11, 2008, Bank of America announced that it would purchase
Countrywide Financial for approximately $4.1 billion. See Press Release, Bank of America Corp., Bank of America Agrees to Purchase Countrywide Financial Corp., (Jan. 11, 2008). Based upon the steps taken to consummate this transaction, Bank of America, Bank of America, N.A., and NB Holdings became the successors-in-interest to Countrywide Financial because (a) there was continuity of ownership between Bank of America and Countrywide, (b) Countrywide ceased ordinary business soon after the transaction was consummated, (c) there was continuity of management, personnel, physical location, assets and general business operations between Bank of America and Countrywide, (d) Bank of America assumed the liabilities ordinarily necessary for the uninterrupted continuation of Countrywides business, and (e) Bank of America assumed Countrywides mortgage repurchase and tort liabilities. Bank of America, Bank of America, N.A., and NB Holdings also became the successors-in-interest to Countrywide because a series of transactions between July 1, 2008 and November 7, 2008, which were not arms length
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transactions and which gave inadequate consideration to Countrywide, were structured in such a way as to leave Countrywide unable to satisfy its massive contingent liabilities. A. 257. The Structuring of Bank of Americas Merger with Countrywide Bank of Americas Form 8-K, dated January 11, 2008, states that under the terms
of the merger shareholders of Countrywide [] receive[d] .1822 of a share of Bank of America Corporations stock in exchange for each share of Countrywide. See Bank of America Corp., Form 8-K, Ex. 99.1 at 2 (Jan. 11, 2008). became Bank of America shareholders. 258. On July 1, 2008, a subsidiary of Bank of America completed the merger with In other words, former Countrywide shareholders
Defendant Countrywide Financial, the parent of all of the Countrywide entities. Bank of Americas Form 10-Q for the period ending September 30, 2009, reported that On July 1, 2008, the Corporation [i.e., Bank of America] acquired Countrywide through its merger with a subsidiary of the Corporation . The acquisition of Countrywide significantly expanded the Corporations mortgage originating and servicing capabilities, making it a leading mortgage originator and servicer. Bank of America Corp., Form 10-Q at 7 (Nov. 6, 2008). According to the 10-Q, Countrywides results of operations were included in the Corporations results beginning July 1, 2008. Id. The Form 10-Q also acknowledged pending litigation against Countrywide. Id. at 35. 259. Following this initial transaction and over the course of the next few months,
Bank of America planned to and did enter into a series of transactions with Countrywide Financial and its various subsidiaries, which Bank of America then controlled. These transactions were designed both to integrate Countrywides operations with Bank of Americas and to leave Countrywide Financial without any source of income and with insufficient assets to cover its massive contingent liabilities arising from Countrywides mortgage origination,
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securitization, and servicing practices. Moreover, these transactions were not negotiated at arms length because after July 1, 2008, Bank of America owned Countrywide Financial. 260. In particular, on July 2, 2008, Countrywide Home Loans, a subsidiary of
Countrywide Financial (controlled by Bank of America as of this date), completed the sale of some or substantially all of its assets to NB Holdings, another wholly-owned subsidiary of Bank of America. Specifically, Countrywide Home Loans sold NB Holdings its membership interests in Countrywide GP, LLC and Countrywide LP, LLC, whose sole assets were equity interests in Countywide Home Loans Servicing LP, in exchange for an approximately $19.7 billion promissory note. Countrywide Home Loans Servicing LP was the operating entity which serviced the vast majority of residential mortgage loans for Countrywide and was an operating business. Countrywide Home Loans also sold a pool of residential mortgages to NB Holdings for approximately $9.4 billion. NB Holdings is Countrywide Home Loans successor. 261. On November 7, 2008, after obtaining the necessary consents and approvals, two
additional transactions occurred that facilitated the completion of Bank of Americas merger with Countrywide. First, in exchange for approximately $1.76 billion, Countrywide Home Loans sold Bank of America substantially all of its remaining assets. Second, in exchange for promissory notes of approximately $3.6 billion Bank of America acquired 100 percent of Countrywide Financials equity interest in various subsidiaries, including Countrywide Bank, FSB. In connection with this transaction, Bank of America also assumed approximately $16.6 billion of Countrywides public debt and related guarantees. These two transactions completed Bank of Americas transfer of substantially all of the operating and income generating assets of Countrywide out of the Countrywide entities. In February of 2009 Countrywide Bank, FSB, filed an application to become a National Association, and in April of 2009, Countrywide Bank,
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NA was merged into Bank of America, N.A. Similarly, on July 1, 2011, BAC Home Loans Servicing, L.P. (f/k/a Countrywide Home Loans Servicing, L.P.) was merged into Bank of America, N.A. As a result of these mergers, Bank of America, N.A. assumed all of the liabilities of Countrywide Bank, NA and BAC Home Loans Servicing, L.P. (f/k/a Countrywide Home Loans Servicing, L.P.). 262. At the time of the November 2008 transactions, Countrywide Bank, FSB was the
largest Countrywide subsidiary. Countrywides 2007 10-K revealed that as of December 31, 2007, over 90% of [Countrywides] monthly mortgage loan production occurred in Countrywide Bank and that as of January 1, 2008 Countrywides production channels ha[d] moved into the Bank, completing the migration of substantially all of [Countrywides] loan production activities from CHL to the Bank. See Countrywide Financial Corporation Form 10-K (Feb. 29, 2008). By transferring to itself Countrywide Bank, FSB, along with substantially all of the assets of Countrywide Home Loans, Bank of America left the remaining Countrywide entities with only illiquid assets, no ongoing business, no ability to generate revenue, and insufficient assets to satisfy their contingent liabilities. This conclusion is echoed by Bruce Bingham (who prepared a report on behalf of BoNY, trustee for Countrywide-issued residential mortgage-backed securities, attempting to value Countrywide Financial) who found that Countrywide Financial has negative earnings, minimal operating revenues, does not originate, securitize, or service real estate loans and has no operations that by themselves are economically viable on a goforward basis. 263. The transactions between Countrywide and Bank of America were intentionally
structured so that Countrywides massive contingent liabilities relating to its mortgage origination, securitization, and servicing practices remained with Countrywide, while all of its
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assets and businesses that generated revenue were sold to Bank of America, thus leaving Countrywide unable to satisfy these liabilities. Not only did Bank of America control the Countrywide entities at the time these transactions were entered into, but Bank of America did not provide adequate consideration for the assets it received from Countrywide. In other words, in self-dealing transactions, and in exchange for inadequate consideration, Bank of America intentionally rendered Countrywide insolvent and unable to satisfy its creditors. Moreover, Bank of America was fully aware of Countrywides contingent liabilities when it transferred these assets out of Countrywide. For example, in an interview published on February 22, 2008 in the legal publication Corporate Counsel, a Bank of America spokesperson acknowledged Countrywides liabilities: Handling all this litigation wont be cheap, even for Bank of America, the soon-to-be largest mortgage lender in the country. Nevertheless, the banking giant says that Countrywides legal expenses were not overlooked during negotiations. We bought the company and all of its assets and liabilities, spokesman Scott Silvestri says. We are aware of the claims and potential claims against the company and have factored these into the purchase. See Amy Miller, Countrywide in Crosshairs as Mortgage Crisis Fuels Litigation, Corporate Counsel, Feb. 22, 2008. 264. One significant entity that Bank of America did not acquire was Countrywide
Securities, which acted as Countrywides broker-dealer and underwriter. However, on October 29, 2008, just before the November transactions, this entity withdrew its registration as a broker dealer from FINRA. See Financial Industry Regulatory Authority (FINRA), BrokerCheck Report for Countrywide Securities Corporation, Aug. 17, 2011 at 2. Without this registration, Countrywide Securities was unable to continue in the business in which it had primarily been engaged (securities dealing and underwriting) and so as of October 29, 2008, Countrywide
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Securities effectively ceased doing business. This is yet more evidence that Countrywide is no longer engaged in revenue producing activities. B. 265. Countrywide Ceases Doing Business and Is Rebranded as Bank of America On April 27, 2009, Bank of America rebranded Countrywide Home Loans as
Bank of America Home Loans. See Press Release, Bank of America Corp., Bank of America Responds to Consumer Desire for Increased Transparency (Apr. 27, 2009). Many former Countrywide locations, employees, assets and business operations now continue under the Bank of America Home Loans brand. On the Form 10-K submitted by Bank of America on February 26, 2010, both Countrywide Capital Markets and Countrywide Securities were listed as Bank of America subsidiaries. See Bank of America Corporation, Form 10-K, Ex. 21 at 13 (Feb. 26, 2010). 266. As is customary in large corporate mergers, at least some of the Countrywide
Defendants retained their pre-merger corporate names following their merger with Bank of America. However, Countrywides operations are fully consolidated into Bank of Americas and the Countrywide entities have lost any independent identity they had maintained following the merger. Bank of America announced in its April 27, 2009 press release that [t]he Countrywide brand has been retired and that Bank of America would operate its home loan and mortgage business through a new division named Bank of America Home Loans, which represents the combined operations of Bank of Americas mortgage and home equity business and Countrywide Home Loans. Bank of America Press Release, Bank of America Responds to Consumer Desire for Increased Transparency (Apr. 27, 2009). 267. A May 2009 article published by Housing Wire magazine reported that the move
to shutter the Countrywide name was essentially complete and noted that Bank of America would be migrating some of its mortgage operations over to a technology platform it acquired
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from Countrywide to originate and service loans. Barbara Desoer, the then-head of the combined mortgage, home equity and insurance business of Bank of America and Countrywide Financial, explained that the integration of Countrywide Financial and Bank of America platforms was a critical goal. Q&A with BofA Mortgage Chief Barbara Desoer, Housing Wire Magazine (May 2009). 268. Desoer stated in an October 2009 issue of Mortgage Banking that it was the
highlight of the year . . . when we retired the Countrywide brand and launched the Bank of America Home Loans brand. Robert Stowe England, Profile: Bank of America Home Mortgage, Mortgage Banking (Oct. 1, 2009). Desoer explained the first year is a good story in terms of the two companies [coming] together and meeting all the major [goals and] milestones that we had set for ourselves for how we would work to integrate the companies. Id. In the same profile, Mary Kanaga, a Countrywide transition executive who helped oversee integration, likened the process of integration to the completion of a mosaic: Everything [i.e., each business element] counts. Everything has to get there, whether it is the biggest project or the smallest project. Its very much putting a puzzle together. If there is a missing piece, we have a broken chain and we cant complete the mosaic. Id. 269. Countrywides former web address, www.countrywide.com, now takes users to
Bank of Americas website. The Bank of America website announced that the companies merged and the now-discontinued Countrywide website previously redirected inquiries about the merger to the Bank of America webpage regarding the merger. Bank of America noted on its website that it was combining the valuable resources and extensive product lines of both companies.
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270.
The April 27, 2009 press release made clear that Bank of America planned to
complete its integration of Countrywide Financial into Bank of America later this year. The press release explained that Bank of America was in the process of rebranding former Countrywide locations, account statements, marketing materials and advertising as Bank of America Home Loans, and stated that the full systems conversion to Bank of America Home Loans would occur later in 2009. See Press Release, Bank of America Corp., Bank of America Responds to Consumer Desire for Increased Transparency (Apr. 27, 2009). Bank of America Home Loans is thus a direct continuation of Countrywides operations, and the Bank of America Defendants have represented that Bank of America Home Loans is a trade name rather than a separate legal entity. It is a Bank of America trade name or brand and thus a part of Bank of America. 271. As of September 21, 2009, former Countrywide bank deposit accounts were
reportedly converted to Bank of America accounts. And on November 9, 2009, online account services for Countrywide mortgages were reportedly transferred to Bank of Americas Online Banking website. Bank of America Home Loans continued to operate out of Countrywides offices in Calabasas, California, with substantially the same employees as the former Countrywide entities. 272. Mortgage contracts and legal documents state that BAC Home Loans Servicing,
LP is the entity formerly known as Countrywide Home Loans Servicing, a Countrywide subsidiary, which clearly shows that BAC Home Loans Servicing, LP is the direct successor to Countrywide Home Loans, since it is a mere continuation of Countrywides business. 273. Bank of Americas heritage website, http://message.bankofamerica.com/heritage/,
lists Countrywide as one of the list of companies Bank of America has acquired under its
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Merger History tab. The Merger History tab also states that Bank of America, in connection with the acquisition of Countrywide rebranded its mortgage offerings as Bank of America Home Loans. Lastly, under the Merger History tab, the website states that the acquisition of Countrywide resulted in the launch of Bank of America Home Loans in 2009, making the bank the nations leading mortgage originator and servicer. The Countrywide logo appears on the page. 274. Bank of America has described the transaction through which it acquired
Countrywide Financial and its subsidiaries as a merger of the mortgage operations of both companies and made clear that it intended to integrate Countrywide Financial and its subsidiaries into Bank of America fully by the end of 2009. Public statements by Bank of America and Countrywide confirm that Bank of America intended for the two companies to combine into one:
In a July 1, 2008 Bank of America press release, Desoer stated Now we begin to combine the two companies and prepare to introduce our new name and way of operating. Press Release, Bank of America, Bank of America Completes Countrywide Financial Purchase (July 1, 2008). That press release also stated that the bank anticipates substantial cost savings from combining the two companies. Cost reductions will come from a range of sources, including the elimination of positions announced last week, and the reduction of overlapping technology, vendor and marketing expenses. In addition, [Countrywide] is expected to benefit by leveraging its broad product set to deepen relationships with existing Countrywide customers. Id. Bank of America, in its 2008 Annual Report, stated that by acquiring Countrywide, it became the No. 1 provider of both mortgage originations and servicing and, as a combined company, it would be recognized as a responsible lender who is committed to helping our customers become successful homeowners. See Bank of America 2008 Annual Report, at 14 (Mar. 2009). In a January 11, 2008 Bank of America press release, Angelo Mozilo stated that the combination of Countrywide and Bank of America will create one of the most powerful mortgage franchises in the world.
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Press Release, Bank of America Corp., Bank of America Agrees to Purchase Countrywide Financial Corp. (Jan. 11, 2008).
Former CEO of Bank of America Ken Lewis on an October 6, 2008 earnings call responded to a question about the formal guaranteeing of Countrywides debt, stating The normal process we followed is what are the operational movements that well make to combine the operations. When we do that weve said the debt would fall in line . . . . Transcript of Q3 Earnings Call at 16-17, Bank of America Corp. Q3 2008 Earnings Call (Oct. 6, 2008).
C. 275.
Bank of America Takes Steps To Expressly and Impliedly Assume Countrywide Financials Liabilities Substantially all of Countrywide Financials and Countrywide Home Loans
assets were transferred to Bank of America on November 7, 2008 in connection with Countrywides integration with Bank of Americas other businesses and operations, along with certain of Countrywides debt securities and related guarantees. Bank of America Corp., Form8-K (Nov. 10, 2008). According to the Bank of America website, while the integration was being completed Countrywide customers . . . ha[d] access to Bank of Americas 6,100 banking centers. Press Release, Bank of America Corp., Bank of America Responds to Consumer Desire for Increased Transparency (Apr. 27, 2009). 276. Countrywide Financial ceased filing its own financial statements in November
2008, and its assets and liabilities have been included in Bank of Americas recent financial statements. Bank of America has paid to restructure certain of Countrywide Financials home loans on its behalf, including permitting Countrywide Financial and Countrywide Home Loans to settle the lawsuits brought by state attorneys general and agreeing to modify up to 390,000 Countrywide loans, as described above at paragraph 176. See Press Release, MortgageForeclosure.com, Bank of America Modified 50,000 Loans in Countrywide Settlement (May 26, 2009). As also described above, at paragraphs 177 through 178, Bank of America also announced on June 28, 2011 that it would settle for $8.5 billion with BoNY (as Trustee) for
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Countrywide residential mortgage-backed security trusts. See Bank of America Corp., Form 8-K at 2 (June 29, 2011). 277. As stated above, in purchasing Countrywide Financial and its subsidiaries for 27
percent of its book value, Bank of America was fully aware of the pending claims and potential claims against Countrywide and factored them into the transaction. 278. Moreover, on October 6, 2008, during an earnings call, Joe Price, Bank of
Americas Chief Financial Officer, stated that As we transfer those operations [i.e., Countrywide Financial and its subsidiaries] our company intends to assume the outstanding Countrywide debt totaling approximately $21 billion. See Transcript of Q3 Earnings Call at 7, Bank of America Corp. Q3 2008 Earnings Call (Oct. 6, 2008). 279. Similarly, former CEO Lewis was quoted in a January 23, 2008 New York Times
article reporting on the acquisition of Countrywide Financial and its subsidiaries, in which he acknowledged that Bank of America knew of the legal liabilities of Countrywide Financial and its subsidiaries and impliedly accepted them as part of the cost of the acquisition: We did extensive due diligence. We had 60 people inside the company for almost a month. It was the most extensive due diligence we have ever done. So we feel comfortable with the valuation. We looked at every aspect of the deal, from their assets to potential lawsuits and we think we have a price that is a good price. See Julie Creswell, Bank of America Joins Parade of Mortgage-Related Losses, N.Y. Times (Jan. 23, 2008) (emphasis added). 280. Bank of America has made additional statements showing that it has assumed the
liabilities of Countrywide. In a press release announcing the merger, Lewis stated that he was aware of the issues within the housing and mortgage industries and said that the transaction [with Countrywide] reflects those challenges. See Press Release, Bank of America Corp., Bank of America Agrees to Purchase Countrywide Financial Corp. (Jan. 11, 2008). Despite these
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challenges, Lewis stated in September 2009 that The Merrill Lynch and Countrywide integrations are on track and returning value already. Press Release, Bank of America Corp., Ken Lewis Announces His Retirement (Sept. 30, 2009). 281. Likewise, in Bank of Americas Form 10-K for 2009, Bank of America
acknowledged that, [W]e face increased litigation risk and regulatory scrutiny as a result of the Merrill Lynch and Countrywide acquisitions. See Bank of America Corp., Form 10-K at 8 (Feb. 26, 2010). 282. Brian Moynihan, Bank of Americas CEO and President, testified before the
Financial Crisis Inquiry Commission on January 13, 2010, that our primary window into the mortgage crisis came through the acquisition of Countrywide . The Countrywide acquisition has positioned the bank in the mortgage business on a scale it had not previously achieved. There have been losses, and lawsuits, from the legacy of Countrywide operations, but we are looking forward. Press Release, Bank of America Corp., Testimony to Financial Crisis Inquiry Commission (FCIC), Brian T. Moynihan, President and Chief Executive Officer, Bank of America (Jan. 13, 2010). Addressing investor demands for refunds on faulty loans sold by Countrywide, Moynihan stated: Theres a lot of people out there with a lot of thoughts about how we should solve this, but at the end of the day, well pay for the things that Countrywide did. See Hugh Son & David Mildenberg, Bank of America in Hand-to-Hand Combat Over Mortgage Disputes, CEO Says, Bloomberg (Nov. 16, 2010). 283. Similarly, Jerry Dubrowski, a spokesman for Bank of America, was quoted in an
article published by Bloomberg in December 2010 that the bank will act responsibly and repurchase loans in cases where there were valid defects with the loans. Hugh Son & Dakin Campbell, BofAs Sloppy Prime Mortgages Add to Pressure for Buybacks, Bloomberg (Dec. 1,
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2010). Through the third quarter of 2010, Bank of America has faced $26.7 billion in repurchase requests and has resolved, declined or rescinded $18 billion of those claims. It has established a reserve fund against the remaining $8.7 billion in repurchase requests, which at the end of the third quarter stood at $4.4 billion. Id. 284. During an earnings call for the second quarter of 2010, Charles Noski, Bank of
Americas Chief Financial Officer, stated that we increased our reps and warranties expense by $722 million to $1.2 billion as a result of our continued evaluation of exposure to repurchases including our exposure to repurchase demands from certain monoline insurers. See Transcript of Q2 Earnings Call, Bank of America Corp. Q2 2010 Earnings Call (July 16, 2010). And during the earnings call for the third quarter of 2010, Noski stated that [t]hrough September, weve received $4.8 billion of reps and warranty claims related to the monoline-insured deals, of which $4.2 billion remains outstanding, and approximately $550 million were repurchased. See Transcript of Q3 Earnings Call, Bank of America Corp. Q3 2010 Earnings Call (Oct. 19, 2010). 285. Bank of America has reached various settlement agreements in which it has
directly taken responsibility for Countrywides liabilities. As part of the settlement agreement with state attorneys general, Bank of America agreed to forgive up to 30 percent of the outstanding mortgage balances owed by former Countrywide customers. The loans were made before Bank of America acquired Countrywide. See Press Release, Bank of America Corp., Bank of America Announces Nationwide Homeownership Retention Program for Countrywide Customers (Oct. 6, 2008) . 286. In October 2010, the New York Times reported that Bank of America is on the
hook for $20 million of the disgorgement that CEO Mozilo agreed to pay in his settlement agreement with the SEC. See Gretchen Morgenson, Lending Magnate Settles Fraud Case, N.Y.
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Times, Oct. 16, 2010, at A1. The agreement and plan of merger between Bank of America and Countrywide provided that all indemnification provisions shall survive the merger and shall continue in full force and effect . . . for a period of six years. Id. According to the article, Because Countrywide would have had to pay Mr. Mozilos disgorgement, Bank of America took on the same obligation, even though it had nothing to do with the companys operations at the time. Id. 287. On April 15, 2011, Assured Guaranty Ltd. (Assured) reached a comprehensive
$1.1 billion settlement with Bank of America regarding its liabilities with respect to 29 residential mortgage-backed securities transactions insured by Assured. The settlement agreement covered Bank of America and Countrywide-sponsored securitizations, as well as certain other securitizations containing concentrations of Countrywide-originated loans that Assured insured on a primary basis. See Press Release, Bank of America Corp., Bank of America Announces Agreement on Legacy Countrywide Mortgage Repurchase and Servicing Claims (Apr. 15, 2011). 288. On May 26, 2011, Bank of America agreed to pay more than $22 million to settle
charges that it improperly foreclosed on the homes of active-duty members of the U.S. military between January 2006 and May 2009. In a public statement concerning the settlement, Bank of America Executive President Terry Laughlin said: While most cases involve loans originated by Countrywide and the improper foreclosures were taken or started by Countrywide prior to our acquisition, it is our responsibility to make things right. Press Release, The United States Department of Justice, Justice Department Settles with Bank of America and Saxon Mortgage for Illegally Foreclosing on Servicemembers (May 26, 2011).
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289.
Under the proposed $8.5 billion settlement announced June 28, 2011 between
Bank of America and BoNY (as Trustee for certain Countrywide RMBS), Bank of America is responsible for payment of the settlement, indemnification of the Trustee, and payment of legal fees. See Press Release, Bank of America Corp., Bank of America Announces Agreement on Legacy Countrywide Mortgage Repurchase and Servicing Claims (June 29, 2011). 290. Bank of Americas public statements accepting responsibility for Countrywides
contingent liabilities arising from Countrywides mortgage origination, securitization and servicing practices, along with Bank of Americas actual settlement of such liabilities demonstrates that Bank of America and Countrywide intentionally structured the transfer of substantially all Countrywides assets in such a way as to leave minimal and inadequate assets remaining in Countrywide to cover these liabilities. 291. Bank of America has also generated substantial earnings from the absorption of
Countrywides mortgage business. For example, a Bank of America press release regarding the companys 2009 first quarter earnings stated that [n]et revenue nearly quadrupled to $5.2 billion primarily due to the acquisition of Countrywide and from higher mortgage banking income as lower interest rates drove an increase in mortgage activity. Lewis was quoted as saying, We are especially gratified that our new teammates at Countrywide and Merrill Lynch had outstanding performance that contributed significantly to our success. Press Release, Bank of America Corp., Bank of America Earns $4.2 Billion in First Quarter (Apr. 20, 2009). 292. A press release regarding Bank of Americas 2009 second quarter earnings
similarly stated that [n]et revenue rose mainly due to the acquisition of Countrywide and higher mortgage banking income as lower interest rates spurred an increase in refinance activity. The press release explained that higher mortgage banking income, trading account profits and
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investment and brokerage services income reflected the addition of Merrill Lynch and Countrywide. Bank of America reported that its average retail deposits in the quarter increased $136.3 billion, or 26 percent, from a year earlier, including $104.3 billion in balances from Merrill and Countrywide. Press Release, Bank of America Corp., Bank of America Earns $3.2 Billion in Second Quarter (July 17, 2009). 293. Bank of Americas 2009 annual report stated that [r]evenue, net of interest
expense on a fully taxable-equivalent basis, rose to $120.9 billion, representing a 63 percent increase from $74.0 billion in 2008, reflecting in part the addition of Merrill Lynch and the fullyear impact of Countrywide. Bank of America also reported that [m]ortgage banking income increased $4.7 billion driven by higher production and servicing income . . . primarily due to increased volume as a result of the full-year impact of Countrywide . . . . Insurance income also increased $927 million due to the full-year impact of Countrywides property and casualty businesses. Bank of America Corp., Form 10-K at 30, 32 (Feb. 26, 2010). 294. The above allegations demonstrate Bank of Americas de facto merger with
Countrywide and its assumption of Countrywides liabilities. FIRST CAUSE OF ACTION Violation of Section 11 of the Securities Act of 1933 (Against the Underwriter Defendants, CWALT and CWABS, and N. Joshua Adler, Ranjit Kripalani, Stanford Kurland, Jennifer S. Sandefur, Eric Sieracki, and David A. Spector (the Section 11 Individual Defendants)) 295. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes from this cause of action any allegation that could be construed as alleging fraud or intentional or reckless conduct. This cause of action specifically excludes the allegations as to Defendants scienter, including those set forth in Section V.
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296.
This claim is brought by Plaintiff pursuant to Section 11 of the Securities Act of
1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements. This claim is brought against Countrywide Securities with respect to the Registration Statements for the Securitizations for which it was a lead or co-lead underwriter or sold the GSE Certificates (as set forth in Tables 2, 11, and 12), and against Countrywide Securities and the other Underwriter Defendants with respect to the Registration Statements for the Securitizations for which they sold the GSE Certificates (as set forth in Tables 11 and 12), and is brought against CWALT and CWABS and the Section 11 Individual Defendants with respect to the Registration Statements filed by CWALT and CWABS that registered securities that were bona fide offered to the public on or after September 6, 2005. 297. This claim is predicated upon the strict liability of the Underwriter Defendants for
making false and materially misleading statements in one or more of the Registration Statements for the Securitizations (as set forth in Tables 2, 11, and 12), and for omitting facts necessary to make the facts stated therein not misleading. CWALT and CWABS and the Section 11 Individual Defendants are strictly liable for making false and materially misleading statements in the Registration Statements filed by the Depositor Defendants that registered securities that were bona fide offered to the public on or after September 6, 2005 and for omitting facts necessary to make the facts stated therein not misleading. 298. The Underwriter Defendants served as underwriter for one or more of the 86
Securitizations (as set forth in Tables 2, 11, and 12), and as such, are liable for the misstatements and omissions in the Registration Statements under Section 11 of the Securities Act.
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299.
The Depositor Defendants filed nine Registration Statements under which 86
Securitizations were carried out. As depositors, the Depositor Defendants are issuers of the GSE Certificates issued pursuant to the Registration Statements they filed within the meaning of Section 2(a)(4) of the Securities Act, 15 U.S.C. 77b(a)(4), and in accordance with Section 11(a), 15 U.S.C. 77k(a). As such, CWALT and CWABS are liable under Section 11 of the Securities Act for the misstatements and omissions in those five Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005. 300. At the time CWALT and CWABS filed five Registration Statements applicable to
62 Securitizations, the Section 11 Individual Defendants were officers and/or directors of CWALT and CWABS. In addition, the Section 11 Individual Defendants signed those Registration Statements and either signed or authorized another to sign on their behalf the amendments to those Registration Statements. As such, the Section 11 Individual Defendants are liable under Section 11 of the Securities Act for the misstatements and omissions in those Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005. 301. At the time that they became effective, each of the Registration Statements
Registration Statements are set forth above in Section IV and pertain to compliance with underwriting guidelines, occupancy status and loan-to-value ratios.
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303.
Fannie Mae and Freddie Mac purchased or otherwise acquired the GSE
Certificates pursuant to the false and misleading Registration Statements. At the time they purchased the GSE Certificates, Fannie Mae and Freddie Mac did not know of the facts concerning the false and misleading statements and omissions alleged herein, and if the GSEs would have known those facts, they would not have purchased the GSE Certificates. 304. The Underwriter Defendants owed to Fannie Mae, Freddie Mac, and other
investors a duty to make a reasonable and diligent investigation of the statements contained in the Registration Statements at the time they became effective to ensure that such statements were true and correct and that there were no omissions of material facts required to be stated in order to make the statements contained therein not misleading. The Section 11 Individual Defendants owed the same duty with respect to the five Registration Statements that they signed that registered securities that were bona fide offered to the public on or after September 6, 2005, which are applicable to 62 of the Securitizations. 305. The Underwriter Defendants and the Section 11 Individual Defendants did not
exercise such due diligence and failed to conduct a reasonable investigation. In the exercise of reasonable care, these Defendants should have known of the false statements and omissions contained in or omitted from the Registration Statements filed in connection with the Securitizations, as set forth herein. In addition, CWALT and CWABS, though subject to strict liability without regard to whether they performed diligence, also failed to take reasonable steps to ensure the accuracy of the representations. 306. Fannie Mae and Freddie Mac sustained substantial damages as a result of the
misstatements and omissions in the Registration Statements.
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307.
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae, Countrywide Securities, Countrywide Home Loans, CWALT, CWMBS, CWABS, and Bank of America. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). 308. By reason of the conduct herein alleged, the Underwriter Defendants, CWALT
and CWABS, and the Section 11 Individual Defendants are jointly and severally liable for their wrongdoing. SECOND CAUSE OF ACTION Violation of Section 12(a)(2) of the Securities Act of 1933 (Against the Underwriter Defendants and the Depositor Defendants) 309. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes from this cause of action any allegation that could be construed as alleging fraud or intentional or reckless conduct. This cause of action specifically excludes the allegations as to Defendants scienter, including those set forth in Section V. 310. This claim is brought by Plaintiff pursuant to Section 12(a)(2) of the Securities
Act of 1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements in the Securitizations listed in Table 1. 311. This claim is predicated upon the negligence of the Underwriter Defendants as
selling underwriters to Freddie Mac and Fannie Mae (as specified in Tables 11 and 12, above) for making false and materially misleading statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as Prospectuses) for one or more Securitizations. The Depositor Defendants acted negligently in making false and
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materially misleading statements in the Prospectuses for the Securitizations carried out under the Registration Statements they filed, which are applicable to all 86 Securitizations. 312. The Underwriter Defendants are prominently identified in the Prospectuses, the
primary documents that they used to sell the GSE Certificates. The Underwriter Defendants offered the Certificates publicly, including selling to Fannie Mae and Freddie Mac their GSE Certificates, as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. 313. The Underwriter Defendants offered and sold the GSE Certificates to Fannie Mae
and Freddie Mac by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. Countrywide Securities and the Underwriter Defendants reviewed and participated in drafting the Prospectuses. 314. The Underwriter Defendants successfully solicited Fannie Maes and Freddie
Macs purchases of the GSE Certificates. As underwriters, the Underwriter Defendants obtained substantial commissions based upon the amount received from the sale of the Certificates to the public. 315. The Underwriter Defendants offered the GSE Certificates for sale, sold them, and
distributed them by the use of means or instruments of transportation and communication in interstate commerce. 316. The Depositor Defendants are prominently identified in the Prospectuses for the
Securitizations carried out under the Registration Statements that they filed. These Prospectuses were the primary documents each used to sell Certificates for the 86 Securitizations under those
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Registration Statements. The Depositor Defendants offered the Certificates publicly and actively solicited their sale, including to Fannie Mae and Freddie Mac. 317. With respect to the 86 Securitizations for which they filed Registration
Statements, the Depositor Defendants offered the GSE Certificates to Fannie Mae and Freddie Mac by means of Prospectuses that contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. Upon information and belief, the Depositor Defendants reviewed and participated in drafting the Prospectuses. 318. The Depositor Defendants offered the GSE Certificates for sale by the use of
means or instruments of transportation and communication in interstate commerce. 319. Each of the Underwriter Defendants and the Depositor Defendants actively
participated in the solicitation of the GSEs purchase of the GSE Certificates, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates. 320. Each of the Prospectuses contained material misstatements of fact and omitted
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322.
The Underwriter Defendants and the Depositor Defendants offered and sold the
GSE Certificates offered pursuant to the Registration Statements directly to Fannie Mae and Freddie Mac, pursuant to the false and misleading Prospectuses. 323. The Underwriter Defendants owed to Fannie Mae and Freddie Mac, as well as to
other investors in these trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses for the Securitizations in which they acted as selling underwriter, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. The Depositor Defendants owed the same duty with respect to the Prospectuses for the Securitizations carried out under the nine Registration Statements filed by them. 324. The Underwriter Defendants and the Depositor Defendants failed to exercise such
reasonable care. These defendants in the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above. 325. In contrast, Fannie Mae and Freddie Mac did not know of the untruths and
omissions contained in the Prospectuses at the time they purchased the GSE Certificates. If the GSEs would have known of those untruths and omissions, they would not have purchased the GSE Certificates. 326. Fannie Mae and Freddie Mac acquired all of the GSE Certificates sold by the
Underwriter Defendants, as specified in Tables 11 and 12, above, in the primary market pursuant to the Prospectuses.
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327.
Fannie Mae and Freddie Mac sustained substantial damages in connection with
their investments in the GSE Certificates and have the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 328. The time period from July 13, 2009 through August 30, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae, CWALT, CWMBS, CWABS, Countrywide Securities, and Countrywide Home Loans. Additionally, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). THIRD CAUSE OF ACTION Violation of Section 15 of the Securities Act of 1933 (Against Countrywide Financial, Countrywide Home Loans, Countrywide Capital Markets, and the Individual Defendants) 329. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes from this cause of action any allegation that could be construed as alleging fraud or intentional or reckless conduct. This cause of action specifically excludes the allegations as to Defendants scienter, including those set forth in Section V. 330. This claim is brought under Section 15 of the Securities Act of 1933, 15 U.S.C.
77o (Section 15), against Countrywide Financial, Countrywide Home Loans, Countrywide Capital Markets, and the Individual Defendants for controlling-person liability with regard to the Section 11 and Section 12(a)(2) causes of actions set forth above. 331. The Individual Defendants at all relevant times participated in the operation and
management of the Depositor Defendants and their related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of the Depositor Defendants business affairs. 332. Defendant Countrywide Home Loans was the sponsor for the 86 Securitizations
carried out under the nine Registration Statements filed by the Depositor Defendants and
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culpably participated in the violations of Sections 11 and 12(a)(2) set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting the Depositor Defendants as the special purpose vehicles, and selecting Countrywide Securities as underwriter. In its role as sponsor, Countrywide Home Loans knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 333. Defendant Countrywide Home Loans also acted as the seller of the mortgage
loans for the 86 Securitizations carried out under the nine Registration Statements filed by the Depositor Defendants, in that it conveyed such mortgage loans to the Depositor Defendants pursuant to the PSAs. 334. Defendant Countrywide Home Loans also controlled all aspects of the business of
the Depositor Defendants, as the Depositor Defendants were merely special purpose entities created for the purpose of acting as a pass-through for the issuance of the Certificates. In addition, because of its position as sponsor, Countrywide Home Loans was able to, and did in fact, control the contents of the nine Registration Statements filed by the Depositor Defendants, including the Prospectuses and Prospectus Supplements, which pertained to 86 Securitizations and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 335. Defendant Countrywide Capital Markets controlled the business operations of
Defendant Countrywide Securities. Countrywide Capital Markets is the sole owner of Countrywide Securities and as such, had the practical ability to direct and control the actions of
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Countrywide Securities in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of Countrywide Securities in connection with the issuance and sale of the Certificates. 336. Defendant Countrywide Capital Markets culpably participated in the violations of
Section 11 and 12(a)(2) set forth. It oversaw the actions of its subsidiary, Countrywide Securities, and allowed it to misrepresent the mortgage loans characteristics in the Registration Statements. 337. Defendant Countrywide Financial controlled the business operations of the
Depositor Defendants and Countrywide Securities. Defendant Countrywide Financial is the corporate parent of the Depositor Defendants and the ultimate corporate parent of Countrywide Securities. As such, Countrywide Financial had the practical ability to direct and control the actions of Countrywide Securities and the Depositor Defendants in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of Countrywide Securities and the Depositor Defendants in connection with the issuance and sale of the Certificates. 338. Countrywide Financial expanded its share of the residential mortgage-backed
securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 339. Countrywide Financial culpably participated in the violations of Section 11 and
12(a)(2) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established
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special-purpose financial entities such as the Depositor Defendants and the issuing trusts to serve as conduits for the mortgage loans. 340. Countrywide Financial, Countrywide Home Loans, Countrywide Capital Markets,
and the Individual Defendants are controlling persons within the meaning of Section 15 by virtue of their actual power over, control of, ownership of, and/or directorship of Countrywide Securities and the Depositor Defendants at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 341. Fannie Mae and Freddie Mac purchased in the primary market Certificates issued
misstatements and omissions in the Registration Statements, for which they are entitled to compensation. 344. The time period from July 13, 2009 through August 30, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae, CWALT, CWMBS, CWABS, Countrywide Securities, and Countrywide Home Loans. Additionally, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12).
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FOURTH CAUSE OF ACTION Violation of Section 13.1-522(A)(ii) of the Virginia Code (Against Countrywide Securities, CGMI, DB Securities, and RBS Securities (the Freddie Mac Underwriter Defendants) and CWALT and CWABS) 345. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes from this cause of action any allegation that could be construed as alleging fraudulent or intentional or reckless conduct. This cause of action specifically excludes the allegations as to Defendants scienter, including those set forth in Section V. 346. This claim is brought by Plaintiff pursuant to Section 13.1-522(A)(ii) of the
Virginia Code and is asserted on behalf of Freddie Mac. The allegations set forth below in this cause of action pertain to only those GSE Certificates identified in Table 11 above that were purchased by Freddie Mac on or after September 6, 2006. 347. This claim is predicated upon the negligence of the Freddie Mac Underwriter
Defendants as selling underwriters to Freddie Mac (as specified in Table 11, above) for making false and materially misleading statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as Prospectuses) for one or more Securitizations. CWALT and CWABS acted negligently in making false and materially misleading statements in the Prospectuses for the Securitizations carried out under the Registration Statements they filed. 348. The Freddie Mac Underwriter Defendants are prominently identified in the
Prospectuses, the primary documents that they used to sell the GSE Certificates. The Freddie Mac Underwriter Defendants offered the Certificates publicly, including selling to Freddie Mac its GSE Certificates, as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses.
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349.
The Freddie Mac Underwriter Defendants offered and sold the GSE Certificates
to Freddie Mac by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. The Freddie Mac Underwriter Defendants reviewed and participated in drafting the Prospectuses. 350. The Freddie Mac Underwriter Defendants successfully solicited Freddie Macs
purchases of the GSE Certificates. As underwriters, the Freddie Mac Underwriter Defendants obtained substantial commissions based upon the amount received from the sale of the Certificates to the public. 351. The Freddie Mac Underwriter Defendants offered the GSE Certificates for sale,
sold them, and distributed them to Freddie Mac in the State of Virginia. 352. CWALT and CWABS are prominently identified in the Prospectuses for the
Securitizations carried out under the Registration Statements that they filed. These Prospectuses were the primary documents each used to sell Certificates for the Securitizations under those Registration Statements. CWALT and CWABS offered the Certificates publicly and actively solicited their sale, including to Freddie Mac. 353. With respect to the Securitizations for which they filed Registration Statements,
CWALT and CWABS offered the GSE Certificates to Freddie Mac by means of Prospectuses that contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. Upon information and belief, CWALT and CWABS reviewed and participated in drafting the Prospectuses.
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354.
Each of the Freddie Mac Underwriter Defendants, CWALT, and CWABS
actively participated in the solicitation of Freddie Macs purchase of the GSE Certificates, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates. 355. Each of the Prospectuses contained material misstatements of fact and omitted
Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 357. The Freddie Mac Underwriter Defendants, CWALT, and CWABS offered and
sold the GSE Certificates offered pursuant to the Registration Statements directly to Freddie Mac, pursuant to the false and misleading Prospectuses. 358. The Freddie Mac Underwriter Defendants owed to Freddie Mac, as well as to
other investors in these trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses for the Securitizations in which they acted as selling underwriter, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. CWALT and CWABS owed the same duty with respect to the Prospectuses for the Securitizations carried out under the Registration Statements filed by them.
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359.
The Freddie Mac Underwriter Defendants, CWALT, and CWABS failed to
exercise such reasonable care. These defendants in the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above. 360. In contrast, Freddie Mac did not know of the untruths and omissions contained in
as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). FIFTH CAUSE OF ACTION Violation of Section 13.1-522(C) of the Virginia Code (Against Countrywide Financial, Countrywide Home Loans, Countrywide Capital Markets, and N. Joshua Adler, Ranjit Kripalani, Stanford Kurland, Jennifer S. Sandefur, Eric Sieracki, and David A. Spector (the Freddie Mac Individual Defendants)) 363. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes from this cause of action any allegation that could be construed as alleging fraud or intentional or reckless conduct. This cause of action specifically excludes the allegations as to Defendants scienter, including those set forth in Section V. 364. This claim is brought by Plaintiff under Section 13.1-522(C) of the Virginia Code
and is asserted on behalf of Freddie Mac. The allegations set forth in this cause of action pertain only to those GSE Certificates identified in Table 11 above that were purchased by Freddie Mac
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on or after September 6, 2006. This claim is brought against Countrywide Financial, Countrywide Home Loans, Countrywide Capital Markets, and the Freddie Mac Individual Defendants for controlling-person liability with regard to the Fourth Cause of Action set forth above. 365. The Freddie Mac Individual Defendants at all relevant times participated in the
operation and management of CWALT and CWABS and their related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of CWALTs and CWABS business affairs. 366. Defendant Countrywide Home Loans was the sponsor for the Securitizations
carried out under the Registration Statements filed by CWALT and CWABS and culpably participated in the violations of Section 13.1-522(A)(ii) set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting CWALT and CWABS as the special purpose vehicles, and selecting Countrywide Securities as underwriter. In its role as sponsor, Countrywide Home Loans knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 367. Defendant Countrywide Home Loans also acted as the seller of the mortgage
loans for the Securitizations carried out under the Registration Statements filed by CWALT and CWABS, in that it conveyed such mortgage loans to those Defendants pursuant to the PSAs. 368. Defendant Countrywide Home Loans also controlled all aspects of the business of
CWALT and CWABS, as those Defendants were merely special purpose entities created for the
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purpose of acting as a pass-through for the issuance of the Certificates. In addition, because of its position as sponsor, Countrywide Home Loans was able to, and did in fact, control the contents of the Registration Statements filed by CWALT and CWABS, including the Prospectuses and Prospectus Supplements, which pertained to the Securitizations and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 369. Defendant Countrywide Capital Markets controlled the business operations of
Defendant Countrywide Securities. Countrywide Capital Markets is the sole owner of Countrywide Securities and as such, had the practical ability to direct and control the actions of Countrywide Securities in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of Countrywide Securities in connection with the issuance and sale of the Certificates. 370. Defendant Countrywide Capital Markets culpably participated in the violation of
Section 13.1-522(A)(ii) set forth above. It oversaw the actions of its subsidiary, Countrywide Securities, and allowed it to misrepresent the mortgage loans characteristics in the Registration Statements. 371. Defendant Countrywide Financial controlled the business operations of the
CWALT and CWABS and Countrywide Securities. Defendant Countrywide Financial is the corporate parent of CWALT and CWABS and the ultimate corporate parent of Countrywide Securities. As such, Countrywide Financial had the practical ability to direct and control the actions of Countrywide Securities, CWALT, and CWABS in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of Countrywide Securities, CWALT, and CWABS in connection with the issuance and sale of the Certificates.
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372.
Countrywide Financial expanded its share of the residential mortgage-backed
securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 373. Countrywide Financial culpably participated in the violation of Section 13.1-
522(A)(ii) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as CWALT and CWABS and the issuing trusts to serve as conduits for the mortgage loans. 374. Countrywide Financial, Countrywide Home Loans, Countrywide Capital Markets,
and the Freddie Mac Individual Defendants are controlling persons within the meaning of Section 13.1-522(C) by virtue of their actual power over, control of, ownership of, and/or directorship of Countrywide Securities, CWALT, and CWABS at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 375. Freddie Mac purchased in Certificates issued pursuant to the Registration
Statements; had Freddie Mac known of those misstatements and omissions, it would not have purchased the GSE Certificates.
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377.
Freddie Mac has sustained damages as a result of the misstatements and
as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). SIXTH CAUSE OF ACTION Violation of Section 31-5606.05(a)(1)(B) of the District of Columbia Code (Against Countrywide Securities, BOA Securities, DB Securities, RBS Securities, and UBS Securities (the Fannie Mae Underwriter Defendants) and the Depositor Defendants) 379. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes from this cause of action any allegation that could be construed as alleging fraudulent or intentional or reckless conduct. This cause of action specifically excludes the allegations as to Defendants scienter, including those set forth in Section V. 380. This claim is brought by Plaintiff pursuant to Section 31-5606.05(a)(1)(B) of the
District of Columbia Code and is asserted on behalf of Fannie Mae. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 12 above. 381. This claim is predicated upon the negligence of the Fannie Mae Underwriter
Defendants as selling underwriters to Fannie Mae (as specified in Table 12, above) for making false and materially misleading statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as Prospectuses) for one or more Securitizations. The Depositor Defendants acted negligently in making false and materially misleading statements in the Prospectuses for the Securitizations carried out under the Registration Statements they filed.
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382.
The Fannie Mae Underwriter Defendants are prominently identified in the
Prospectuses, the primary documents that they used to sell the GSE Certificates. The Fannie Mae Underwriter Defendants offered the Certificates publicly, including selling to Fannie Mae its GSE Certificates, as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. 383. The Fannie Mae Underwriter Defendants offered and sold GSE Certificates to
Fannie Mae by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. The Fannie Mae Underwriting Defendants reviewed and participated in drafting the Prospectuses. 384. The Fannie Mae Underwriter Defendants successfully solicited Fannie Maes
purchases of the GSE Certificates. As underwriters, the Fannie Mae Underwriter Defendants obtained substantial commissions based upon the amount received from the sale of the Certificates to the public. 385. The Fannie Mae Underwriter Defendants offered the GSE Certificates for sale,
sold them, and distributed them to Fannie Mae in the District of Columbia. 386. The Depositor Defendants are prominently identified in the Prospectuses for the
Securitizations carried out under the Registration Statements that they filed. These Prospectuses were the primary documents each used to sell Certificates for the Securitizations under those Registration Statements. The Depositor Defendants offered the Certificates publicly and actively solicited their sale, including to Fannie Mae. 387. With respect to the Securitizations for which they filed Registration Statements,
the Depositor Defendants offered the GSE Certificates to Fannie Mae by means of Prospectuses
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that contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. Upon information and belief, the Depositor Defendants reviewed and participated in drafting the Prospectuses. 388. Each of the Fannie Mae Underwriter Defendants and the Depositor Defendants
actively participated in the solicitation of Fannie Maes purchase of the GSE Certificates, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates. 389. Each of the Prospectuses contained material misstatements of fact and omitted
Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 391. The Fannie Mae Underwriter Defendants and the Depositor Defendants offered
and sold the GSE Certificates offered pursuant to the Registration Statements directly to Fannie Mae, pursuant to the false and misleading Prospectuses. 392. The Fannie Mae Underwriter Defendants owed to Fannie Mae, as well as to other
investors in these trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses for the Securitizations in which they acted as selling underwriter, to ensure that such statements were true, and to ensure that there was no omission of a material
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fact required to be stated in order to make the statements contained therein not misleading. The Depositor Defendants owed the same duty with respect to the Prospectuses for the Securitizations carried out under the Registration Statements filed by them. 393. The Fannie Mae Underwriter Defendants and the Depositor Defendants failed to
exercise such reasonable care. These defendants in the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above. 394. In contrast, Fannie Mae did not know of the untruths and omissions contained in
the Prospectuses at the time it purchased the GSE Certificates. If Fannie Mae would have known of those untruths and omissions, it would not have purchased the GSE Certificates. 395. Fannie Mae sustained substantial damages in connection with its investments in
the GSE Certificates and has the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 396. The time period from July 13, 2009 through August 30, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae, CWALT, CWMBS, CWABS, Countrywide Securities, and Countrywide Home Loans. Additionally, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). SEVENTH CAUSE OF ACTION Violation of Section 31-5606.05(c) of the District of Columbia Code (Against Countrywide Financial, Countrywide Home Loans, Countrywide Capital Markets, and the Individual Defendants) 397. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes from this cause of action any allegation that could be construed as alleging fraudulent or intentional or reckless conduct. This cause of action
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specifically excludes the allegations as to Defendants scienter, including those set forth in Section V. 398. This claim is brought by Plaintiff pursuant to Section 31-5606.05(c) of the
District of Columbia Code and is asserted on behalf of Fannie Mae. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 12 above that were purchased by Fannie Mae. This claim is brought against Countrywide Financial, Countrywide Home Loans, Countrywide Capital Markets, and the Individual Defendants for controlling-person liability with regard to the Sixth Cause of Action set forth above. 399. The Individual Defendants at all relevant times participated in the operation and
management of the Depositor Defendants and their related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of the Depositor Defendants business affairs. 400. Defendant Countrywide Home Loans was the sponsor for the Securitizations
carried out under the Registration Statements filed by the Depositor Defendants and culpably participated in the violations of Section 31-5606.05(a)(1)(B) set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting the Depositor Defendants as the special purpose vehicles, and selecting Countrywide Securities as underwriter. In its role as sponsor, Countrywide Home Loans knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 401. Defendant Countrywide Home Loans also acted as the seller of the mortgage
loans for the Securitizations carried out under the Registration Statements filed by the Depositor
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Defendants, in that it conveyed such mortgage loans to the Depositor Defendants pursuant to the PSAs. 402. Defendant Countrywide Home Loans also controlled all aspects of the business of
the Depositor Defendants, as the Depositor Defendants were merely special purpose entities created for the purpose of acting as a pass-through for the issuance of the Certificates. In addition, because of its position as sponsor, Countrywide Home Loans was able to, and did in fact, control the contents of the Registration Statements filed by the Depositor Defendants, including the Prospectuses and Prospectus Supplements, which pertained to the Securitizations and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 403. Defendant Countrywide Capital Markets controlled the business operations of
Defendant Countrywide Securities. Countrywide Capital Markets is the sole owner of Countrywide Securities and as such, had the practical ability to direct and control the actions of Countrywide Securities in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of Countrywide Securities in connection with the issuance and sale of the Certificates. 404. Defendant Countrywide Capital Markets culpably participated in the violation of
Section 31-5606.05(a)(1)(B) set forth above. It oversaw the actions of its subsidiary, Countrywide Securities, and allowed it to misrepresent the mortgage loans characteristics in the Registration Statements. 405. Defendant Countrywide Financial controlled the business operations of the
Depositor Defendants and Countrywide Securities. Defendant Countrywide Financial is the corporate parent of the Depositor Defendants and the ultimate corporate parent of Countrywide
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Securities. As such, Countrywide Financial had the practical ability to direct and control the actions of Countrywide Securities and the Depositor Defendants in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of Countrywide Securities and the Depositor Defendants in connection with the issuance and sale of the Certificates. 406. Countrywide Financial expanded its share of the residential mortgage-backed
securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 407. Countrywide Financial culpably participated in the violation of Section 31-
5606.05(a)(1)(B) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as the Depositor Defendants and the issuing trusts to serve as conduits for the mortgage loans. 408. Countrywide Financial, Countrywide Home Loans, Countrywide Capital Markets,
and the Individual Defendants are controlling persons within the meaning of Section 315606.05(c) by virtue of their actual power over, control of, ownership of, and/or directorship of Countrywide Securities and the Depositor Defendants at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 409. Fannie Mae purchased in Certificates issued pursuant to the Registration
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the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements. 410. Fannie Mae did not know of the misstatements and omissions in the Registration
in the Registration Statements, for which it is entitled to compensation. 412. The time period from July 13, 2009 through August 30, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae, CWALT, CWMBS, CWABS, Countrywide Securities, and Countrywide Home Loans. Additionally, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). EIGHTH CAUSE OF ACTION Common Law Negligent Misrepresentation (Against Countrywide Securities and the Depositor Defendants) 413. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes from this cause of action any allegation that could be construed as alleging fraudulent or intentional or reckless conduct. This cause of action specifically excludes the allegations as to Defendants scienter, including those set forth in Section V. 414. This is a claim for common law negligent misrepresentation against Countrywide
Securities and the Depositor Defendants. 415. Between September 27, 2005 and October 30, 2007, Countrywide Securities and
the Depositor Defendants sold the GSE Certificates to the GSEs as described above. Because the
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Depositor Defendants owned and then conveyed the underlying mortgage loans that collateralized the Securitizations for which they served as depositors, the Depositor Defendants had unique, exclusive, and special knowledge about the mortgage loans in the Securitizations through their possession of the loan files and other documentation. 416. Likewise, as underwriter for the vast majority of the Securitizations, Countrywide
Securities was obligated and had the opportunity to perform sufficient due diligence to ensure that the Registration Statements for those Securitizations, including without limitation the corresponding Prospectus Supplements, did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. As a result of this privileged position as underwriter which gave it access to loan file information and obligated it to perform adequate due diligence to ensure the accuracy of the Registration Statements Countrywide Securities had unique, exclusive, and special knowledge about the underlying mortgage loans in the Securitizations. 417. Countrywide Securities also had unique, exclusive, and special knowledge of the
work of third-party due diligence providers, such as Clayton, who identified significant failures of originators to adhere to the underwriting standards represented in the Registration Statements. The GSEs, like other investors, had no access to borrower loan files prior to the closing of the Securitizations and their purchase of the Certificates. Accordingly, when determining whether to purchase the GSE Certificates, the GSEs could not evaluate the underwriting quality or the servicing practices of the mortgage loans in the Securitizations on a loan-by-loan basis. The GSEs therefore reasonably relied on Countrywide Securities knowledge and its express representations made prior to the closing of the Securitizations regarding the underlying mortgage loans.
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418.
Countrywide Securities and the Depositor Defendants were aware that the GSEs
reasonably relied on their reputations and unique, exclusive, and special expertise and experience, as well as their express representations made prior to the closing of the Securitizations, and that the GSEs depended upon these Defendants for complete, accurate, and timely information. The standards under which the underlying mortgage loans were actually originated were known to these Defendants and were not known, and could not be determined, by the GSEs prior to the closing of the Securitizations. 419. Based upon their unique, exclusive, and special knowledge and expertise about
the loans held by the trusts in the Securitizations, Countrywide Securities and the Depositor Defendants had a duty to provide the GSEs complete, accurate, and timely information regarding the mortgage loans and the Securitizations. Countrywide Securities and the Depositor Defendants negligently breached their duty to provide such information to the GSEs by instead making to the GSEs untrue statements of material facts in the Securitizations, or otherwise misrepresenting to the GSEs material facts about the Securitizations. The misrepresentations are set forth in Section IV above, and include misrepresentations as to the accuracy of the represented credit ratings, compliance with underwriting guidelines for the mortgage loans and the accuracy of the owner-occupancy statistics and the loan-to-value ratios applicable to the Securitizations, as disclosed in the term sheets and Prospectus Supplements. 420. In addition, having made actual representations about the underlying collateral in
the Securitizations and the facts bearing on the riskiness of the Certificates, Countrywide Securities and the Depositor Defendants had a duty to correct misimpressions left by their statements, including with respect to any half truths. The GSEs were entitled to rely upon the representations of Countrywide Securities and the Depositor Defendants about the
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Securitizations, and these Defendants failed to correct in a timely manner any of their misstatements or half truths, including misrepresentations as to compliance with underwriting guidelines for the mortgage loans. 421. The GSEs reasonably relied on the information Countrywide Securities and the
Depositor Defendants provided, and these Defendants knew that the GSEs were acting in reliance on such information. The GSEs were damaged in an amount to be determined at trial as a direct, proximate, and foreseeable result of Countrywide Securities and the Depositor Defendants misrepresentations, including any half truths. 422. The time period from July 13, 2009 through August 30, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae, CWALT, CWMBS, CWABS, Countrywide Securities, and Countrywide Home Loans. Additionally, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). NINTH CAUSE OF ACTION Common Law Fraud (Against the Countrywide Fraud Defendants) 423. forth herein. 424. 425. This is a claim for common law fraud against the Countrywide Fraud Defendants. The material representations set forth above were fraudulent, and the Plaintiff realleges each allegation in paragraphs 1 through 294 above as if fully set
representations of Countrywide Securities to the GSEs in the term sheets and Prospectus Supplements falsely and misleadingly misrepresented and omitted material statements of fact. The misrepresentations are set forth in Section IV above, and include misrepresentations as to the accuracy of the represented credit ratings, compliance with underwriting guidelines for the
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mortgage loans, and the accuracy of the owner-occupancy statistics and the loan-to-value ratios applicable to the Securitizations, as disclosed in the terms sheets and Prospectus Supplements. The representations on which the GSEs relied were directly communicated to them by Countrywide Securities. Countrywide Securities knew, or was reckless in not knowing, that its representations and omissions were false and/or misleading at the time they were made. Countrywide Securities made the misleading statements for the purpose of inducing the GSEs to purchase the GSE Certificates. 426. The basis for the false representations in the term sheets and Prospectus
Supplements that Countrywide Securities made to the GSEs was information that Countrywide Home Loans and the Depositor Defendants provided to Countrywide Securities as to the strength of the collateral underlying the GSE Certificate and the structure of the Securitizations. Countrywide Home Loans and the Depositor Defendants communicated this information to Countrywide Securities with the knowledge and intent that Countrywide Securities would communicate this information to purchasers of the GSE Certificates. Countrywide Home Loans and the Depositor Defendants each had reason to expect that the GSEs were among the class of persons who would receive and rely on such representations. 427. Each of the Countrywide Fraud Defendants intended that the above misleading
statements were to be made for the purpose of inducing the GSEs to purchase the GSE Certificates. Countrywide Home Loans made misleading statements with reason to expect that Fannie Mae and Freddie Mac would be among the class of persons who would receive and rely upon the statements. 428. The GSEs justifiably relied on the Countrywide Fraud Defendants false
representations and misleading omissions.
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429.
Had the GSEs known the true facts regarding Countrywides underwriting
practices and quality of the mortgage loans collateralizing the GSE Certificates, they would not have purchased the GSE Certificates. 430. As a result of the foregoing, the GSEs have suffered damages according to proof.
In the alternative, Plaintiff hereby demands rescission and makes any necessary tender of the GSE Certificates. 431. The misconduct of the Countrywide Fraud Defendants was intentional and
wanton. The immediate victims of the fraud perpetrated by the Countrywide Fraud Defendants were Fannie Mae and Freddie Mac, two Government-sponsored entities whose primary mission is assuring affordable housing to millions of Americans. Further, the public nature of the Countrywide Fraud Defendants harm is apparent in and conclusively demonstrated by the state and federal suits and investigations that have been pursued against Countrywide as a direct result of its fraudulent conduct at issue in this Complaint (as set forth above in Section V). See, e.g., SEC Complaint; FCIC Report, passim. Punitive damages are therefore warranted for the actions of the Countrywide Fraud Defendants in order to punish, deter them from future misconduct, and protect the public. 432. The time period from July 13, 2009 through August 30, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae, CWALT, CWMBS, CWABS, Countrywide Securities, and Countrywide Home Loans. Additionally, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12).
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TENTH CAUSE OF ACTION Aiding and Abetting Fraud (Against Countrywide Home Loans and the Depositor Defendants) 433. forth herein. 434. This is a claim for aiding and abetting fraud against Defendants Countywide Plaintiff realleges each allegation in paragraphs 1 through 294 above as if fully set
Home Loans and the Depositor Defendants with respect to the Securitizations sponsored by Countrywide Home Loans. 435. Countrywide Home Loans, as sponsor of all 70 Securitizations in which
Countrywide Securities was a lead underwriter, substantially assisted Countrywide Securities fraud by choosing which mortgage loans would be included in those Securitizations. It also selected and pooled for securitization mortgage loans it had originated itself, knowing that those mortgage loans had not been originated in compliance with its underwriting guidelines. Countywide Home Loans action in originating, selecting, and pooling for securitization mortgage loans that had not been originated in compliance with its underwriting guidelines was an integral part of the Securitizations. 436. Likewise, the Depositor Defendants, as depositors of the Securitizations,
substantially assisted Countrywide Securities fraud by issuing the Registration Statements that were used to offer publicly the Certificates. As the issuers of the Certificates, the Depositor Defendants were an integral part of Countrywide Securities sale of the Certificates to the GSEs. 437. As described above, Countrywide Securities made fraudulent and untrue
statements of material fact and omitted to state material facts regarding the true credit quality of the GSE Certificates, the true rate of owner occupancy, the true LTV and CLTV ratio of the
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underlying mortgage loans, the true credit ratings, and compliance by the originators with applicable underwriting guidelines. 438. Each of Countrywide Home Loans and the Depositor Defendants had unique
access to the loan files, and therefore was aware of the extreme weakness of the loans. In fact, as described above in Section V, during the same period that it was selling mortgage loans to be securitized, and thereby passing on to investors such as Fannie Mae and Freddie Mac the risks of non-performance of those loans, Countrywide Home Loans was well aware that the loans had not been originated in compliance with underwriting guidelines and thus that their risk profiles had been significantly understated. Accordingly, Countrywide Home Loans and the Depositor Defendants were aware that the representations and omissions of Countrywide Securities were fraudulent. 439. The central role of Countywide Home Loans and the Depositor Defendants in
Countrywide Securities vertically integrated sales strategy for the Certificates substantially assisted in Countrywide Securities fraud. The Depositor Defendants, as the purchaser of the underlying mortgage loans, worked closely with Countrywide Home Loans, as the vehicle for securitizing the mortgage loans, which in turn worked closely with Countrywide Securities, as the distribution arm for the Certificates collateralized by those mortgage loans and then sold to the GSEs. Each of Countrywide Home Loans and the Depositor Defendants worked hand-inglove to provide their affiliate Countrywide Securities with Certificates that it could fraudulently sell to the GSEs. 440. Countywide Home Loans and the Depositor Defendants substantial assistance in
Countrywide Securities fraud played a significant and material role in inducing the GSEs to purchase the GSE Certificates. As a direct, proximate, and foreseeable result of Countrywide
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Home Loans and the Depositor Defendants aiding and abetting Countrywide Securities in perpetrating a fraud against the GSEs, the GSEs have been damaged in an amount to be determined at trial. 441. Because Countywide Home Loans and the Depositor Defendants aided and
abetted Countrywide Securities fraud willfully and wantonly, and because by means of their acts Countrywide Home Loans and the Depositor Defendants knowingly affected the general public, including but not limited to all persons with interests in the Certificates, Plaintiff is entitled to recover punitive damages. 442. The time period from July 13, 2009 through August 30, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae, CWALT, CWMBS, CWABS, Countrywide Securities, and Countrywide Home Loans. Additionally, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). ELEVENTH CAUSE OF ACTION (Successor and Vicarious Liability) (Against the Bank of America Defendants) 443. 444. Plaintiff realleges each allegation above as if fully set forth herein. The Bank of America Defendants are jointly and severally liable or otherwise
vicariously liable for any and all damages resulting from the wrongful actions of Countrywide, as alleged herein, because they are the successors-in-interest to Countrywide. 445. The Bank of America Defendants became the successors-in-interest to
Countrywide because (a) there was continuity of ownership between Bank of America and Countrywide; (b) Countrywide ceased ordinary business soon after the transaction was consummated; (c) there was continuity of management, personnel, physical location, assets and general business operations between Bank of America and Countrywide; (d) Bank of America
171
assumed the liabilities ordinarily necessary for the uninterrupted continuation of Countrywides business; and (e) Bank of America assumed Countrywides mortgage repurchase and tort liabilities. The Bank of America Defendants also became successors-in-interest to Countrywide because the transactions, which were not arms length transactions and which gave inadequate consideration to Countrywide, were structured in such a way as to leave Countrywide unable to satisfy massive contingent liabilities. PRAYER FOR RELIEF WHEREFORE Plaintiff prays for relief as follows: An award in favor of Plaintiff against all Defendants, jointly and severally, for all damages sustained as a result of Defendants wrongdoing, in an amount to be proven at trial, but including: a. Rescission and recovery of the consideration paid for the GSE
GSE Certificates, as well as lost principal and lost interest payments thereon; c. d. e. f. Punitive damages; Attorneys fees and costs; Prejudgment interest at the maximum legal rate; and Such other and further relief as the Court may deem just and proper.
172
SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK FEDERAL HOUSING FINANCE AGENCY, AS CONSERVATOR FOR THE FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff, -againstGENERAL ELECTRIC COMPANY; GENERAL ELECTRIC CAPITAL SERVICES, INC. d/b/a GE CONSUMER FINANCE or GE MONEY; GE MORTGAGE HOLDING, L.L.C., GE-WMC SECURITIES, L.L.C., MORGAN STANLEY & CO., INC., and CREDIT SUISSE SECURITIES (USA) LLC f/k/a CREDIT SUISSE FIRST BOSTON LLC, Defendants. TO THE ABOVE NAMED DEFENDANTS: YOU ARE HEREBY SUMMONED to answer the Complaint in this action and to serve a copy of your answer, or if the Complaint is not served with this summons, to serve a notice of appearance on Plaintiffs attorneys within 20 days after the service of this summons, exclusive of the day of service (or within 30 days after the service is complete if this summons is not personally delivered to your within the State of New York); and in the case of your failure to appear or answer, judgment will be taken against you by default for the relief demanded in the Complaint. The basis of venue is the residence of one or more of the parties pursuant to CPLR 503
Index No._______________ Date Purchased:
Plaintiff designates New York County as the place of trial
SUMMONS
DATED:
By:_/s/ Marc E. Kasowitz Marc E. Kasowitz (mkasowitz@kasowitz.com) Hector Torres (htorres@kasowitz.com) Michael S. Shuster (mshuster@kasowitz.com) Christopher P. Johnson (cjohnson@kasowitz.com) Charles M. Miller (cmiller@kasowitz.com) Michael A. Hanin (mhanin@kasowitz.com) 1633 Broadway New York, New York 10019 (212) 506-1700 Attorneys for Plaintiff Federal Housing Finance Agency, as Conservator for the Federal Home Loan Mortgage Corporation
SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK FEDERAL HOUSING FINANCE AGENCY, AS CONSERVATOR FOR THE FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff, -againstGENERAL ELECTRIC COMPANY; GENERAL ELECTRIC CAPITAL SERVICES, INC. d/b/a GE CONSUMER FINANCE or GE MONEY; GE MORTGAGE HOLDING, L.L.C., GE-WMC SECURITIES, L.L.C., MORGAN STANLEY & CO., INC., and CREDIT SUISSE SECURITIES (USA) LLC f/k/a CREDIT SUISSE FIRST BOSTON LLC, Defendants.
Index No.______
COMPLAINT
TABLE OF CONTENTS Page NATURE OF ACTION ...................................................................................................................1 PARTIES .........................................................................................................................................5 The Plaintiff .........................................................................................................................5 The Defendants ....................................................................................................................5 The GE Defendants..............................................................................................................5 Underwriter Defendants.......................................................................................................7 The Non-Party Originator ....................................................................................................7 JURISDICTION AND VENUE ......................................................................................................8 FACTUAL ALLEGATIONS ..........................................................................................................9 I. FACTUAL ALLEGATIONS APPLICABLE TO ALL CLAIMS......................................9 A. The Securitizations...................................................................................................9 1. 2. 3. Residential Mortgage-Backed Securitizations Generally ............................9 The Securitizations At Issue In This Case .................................................11 The Securitization Process.........................................................................12 a. b. 4. The Sponsor Groups Mortgage Loans In Special Purpose Trusts..............................................................................................12 The Trusts Issue Securities Backed By The Loans........................13
The Defendants Participation In The Securitization Process ...................14 a. b. c. d. Defendant GE-WMC Securities ....................................................15 Defendant GE Holding ..................................................................15 Defendants GE Capital Services and General Electric ..................16 The Underwriters ...........................................................................17
5.
The Statements In The Prospectus Supplements .......................................17
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a. b. c. d. 6.
Statements Regarding Compliance With Underwriting Guidelines ......................................................................................17 Statements Regarding Occupancy Status of Borrower..................20 Statements Regarding Loan-to-Value Ratios.................................22 Statements Regarding Credit Ratings ............................................24
Falsity Of Statements In The Registration Statements And Prospectus Supplements.............................................................................26 a. The Statistical Data Provided in the Prospectus Supplements Concerning Owner-Occupancy and Loan-ToValue Ratios Was Materially False................................................26 Owner-Occupancy Data Was Materially False..............................26 Loan-to-Value Data Was Materially False ....................................28 The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines.........31 Government and Private Investigations Confirm That the Originator of the Loans in the Securitizations Systematically Failed to Adhere to Its Underwriting Guidelines ......................................................................................31 The Collapse of the Certificates Credit Ratings Further Indicates that the Mortgage Loans were not Originated in Accordance with the Stated Underwriting Guidelines...................33 The Surge in Mortgage Delinquency and Default Further Demonstrates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines ......................................................................................33
b. c. d. e.
f.
g.
7. II.
Freddie Macs Purchases Of The Certificates And The Resulting Damages.....................................................................................................34
FACTUAL ALLEGATIONS APPLICABLE TO STATE LAW CLAIM .......................36 A. B. Defendants Were Incentivized to Fund Risky Residential Mortgage Loans and To Securitize and Sell Them to Investors ......................................................36 Freddie Mac Attempts to Minimize Risk by Requiring Certain Conditions Be Met Before Purchasing RMBS.........................................................................37
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ii
C. D.
Defendants Material Misrepresentations and Omissions in the Offering Materials ................................................................................................................38 Freddie Mac Justifiably Relied on the Misrepresentations in the Offering Materials ................................................................................................................42
FIRST CAUSE OF ACTION ........................................................................................................44 SECOND CAUSE OF ACTION ...................................................................................................46 THIRD CAUSE OF ACTION .......................................................................................................48 FOURTH CAUSE OF ACTION ...................................................................................................51 FIFTH CAUSE OF ACTION ........................................................................................................54 SIXTH CAUSE OF ACTION .......................................................................................................57 PRAYER FOR RELIEF ................................................................................................................59
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iii
Plaintiff Federal Housing Finance Agency (Plaintiff or FHFA), as Conservator of the Federal Home Loan Mortgage Corporation (Freddie Mac), by its attorneys, Kasowitz, Benson, Torres & Friedman LLP, for its Complaint against the defendants named herein (the Defendants), alleges as follows: NATURE OF ACTION 1. This action arises from false and misleading statements and omissions in
registration statements, prospectuses, and other offering materials pursuant to which certain residential mortgage-backed securities (RMBS) were purchased by Freddie Mac. Among other things, these documents falsely represented that the mortgage loans underlying the RMBS complied with certain underwriting guidelines and standards, and presented a false picture of the characteristics and riskiness of those loans. These representations were material to Freddie Mac, as they would have been to any reasonable investor, and their falsity violates Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77a et seq. (the Securities Act), as well as Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code (the Virginia Securities Act). Freddie Mac justifiably relied on Defendants misrepresentations and omissions of material fact to their detriment. In addition to their strict statutory liability under federal securities law, Defendants statements and omissions give rise to liability under state common law principles. 2. Between September 28, 2005 and December 19, 2005, Freddie Mac purchased
over $549 million in RMBS (the Certificates) issued in connection with 2 securitizations (the
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Securitizations) in which GE-affiliated entities played crucial roles, along with certain underwriters.1 3. The Certificates were offered for sale pursuant to a shelf registration statement
(the Shelf Registration Statement) filed with the Securities and Exchange Commission (the SEC) by a GE special purpose vehicle. For each of the Securitizations, the Certificates were sold to Freddie Mac pursuant to a prospectus (Prospectus) and prospectus supplement (Prospectus Supplement) that was filed with the SEC as part of the Registration Statement for that Securitization.2 The Certificates were marketed and sold to Freddie Mac pursuant to the Registration Statement. 4. The Registration Statement contained representations concerning, among other
things, the characteristics and credit quality of the mortgage loans underlying the Securitizations, the creditworthiness of the borrowers on those underlying mortgage loans, and the origination and underwriting practices used to make and approve the loans. Such representations were material to a reasonable investors decision to invest in the Certificates, and they were material to Freddie Mac. Unbeknownst to Freddie Mac, those representations were false because, among other reasons, material percentages of the underlying mortgage loans were not originated in accordance with the represented underwriting standards and origination practices, and did not have the credit and other characteristics set forth in the Registration Statement.
For purposes of this Complaint, the securities issued under the Registration Statement (as defined in note 2, infra) are referred to as Certificates. Holders of Certificates are referred to as Certificateholders.
2
The term Registration Statement as used herein incorporates the Shelf Registration Statement, the Prospectus and the Prospectus Supplement for each referenced Securitization, except where otherwise indicated.
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5.
Among other misrepresentations, the Registration Statement falsely represented
that WMC Mortgage Corporation the mortgage loan originator who originated all of the loans that serve as collateral for the Certificates sold to Freddie Mac adhered to its loan origination guidelines except in specified circumstances. In fact, the guidelines systematically were disregarded. 6. The Registration Statement also set forth for each Securitization statistical
summaries of the characteristics of the underlying mortgage loans, such as the percentage of loans secured by owner-occupied properties and the percentage of the loan groups aggregate principal balance with loan-to-value ratios within specified ranges. This information was material to reasonable investors, and it was material to Freddie Mac. However, a loan-level analysis of a statistically significant sample of loans for each Securitizationapproximately one thousand mortgages for each Securitizationhas revealed that the statistical summaries were false and misleading. The statistics reflected or were based upon misrepresentations of key characteristics of the mortgage loans and inflated property values. 7. The Prospectus Supplements also misrepresented several risk factors that are
material to purchasers of Certificates such as Freddie Mac. For example, the percentage of owner-occupied properties in the loan pool underlying a RMBS is a material risk factor because a borrower who actually lives in a mortgaged property is generally less likely to stop paying the mortgage and more likely to take care of the property. The loan-level review, however, revealed that the true percentage of owner-occupied properties for the loans supporting the Certificates was materially lower than that represented in the Prospectus Supplements. Similarly, the loanto-value ratio of the loan pool -- that is, the relationship between the principal amount of the loans and the true value of the mortgaged properties securing those loans is a material risk
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factor because it is a strong indicator of both the likelihood of default and recovery upon default. The loan-level review, however, revealed that the true loan-to-value ratio of the loans in the pool was materially worse than was represented in the Prospectus Supplements. 8. The Registration Statement also set forth ratings for each of the Securitizations.
Those AAA ratings were material to a reasonable investors decision to purchase the Securities, and they were material to Freddie Mac. The ratings for the Securitizations were materially inaccurate and were based upon false information supplied by the Defendants. Upon information and belief, neither the Defendants nor the rating agencies who issued the ratings believed or had any sound basis to believe in their truthfulness. 9. Defendants, who are issuers, sponsors, and/or underwriters of the Certificates
purchased by Freddie Mac, are liable under the Securities Act for the misstatements and omissions of material fact contained in the Registration Statement and other offering materials because they prepared, signed, filed and/or used these documents to market and sell the Certificates to Freddie Mac. The remaining Defendants are liable under the Securities Act because they directed and controlled the issuers, sponsors, and/or underwriters of the Certificates purchased by Freddie Mac. 10. Defendants misstatements and omissions of material facts have caused loss and
injury to Freddie Mac. Freddie Mac purchased the most senior tranches of Certificates offered for sale by Defendants, and would not have purchased these Certificates but for Defendants material misrepresentations and omissions concerning the mortgage loans underlying the RMBS. As the truth concerning the misrepresented and omitted facts has come to light, and as the hidden risks have materialized, the value of the Certificates purchased by Freddie Mac has declined considerably. Freddie Mac has suffered losses of tens of millions of dollars as a result of the
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misrepresentations and omissions alleged herein. FHFA, as Conservator for Freddie Mac, now seeks rescission and damages for those losses.3 PARTIES The Plaintiff 11. Plaintiff Federal Housing Finance Agency is a federal agency located at 1700 G
Street, NW in Washington, D.C. FHFA was created on July 30, 2008 pursuant to the Housing and Economic Recovery Act of 2008, Pub L. No. 110-289, 122 Stat. 2654, codified at 12 U.S.C. 4617 et seq. (HERA) to oversee Freddie Mac, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Banks. On September 6, 2008, also pursuant to HERA, the Director of FHFA placed Freddie Mac into conservatorship and appointed FHFA as Conservator. In that capacity, FHFA has the authority to exercise all rights and remedies of Freddie Mac, including but not limited to, the authority to bring suits on its behalf of and/or for its benefit 12 U.S.C. 4617(b)(2). 12. Freddie Mac is a government-sponsored enterprise (a GSE) chartered by
Congress with a mission to provide liquidity, stability and affordability to the United States housing and mortgage markets. As part of this mission, Freddie Mac invests in RMBS. Freddie Mac is located at 8200 Jones Branch Drive in McLean, Virginia. The Defendants The GE Defendants 13. Defendant General Electric Company (General Electric or GE) is a leading,
multi-national technology, services, and finance company with approximately $739 billion of assets, and operations in more than 100 countries. General Electric is a corporation organized
3
The Certificates purchased by Freddie Mac are identified infra in Table 8 and 9 at paragraphs 98 and 100.
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and existing under the laws of the State of Connecticut with its principal office in the United States at 3135 Easton Turnpike, Fairfield, CT 06828. General Electric is the parent and sole owner of Defendant GE Capital Services, and, upon information and belief, the ultimate parent of Defendants GE Holding and GE-WMC Securities. GE transacts billions of dollars in business within New York State annually in furtherance of its various businesses. 14. Defendant GE Capital Services (GE Capital), doing business as GE Consumer
Finance or GE Money, is a leading multi-national financial services company with approximately $605 billion in assets and operations in more than 50 countries. GE Capital Services is a corporation organized and existing under the laws of the State of Delaware with its principal office in the United States at 3135 Easton Turnpike, Fairfield, CT 06828. GE Capital maintains a branch office in New York City at 299 Park Avenue, New York, NY 10171. 15. Upon information and belief, GE Capital is the parent and sole shareholder of
Defendant GE Mortgage Holding (GE Holding). 16. Prior to losing its license to operate in June 2008 for the non-payment of taxes,
GE Holding was a limited liability company organized and existing under the laws of the State of Delaware. GE Holding was the parent and sole owner of GE-WMC Securities. For both Securitizations, GE Holding was the sponsorthe entity that acquires or originates the mortgage loansand is sometimes referred to herein as the Sponsor. Upon information and belief, GE Capital is the parent and/or successor-in-interest to GE Holding. 17. Defendant GE-WMC Securities is a limited liability company organized and
existing under the laws of the State of Delaware. GE-WMC Securities principal office is located at 3100 Thornton Avenue, Office 344, Burbank, CA 91504. GE-WMC Securities was the depositor who transfers the assets to the trust for both Securitizations, here, and is sometimes
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referred to as the Depositor. GE-WMC Securities, as depositor, was also responsible for preparing and filing the Registration Statement required under the Securities Exchange Act of 1934 with respect to the Securitizations. In connection with the Securitizations, GE-WMC Securities delivered the mortgage loans to the Trustee, Bank of New York, in New York City. Collectively, GE, GE Capital, GE Holding, and GE-WMC Securities are referred to as the GE Defendants. Underwriter Defendants 18. Defendant Morgan Stanley & Co., Inc. (MS&Co.) is an SEC-registered broker-
dealer, incorporated in the State of Delaware, with its principal offices at 1585 Broadway, New York, NY 10036. MS&Co. is an SEC-registered broker-dealer, and was a selling underwriter for the GE-WMC 2005-1 Securitization. Freddie Mac purchased the Certificates for the GE-WMC 2005-1 Securitization from MS&Co. 19. Defendant Credit Suisse Securities (USA) LLC f/k/a Credit Suisse First Boston
LLC (Credit Suisse) is a corporation organized and existing under the laws of the State of Delaware with its principal place of business at 11 Madison Ave., New York, NY 10010. Prior to January 16, 2006, Credit Suisse was known as Credit Suisse First Boston LLC. Credit Suisse is an SEC-registered broker-dealer, and was a selling underwriter for the GE-WMC 2005-2 Securitization. Freddie Mac purchased the Certificates for the GE-WMC 2005-2 Securitization from Credit Suisse. MS&Co. and Credit Suisse are referred to herein collectively as the Underwriters or Underwriter Defendants. The Non-Party Originator 20. WMC Mortgage Corporation (WMC) was a mortgage banking company
organized and existing under the laws of the State of California. Established in 1955, WMC developed a national mortgage origination franchise with a special emphasis on originating
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single-family, alternative sub-prime mortgage loans. It had nine regional offices, including an office in New York. WMC was owned by a subsidiary of Weyerhaeuser Company until May 1997 when it was sold to WMC Finance. In 2004, Defendant GE Capital acquired WMC Finance and its subsidiary WMC. 21. WMC publicly touted its ability to finance up to 95 percent loan-to-value,
working with applicants with FICO scores as low as 530. However, according to a March 2007 article published on MortgageDaily.com, WMC, faced with growing delinquencies, announced that it would no longer originate mortgages without a down payment. Shortly after, on September 20, 2007, Defendant GE Capital closed WMCs operations, taking a $400 million write-down as a result. 22. GE Holding, the sponsor for each Securitization, acquired all of the loans
underlying the Certificates from WMC, the originator. As discussed infra, it was only well after WMC ceased operations on September 20, 2007 that disclosures began to emerge regarding WMCs loan origination practices. JURISDICTION AND VENUE 23. This Court has jurisdiction over this action pursuant to Section 22 of the
Securities Act of 1933, 15 U.S.C. 77v. 24. This court has personal jurisdiction over the Defendants pursuant to C.P.L.R.
301-302. Defendants Credit Suisse and MS&Co. are domiciled in New York. Defendants GE and GE Capital are internationally renowned corporations that conduct billions of dollars in business annually in New York State through myriad divisions and business lines. Both GE and GE Capital have registered agents and branch offices in New York State. Defendant GE Holding is defunct, although its parent and sole shareholder, GE Capital, has the extensive New York
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contacts described above. Defendant GE-WMC Securities transacted business in New York State, supplied goods (i.e., the Certificates) to investors in New York State, and delivered the mortgage loans underlying the Certificates to the Trustee in New York State. 25. Venue is proper in this county pursuant to C.P.L.R. 503 because one or more of
the parties resides in New York County, New York. The Underwriters reside or have their principal place of business in this district and many of the alleged acts and transactions, including the preparation and dissemination of the Registration Statement, occurred in substantial part within New York County, New York. FACTUAL ALLEGATIONS I. FACTUAL ALLEGATIONS APPLICABLE TO ALL CLAIMS 26. The factual allegations set forth in paragraphs below are made with respect to all
causes of action against Defendants and are sufficient to establish Defendants strict statutory liability under the Securities Act and the Virginia Securities Act. With respect to such liability, no allegations are made or intended, and none are necessary, concerning Defendants state of mind. Defendants are strictly liable, without regard to intent on their part or reliance on Freddie Macs part, for the misstatements in, and material omissions from, the Registration Statements under Sections 11 and 12 and, for control person defendants, under Section 15, of the Securities Act. A. The Securitizations 1. 27. Residential Mortgage-Backed Securitizations Generally
issuing securities backed by those pools of assets. In residential mortgage-backed securitizations, the cash-producing financial assets are residential mortgage loans.
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28.
In the most common form of securitization of mortgage loans, a sponsor the
entity that acquires or originates the mortgage loans and initiates the securitization directly or indirectly transfers a portfolio of mortgage loans to a trust. In many instances, the transfer of assets to the trust is a two-step process in which the sponsor first transfers the financial assets to an intermediate entity, typically referred to as a depositor, and then the depositor transfers the assets to a trust. The trust is established pursuant to a pooling and servicing agreement or a trust agreement entered into by, among others, the depositor for that securitization. 29. RMBS are the securities backed by the underlying mortgage loans in the trust.
Some residential mortgage-backed securitizations are created from more than one cohort of loans, called collateral groups, in which case the trust issues different tranches of securities backed by different groups of loans. For example, a securitization may involve two groups of mortgages, with some securities backed primarily by the first group, and others primarily by the second group. Purchasers of the securities (in the form of certificates) acquire an ownership interest in the assets of the trust, which in turn owns the loans. These purchasers are thus dependent for repayment of principal and payment of interest upon the cash-flows from the designated group of mortgage loans primarily mortgagors payments of principal and interest on the mortgage loans held by the related trust. 30. RMBS are generally issued and sold pursuant to registration statements filed with
the SEC. These registration statements include prospectuses, which describe the general structure of the investment, and prospectus supplements, which set forth detailed descriptions of, among other things, the mortgage groups underlying the certificates. Certificates are issued by the trust and sold pursuant to the registration statement, the prospectus and prospectus supplement. Underwriters offer, sell, or distribute the Certificates to investors.
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10
31.
A mortgage servicer manages the collection of proceeds from the mortgage loans.
The servicer is responsible for collecting homeowners mortgage loan payments, which the servicer remits to the trustee after deducting a monthly servicing fee. The servicers duties include making collection efforts on delinquent loans, initiating foreclosure proceedings, and determining when to charge off a loan by writing down its balance. The servicer is required to report key information about the loans to the trustee. The trustee (or trust administrator) administers the trust funds and delivers payments due each month on the certificates to the investors. 2. 32. The Securitizations At Issue In This Case
This case involves the following two securitizations: GE-WMC Asset-Backed Pass-Through Certificates, Series 2005-1 (GE-WMC 2005-1) GE-WMC Asset-Backed Pass-Through Certificates, Series 2005-2 (GE-WMC 2005-2)
33.
For each of the Securitizations, Table 1 identifies the: (1) sponsor; (2) depositor;
(3) underwriter; (4) principal amount issued for the tranches4 purchased by Freddie Mac; (5) date of issuance; and (6) the loan group or groups backing the Certificate for that Securitization (referred to as the Supporting Loan Groups). Table 1
Transaction GEWMC 2005-1 Tranche A1 Sponsor GE Mortgage Holding, L.L.C Depositor GE-WMC Securities, L.L.C. Lead Underwriters MS&Co. Credit Suisse Principal Amount Issued ($) 230,365,000.00 Date of Issuance 09/28/05 Supporting Loan Groups Group 1
A tranche is one of the classes of debt securities issued as part of a single bond or instrument. Securities are often issued in tranches to meet different investor objectives for portfolio diversification.
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11
GEWMC 2005-2
A1
GE Mortgage Holding, L.L.C
GE-WMC Securities, L.L.C.
MS&Co. Credit Suisse
319,314,000.00
12/19/05
Group 1
3.
The Securitization Process a. The Sponsor Groups Mortgage Loans In Special Purpose Trusts
34.
As the sponsor for each of the Securitizations, GE Holding sold the mortgage
loans for the Securitizations that it sponsored to its subsidiary GE-WMC Securities. 35. Defendant Credit Suisse was the selling underwriter for GE-WMC 2005-2.
MS&Co. was the selling underwriter for GE-WMC 2005-1. 36. GE-WMC Securities was a wholly-owned, limited-purpose financial subsidiary
and limited-purpose affiliate of GE Holding. The sole purpose of GE-WMC Securities, as depositor, was to act as a conduit through which loans originated by its affiliate, WMC, could be securitized and sold to investors. 37. As depositor for each of the Securitizations, GE-WMC Securities transferred the
relevant mortgage loans to the trusts, pursuant to a Mortgage Loan Purchase Agreement that contained various representations and warranties regarding the mortgage loans for the Securitizations. 38. As part of each Securitization, the trustee for that Securitization, on behalf of the
Certificateholders, executed a Pooling and Servicing Agreement (PSA) with GE-WMC Securities and the relevant servicer. In each case, the trust, administered by the trustee, held the mortgage loans pursuant to the related PSA and issued certificates, including the Certificates, backed by such loans. Freddie Mac purchased the Certificates, through which it obtained an ownership interest in the assets of the trust, including the mortgage loans.
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12
b. 39.
The Trusts Issue Securities Backed By The Loans
PSAs, each trust issued certificates backed by the underlying mortgage loans. The certificates were then sold to investors, including Freddie Mac. Each certificate entitles its holder to a specified portion of the cash flows from the underlying mortgages in the supporting loan group for that certificate. Therefore, the value of the certificates, derived in part from the likelihood of payment of principal and interest on Securitizations, depends upon the credit quality of the underlying mortgages, i.e. the risk of default by borrowers and the recovery value upon default of foreclosed-upon properties. 40. The Certificates were issued and sold pursuant to a Shelf Registration Statement
filed with the SEC on a Form S-3. The Shelf Registration Statement (S-3) was amended by a Form S-3/A (the Amendment or S-3/A) filed with the SEC. The SEC filing number, registrants, signatories and filing dates for the Registration Statement with Amendment, as well as the Certificates covered by the Shelf Registration Statement, are reflected in Table 2 below. Table 2
SEC File No. 333-127360 333-127360 Date S-3 Filed 08/09/05 08/09/05 Date(s) S-3/A(s) Filed 08/30/05 08/30/05 Registrants GE-WMC Securities GE-WMC Securities Covered Certificates GE-WMC 2005-1 GE-WMC 2005-2
41.
underwriting guidelines that purportedly were used in connection with the origination of the underlying mortgage loans. In addition, the Prospectus Supplements purport to provide accurate statistics regarding the mortgage loans in each group, including: the ranges of and weighted average FICO credit scores of the borrowers, the ranges of and weighted average loan-to-value (LTV) ratios of the loans, the ranges of and weighted average outstanding principal balances
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13
of the loans, the debt-to-income ratios of the borrowers, the geographic distribution of the loans, the extent to which the loans were for purchase or refinance purposes, information concerning whether the loans were secured by a property to be used as a primary residence, second home, or investment property, and information concerning whether the loans were delinquent. 42. The Prospectus Supplement for each Securitization was filed with the SEC as part
of the Registration Statement. The Form 8-Ks attaching the PSAs for each Securitization were also filed with the SEC. The date on which the Prospectus Supplement and Form 8-K were filed for each Securitization, as well as the filing number of the Shelf Registration Statement related to each, are set forth in Table 3 below. Table 3
Transaction GE-WMC 2005-1 GE-WMC 2005-2 Date Prospectus Supplement Filed 09/28/05 12/16/05 Date Form 8-K Attaching PSA 10/13/05 01/04/06 Filing No. of Related Registration Statement 333-127360 333-127360
4. 43.
The Defendants Participation In The Securitization Process
Each of the Defendants played a role in the securitization process and the
marketing for some or all of the Certificates, which included purchasing the mortgage loans from the originator, arranging the Securitizations, selling the mortgage loans to the depositor, transferring the mortgage loans to the trustee on behalf of the Certificateholders, underwriting the public offering of the Certificates, structuring and issuing the Certificates, and marketing and selling the Certificates to investors such as Freddie Mac. 44. The Defendants are liable, jointly and severally, as participants in the registration,
issuance and offering of the Certificates, including issuing, causing, or making materially misleading statements in the Registration Statement, and omitting material facts required to be stated therein or necessary to make the statements contained therein not misleading.
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14
a. 45.
Defendant GE-WMC Securities
GE-WMC Securities was a wholly-owned subsidiary of GE Holding. GE-WMC
Securities was a special purpose entity formed by GE Holding solely for the purpose of purchasing mortgage loans, filing registration statements with the SEC, forming issuing trusts, assigning mortgage loans and all of its rights and interests in such mortgage loans to the trustee for the benefit of the certificateholders, and depositing the underlying mortgage loans into the issuing trusts. 46. GE-WMC Securities was the depositor for each of the Securitizations. As
depositor, GE-WMC Securities purchased the mortgage loans from GE Holding pursuant to Mortgage Loan Purchase Agreements. GE-WMC Securities then sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trusts. Together with the other Defendants, GE-WMC Securities was responsible for preparing and filing the Registration Statement pursuant to which the Certificates were offered for sale. The trusts in turn held the mortgage loans for the benefit of the Certificateholders, and issued the Certificates in public offerings for sale to investors including Freddie Mac. b. 47. Defendant GE Holding
Upon information and belief, GE Holding was a wholly owned subsidiary of GE
Capital that was formed for the purpose of issuing securities through its wholly-owned subsidiary, GE-WMC Securities. 48. GE Holding was the sponsor of each of the Securitizations. As sponsor, GE
Holding determined the structure of the Securitizations, initiated the Securitizations, purchased the mortgage loans to be securitized, determined distribution of principal and interest, and provided data to the rating agencies to secure investment grade ratings for the Certificates. GE Holding also selected its wholly owned subsidiary, GE-WMC Securities, as the special purpose
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vehicle that would be used to transfer the mortgage loans from GE Holding to the trusts, and selected MS&Co. and Credit Suisse as the underwriters for the Securitizations. As sponsor, GE Holding knew and intended that the mortgage loans it purchased from its affiliate, WMC, would be sold in connection with the securitization process, and that certificates representing such loans would be issued by the relevant trusts. c. 49. Defendants GE Capital Services and General Electric
Upon information and belief, GE Capital wholly owns GE Holding. As the sole
corporate parent of GE Holding, GE Capital had the practical ability, in connection with the Securitizations and the issuance and sale of the Certificates, to direct and control the actions of GE Holding, and in fact exercised such direction and control over these activities. 50. General Electric wholly owns GE Capital, and is also the ultimate parent of GE
Holding and GE-WMC Securities. The chart below indicates the corporate structure of the GE Defendants.
General Electric
GE Capital
WMC Finance
GE Holding (Sponsor) GE-WMC Securities (Depositor)
WMC (Originator)
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d. 51.
The Underwriters
The Underwriters, Credit Suisse and MS&Co., were two of the nations largest
non-agency mortgage-backed securities underwriters between 2004 and 2007. During those years, Credit Suisse was one of the top ten underwriters of non-agency MBS, underwriting $67.5 billion in 2004 (ranking 5th); $89.2 billion in 2005 (ranking 5th); $69.4 billion in 2006 (ranking 7th); and $44.1 million in 2007 (ranking 6th). Likewise, MS&Co. was one of the top ten underwriters of non-agency MBS during most of those years, underwriting $43.7 billion in 2004 (ranking 7th), $53.9 billion in 2006 (ranking 10th); and $40 billion in 2007 (ranking 8th). 52. As underwriters for the Securitizations, Credit Suisse and MS&Co. were
responsible for underwriting and managing, and did underwrite and manage, the offer and sale of the Certificates to Freddie Mac, as well as other investors. Credit Suisse and MS&Co. were also obligated to conduct due diligence to ensure that the Registration Statement was free from material misstatements or omissions, including as to the manner in which the underlying mortgage loans were originated, transferred, and underwritten. 5. 53. The Statements In The Prospectus Supplements
Plaintiff relies for its claims, in part, upon the Registration Statements in their
entirety. The representations and warranties in the Registration Statement that form the basis for the claims herein are set forth for each Securitization in Appendix A hereto. a. 54. Statements Regarding Compliance With Underwriting Guidelines
descriptions of the underwriting guidelines used to originate the mortgage loans included in the Securitization. Because payment on, and the value of, the Certificates is based on the cash flows from the underlying mortgage pool, representations concerning compliance with the stated
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underwriting guidelines were material to reasonable investors. Investors, including Freddie Mac, did not have access to information concerning the collateral pool, and were required to rely on the representations in the Prospectus Supplements concerning that collateral. 55. Among other consequences, the failure to originate mortgage loans in accordance
with stated guidelines diminishes the value of the Certificates by increasing the risk that an investor will not be paid its principal and interest. Misrepresentations concerning, or failure accurately to disclose, borrower, loan and property characteristics bearing on the risk of default by the borrower as well as the severity of losses given default can artificially inflate the perceived value of the securities. Without complete and accurate information regarding the collateral pool, reasonable investors, including Freddie Mac, are unable to accurately and independently assess whether the price of an RMBS adequately accounts for the risks they are assuming when they purchase the security. 56. The Prospectus Supplements for each of the Securitizations contained several key
statements with respect to the loan purchasing and underwriting standards of the entities that originated the loans in the Securitizations. For example, the Prospectus Supplements for each of the Securitizations, for which WMC was the originator, GE Holding was the sponsor, GE-WMC Securities was the depositor, and Credit Suisse and MS&Co. were the underwriters, stated: The mortgage loans have been either (i) originated generally in accordance with the underwriting guidelines established by WMC Corp. (collectively, the Underwriting Guidelines) or (ii) purchased from correspondent lenders after being re-underwritten by WMC Corp., generally in accordance with the Underwriting Guidelines. (Emphasis added). 57. The Prospectus Supplement explained the importance of compliance with the
Underwriting Guidelines as a means of limiting the risk of loss: The Underwriting Guidelines are primarily intended to (a) determine that the borrower has the ability to repay the
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mortgage loan in accordance with its terms and (b) determine that the related mortgaged property will provide sufficient value to recover the investment of the borrower defaults. (Emphasis added). The Underwriting Guidelines specified various risk categories for borrowers and associated criteria for grading the potential likelihood that an applicant will satisfy the repayment obligations of a mortgage loan. 58. In addition, with respect to the information evaluated by the originator, the
Prospectus Supplement for each Securitization stated: The Underwriting Guidelines require that the documentation accompanying each mortgage loan application include, among other things, a tri-merge credit report on the related applicant from a credit reporting company aggregator. The report5 typically contains information relating to such matters as credit history with loan and national merchants and lenders, installment debt payments and any record of defaults, bankruptcy, repossession, suits or judgments. In most instances, WMC Corp. obtains a trimerge credit score independent from the mortgage loan application from a credit reporting company aggregator. Under the Underwriting Guidelines, WMC Corp. verifies the loan applicants eligible sources of income for all products, calculates the amount of income from eligible sources indicated on the loan application, reviews the credit and mortgage payment history of the applicant and calculates the Debt Ratio to determine the applicants ability to repay the loan, and reviews the mortgaged property for compliance with the Underwriting Guidelines. 59. The Prospectus Supplement further stated: The Underwriting Guidelines are applied in accordance with a procedure which complies with applicable federal and state laws and regulations and requires, among other things, (1) an appraisal of the mortgaged property which conforms to the Uniform Standards of Professional Appraisal Practice and (2) an audit of such appraisal by a WMC Corp.-approved appraiser or by WMC Corps in-house collateral auditors (who may be licensed appraisers) and such audit may in certain circumstances consist of
5
A tri-merge credit report is a credit report obtained from each of the three credit bureaus (Equifax, Experian, and Transunion).
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a second appraisal, a field review, a desk review or an automated valuation model. 60. Contrary to these representations, however, WMC abandoned completely its
stated underwriting guidelines, as discussed infra. As a result, the purported compliance with underwriting guidelines and the inclusion and descriptions of those guidelines in the Prospectus Supplements were false and misleading, and the mortgages underlying each Securitization presented a materially greater risk to investors than that actually represented in the Prospectus Supplements. 61. As reflected more fully in the Appendix, for the vast majority of the
Securitizations, the Prospectus Supplements included representations that (i) the mortgage loans were underwritten in accordance with the WMCs underwriting guidelines in effect at the time of origination, subject only to limited exceptions; and (ii) the origination and collection practices used by WMC with respect to each mortgage note and mortgage were in all respects legal, proper, and customary in the mortgage origination and servicing business. 62. The inclusion of these representations in the Prospectus Supplements had the
purpose and effect of providing assurances to investors regarding the quality of the mortgage collateral underlying the Securitizations and thus the likelihood of payment on the Certificates. These representations were material to a reasonable investors decision to purchase the Certificates, and they were material to Freddie Mac. As alleged more fully below, the representations were materially false. b. 63. Statements Regarding Occupancy Status of Borrower
the occupancy status of the borrowers of the loans underlying the Securitization; that is, whether the property securing a mortgage is (i) the borrowers primary residence, (ii) a second home, or
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(iii) an investment property. This information was presented in tables, typically titled Occupancy (All Mortgage Loans), that assigned all the properties in the collateral group to one of the following categories: (i) Primary; (ii) Second Home; or (iii) Investment. For each category, the table stated the number of loans in that category. Occupancy statistics for the Supporting Loan Groups for each Securitization were reported in the Prospectus Supplements as follows:6 Table 4
Transaction GE-WMC 2005-1 GE-WMC 2005-2 Supporting Loan Group Group I Group I Primary 91.48% 91.85% Second Home 5.37% 4.78% Investment 3.15% 3.37%
64.
reported that at least 90 percent of the mortgage loans in the Supporting Loan Groups were owner-occupied. 65. Because information about occupancy status is an important factor in determining
the credit risk associated with a mortgage loan -- and, therefore, the securitization that it backs -the statements in the Prospectus Supplements concerning occupancy status were material to a reasonable investors decision to invest in the Certificates, and they were material to Freddie Mac. These statements were material because (among other reasons) borrowers who actually live in mortgaged properties are substantially less likely to default and more likely to care for their primary residence than borrowers who purchase homes as second homes or investments and live elsewhere. Accordingly, the percentage of loans in the collateral group of a securitization
Each Prospectus Supplement provides the total number of loans and the number of loans in the following categories: primary, second home, and investment. These numbers have been converted to percentages.
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that are secured by mortgage loans on owner-occupied residences is an important measure of the risk of the certificates sold in that securitization. 66. Other things being equal, the lower the percentage of loans secured by owner-
occupied residences, the greater the risk of loss to Certificateholders. Even modest differences in the percentages of primary/owner-occupied, second home/secondary, and investment properties in the collateral group of a securitization can have a significant effect on the risk of each certificate sold in that securitization, and thus, are important to the decision of a reasonable investor whether to purchase any such certificate. As discussed infra at paragraphs 77 through 81, the Prospectus Supplements for each Securitization materially overstated the percentage of loans in the Supporting Loan Groups that were owner-occupied, thereby misrepresenting the risk of the Certificates purchased by Freddie Mac. c. 67. Statements Regarding Loan-to-Value Ratios
generally the lower of the purchase price or the appraised value of the property. In a refinancing or home-equity loan, there is no purchase price to use as the denominator, so the denominator is often equal to the appraised value at the time of the origination of the refinanced loan or homeequity loan. Accordingly, an accurate appraisal is essential to an accurate LTV ratio. In particular, an inflated appraisal will understate, sometimes greatly, the credit risk associated with a given loan. 69. The Prospectus Supplements for the Securitizations contained information about
the LTV ratio for each Supporting Loan Group. Table 5 below reflects two categories of important information reported in the Prospectus Supplements concerning the LTV ratios for
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each Supporting Loan Group: (i) the percentage of loans with an LTV ratio of 80 percent or less; and (ii) the percentage of loans with an LTV ratio greater than 100 percent.7 Table 5
Supporting Loan Group Group I Group I Percentage of loans, by aggregate principal balance, with LTV less than or equal to 80% 60.40% 61.37% Percentage of loans, by aggregate principal balance, with LTV greater than 100% 0.00% 0.00%
Transaction GE-WMC 2005-1 GE-WMC 2005-2
70.
As Table 5 makes clear, the Prospectus Supplements for each of the
Securitizations reported that the majority of mortgage loans in the Supporting Loan Groups had an LTV ratio of 80 percent or less. The Prospectus Supplements further stated that none of the Supporting Loan Groups contained a single loan with an LTV ratio over 100 percent. 71. The LTV ratio is among the most important measures of the risk of a mortgage
loan for several reasons. First, the LTV ratio is a strong indicator of the likelihood of default, because a higher LTV ratio makes it more likely that a decline in the value of a property will completely eliminate a borrowers equity, and will incentivize the borrower to stop making mortgage payments and abandon the property. Second, the LTV ratio is a strong predictor of the severity of loss in the event of a default, because the higher the LTV ratio, the smaller the equity cushion, and the greater the likelihood that the proceeds of foreclosure will not cover the unpaid balance of the mortgage loan.
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72.
Thus, the LTV ratios were material to a reasonable investors investment decision
with respect to the Certificates, and they were material to Freddie Mac. Even small differences between the LTV ratios of the mortgage loans in the collateral group of a securitization have a significant effect on the likelihood that collateral groups will generate sufficient funds to pay certificateholders in that securitization. Such differences are important to the decision of a reasonable investor on whether to purchase any such certificate and they affect the intrinsic value of the certificate. As discussed infra at paragraphs 82 through 87, the Prospectus Supplements for the Securitizations materially overstated the percentage of loans in the Supporting Loan Groups with an LTV ratio at or less than 80 percent, and materially understated the percentage of loans in the Supporting Loan Groups with an LTV ratio over 100 percent, thereby misrepresenting the degree of risk to Certificateholders. d. 73. Statements Regarding Credit Ratings
the credit rating agencies, including Standard & Poors, Moodys Investor Service, and Fitch Ratings. Each credit rating agency uses its own scale with letter designations to describe various levels of risk. In general, AAA or its equivalent ratings are at the top of the credit rating scale and are intended to designate the safest investments. C and D ratings are at the bottom of the scale and refer to investments that are currently in default and exhibit little or no prospect for recovery. At the time Freddie Mac purchased the Certificates, investments with AAA or its equivalent ratings historically experienced a loss rate of less than .05 percent. Investments with a BBB rating, or its equivalent, historically experienced a loss rate of less than one percent. As a result, securities with credit ratings between AAA or its equivalent through BBB- or its equivalent were generally referred to as investment grade.
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74.
Rating agencies determine the credit rating for each tranche of a mortgage-backed
securitization by comparing the likelihood of contractual principal and interest repayment to the credit enhancements available to protect investors. Rating agencies determine the likelihood of repayment by estimating cash flows based on the quality of the underlying mortgages by using sponsor provided loan-level data. Credit enhancements, such as subordination, represent the amount of cushion or protection from loss incorporated into a given securitization.8 This cushion is intended to improve the likelihood that holders of highly-rated certificates receive the interest and principal to which they are contractually entitled. The level of credit enhancement offered is based on the make-up of the loans in the underlying collateral group and entire securitization. Riskier loans underlying the securitization necessitate higher levels of credit enhancement to insure payment to senior certificate holders. If the collateral within the deal is of a higher quality, then rating agencies require less credit enhancement for an AAA or its equivalent rating. 75. For almost a hundred years, investors like pension funds, municipalities,
insurance companies, and university endowments have relied heavily on credit ratings to assist them in distinguishing between safe and risky investments. 76. Each tranche of the Securitizations received a credit rating upon issuance, which
purported to describe the riskiness of that tranche. The Defendants reported the credit ratings for each tranche in the Prospectus Supplements. The credit rating provided for each of the Certificates purchased by Freddie Mac was always AAA or its equivalent. The accuracy of these
Subordination refers to the fact that the certificates for a mortgage-backed securitization are issued in a hierarchical structure, from senior to junior. The junior certificates are subordinate to the senior certificates in that, should the underlying mortgage loans become delinquent or default, the junior certificates suffer losses first. These subordinate certificates thus provide a degree of protection to the senior certificates from losses on the underlying loans.
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ratings was material to a reasonable investors decision to purchase the Certificates, and it was material to Freddie Mac. Among other things, the ratings provided additional assurance that investors in the Certificates would receive the expected interest and principal payments. The ratings for the Securitizations, however, were false and inflated as a result of, among other things, the Defendants providing incorrect data concerning the attributes of the underlying mortgage collateral to the ratings agencies. 6. Falsity Of Statements In The Registration Statements And Prospectus Supplements a. The Statistical Data Provided in the Prospectus Supplements Concerning Owner-Occupancy and Loan-To-Value Ratios Was Materially False
77.
A review of loan-level data was conducted in order to assess whether the
statistical information provided in the Prospectus Supplements was true and accurate. For each Securitization, the review included an analysis of either: (i) a sample of 1,000 loans randomly selected in from the Supporting Loan Group; or (ii) all of the loans in the Supporting Loan Group, if there were fewer than 1,000 such loans. The review of the sample data has confirmed, on a statistically-significant basis, that the data provided in the Prospectus Supplements concerning owner-occupancy and LTV ratios was materially false, and that the Prospectus Supplements contained material misrepresentations with respect to the underwriting standards employed by the originators, and certain key characteristics of the mortgage loans across the Securitizations. b. 78. Owner-Occupancy Data Was Materially False
Prospectus Supplements were materially false and inflated. Indeed, the Prospectus Supplements overreported the number of underlying properties that were occupied by their owners, and
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underreported the number of underlying properties that were held as second homes or investment properties. 79. To determine whether a given borrower actually occupied the property as
claimed, a number of tests were conducted, including, inter alia, whether, months after the loan closed, the borrowers tax bill was being mailed to the property or to a different address, whether the borrower had claimed a tax exemption on the property, and whether the mailing address of the property was reflected in the borrowers credit reports, tax records, or lien records. Failing two or more of these tests constitutes strong evidence that the borrower did not live at the mortgaged property and instead used it as a second home or an investment property, rendering it much more likely that a borrower will not repay the loan. 80. For each Securitization, a significant number of the underlying loans failed two or
more of these tests, demonstrating that the owner-occupancy statistics provided to Freddie Mac were materially false and misleading. For example, the Prospectus Supplement for the GEWMC 2005-2 Securitization for which GE Holding was the sponsor and Credit Suisse was the underwriter -- stated that 8.15 percent of the underlying properties by loan count in the Supporting Loan Group were not owner-occupied. But the data review revealed that, for 13.33 percent of the properties represented as owner-occupied, the owners lived elsewhere, indicating that the true percentage of non-owner-occupied properties9 was 20.39 percent, over 250 percent greater than the percentage reported in the Prospectus Supplement.
The true percentage of non-owner-occupied properties (Table 6 Column C) is calculated by adding the percentage reported in the Prospectus Supplement (Table 6 Column A) to the product of owner-occupied properties reported in the Prospectus Supplement (100 minus Column A) and the percentage of properties reported as owner-occupied but with strong indication of non-owner occupancy (Table 6 Column B).
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81.
misrepresented the percentage of non-owner-occupied properties. The true percentage of nonowner-occupied properties, as determined by the data review, versus the percentage stated in the Prospectus Supplement for each Securitization, is reflected in Table 6 below. Table 6 demonstrates that the percentage of non-owner-occupied properties reported in the Prospectus Supplement for each Securitization understated the actual percentage of non-owner-occupied properties by more than half. Table 6
A Reported Percentage of Non-OwnerOccupied Properties 8.52% 8.15% B Percentage of Properties Reported as Owner-Occupied That Were Not Owner- Occupied 12.78% 13.33% C Actual Percentage of Non-OwnerOccupied Properties 20.21% 20.39% D Prospectus Understatement of Non-OwnerOccupied Properties 11.69% 12.24%
Transaction
GE-WMC 2005-1 GE-WMC 2005-2
c. 82.
Prospectus Supplements were materially false and understated, as more specifically set out below. For each of the sampled loans, an industry standard automated valuation model (AVM) was used to calculate the value of the underlying property at the time the mortgage loan was originated. AVMs are routinely used in the industry as a way of valuing properties during prequalification, origination, portfolio review, and servicing. AVMs rely upon similar data as appraisers -- primarily county assessor records, tax rolls, and data on comparable properties. AVMs produce independent, statistically-derived valuation estimates by applying modeling techniques to this data. 83. Applying the AVM to the available data for the properties securing the sampled
loans shows that the retroactive appraised value given to such properties was significantly higher
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than the actual value of such properties. The result of this overstatement of property values is a material understatement of LTV. That is, if a propertys true value is significantly less than the value used in the loan underwriting, then the loan represents a significantly higher percentage of the propertys value. This, of course, increases the risk a borrower will not repay the loan and the risk of greater losses in the event of a default. As stated in the Prospectus Supplement for GE-WMC 2005-1: Certain of the mortgage loans may have high loan-to-value ratios or combined loan-to-value ratios, so that the related borrower has little or no equity in the related mortgage property, which may result in losses with respect to these mortgage loans allocated to the certificates. 84. For example, the Prospectus Supplement for the GE-WMC 2005-1 Securitization
stated that No mortgage loan purchased by the trust will have a loan-to-value ratio or combined loan-to-value ratio, as applicable, exceeding 100 percent at origination. In fact, 11.86 percent of the sample of loans included in the data review had LTV ratios above 100 percent. In addition, the Prospectus Supplement stated that 60.40 percent of the loans had LTV ratios at or below 80 percent, whereas the data review indicated that only 42.58 percent of the loans had LTV ratios at or below 80 percent. 85. The data review revealed that for each Securitization, the Prospectus Supplement
misrepresented the percentage of loans with an LTV ratio that were above 100 percent, as well the percentage of loans that had an LTV ratio at or below 80 percent. Table 7 reflects (i) the true percentage of mortgages in the Supporting Loan Group with LTV ratios above 100 percent, versus the percentage reported in the Prospectus Supplement; and (ii) the true percentage of mortgages in the Supporting Loan Group with LTV ratios at or below 80 percent, versus the
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PROSPECTUS Percentage of Loans Reported to Have LTV Ratio At Or Less Than 80% 60.40% 61.37% DATA REVIEW True Percentage of Loans With LTV Ratio At Or Less Than 80% 42.58% 38.89% PROSPECTUS Percentage of Loans Reported to Have LTV Ratio Over 100% 0.00% 0.00% DATA REVIEW True Percentage of Loans With LTV Ratio Over 100% 11.86% 15.45%
Transaction
GE-WMC 2005-1 GE-WMC 2005-2
86.
As Table 7 demonstrates, the Prospectus Supplements for each Securitization
falsely reported that none of the mortgage loans in the Supporting Loan Groups had an LTV ratio over 100 percent: the data review revealed that more than 11 percent of the mortgages in the Supporting Loan Group for each Securitization had a true LTV ratio over 100 percent. 87. These misrepresentations with respect to reported LTV ratios also demonstrate
that the representations in the Prospectus Supplements relating to appraisal practices were false, and that the appraisers, in many instances, furnished appraisals that they understood were inaccurate and that they knew bore no reasonable relationship to the actual value of the underlying properties. Indeed, independent appraisers following proper practices, and providing genuine estimates as to valuation, would not systematically generate appraisals that deviate so significantly (and so consistently upward) from the true values of the appraised properties. The Financial Crisis Inquiry Commission (FCIC), created by Congress to investigate the mortgage crisis and attendant financial collapse in 2008, identified inflated appraisals as a pervasive problem during the period of the Securitizations, and determined through its investigation that appraisers were often pressured by mortgage originators, among others, to produce inflated results. (See Financial Crisis Inquiry Commission, Final Report of the National Commission on
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the Causes of the Financial and Economic Crisis in the United States (2011) (FCIC Report), at 91.) d. 88. The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines
The Prospectus Supplements each contained numerous material misstatements
and omissions concerning the underwriting guidelines. Indeed, WMC, the originator for the loans underlying the Securitizations, systematically disregarded its Underwriting Guidelines in order to increase production and profits derived from its mortgage lending businesses. This is confirmed not only by the systematically mis-reported owner-occupancy and LTV figures, alleged supra at paragraphs 82 through 87, but also by: (1) government investigations and private actions relating to WMCs underwriting practices, which have revealed widespread abandonment of their reported underwriting guidelines during the period of the Securitizations; (2) the decline of the Certificates credit ratings; and (3) the surge in delinquencies and defaults in the mortgages in the Securitizations. e. Government and Private Investigations Confirm That the Originator of the Loans in the Securitizations Systematically Failed to Adhere to Its Underwriting Guidelines
89.
reports and investigations, confirms that the originators whose loans were included by the Defendants in the Securitizations abandoned their loan origination guidelines throughout the period of the Securitizations. 90. WMC, which originated loans for each of the Securitizations, employed reckless
underwriting standards and practices, as described more fully below, that resulted in a huge amount of foreclosures, ranking WMC fourth in the report presented to the FCIC in April 2010 identifying the Worst Ten mortgage originators in the Worst Ten metropolitan areas. (See
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Worst Ten in the Worst Ten, Office of the Comptroller of the Currency Press Release, Nov. 13, 2008.) General Electric, which had purchased WMC in 2004, closed down operations at WMC in late 2007 and took a $1.4 billion charge in the third quarter of that year. (See, e.g., Diane Brady, Adventures of a Subprime Survivor, Bloomberg Businessweek, Oct. 29, 2007 (available at http://www.businessweek.com/magazine/content107_44/b4056074.htm).) 91. WMCs reckless loan origination practices did not go unnoticed by regulators.
For example, in June 2008, the Washington State Department of Financial Institutions, Division of Consumer Services filed a statement of charges and Notice of Intention to Enter an Order to Revoke License, Prohibit from Industry, Impose Fine, Order Restitution and collect Investigation Fees (the Statement of Charges) against WMC and its principal owners individually. (See Statement of Charges, No. C-07-557-08-SC01, Jun. 4, 2008.) The Statement of Charges alleged that of 86 loan files reviewed by the regulator, at least 76 loans were defective or otherwise in violation of Washington state law. (Id.) Among other things, the investigation uncovered that WMC had originated loans with unlicensed or unregistered mortgage brokers, understated amounts of finance charges on loans, understated amounts of payments made to escrow companies, understated annual percentage rates to borrowers and committed many other violations of Washington State deceptive and unfair practices law. 92. WMC went beyond the systematic disregard of its own Underwriting Guidelines.
The FCIC found that mortgage loan originators pressured appraisers, during the period of the Securitizations, to issue inflated appraisals that met or exceeded the amounts needed for the subject loans to be approved, regardless of the accuracy of such appraisals, and especially when the originators hoped to package the mortgages for securitization. Upon information and belief, these inflated appraisals resulted in materially inaccurate LTV ratios.
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f.
The Collapse of the Certificates Credit Ratings Further Indicates that the Mortgage Loans were not Originated in Accordance with the Stated Underwriting Guidelines
93.
The decline in the credit ratings of the Certificates is further evidence of the
originators systematic disregard of underwriting guidelines, underscoring that these securities were impaired from the start. 94. The Certificates purchased by Freddie Mac originally were assigned credit ratings
of AAA or its equivalent, which purportedly reflected the description of the mortgage loan collateral and underwriting practices set forth in the Registration Statement. Those ratings artificially were inflated, however, upon information and belief in part as a result of the same misrepresentations that the Defendants made to investors in the Prospectus Supplements. 95. Defendants provided information to the rating agencies, including LTV ratios,
owner-occupancy rates and other loan statistics, that the agencies used in part to calculate the assigned ratings of the Certificates purchased by Freddie Mac. Upon information and belief, because the information that Defendants provided, which information included, among other things, the Registration Statement or portions thereof, the ratings were inflated. As a result, the Certificates were offered and purchased at prices suitable for investment grade securities, when in fact the Certificates carried a severe risk of loss and inadequate credit enhancement. 96. Since the issuance of the Certificates, the ratings agencies have significantly
downgraded their ratings to reflect the revelations regarding the true underwriting practices used to originate the mortgage loans, and the true value and credit quality of the mortgage loans. g. The Surge in Mortgage Delinquency and Default Further Demonstrates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines
97.
significant percentage of the mortgage loans backing these Certificates have defaulted, been
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foreclosed upon, or are delinquent, resulting in massive losses to the Certificateholders. The overall poor performance of the mortgage loans is a direct consequence of the fact that they were not underwritten in accordance with applicable underwriting guidelines as represented in the Prospectus Supplements. 98. Loan groups that were properly underwritten and contained loans with the
characteristics represented in the Prospectus Supplements would have experienced substantially fewer payment problems and substantially lower percentages of defaults, foreclosures, and delinquencies than occurred here. Table 8 reflects the percentage of loans in the Supporting Loan Groups that are in default, have been foreclosed upon, or are delinquent as of July 2011. Table 8
Transaction GEWMC 2005-1 GEWMC 2005-2 Supporting Loan Group Group I Group I Percentage of Delinquent/Defaulted/Foreclosed Loans 41.0% 44.6%
99.
confirmed systematic underwriting failures by the originators responsible for the mortgage loans across the Securitizations; and the drop in credit rating and rise in delinquencies across those Securitizations all indicate that the mortgage loans in the Supporting Loan Groups, contrary to the representations in the Registration Statement, were not originated in accordance with the stated underwriting guidelines. 7. 100. Freddie Macs Purchases Of The Certificates And The Resulting Damages
Between September 28, 2005 and December 19, 2005, Freddie Mac purchased
over $549 million in RMBS issued in connection with the Securitizations. Table 9 reflects each
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of Freddie Macs purchases of the Certificates.10 To date, the GSEs have not sold any of the Certificates and thus remain in possession of the Securities. Table 9
Settlement Date of Purchase by Freddie Mac 09/28/05 12/19/05 Initial Unpaid Principal Balance 230,365,000.00 319,314,000.00 Purchase Price (% of Par) 100 100 Seller to Freddie Mac MS&Co. Credit Suisse
Transaction GE-WMC 2005-1 GE-WMC 2005-2
Tranche A1 A1
CUSIP 367910AA4 367910AR7
101.
The statements and information in the Registration Statement regarding the credit
quality and characteristics of the mortgage loans underlying the Certificates, and the origination and underwriting practices pursuant to which the mortgage loans purportedly were originated, were material to a reasonable investor. But for the misrepresentations and omissions in the Registration Statement concerning those matters, Freddie Mac would not have purchased the Certificates. 102. Based upon sales of the Certificates or similar certificates in the secondary market
and other indications of value, Freddie Mac has incurred substantial losses on the Certificates due to a decline in value that is directly attributable to Defendants material misrepresentations and omissions. Among other things, the mortgage loans underlying the Certificates experienced defaults and delinquencies at a higher rate than would have been the case had the loans underlying the Certificates actually conformed to the origination guidelines, and had the Certificates merited the credit ratings set forth in the Registration Statement.
10
Purchases and holdings of securities in Table 9 are stated in terms of unpaid principal balance (UPB) of the relevant Certificates. Purchase prices are stated in terms of percentage of par.
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103.
Defendants misstatements and omissions in the Registration Statement were the
direct, proximate and actual cause of Freddie Macs massive losses resulting from their purchase of the Certificates. The precise extent of Freddie Macs injuries will be proven at trial. 104. At the time it purchased the Certificates, Freddie Mac was unaware of the
Defendants misrepresentations, omissions, and/or untrue statements. Plaintiff was appointed Conservator of Freddie Mac less than one year after the discovery of the untrue statements and omissions contained in the Registration Statement and within three years of the Certificates being offered for sale to the public. Despite the exercise of reasonable diligence, Freddie Mac could not reasonably have discovered the untrue statements and omissions in the Registration Statement more than one year prior to the appointment of the Plaintiff as Conservator. This action is timely pursuant to 12 U.S.C. 4617(b)(12), which provides for extension or tolling of all time periods applicable to the claims brought herein. II. Factual Allegations Applicable To Plaintiffs Common Law Claim 105. Separate and apart from Defendants violations of the Securities Act and Virginia
Securities Act giving rise to strict statutory liability without regard to intent or reliance, Defendants are also liable in tort for the misrepresentations in, and omissions from, the Registration Statement. A. Defendants Were Incentivized to Fund Risky Residential Mortgage Loans and To Securitize and Sell Them to Investors Securitizing large volumes of loans was a highly lucrative and competitive
106.
business for the Underwriters. Credit Suisse and MS&Co. underwrote RMBS securitizations on a massive scale during the relevant time period, with each doing multiple billions of dollars worth of securitizations during the period when they sold the Certificates to Freddie Mac. Fees, which were a percentage of the balance of the loan pool being purchased, and other transaction
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revenues associated with the Underwriters RMBS securitization business accounted for hundreds of millions of dollars in earnings in the relevant time period. 107. GE Capital and its affiliates shared this same pecuniary motive and desire to
participate in the securitization boom. The more and the larger the securitizations these Defendants arranged and participated in, the greater their earnings. To that end, and in order to increase its Alt-A lending and securitization business, GE Capital acquired WMC on April 26, 2004. WMC, of course, was the sole originator for the 2 Securitizations sponsored by GE Holding, for which GE-WMC Securities served as depositor. This financial incentive and the fact that GE-related entities participated in every step of the securitization process, from loan origination to securitization sales to Freddie Mac may explain why the GE Defendants made statements to Freddie Mac about WMCs compliance with underwriting guidelines, and about the credit quality of the loan pools underlying the Certificates, with a negligent disregard for the truth and accuracy of those statements. B. 108. Freddie Mac Attempts to Minimize Risk by Requiring Certain Conditions Be Met Before Purchasing RMBS Freddie Mac is a government-sponsored enterprise chartered by Congress to
provide liquidity, stability, and affordability to the U.S. housing and mortgage markets. The liquidity provided by Freddie Mac serves the public by enhancing the availability of residential mortgage and community investment funds. In fulfilling this mission, Freddie Mac purchases mortgages and invests in RMBS. 109. Generally when purchasing RMBS, the GSEs require compliance with their
investment requirements, as well as various representations and warranties concerning, among other things, the credit quality of the underlying loans, the evaluation of the borrowers ability to pay, the accuracy of the loan data provided, and adherence to applicable local, state and
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federal law. Such representations and warranties were material to the GSEs decisions to purchase RMBS, including the Certificates. 110. Because Freddie Mac lacked possession of the underlying loan files, these
representations and warranties were material to its decision to purchase RMBS. If a seller refused to provide Freddie Mac with these assurances, the bonds were rejected for purchase outright. C. 111. Defendants Material Misrepresentations and Omissions in the Offering Materials In connection with the sale of the Certificates, the Depositor, the Sponsor, and the
Underwriters (together, the Negligent Misrepresentation Defendants) each made misrepresentations to Freddie Mac in term sheets, Registration Statement, Prospectuses, Prospectus Supplements, and other draft and final written offering documents (together, the Offering Materials). These Offering Materials described the credit quality and other characteristics of the underlying mortgage loans on an aggregate basis and were provided to investors, including the GSEs. 112. Freddie Mac therefore required the Negligent Misrepresentation Defendants to
provide representations and warranties regarding the origination and quality of the mortgage loans, including that the mortgage loans had been underwritten by WMC pursuant to its stated underwriting guidelines. 113. Through term sheets or other offering documents, the Negligent
Misrepresentation Defendants also furnished Freddie Mac with anticipated credit ratings on the proposed pool of mortgage loans intended for securitization. On information and belief, the Negligent Misrepresentation Defendants solicited the anticipated ratings from credit rating agencies based on misrepresentations as to the credit quality of the mortgage loans and the
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amount of the overcollateralization in the deal. Both of the Securitizations had anticipated ratings of at least AAA or its equivalent. 114. Furthermore, the Negligent Misrepresentation Defendants were required to, and
generally did, deliver Prospectus Supplements to Freddie Mac 48 hours prior to, or on the date of, settlement. The Prospectus Supplements included the same loan-level information about the loan pools underlying the Certificates. In the event that the Prospectus Supplements did not conform to the negotiated terms or the representations previously made, Freddie Mac required that the Negligent Misrepresentation Defendants resolve the discrepancy. 115. The Negligent Misrepresentation Defendants agreed that, in the event of a breach
of any representation or warranty related to a mortgage loan, they would either cure the breach or repurchase or substitute eligible mortgage loans for the defective loans. 116. The Offering Materials included, among other things, (1) statements concerning
WMCs adherence to the stated underwriting guidelines; (2) statements concerning the percentage of owner-occupied properties in the loan pool; (3) statements concerning the average LTV ratios in the loan pools; and (4) statements concerning the credit ratings of the Certificates. Each misrepresentation created an additional, hidden layer of risk well beyond that known to be associated with non-agency loans or subprime loans. 117. First, the Negligent Misrepresentation Defendants statements regarding WMCs
compliance with its stated underwriting guidelines were false. The falsity of such representations is evident from disclosures concerning WMCs systematic disregard of its stated underwriting guidelines, as well as the Certificates default rates and credit ratings. Indeed, WMC was cited among the countrys worst ten originators, and government and private investigations have confirmed that these originators failed to apply any standards at all when
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making high-risk loans. Moreover, the high default rates and low credit ratings confirm that the loans were not properly underwritten in the first place. As shown in Tables 8 and 9, the average rate of default across the Securitizations is approximately 43 percent, although the Certificates that Freddie Mac invested were rated AAA (or its equivalent) at the time of purchase. As of July 31, 2011, both Certificates had been had been downgraded significantly. See supra at paragraphs 94-96. 118. The misstatements by the Negligent Misrepresentation Defendants were material
because, as discussed above, the quality of loans in the pool determined the risk of the Certificates backed by those loans. Because a reasonable underwriting process had not been followed, the entire loan pool was much riskier and more prone to default and market losses than represented. The systemic underwriting failures decreased the reliability of all the information provided to Freddie Mac about the loans, and thus increased the actual risk to investors. As a result of those failures, the value of the Certificates was substantially lower than the price paid by Freddie Mac for those Certificates. 119. Second, as shown in Table 6, the Negligent Misrepresentation Defendants
materially understated the non-owner-occupied status for each Securitization by more than half. This information was material to Freddie Mac because high owner-occupancy rates should have made the Certificates purchased by Freddie Mac safer investments than certificates backed by as many second homes or investment properties. 120. Third, the Negligent Misrepresentation Defendants understated the loan pools
average LTV ratios, which overstated the borrowers equity cushion in the property. As Table 7 demonstrates, on average, only 40 percent of the loans actually had LTV ratios of less than 80 percent, as opposed to 60 percent as represented in the Prospectus Supplements. Moreover,
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while all of the Certificates purchased by Freddie Mac were represented to have no loans with an LTV over 100 percent, in reality, approximately 13 percent of the loan pools were comprised of loans with greater than 100 percent LTV. In other words, in both Securitizations, a significant percentage of the mortgage loans either were under-secured or under water from the start. The understatement of LTV ratios was misleading because it misrepresented the risk of a borrower abandoning a property if the value dropped below the unpaid balance of the loan, as well as the risk that proceeds from a foreclosure sale would fail to cover the unpaid balance. 121. Further, the Negligent Misrepresentation Defendants failed to disclose that the
Certificates credit ratings were false and misleading because Defendants provided to the ratings agencies the same misinformation found in the Offering Materials. In testimony before the Senate Permanent Subcommittee on Investigations, Susan Barnes, the North American Practice Leader for RMBS at S&P from 2005 to 2008, confirmed that the rating agencies relied upon investment banks to provide accurate information about the loan pools: The securitization process relies on the quality of the data generated about the loans going into the securitizations. S&P relies on the data produced by others and reported to both S&P and investors about those loans . . . . S&P does not receive the original loan files for the loans in the pool. Those files are reviewed by the arranger or sponsor of the transaction, who is also responsible for reporting accurate information about the loans in the deal documents and offering documents to potential investors. (SPSI hearing testimony, April 23, 2010.) As a result, the ratings failed to reflect accurately the actual risk underlying the Certificates purchased by Freddie Mac because the ratings agencies were analyzing a mortgage pool that had no relation to the pool that actually backed the Certificates purchased by Freddie Mac 122. The AAA (or equivalent) anticipated and final credit ratings were material to
Freddie Mac, because the ratings provided additional assurances that Freddie Mac would receive
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the expected interest and principal payments. Freddie Mac would not have purchased the Certificates without the AAA ratings assigned to them. 123. Each of the Negligent Misrepresentation Defendants is responsible for the
representations made in or omitted from the Offering Materials. Specific false and misleading statements in the Registration Statement for the Certificates purchased by Freddie Mac are described supra and in Appendix A, which is incorporated by reference. 124. Because payment on the Certificates ultimately was funded by payments from the
mortgagors, Freddie Mac faced a risk of non-payment if too many borrowers defaulted on their loans and the value of the mortgaged properties was insufficient to cover the unpaid principal balance. Accordingly, any representation bearing on the riskiness of the underlying mortgage loans was material to Freddie Mac. 125. As the FCIC found: The Commission concludes that firms securitizing mortgages failed to perform adequate due diligence on the mortgages they purchased and at times knowingly waived compliance with underwriting standards. Potential investors were not fully informed or were misled about the poor quality of the mortgages contained in some mortgage-related securities. These problems appear to have been significant. (FCIC Report at 187 (emphasis added).) D. 126. Freddie Mac Justifiably Relied on the Misrepresentations in the Offering Materials The Negligent Misrepresentation Defendants knew that Freddie Mac had specific
requirements for investing in non-agency mortgage-backed securities and that Freddie Mac would rely on their misstatements in the Offering Materials.
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127.
In fact, Freddie Mac did rely to their detriment on the Negligent
Misrepresentation Defendants misrepresentations and material omissions in the Offering Materials. 128. Freddie Macs reliance was justifiable because Freddie Mac was necessarily
required to rely on the Negligent Misrepresentation Defendants to provide complete and accurate information regarding the loans. Freddie Mac lacked access to the actual loan files and the loanlevel data essential to perform statistical tests with respect to, among other things, owneroccupancy and LTV ratios. 129. Freddie Macs reliance also was justifiable because industry practice was for an
investor to rely upon the representations and warranties of the sponsors and underwriters regarding the quality of the mortgage loans and the standards under which they were originated. Information regarding the originators compliance with underwriting guidelines, owneroccupancy rates, LTV ratios, and the information provided to credit ratings agencies, was solely within the knowledge of the Negligent Misrepresentation Defendants. 130. Freddie Mac was induced into buying the Certificates based on the false and
misleading Offering Materials. It would not have purchased the Certificates had it known the truth concerning the matters alleged herein. Alternatively, Freddie Mac suffered damages because the price it paid for the Certificates was higher than their actual value. 131. Freddie Mac suffered injury from the day that the purchase of the Certificates was
complete. As a result of Defendants misrepresentations, the true value of the Certificates on the date of purchase was far lower than the price paid for them by Freddie Mac.
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FIRST CAUSE OF ACTION Violation of Section 11 of the Securities Act of 1933 (Against Defendants GE-WMC Securities, Credit Suisse and MS&Co) 132. Plaintiff realleges each allegation above as if fully set forth herein. For purposes
of this cause of action, Plaintiff hereby expressly excludes any allegation that could be construed as sounding in fraud. 133. This claim is brought by FHFA pursuant to Section 11 of the Securities Act of
1933 and is asserted on behalf of Freddie Mac, which purchased the Certificates issued pursuant to the Registration Statement for the Securitizations described herein. 134. This claim is for strict liability based on the material misstatements and omissions
in the Registration Statement that registered securities that were bona fide offered to the public on or after September 6, 2005 (as specified in Table 1, supra), and is asserted against GE-WMC Securities, Credit Suisse and MS&Co. (together, the Section 11 Defendants). 135. Credit Suisse and MS&Co., as underwriters for each of the Securitizations (as
specified in Table 1, supra), directly and indirectly participated in distributing the Certificates, and directly and indirectly participated in drafting and disseminating the Registration Statement that registered securities that were bona fide offered to the public on or after September 6, 2005. As such, they are liable for the misstatements and omissions in the Registration Statement under Section 11 of the Securities Act. 136. GE-WMC Securities filed two Registration Statement (as specified in Table 2,
supra), pursuant to which the Securitizations were carried out and is the issuer of the Certificates issued pursuant to the Registration Statement within the meaning of Section 2(a)(4) of the Securities Act, 15 U.S.C. 77b(a)(4), and in accordance with Section 11(a), 15 U.S.C. 77k(a).
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137.
At the time that they became effective, each of the Registration Statements, as set
forth above, contained material misstatements of fact and omitted information necessary to make the facts stated therein not misleading. The facts misstated or omitted were material to a reasonable investor in the securities sold pursuant to the Registration Statement. 138. The untrue statements of material fact and omissions of material fact in the
Registration Statement are principally those set forth herein in Section I(A)(6) and Appendix A, and pertain to purported compliance with underwriting guidelines, occupancy status, loan-tovalue ratios and credit ratings. 139. Freddie Mac purchased or otherwise acquired the Certificates pursuant to the false
and misleading Registration Statement and made these purchases in the primary market. At the time it purchased the Certificates, Freddie Mac was not aware of the false and misleading statements and omissions alleged herein, and if it had known those facts, it would not have purchased the Certificates. 140. The Section 11 Defendants were obligated to make a reasonable investigation of
the statements contained in the Registration Statements at the time they became effective to ensure that such statements were true and correct, and that there were no omissions of material facts required to be stated in order to make the statements contained therein not misleading. 141. The Section 11 Defendants did not exercise such due diligence and failed to
conduct a reasonable investigation. In the exercise of reasonable care, these Defendants should have known of the false statements and omissions contained in or omitted from the Registration Statements filed in connection with the Securitizations, as set forth herein. In addition, although the performance of due diligence is not an affirmative defense available to the GE-WMC
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Securities, they nonetheless also failed to take reasonable steps to ensure the accuracy of the representations made in the Registration Statements. 142. By virtue of the foregoing, Freddie Mac sustained substantial damages, including
depreciation in the value of the securities, as a result of the misstatements and omissions in the Registration Statement. Plaintiff is therefore entitled to damages, jointly and severally, from each of the Section 11 Defendants. 143. By reason of the conduct herein alleged, each of GE-WMC Securities, MS& Co.,
and Credit Suisse is jointly and severally liable for its wrongdoing. SECOND CAUSE OF ACTION Violation of Section 12(a)(2) of the Securities Act of 1933 (Against GE-WMC Securities, Credit Suisse, and MS&Co.) 144. Plaintiff realleges each allegation above as if fully set forth herein. Plaintiff
hereby expressly excludes any allegation that could be construed as sounding in fraud. 145. This claim is brought by FHFA pursuant to Section 12(a)(2) of the Securities Act
of 1933 and is asserted on behalf of Freddie Mac, which purchased the Certificates issued pursuant to the Registration Statement in the Securitizations. 146. The Underwriters are prominently identified as underwriters in the Prospectuses
that were used to sell the Certificates. The Underwriters offered, promoted, and/or sold the Certificates publicly, including selling to Freddie Mac, as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. The Underwriters offered, promoted, and/or sold the Certificates to Freddie Mac as specified in Table 2, supra. 147. The Underwriters offered, promoted, and/or sold the Certificates to Freddie Mac
by means of the Prospectuses that contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which
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they were made, not misleading. Upon information and belief, the Underwriters reviewed and participated in drafting the Prospectuses. The Underwriters successfully solicited Freddie Macs purchases of the Certificates, and generated millions of dollars in commissions in connection with the sale of the Certificates. The Underwriters offered the Certificates for sale, sold them, and distributed them by the use of means or instruments of transportation and communication in interstate commerce. 148. GE-WMC Securities is prominently identified in the Prospectuses for the
Securitizations carried out pursuant to the Registration Statement filed by GE-WMC Securities. GE-WMC Securities offered the Certificates publicly and actively solicited their sale, including to Freddie Mac. 149. GE-WMC Securities offered the Certificates to Freddie Mac by means of
Prospectuses that contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. Upon information and belief, GE-WMC Securities reviewed and participated in drafting the Prospectuses. 150. GE-WMC Securities offered the Certificates for sale by the use of means or
instruments of transportation and communication in interstate commerce. 151. GE-WMC Securities and the Underwriters actively participated in the solicitation
of Freddie Macs purchase of the Certificates, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statement, filing the Registration Statement, and assisting in marketing and selling the Certificates.
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152.
Registration Statement, which include the Prospectuses, are set forth above and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and credit ratings. 154. GE-WMC Securities and the Underwriters offered and sold the Certificates
offered pursuant to the Registration Statement directly to Freddie Mac pursuant to the false and misleading Prospectuses. 155. Freddie Mac acquired the Certificates in the primary market pursuant to the
Prospectuses. Freddie Mac did not know of the misstatements and omissions contained in the Prospectuses at the time it purchased the Certificates. If Freddie Mac had known of those misstatements and omissions, it would not have purchased the Certificates. 156. Freddie Mac sustained substantial damages in connection with its investment in
the Certificates and has the right to rescind and recover the consideration paid for the Certificates, with interest thereon. Freddie Mac hereby tenders the Certificates in connection with this request for rescission. THIRD CAUSE OF ACTION Violation of Section 15 of the Securities Act of 1933 (Against General Electric, GE Capital, and GE Holding) 157. Plaintiff realleges each allegation above as if fully set forth herein. Plaintiff
hereby expressly excludes any allegation that could be construed as sounding in fraud.
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158.
This claim is brought under Section 15 of the Securities Act of 1933, 15 U.S.C.
77o (Section 15), against General Electric, GE Capital and GE Holding for control person liability with regard to the Section 11 and Section 12(a)(2) causes of actions set forth above. 159. GE Holding acted as Sponsor for the Securitizations carried out under the
Registration Statement filed by GE-WMC Securities, and culpably participated in GE-WMC Securities violations of Sections 11 and 12(a)(2) by initiating the Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting GEWMC Securities as the special purpose vehicle for the Securitizations, and selecting Credit Suisse and MS&Co. as the Underwriters. As Sponsor, GE Holding knew and intended that the mortgage loans it purchased would be securitized, and that certificates representing the ownership interests of investors in the mortgages would be issued by the relevant trusts. 160. GE Holding also acted as the seller of the mortgage loans for all the
Securitizations carried out under the Registration Statement filed by GE-WMC Securities, in that it conveyed such mortgage loans to GE-WMC Securities pursuant to a Mortgage Loan Purchase Agreement. 161. GE Holding also controlled all aspects of the business of GE-WMC Securities as
the direct parent of GE-WMC Securities, and GE-WMC Securities was merely a special purpose entity created by GE Holding for the purpose of acting as a pass-through for the issuance of the Certificates. As Sponsor, GE Holding was able to, and did in fact, control the contents of the Registration Statement filed by GE-WMC Securities, including the Prospectuses and Prospectus Supplements pertaining to each of the Securitizations. GE Holding had the practical ability to direct and control the actions of GE-WMC Securities in issuing and selling the Certificates, and
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in fact exercised such direction and control over the activities of GE-WMC Securities in connection with the issuance and sale of the Certificates. 162. GE controlled the business operations of GE Capital, which in turn controlled the
business operations of GE Holding. As the corporate parent of GE Capital, GE had the practical ability to direct and control the actions of GE Capital, who in turn had the practical ability to direct and control the actions of GE Holding and GE-WMC Securities in issuing and selling the Certificates, and in fact, exercised such direction and control over the activities of GE Holding and GE-WMC Securities in connection with the issuance and sale of the Certificates. As the corporate parent of GE Holding, GE Capital had the practical ability to direct and control the actions of GE Holding and GE-WMC Securities in issuing and selling the Certificates, and in fact, exercised such direction and control over the activities of GE Holding and GE-WMC Securities in connection with the issuance and sale of the Certificates. 163. GE and GE Capital culpably participated in the violations of Section 11 and
12(a)(2) set forth above. GE and GE Capital oversaw and directed the actions of their subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statement and establish special-purpose financial entities such as GE-WMC Securities and the issuing trusts to serve as conduits for the mortgage loans. 164. Freddie Mac purchased the Certificates in the primary market, which were issued
pursuant to the Registration Statement that included the Prospectuses and Prospectus Supplements. The facts misstated in and omitted from these Registration Statement were material to a reasonable investor reviewing the Registration Statement.
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165.
Statement; had it known of those misstatements and omissions, it would not have purchased the Certificates. 166. Freddie Mac has sustained damages as a result of the misstatements and
omissions in the Registration Statement, for which it is entitled to compensation. FOURTH CAUSE OF ACTION Primary Violations of the Virginia Securities Act (Against GE-WMC Securities, Credit Suisse, and MS&Co) 167. Plaintiff realleges each allegation above as if fully set forth herein. Plaintiff
hereby expressly excludes any allegation that could be construed as sounding in fraud. 168. This claim is brought by Plaintiff pursuant to Section 13.1-522(A)(ii) of the
Virginia Code and is asserted on behalf of Freddie Mac with respect to those Certificates identified in Table 9 that were purchased by Freddie Mac and issued pursuant to the Registration Statements. 169. Defendant GE-WMC Securities made false and materially misleading statements
in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as Prospectuses) for each Securitization. Defendants Credit Suisse and MS&Co made false and materially misleading statements in the Prospectuses for the Securitizations effected under the Shelf Registration Statements. 170. Credit Suisse and MS&Co. are prominently identified in the Prospectuses, the
primary documents that they used to sell the Certificates. Credit Suisse and MS&Co. offered the Certificates publicly, including selling to Freddie Mac the Certificates, as set forth in the Method of Distribution or equivalent underwriting section of each Prospectus.
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171.
Credit Suisse and MS&Co. offered and sold the Certificates to Freddie Mac by
means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. Credit Suisse and MS&Co. reviewed and participated in drafting the Prospectuses. 172. Credit Suisse and MS&Co. successfully solicited Freddie Macs purchases of the
Certificates. As underwriters, Credit Suisse and MS&Co. were paid a substantial commission based on the amount it received from the sale of the Certificates to the public. 173. Credit Suisse and MS&Co. offered the Certificates for sale, sold them, and
distributed them to Freddie Mac in the State of Virginia. 174. GE-WMC Securities is prominently identified in the Prospectuses for the
Securitizations carried out under the Registration Statements. These Prospectuses were the primary documents used to sell Certificates for the Securitizations under the Registration Statements. GE-WMC Securities offered the Certificates publicly and actively solicited their sale, including to Freddie Mac. GE-WMC Securities was paid a percentage of the total dollar amount of the offering upon completion of the Securitizations effected pursuant to the Shelf Registration Statements. 175. With respect to the Securitizations for which it filed the Shelf Registration
Statements, including the related Prospectus Supplements, GE-WMC Securities offered the Certificates to Freddie Mac by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. GE-WMC Securities reviewed and participated in drafting the Prospectuses.
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176.
Each of Credit Suisse, MS&Co. and GE-WMC Securities actively participated in
the solicitation of the Freddie Macs purchase of the Certificates, and did so in order to benefit itself. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the Certificates. 177. Each of the Prospectuses contained material misstatements of fact and omitted
Registration Statements, which include the Prospectuses, are set forth above, and include compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 179. Credit Suisse and MS&Co. and GE-WMC Securities offered and sold the
Certificates directly to Freddie Mac pursuant to the materially false, misleading, and incomplete Prospectuses. 180. Credit Suisse and MS&Co. each owed to Freddie Mac, as well as to other
investors in these trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. GE-WMC Securities owed the same duty with respect to the Prospectuses for the Securitizations effected under the Shelf Registration Statements. 181. Credit Suisse, MS&Co. and GE-WMC Securities failed to exercise such
reasonable care. These Defendants in the exercise of reasonable care should have known that the
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Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations, as set forth above. 182. In contrast, Freddie Mac did not know, and in the exercise of reasonable diligence
the Certificates and has the right to rescind and recover the consideration paid for the Certificates, with interest thereon. 184. This action is timely under 12 U.S.C. 4617(b)(12), which provides for extension
or tolling of all time periods applicable to the claims brought herein. FIFTH CAUSE OF ACTION Controlling Person Liability Under the Virginia Securities Act (Against General Electric, GE Capital, and GE Holding) 185. Plaintiff realleges each allegation above as if fully set forth herein. Plaintiff
hereby expressly excludes any allegation that could be construed as sounding in fraud. 186. This claim is brought under Section 13.1-522(C) of the Virginia Code and is
asserted on behalf of Freddie Mac, which purchased the Certificates (identified in Table 9) issued pursuant to the Registration Statements. This claim is brought against General Electric, GE Capital, and GE Holding (Control Persons) for controlling-person liability with regard to the claim brought by Plaintiff pursuant to Section 13.1-522(A)(ii). 187. GE Holding acted as Sponsor for the Securitizations carried out under the
Registration Statements filed by GE-WMC Securities, and culpably participated in GE-WMC Securities violations of Section 13.1-522(A)(ii) by initiating the Securitizations, purchasing the
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mortgage loans to be securitized, determining the structure of the Securitizations, selecting GEWMC Securities as the special purpose vehicle for the Securitizations, and selecting Credit Suisse and MS&Co. as the Underwriters. As Sponsor, GE Holding knew and intended that the mortgage loans it purchased would be securitized, and that certificates representing the ownership interests of investors in the mortgages would be issued by the relevant trusts. 188. GE Holding acted as the seller of the mortgage loans for all the Securitizations
carried out under the Registration Statements filed by GE-WMC Securities, in that it conveyed such mortgage loans to GE-WMC Securities pursuant to a Mortgage Loan Purchase Agreement. 189. GE Holding controlled all aspects of the business of GE-WMC Securities as the
direct parent of GE-WMC Securities, and GE-WMC Securities was merely a special purpose entity created by GE Holding for the purpose of acting as a pass-through for the issuance of the Certificates. As Sponsor, GE Holding was able to control, and did in fact control, the contents of the Registration Statements filed by GE-WMC Securities, including the Prospectuses and Prospectus Supplements pertaining to each of the Securitizations. GE Holding had the practical ability to direct and control the actions of GE-WMC Securities in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of GE-WMC Securities in connection with the issuance and sale of the Certificates. 190. GE controlled the business operations of GE Capital, which in turn controlled the
business operations of GE Holding. As the corporate parent of GE Capital, GE had the practical ability to direct and control the actions of GE Capital, who in turn had the practical ability to direct and control the actions of GE Holding and GE-WMC Securities in issuing and selling the Certificates, and in fact, exercised such direction and control over the activities of GE Holding and GE-WMC Securities in connection with the issuance and sale of the Certificates. As the
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corporate parent of GE Holding, GE Capital had the practical ability to direct and control the actions of GE Holding and GE-WMC Securities in issuing and selling the Certificates, and in fact, exercised such direction and control over the activities of GE Holding and GE-WMC Securities in connection with the issuance and sale of the Certificates. 191. GE and GE Capital culpably participated in the violations of Section 13.1-
522(A)(ii) set forth above. GE and GE Capital oversaw and directed the actions of their subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and establish special-purpose financial entities such as GE-WMC Securities and the issuing trusts to serve as conduits for the mortgage loans. 192. Freddie Mac purchased the Certificates, which were issued pursuant to the
and omissions in the Registration Statements, for which it is entitled to compensation, and for which the Control Persons are jointly and severally liable. 195. This action is timely under 12 U.S.C. 4617(b)(12), which provides for extension
or tolling of all time periods applicable to the claims brought herein.
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SIXTH CAUSE OF ACTION (Negligent Misrepresentation Against GE Holdings, GE-WMC Securities, Credit Suisse, and MS&Co.) 196. 197. Plaintiff realleges each allegation above as if fully set forth herein. The Sponsor, the Depositor, and the Underwriters each marketed and sold the
Certificates to Freddie Mac as described above. 198. Because the Sponsor (GE Holding) acquired all of the loans underlying the
Certificates from a wholly-owned subsidiary (i.e., WMC) of its parent company (GE Capital), and then transferred those loans to a wholly-owned special purpose vehicle (GE-WMC Securities), and through its familiarity with the loan origination and transfer process and its possession of the loan files and other documentation, the Sponsor had unique, exclusive, and special knowledge about credit quality of the mortgage loans in the Securitizations. 199. Because the Depositor (GE-WMC Securities) acquired, owned and then conveyed
the underlying mortgage loans to the issuing trusts, and through its familiarity with the loan origination and transfer process and its possession of the loan files and other documentation, the Depositor had unique, exclusive, and special knowledge about the credit quality of the mortgage loans in the Securitizations. 200. Because the Underwriters (MS&Co. and Credit Suisse) had access to (and ability
to review) the information contained in the loan files underlying the Certificates, and were obligated to perform a reasonable investigation to ensure the accuracy of the Registration Statement, the underwriters had unique, exclusive, and special knowledge about the credit quality of the underlying mortgage loans in the Securitizations. 201. In contrast, Freddie Mac did not have access to the borrower loan files and could
not evaluate the credit quality of the mortgage loans in the Securitizations or whether WMC
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had complied with its origination guidelines on a loan-by-loan basis. Freddie Mac therefore necessarily relied, when determining whether to purchase the Certificates, on the information provided by the Sponsor, the Depositor, and the Underwriters concerning the credit quality of the loans and WMCs purported compliance with its origination guidelines. 202. The Sponsor, the Depositor and the Underwriters provided Freddie Mac with
information regarding the credit quality of the mortgage loans (including the LTV ratios and owner-occupancy rates of the loan pools) and WMCs purported compliance with its origination guidelines in (i) the Registration Statement and (ii) direct communications with Freddie Macs trading department. Having provided Freddie Mac with this incomplete and/or misleading information, the Sponsor, the Depositor and the Underwriters had a duty to correct the misimpressions left by their statements, including with respect to any half truths. 203. The Sponsor, the Depositor and the Underwriters knew that Freddie Mac would
reasonably rely on them to provide complete, accurate, and timely information. The actual credit quality of the loans, and the standards by which WMC originated the mortgage loans, were known to these Defendants and were not known, and could not be determined, by Freddie Mac prior to the closing of the Securitizations. Freddie Mac therefore reasonably relied upon these Defendants misrepresentations and omissions in the Offering Materials. 204. The Sponsor, the Depositor and the Underwriters breached their duty of
disclosure by making false or misleading statements of material facts to Freddie Mac in connection with Freddie Macs purchase of the Certificates, and these defendants were negligent in failing to learn of the falsity of these statements. These false statements are described above and in Appendix A to the Complaint.
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205.
Freddie Mac reasonably relied on the information provided by the Sponsor, the
Depositor and the Underwriters, and as a result, suffered damages in an amount to be determined at trial. PRAYER FOR RELIEF WHEREFORE Plaintiff respectfully requests that judgment be entered: An award in favor of Plaintiff against all Defendants, jointly and severally, for: a. Rescission and recovery of the consideration paid for the Certificates, with interest thereon (in connection with this request for rescission, the Certificates are hereby tendered to the Defendants); b. Freddie Macs monetary losses, including any diminution in value of the Certificates, as well as lost principal and lost interest payments thereon; c. Punitive damages; d. Attorneys fees and costs; e. Prejudgment interest at the maximum legal rate; and f. Such other and further relief as the Court may deem just and proper.
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DATED:
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SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK FEDERAL HOUSING FINANCE AGENCY, AS CONSERVATOR FOR THE FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff, -againstALLY FINANCIAL INC. f/k/a GMAC, LLC, GMAC MORTGAGE GROUP, INC., RESIDENTIAL CAPITAL LLC f/k/a RESIDENTIAL CAPITAL CORPORATION, GMAC-RFC HOLDING COMPANY, LLC d/b/a GMAC RESIDENTIAL FUNDING CORPORATION, RESIDENTIAL FUNDING COMPANY, LLC f/k/a RESIDENTIAL FUNDING CORPORATION, ALLY SECURITIES, LLC f/k/a RESIDENTIAL FUNDING SECURITIES, LLC d/b/a GMAC RFC SECURITIES AND f/k/a RESIDENTIAL FUNDING SECURITIES CORPORATION, RESIDENTIAL ASSET MORTGAGE PRODUCTS, INC., RESIDENTIAL ASSET SECURITIES CORPORATION, AND RESIDENTIAL ACCREDIT LOANS, INC., J.P. MORGAN SECURITIES LLC f/k/a J.P. MORGAN SECURITIES, INC. AND AS SUCCESSORIN-INTEREST TO BEAR, STEARNS & CO. INC., CREDIT SUISSE SECURITIES (USA) LLC f/k/a CREDIT SUISSE FIRST BOSTON LLC, RBS SECURITIES, INC. d/b/a RBS GREENWICH CAPITAL AND f/k/a GREENWICH CAPITAL MARKETS, INC., CITIGROUP GLOBAL MARKETS INC., BARCLAYS CAPITAL INC., UBS SECURITIES LLC, GOLDMAN, SACHS & CO., Defendants. Plaintiff designates New York County as the place of trial The basis of venue is the residence of one or more of the parties pursuant to CPLR 503
Index No._______________ Date Purchased:
SUMMONS
TO THE ABOVE NAMED DEFENDANTS: YOU ARE HEREBY SUMMONED to answer the Complaint in this action and to serve a copy of your answer, or if the Complaint is not served with this summons, to serve a notice of appearance on Plaintiffs attorneys within 20 days after the service of this summons, exclusive of the day of service (or within 30 days after the service is complete if this summons is not personally delivered to your within the State of New York); and in the case of your failure to appear or answer, judgment will be taken against you by default for the relief demanded in the Complaint. Dated: New York, New York September 2, 2011 KASOWITZ, BENSON, TORRES & FRIEDMAN LLP
SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK FEDERAL HOUSING FINANCE AGENCY, AS CONSERVATOR FOR THE FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff, -againstALLY FINANCIAL INC. f/k/a GMAC, LLC, GMAC MORTGAGE GROUP, INC., RESIDENTIAL CAPITAL LLC f/k/a RESIDENTIAL CAPITAL CORPORATION, GMAC-RFC HOLDING COMPANY, LLC d/b/a GMAC RESIDENTIAL FUNDING CORPORATION, RESIDENTIAL FUNDING COMPANY, LLC f/k/a RESIDENTIAL FUNDING CORPORATION, ALLY SECURITIES, LLC f/k/a RESIDENTIAL FUNDING SECURITIES, LLC d/b/a GMAC RFC SECURITIES and f/k/a RESIDENTIAL FUNDING SECURITIES CORPORATION, RESIDENTIAL ASSET MORTGAGE PRODUCTS, INC., RESIDENTIAL ASSET SECURITIES CORPORATION, and RESIDENTIAL ACCREDIT LOANS, INC., J.P. MORGAN SECURITIES LLC f/k/a J.P. MORGAN SECURITIES, INC. and as successor-in-interest to BEAR, STEARNS & CO. INC., CREDIT SUISSE SECURITIES (USA) LLC f/k/a CREDIT SUISSE FIRST BOSTON LLC, RBS SECURITIES, INC. d/b/a RBS GREENWICH CAPITAL and f/k/a GREENWICH CAPITAL MARKETS, INC., CITIGROUP GLOBAL MARKETS INC., BARCLAYS CAPITAL INC., UBS SECURITIES LLC, and GOLDMAN, SACHS & CO., Defendants.
Index No.________
COMPLAINT
TABLE OF CONTENTS Page NATURE OF ACTION........................................................................................................................1 PARTIES...............................................................................................................................................4 Plaintiff .....................................................................................................................................4 Defendants................................................................................................................................5 GMAC Defendants...................................................................................................................5 Non-GMAC Defendants..........................................................................................................7 Non-Party Originators............................................................................................................10 JURISDICTION AND VENUE ........................................................................................................11 FACTUAL ALLEGATIONS ............................................................................................................11 I. FACTUAL ALLEGATIONS APPLICABLE TO ALL CLAIMS .....................................11 A. The Securitizations ....................................................................................................12 1. 2. 3. Residential Mortgage-Backed Securitizations Generally...........................12 Securitizations at Issue in this Case .............................................................13 Securitization Process ...................................................................................16 a. b. B. The Sponsors Grouped Mortgage Loans in Special-Purpose Trusts .................................................................................................16 The Trusts Issued Securities Backed by the Loans ........................17
Defendants Participation in the Securitization Process .........................................20 1. 2. 3. 4. 5. 6. Ally.................................................................................................................21 RFC ................................................................................................................21 RALI, RASC and RAMP .............................................................................23 RFS.................................................................................................................23 GMAC-RFC ..................................................................................................24 Ally, GMACM and ResCap .........................................................................24
7. C.
Non-GMAC Underwriters ............................................................................25
Statements in the Prospectus Supplements ..............................................................26 1. 2. 3. 4. Compliance with Underwriting Guidelines.................................................26 Occupancy Status of Borrower.....................................................................29 Loan-to-Value Ratios....................................................................................31 Credit Ratings ................................................................................................34
D.
Falsity of Statements in the Registration Statements and Prospectus Supplements...............................................................................................................36 1. The Statistical Data Provided in the Prospectus Supplements Concerning Owner-Occupancy and Loan-to-Value Ratios was Materially False .............................................................................................36 a. b. 2. Owner-Occupancy Data was Materially False ...............................36 Loan-to-Value Data was Materially False ......................................38
The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines ...............................................41 a. Government and Private Investigations Confirm That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines..........................................................................................42 i. ii. iii. b. New Century Violated Its Underwriting Guidelines..........43 HFN Violated Its Underwriting Guidelines........................46 MLN Violated Its Underwriting Guidelines.......................48
The Collapse of the Certificates Credit Ratings Further Shows that the Mortgage Loans were not Originated in Adherence to the Stated Underwriting Guidelines .........................49 The Surge in Mortgage Delinquency and Default Further Demonstrates that the Mortgage Loans were not Originated in Adherence to the Stated Underwriting Guidelines.....................50
c.
E. F.
Freddie Macs Purchases of the Certificates............................................................52 Freddie Mac was Damaged by Defendants Violations of Sections 11, 12 and 15 of the Securities Act ......................................................................................53
ii
II.
ADDITIONAL FACTUAL ALLEGATIONS .....................................................................54 A. B. C. D. Defendants Were Incentivized to Fund Risky Residential Mortgage Loans and to Securitize and Sell Them to Investors..........................................................54 Defendants Material Misrepresentations and Omissions in the Offering Materials.....................................................................................................................58 The Fraud Defendants Knew or were Reckless in not Knowing that Their Representations were False and Misleading ............................................................62 Freddie Mac Justifiably Relied on the Misrepresentations and Omissions in the Offering Materials and was Damaged by Defendants Fraudulent Conduct ......................................................................................................................70
FIRST CAUSE OF ACTION ............................................................................................................72 Violation of Section 11 of the Securities Act of 1933 (Against Defendants RALI, RASC, RAMP, RFS, JPM, Credit Suisse, RBS, Citi, Barclays, UBS and Goldman Sachs).........................................................................................................72 SECOND CAUSE OF ACTION .......................................................................................................75 Violation of Section 12(a)(2) of the Securities Act of 1933 (Against Defendants RALI, RASC, RAMP, RFS, JPM, Credit Suisse, RBS, Citi, Barclays, UBS and Goldman Sachs).........................................................................................75 THIRD CAUSE OF ACTION ...........................................................................................................78 Violation of Section 15 of the Securities Act of 1933 (Against RFC, GMAC-RFC, ResCap, GMACM and Ally) ....................................................................................78 FOURTH CAUSE OF ACTION .......................................................................................................81 Primary Violations of the Virginia Securities Act (Against RALI, RASC, RAMP, RFS, JPM, Credit Suisse, RBS, Citi, Barclays, UBS and Goldman Sachs) .........81 FIFTH CAUSE OF ACTION ............................................................................................................84 Controlling Person Liability Under the Virginia Securities Act (Against RFC, GMAC-RFC, ResCap, GMACM and Ally).............................................................84 SIXTH CAUSE OF ACTION ...........................................................................................................88 (Common Law Fraud Against RALI, RAMP, RASC, RFC, RFS JPM, Credit Suisse, RBS, Citi, Barclays, UBS and Goldman Sachs).........................................88 SEVENTH CAUSE OF ACTION.....................................................................................................89
iii
(Aiding and Abetting Fraud Against Ally, GMACM, GMAC-MG, ResCap, GMAC-RFC, RFC, RALI, RASC and RAMP).......................................................89 EIGHTH CAUSE OF ACTION ........................................................................................................91 (Negligent Misrepresentation Against RALI, RASC, RAMP, RFC, RFS, JPM, Credit Suisse, RBS, Citi, Barclays, UBS and Goldman Sachs)..............................91 PRAYER FOR RELIEF.....................................................................................................................93
iv
Plaintiff Federal Housing Finance Agency (Plaintiff or FHFA), as Conservator of the Federal Home Loan Mortgage Corporation (Freddie Mac), by its attorneys Kasowitz, Benson, Torres & Friedman LLP, for its Complaint against the defendants named herein (Defendants), alleges as follows: NATURE OF ACTION 1. This action arises from false and misleading statements and omissions in
registration statements, prospectuses, and other offering materials pursuant to which certain residential mortgage-backed securities (RMBS) were purchased by Freddie Mac. Among other things, these documents falsely represented that the mortgage loans underlying the RMBS complied with certain underwriting guidelines and standards, and presented a false picture of the characteristics and riskiness of those loans. These representations were material to Freddie Mac, as they would have been to any reasonable investor, and their falsity violates Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77a et seq., as well as Sections 13.1522(A)(ii) and 13.1-522(C) of the Virginia Code. Freddie Mac justifiably relied on Defendants misrepresentations and omissions of material fact to its detriment. In addition to its strict statutory liability under federal securities law and liability under state law, Defendants statements and omissions give rise to liability under state common law. 2. Between September 23, 2005 and May 30, 2007, Freddie Mac purchased over $6
billion in Certificates issued in connection with 21 securitizations that were virtually all sponsored and underwritten by Defendants.1
For purposes of this Complaint, the securities issued under the Registration Statements (as defined in note 2, infra) are referred to as Certificates. Holders of Certificates are referred to as Certificateholders.
3.
The Certificates were offered for sale pursuant to one of six shelf registration
statements (the Shelf Registration Statements) filed with the Securities and Exchange Commission (the SEC). For each of the 21 securitizations sold to Freddie Mac (the Securitizations), a prospectus (Prospectus) and prospectus supplement (Prospectus Supplement) were filed with the SEC as part of the Registration Statement for that Securitization. 2 The Certificates were marketed and sold to Freddie Mac pursuant to the Registration Statements. 4. The Registration Statements contained representations concerning, among other
things, the characteristics and credit quality of the mortgage loans underlying the Securitizations, the creditworthiness of the borrowers on those underlying mortgage loans, and the origination and underwriting practices used to make and approve the loans. Such representations were material to a reasonable investors decision to invest in the Certificates, and they were material to Freddie Mac. Unbeknownst to Freddie Mac, those representations were false because, among other reasons, many of material percentages of the underlying mortgage loans were not originated in accordance with the represented underwriting standards and origination practices, and did not have the credit and other characteristics set forth in the Registration Statements. 5. Among other things, the Registration Statements presented the loan origination
guidelines of the mortgage loan originators who originated the loans that underlay the Certificates. The Registration Statements falsely represented that those guidelines were adhered to except in specified circumstances, when in fact the guidelines systematically were disregarded in that the loans were not originated in accordance therewith.
The term Registration Statement as used herein incorporates the Shelf Registration Statement, the Prospectus, and the Prospectus Supplement and in Appendix A for each referenced Securitization, except where otherwise indicated.
6.
The Registration Statements also set forth for each Securitization statistical
summaries of the characteristics of the underlying mortgage loans, such as the percentage of loans secured by owner-occupied properties and the percentage of the loan groups aggregate principal balance with loan-to-value ratios within specified ranges. This information was material to reasonable investors, and it was material to Freddie Mac. However, a loan-level analysis of a sample of loans for each Securitization -- a review that encompassed in the aggregate thousands of mortgages across all of the Securitizations -- has revealed that for each Securitization these statistical summaries were false and misleading. The statistics reflected or were based upon misrepresentations of other key characteristics of the mortgage loans and inflated property values. 7. For example, the percentage of owner-occupied properties in the loan pool
underlying a RMBS is a material risk factor to the purchasers of certificates, such as Freddie Mac, because a borrower who actually lives in a mortgaged property is generally less likely to stop paying the mortgage and more likely to take care of the property. The loan-level review revealed that the true percentage of owner-occupied properties for the loans supporting the Certificates was materially lower than that represented in the Prospectus Supplements. Likewise, the Prospectus Supplements misrepresented such material information as loan-to-value ratios -that is, the relationship between the principal amount of the loans and the true value of the mortgaged properties securing those loans -- and the ability of the individual mortgage holders to satisfy their debts. 8. The Registration Statements also set forth ratings for each of the Securitizations.
Those AAA ratings were material to a reasonable investors decision to purchase the Certificates, and they were material to Freddie Mac. The ratings for the Securitizations were materially
inaccurate and were based upon false information supplied by Defendants. Upon information and belief, neither the Defendants nor the rating agencies who issued the ratings believed or had any sound basis to believe in their truthfulness. 9. Defendants, who are issuers, sponsors, and/or underwriters of the Certificates
purchased by Freddie Mac are liable for the misstatements and omissions of material fact contained in the Registration Statements and other offering materials because they prepared, filed, and/or used these documents to market and sell the Certificates to Freddie Mac, or because they directed and controlled the entities that did so.3 10. Defendants misstatements and omissions of material facts have caused loss and
injury to Freddie Mac. Freddie Mac purchased the highest tranches of Certificates offered for sale by Defendants. Freddie Mac would not have purchased these Certificates but for Defendants material misrepresentations and omissions concerning the mortgage loans underlying the RMBS. As the truth concerning the misrepresented and omitted facts has come to light, and as the hidden risks have materialized, the market value of the Certificates purchased by Freddie Mac has declined. Freddie Mac has suffered enormous financial losses as a result of Defendants misrepresentations and omissions. FHFA, as Conservator for Freddie Mac, now seeks rescission and damages for those losses. PARTIES Plaintiff 11. Plaintiff the Federal Housing Finance Agency is a federal agency located at
1700 G Street, NW in Washington, D.C. FHFA was created on July 30, 2008, pursuant to the Housing and Economic Recovery Act of 2008 (HERA), Pub L. No. 110-289, 122 Stat. 2654,
3
The Certificates purchased by Freddie Mac are identified below in paragraph 130 and are listed infra in Table 10.
codified at 12 U.S.C. 4617 et seq. (HERA), to oversee the Federal National Mortgage Association (Fannie Mae), Freddie Mac and the Federal Home Loan Banks. On September 6, 2008, the Director of FHFA, also pursuant to HERA, placed Freddie Mac into conservatorship and appointed FHFA as Conservator. In that capacity, FHFA has the authority to exercise all rights and remedies of Freddie Mac, including, but not limited to, the authority to bring suits on behalf of and/or for the benefit of Freddie Mac. 12 U.S.C. 4617(b)(2). 12. Freddie Mac is a government-sponsored enterprise chartered by Congress with a
mission to provide liquidity, stability and affordability to the United States housing and mortgage markets. As part of this mission, Freddie Mac invested in RMBS. Freddie Mac is located at 8200 Jones Branch Drive in McLean, Virginia. Defendants GMAC Defendants 13. Defendant Ally Financial Inc. (Ally), a leading, multi-national financial
services firm with a corporate center in New York, has approximately $179 billion of assets and operations in approximately 25 countries. Ally is the parent and sole owner of Defendants GMAC Mortgage Group, Inc. and Residential Funding Services, LLC. Prior to 2010, Ally was known as GMAC, LLC. 14. Defendant GMAC Mortgage Group, Inc. (GMACM) is a wholly-owned
subsidiary and the mortgage arm of Ally. GMACM is a Delaware corporation with its principal place of business at 1100 Virginia Drive, Fort Washington, Pennsylvania 19034. GMACM transacted business in New York. 15. Defendant Residential Capital LLC (ResCap) is a wholly-owned subsidiary of
GMACM and originates, services, and securitizes mortgage loans in the United States, including New York. ResCap was incorporated in the State of Delaware and its principal office is located
at One Meridian Crossings, Minneapolis, Minnesota 55423. Prior to 2007, ResCap was known as Residential Capital Corporation. 16. Defendant GMAC-RFC Holding Company, LLC, doing business as GMAC
Residential Funding Corporation (GMAC-RFC), is a wholly-owned subsidiary of ResCap and acquires residential mortgages and loans, which it then packages as mortgage-backed securities and sells to institutional investors. GMAC-RFC was incorporated in the State of Delaware and its principal office is located at 8400 Normandale Lake Boulevard, Minneapolis, Minnesota 55437. GMAC-RFC transacted business in New York. 17. Defendant Residential Funding Company, LLC (RFC) is a wholly-owned
subsidiary of GMAC-RFC. RFC, a Delaware corporation, has an office in New York, has appointed an agent for service of process in New York, and has consented to the jurisdiction of the New York courts. Prior to October 2006, RFC was known as Residential Funding Corporation. RFC was the sponsor of all 21 of the Securitizations. Defendant RFC is the parent and sole owner of Homecomings Financials, LLC (HFN), the originator of loans underlying the Certificates for 13 of the 21 Securitizations and, upon information and belief, the only Ally subsidiary that originated residential mortgage loans during the relevant time period. Prior to 2006, HFN was known as Homecomings Financials Network, Inc. 18. Defendant Ally Securities, LLC is an SEC-registered broker-dealer and is
registered to do business in New York. Prior to August 1, 2011, Ally Securities, LLC was known as Residential Funding Securities, LLC, which was doing business as GMAC RFC Securities and prior to 2007, Residential Funding Securities, LLC was known as Residential Funding Securities Corporation (collectively, RFS). RFS is a wholly-owned subsidiary of Ally, and was registered to do business in New York. RFS was the co-lead underwriter for five
of the Securitizations and was an underwriter for an additional six of the Securitizations. Freddie Mac purchased five of the Securitizations from RFS in its capacity as co-lead underwriter of those Securitizations. 19. Defendant Residential Asset Mortgage Products, Inc. (RAMP) is a wholly-
owned subsidiary of GMAC-RFC and its principal office is located at 8400 Normandale Lake Boulevard, Minneapolis, Minnesota 55437. RAMP was the depositor for five of the Securitizations and transacted business in New York. RAMP, as depositor, was also responsible for preparing and filing reports required under the Securities Exchange Act of 1934 with respect to the Securitizations. 20. Defendant Residential Asset Securities Corporation (RASC) is a wholly-owned
subsidiary of GMAC-RFC and its principal office is located at 8400 Normandale Lake Boulevard, Minneapolis, Minnesota 55437. RASC was the depositor for 10 of the Securitizations and transacted business in New York. RASC, as depositor, was also responsible for preparing and filing reports required under the Securities Exchange Act of 1934. 21. Defendant Residential Accredit Loans, Inc. (RALI) is a wholly-owned
subsidiary of GMAC-RFC and its principal office is located at 8400 Normandale Lake Boulevard, Minneapolis, Minnesota 55437. RALI was the depositor for 6 of the Securitizations and transacted business in New York. RALI, as depositor, was also responsible for preparing and filing reports required under the Securities Exchange Act of 1934. Defendants Ally, GMACM, ResCap, GMAC-RFC, RFS, RAMP, RASC and RALI are referred to together herein as GMAC. Non-GMAC Defendants 22. Defendant Barclays Capital Inc. (Barclays) is a Connecticut corporation with its
principal place of business located at 200 Park Avenue, New York, New York 10166. Barclays
is an SEC-registered broker-dealer and served as underwriter or co-underwriter for one Securitization. 23. Defendant Citigroup Global Markets Inc. (Citi) is an SEC-registered broker-
dealer. Citi is a corporation organized and existing under the laws of the State of New York with its principal place of business located at 388 Greenwich Street, New York, New York 10013. Citi served as underwriter or co-underwriter for one Securitization. 24. Defendant Credit Suisse Securities (USA) LLC (Credit Suisse) is a corporation
organized and existing under the laws of the State of Delaware with its principal place of business at 11 Madison Ave., New York, New York 10010. Prior to January 16, 2006, Credit Suisse was known as Credit Suisse First Boston LLC. Credit Suisse is an SEC-registered brokerdealer, and was the co-lead underwriter for four of the Securitizations. Credit Suisse was counderwriter for three of the Securitizations. 25. Defendant Goldman, Sachs & Co. (Goldman) is a corporation organized and
existing under the laws of the State of New York with its principal place of business located at 200 West Street, New York, New York 10282. Goldman is an SEC-registered broker-dealer and served as underwriter or co-underwriter for one Securitization. 26. Defendant J.P. Morgan Securities, LLC, f/k/a J.P. Morgan Securities, Inc.
(JPM), is a limited liability company organized and existing under the laws of Delaware with its principal place of business located at 277 Park Avenue, New York, New York 10172. JPM is an SEC-registered broker-dealer and was co-lead underwriter for two of the Securitizations. 27. JPM is also the successor-in-interest to Bear, Stearns & Co., Inc. (Bear Stearns)
because on March 16, 2008, Bear Stearns parent company, Bear Stearns Companies, Inc. (BSCI), entered into an Agreement and Plan of Merger with Bear Stearns Merger Corporation,
a wholly-owned subsidiary of JPMorgan Chase & Co. (JPMorgan Chase), making Bear Stearns a wholly-owned indirect subsidiary of JPMorgan Chase. Following the merger, on or about October 1, 2008, Bear Stearns merged with J.P. Morgan Securities Inc., a subsidiary of JPMorgan Chase, which subsequently changed its name to J.P. Morgan Securities LLC. Thus, BSCI is now doing business as Defendant JPM. 28. In a June 30, 2008 press release describing internal restructuring to be undertaken
pursuant to the Merger, JPMorgan Chase stated its intent to assume Bear Stearns and its debts, liabilities, and obligations as follows: Following completion of this transaction, Bear Stearns plans to transfer its broker-dealer subsidiary Bear, Stearns & Co. Inc. to JPMorgan Chase, resulting in a transfer of substantially all of Bear Stearns assets to JPMorgan Chase. In connection with such transfer, JPMorgan Chase will assume (1) all of Bear Stearns then-outstanding registered U.S. debt securities; (2) Bear Stearns obligations relating to trust preferred securities; (3) Bear Stearns then-outstanding foreign debt securities; and (4) Bear Stearns guarantees of then-outstanding foreign debt securities issued by subsidiaries of Bear Stearns, in each case, in accordance with the agreements and indentures governing these securities. Further, the former Bear Stearns website, www.bearstearns.com, redirects Bear Stearns visitors to J.P. Morgan Securities Inc.s website. 29. J.P. Morgan Securities Inc. was fully aware of the pending and potential claims
against Bear Stearns when it consummated the merger. J.P. Morgan Securities Inc. has further evinced its intent to assume Bear Stearns liabilities by paying to defend and settle lawsuits against Bear Stearns. JPM announced its intention to convert to a limited liability company, effective September 1, 2010, as part of which it changed its name to J.P. Morgan Securities LLC. As a result of the Merger, Defendant JPM Securities is the successor-in-interest to Bear Stearns and is jointly and severally liable for the misstatements and omissions of material fact alleged herein of Bear Stearns. This action is brought against JPM Securities as successor to
Bear Stearns. Prior to acquisition, Bear Stearns was an SEC-registered broker-dealer and served as an underwriter for one Securitization. 30. Defendant RBS Securities, Inc., doing business as RBS Greenwich Capital
(RBS), is an SEC-registered broker-dealer incorporated in the State of Delaware with offices located at 101 Park Avenue, New York, New York 10178. Prior to April 2009, RBS was known as Greenwich Capital Markets, Inc. RBS served as underwriter or co-underwriter for two of the Securitizations. 31. Defendant UBS Securities LLC (UBS) is a Delaware limited liability company
with its principal place of business located at 677 Washington Blvd., Stamford, Connecticut 06901. UBS is an SEC-registered broker-dealer and served as underwriter or co-underwriter for one Securitization. 32. Defendants Barclays, Citi, Credit Suisse, Goldman, JPM, RBS, and UBS are
referred to together herein as the Non-GMAC Defendants, and together with RFS as the Underwriter Defendants. Non-Party Originators 33. The loans underlying the Certificates were acquired by the sponsor RFC for each
Securitization from the following mortgage originators: Homecomings Financials Network Inc. (HFN); Aegis Mortgage Corporation; Decision One Mortgage Company, LLC; EFC Holdings Corporation and its subsidiary EquiFirst Corporation; Finance America, LLC; First National Bank of Nevada; Home123 Corporation; Homefield Financial Inc.; Mortgage Lenders Network USA, Inc.; New Century Mortgage Corporation; Ownit Mortgage Solutions Inc.; Peoples Choice Home Loan, Inc.; Pinnacle Financial Corporation; and SCME Mortgage Bankers, Inc. HFN -- a subsidiary of Defendant Ally and an affiliate of Defendant RFC -- originated loans
10
underlying the Certificates for 13 of the 21 Securitizations. Together, the entities identified in this paragraph are referred to as the Non-Party Originators. JURISDICTION AND VENUE 34. This Court has jurisdiction over this action pursuant to Section 22 of the
Securities Act of 1933, 15 U.S.C. 77v and Section 7 of Article VI of the New York State Constitution. 35. 301 and 302. 36. Venue is proper in this district pursuant to C.P.L.R. 503 because one or more of This Court has personal jurisdiction over the Defendants pursuant to C.P.L.R.
the parties resides in this county. The underwriters reside or have their principal place of business in this county and many of the alleged acts and transactions, including the preparation and dissemination of the Registration Statements, occurred in substantial part within New York County, New York. FACTUAL ALLEGATIONS I. FACTUAL ALLEGATIONS APPLICABLE TO ALL CLAIMS 37. The factual allegations set forth in paragraphs 38 through 134 below are made
with respect to all causes of action against Defendants and are sufficient to establish Defendants strict statutory liability under the federal Securities Act and the Securities Act of Virginia. With respect to such liability, no allegations are made or intended, and none are necessary, concerning Defendants state of mind. Defendants are strictly liable, without regard to intent on their part or reliance on Freddie Macs part, for the misstatements in, and material omissions from, the Registration Statements under Sections 11 and 12 and, for control person defendants, under Section 15, of the Securities Act, and Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code.
11
A.
The Securitizations 1. Residential Mortgage-Backed Securitizations Generally
38.
issuing securities backed by those pools of assets. In residential mortgage-backed securitizations, the cash-producing financial assets are residential mortgage loans. 39. In the most common form of securitization of mortgage loans, a sponsor -- the
entity that acquires or originates the mortgage loans and initiates the securitization -- directly or indirectly transfers a portfolio of mortgage loans to a trust. In many instances, the transfer of assets to the trust is a two-step process in which the sponsor first transfers the financial assets to an intermediate entity, typically referred to as a depositor, and then the depositor transfers the assets to a trust. The trust is established pursuant to a pooling and servicing agreement or trust indenture entered into by, among others, the depositor for that securitization. 40. RMBS are the securities backed by the underlying mortgage loans in the trust.
Some residential mortgage-backed securitizations are created from more than one cohort of loans, called collateral groups, in which case the trust issues different tranches of securities backed by different groups of loans. For example, a securitization may involve two groups of mortgages, with some securities backed primarily by the first group, and others primarily by the second group. Purchasers of the securities (in the form of certificates) acquire an ownership interest in the assets of the trust, which in turn owns the loans. These purchasers are thus dependent for repayment of principal and payment of interest upon the cash flows from the designated group of mortgage loans -- primarily mortgagors payments of principal and interest on the mortgage loans held by the related trust. 41. RMBS are generally issued and sold pursuant to registration statements filed with
the SEC. These registration statements include prospectuses, which describe the general
12
structure of the investment, and prospectus supplements, which set forth detailed descriptions of, among other things, the mortgage groups underlying the certificates. Certificates are issued by the trust and sold pursuant to the registration statement, the prospectus and prospectus supplement. Underwriters purchase the certificates from the trust and then offer, sell or distribute the certificates to investors. 42. A mortgage servicer manages the collection of proceeds from the mortgage loans.
The servicer is responsible for collecting homeowners mortgage loan payments, which the servicer remits to the trustee after deducting a monthly servicing fee. The servicers duties include making collection efforts on delinquent loans, initiating foreclosure proceedings, and determining when to charge off a loan by writing down its balance. The servicer is required to report key information about the loans to the trustee. The trustee (or trust administrator) administers the trust funds and delivers payments due each month on the certificates to the investors. 2. 43. Securitizations at Issue in this Case
This case involves the following 21 Securitizations: i. ii. iii. iv. v. vi. vii. Home Equity Mortgage Asset-Backed Pass-Through Certificates, Series 2005-EMX3 (RASC 2005-EMX3); Home Equity Mortgage Asset-Backed Pass-Through Certificates, Series 2005-KS10 (RASC 2005-KS10); Home Equity Mortgage Asset-Backed Pass-Through Certificates, Series 2005-KS11 (RASC 2005-KS11); Home Equity Mortgage Asset-Backed Pass-Through Certificates, Series 2006-EMX8 (RASC 2006-EMX8); Home Equity Mortgage Asset-Backed Pass-Through Certificates, Series 2006-EMX9 (RASC 2006-EMX9); Home Equity Mortgage Asset-Backed Pass-Through Certificates, Series 2006-KS3 (RASC 2006-KS3); Home Equity Mortgage Asset-Backed Pass-Through Certificates, Series 2006-KS9 (RASC 2006-KS9);
13
viii. ix. x. xi. xii. xiii. xiv. xv. xvi. xvii. xviii. xix. xx. xxi.
Home Equity Mortgage Asset-Backed Pass-Through Certificates, Series 2007-EMX1 (RASC 2007-EMX1); Home Equity Mortgage Asset-Backed Pass-Through Certificates, Series 2007-KS2 (RASC 2007-KS2); Home Equity Mortgage Asset-Backed Pass-Through Certificates, Series 2007-KS3 (RASC 2007-KS3); Mortgage Asset-Backed Pass-Through Certificates, Series 2005-EFC6 (RAMP 2005-EFC6); Mortgage Asset-Backed Pass-Through Certificates, Series 2005-EFC7 (RAMP 2005-EFC7); Mortgage Asset-Backed Pass-Through Certificates, Series 2005-NC1 (RAMP 2005-NC1); Mortgage Asset-Backed Pass-Through Certificates, Series 2005-RS9 (RAMP 2005-RS9); Mortgage Asset-Backed Pass-Through Certificates, Series 2006-RS1 (RAMP 2006-RS1); Mortgage Asset-Backed Pass-Through Certificates, Series 2005-QO4 (RALI 2005-QO4); Mortgage Asset-Backed Pass-Through Certificates, Series 2006-QO4 (RALI 2006-ii. QO4); Mortgage Asset-Backed Pass-Through Certificates, Series 2006-QO5 (RALI 2006-QO5); Mortgage Asset-Backed Pass-Through Certificates, Series 2006-QO8 (RALI 2006-QO8); Mortgage Asset-Backed Pass-Through Certificates, Series 2006-QO9 (RALI 2007-QO9); and Mortgage Asset-Backed Pass-Through Certificates, Series 2007-QH5 (RALI 2007-QH5).
44.
For each of the 21 Securitizations, Table 1 identifies the: (1) sponsor; (2)
depositor; (3) underwriter; (4) principal amount issued for the tranches4 purchased by Freddie
A tranche is one of the classes of debt securities issued as part of a single bond or instrument. Securities are often issued in tranches to meet different investor objectives for portfolio diversification. Freddie Mac purchased two tranches of Certificates from the RALI 2006-Q04 Securitization, which is why the tables have 22 entries for 21 Securitizations.
14
Mac; (5) date of issuance; and (6) the loan group or groups backing the Certificate for that Securitization (referred to as the Supporting Loan Groups). Table 1
Transaction RALI 2005-QO4 RALI 2006-QO4 RALI 2006-QO4 RALI 2006-QO5 RALI 2006-QO8 RALI 2006-QO9 RALI 2007-QH5 RAMP 2005-EFC6 RAMP 2005-EFC7 RAMP 2005-NC1 RAMP 2005-RS9 Tranche IA1 IA1 IA2 IA1 IIA IIA AII AII AII AII AII Sponsor RFC RFC RFC RFC RFC RFC RFC RFC RFC RFC RFC Depositor RALI RALI RALI RALI RALI RALI RALI RAMP RAMP RAMP RAMP Underwriters RBS RBS RBS UBS Lehman Brothers Lehman Brothers Goldman RFS JPM RFS RFS Barclays RFS Credit Suisse Bear Credit Suisse RFS RBS RFS Credit Suisse RBS BOA RFS Credit Suisse JPM RFS BOA Credit Suisse RFS RBS Principal Amount Issued ($) 143,428,800.00 327,356,000.00 81,838,000.00 179,443,000.00 409,198,000.00 284,637,000.00 143,007,000.00 163,581,000.00 199,376,000.00 405,004,000.00 494,922,000.00 Date of Issuance 11/29/05 04/27/06 04/27/06 05/30/06 10/30/06 11/29/06 05/30/07 11/22/05 12/28/05 12/28/05 11/29/05 Supporting Loan Groups Group I Group I Group I Group I Group II Group II Group II Group II Group II Group II Group II
RAMP 2006-RS1
AII
RFC
RAMP
409,790,000.00
01/25/06
Group II
RASC 2005-EMX3
AII
RFC
RASC
267,481,000.00
09/23/05
Group II
RASC 2005-KS10
AII
RFC
RASC
495,741,000.00
10/28/05
Group II
RASC 2005-KS11
AII
RFC
RASC
547,641,000.00
11/29/05
Group II
15
Transaction RASC 2006-EMX8 RASC 2006-EMX9 RASC 2006-KS3 RASC 2006-KS9 RASC 2007-EMX1 RASC 2007-KS2 RASC 2007-KS3
Tranche AII AII AII AII AII AII AII
Sponsor RFC RFC RFC RFC RFC RFC RFC
Depositor RASC RASC RASC RASC RASC RASC RASC
Underwriters RFS Barclays Barclays RFS Citi Barclays RFS Credit Suisse JPM JPM BOA RFS
Principal Amount Issued ($) 236,806,000.00 197,896,000.00 232,006,000.00 153,311,000.00 326,812,000.00 164,400,000.00 167,618,000.00
Date of Issuance 09/28/06 10/27/06 03/29/06 10/27/06 03/12/07 02/23/07 03/29/07
Supporting Loan Groups Group II Group II Group II Group II Group II Group II Group II
3.
Securitization Process a. The Sponsors Grouped Mortgage Loans in Special-Purpose Trusts
45.
In each case, the sponsor purchased the mortgage loans underlying the
Certificates purchased by Freddie Mac for its Securitizations either directly from the originators or through affiliates of the originators. RFC sponsored 21 Securitizations and sold the acquired loans to one of three depositors, all of which are RFC-affiliated entities: RALI, RAMP and RASC. 46. RALI, RAMP and RASC were wholly-owned, limited-purpose financial
subsidiaries of GMAC-RFC and affiliates of RFC. The sole purpose of RALI, RAMP and RASC as depositors was to act as a conduit through which loans acquired by the sponsor could be securitized and sold to investors. 47. As depositors for all 21 of the Securitizations, RALI, RAMP and RASC
transferred the relevant mortgage loans to the respective trusts for each of those Securitizations, in each case pursuant to Assignment and Recognition Agreements or Mortgage Loan Purchase
16
Agreements that contained various representations and warranties regarding the mortgage loans for the Securitizations. 48. As part of each Securitization, the trustee for that Securitization, on behalf of the
Certificateholders, executed a Pooling and Service Agreement (PSA) with the relevant depositor and the relevant servicer. In each case, the trust, administered by the trustee, was required to hold the mortgage loans, pursuant to the related PSA and issued certificates, including the Certificates, backed by such loans. Freddie Mac purchased the Certificates, through which it obtained an ownership interest in the assets of the trust, including the mortgage loans. b. 49. The Trusts Issued Securities Backed by the Loans
PSAs, each trust issued Certificates backed by the underlying mortgage loans. The Certificates were then sold to investors, including Freddie Mac. Each Certificate entitles its holder to a specified portion of the cash flows from the underlying mortgages in the supporting loan group for that certificate. Therefore, the value of the Certificates, derived in part from the likelihood of payment of principal and interest on the Securitizations, depends upon the credit quality of the underlying mortgages, i.e., the risk of default by borrowers and the recovery value upon default of foreclosed-upon properties. 50. The Certificates purchased by Freddie Mac were issued and sold pursuant to Shelf
Registration Statements filed with the SEC on a Form S-3.5 The Shelf Registration Statements (S-3) were amended by one or more Form S-3/A (the Amendments or S-3/A) filed with
5
Defendant RALI filed three Shelf Registration Statements that were used to market six of the Securitizations; Defendant RAMP filed one Shelf Registration Statement that was used to market five of the Securitizations; and Defendant RASC filed two Registration Statements that were used to market 10 of the Securitizations.
17
the SEC. The Individual Defendants signed the six Shelf Registration Statements (and amendments thereto) that were filed, in each case, by RALI, RAMP or RASC. The SEC filing number, registrants, signatories, and filing dates for all six Shelf Registration Statements with Amendments, as well as the Certificates purchased by Freddie Mac covered by each Shelf Registration Statement, are reflected in Table 2 below.
Table 2
Date(s) S-3/A(s) Filed
SEC File No.
Date S-3 Filed
Registrants
Covered Certificates RAMP 2005-EFC6 RAMP 2005-EFC7 RAMP 2005-NC1 RAMP 2005-RS9 RAMP 2006-RS1 RASC 2005-EMX3 RASC 2005-KS10 RASC 2005-KS11 RASC 2006-KS3
Signatories of S-3
Signatories of S-3/A(s)6 Bruce Paradis Kenneth Duncan Ralph Flees David Walker Diane Wold Bruce Paradis Davee Olson Jack Katzmark David Walker Lisa Lundsten Bruce Paradis Kenneth Duncan Ralph Flees David Walker Lisa Lundsten Bruce Paradis Kenneth Duncan Ralph Flees Davee Olson Lisa Lundsten Bruce Paradis Kenneth Duncan Ralph Flees Davee Olson Lisa Lundsten
333-125485
06/03/05
07/07/05
RAMP
Bruce Paradis Kenneth Duncan Ralph Flees David Walker Bruce Paradis Davee Olson Ralph Flees David Walker Bruce Paradis Kenneth Duncan Ralph Flees David Walker
333-122688
02/10/05
04/19/05
RASC
333-126732
07/20/05
08/09/05
RALI
RALI 2005-QO4
333-131209
01/20/06
02/23/06 03/21/06 03/30/06
RASC
RASC 2006-EMX8 RASC 2006-EMX9 RASC 2006-KS9 RASC 2007-EMX1 RASC 2007-KS2 RASC 2007-KS3 RALI 2006-QO4 RALI 2006-QO5 RALI 2006-QO8 RALI 2006-QO9
Bruce Paradis Kenneth Duncan Ralph Flees Davee Olson
333-131213
01/23/06
03/03/06 03/06/06
RALI
Bruce Paradis Kenneth Duncan Ralph Flees Davee Olson
Some Individual Defendants signed certain S-3/As through a power of attorney.
18
SEC File No.
Date S-3 Filed
Date(s) S-3/A(s) Filed
Registrants
Signatories of S-3
Signatories of S-3/A(s)6 James Jones David Bricker Ralph Flees James Young Lisa Lundsten
333-140610
02/12/07
04/03/07
RALI
RALI 2007-QH5
David Applegate David M. Bricker Ralph Flees James Young
51.
underwriting guidelines that purportedly were used in connection with the origination of the underlying mortgage loans. In addition, the Prospectus Supplements purport to provide accurate statistics regarding the mortgage loans in each group, including: the ranges of and weighted average FICO credit scores of the borrowers, the ranges of and weighted average loan-to-value (LTV) ratios of the loans, the ranges of and weighted average outstanding principal balances of the loans, the debt-to-income ratios of the borrowers, the geographic distribution of the loans, the extent to which the loans were for purchase or refinance purposes, information concerning whether the loans were secured by a property to be used as a primary residence, second home, or investment property, and information concerning whether the loans were delinquent. 52. The Prospectus Supplement for each Securitization was filed with the SEC as part
of the Registration Statements. The Form 8-Ks attaching the PSAs for each Securitization were also filed with the SEC. The date on which the Prospectus Supplement and Form 8-K were filed for each Securitization, as well as the filing number of the Shelf Registration Statement related to each, are set forth in Table 3 below.
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Table 3
Filing No. of Related Registration Statement 333-125485 333-125485 333-122688 333-122688 333-122688 333-125485 333-126732 333-125485 333-131209 333-131209 333-122688 333-131209 333-131213 333-131213 333-131213 333-131213 333-125485 333-131209 333-131209 333-131209 333-140610
Transaction RAMP 2005-EFC6 RAMP 2005-EFC7 RASC 2005-EMX3 RASC 2005-KS10 RASC 2005-KS11 RAMP 2005-NC1 RALI 2005-QO4 RAMP 2005-RS9 RASC 2006-EMX8 RASC 2006-EMX9 RASC 2006-KS3 RASC 2006-KS9 RALI 2006-QO4 RALI 2006-QO5 RALI 2006-QO8 RALI 2006-QO9 RAMP 2006-RS1 RASC 2007-EMX1 RASC 2007-KS2 RASC 2007-KS3 RALI 2007-QH5
Date Prospectus Supplement Filed 11/21/05 12/22/05 09/23/05 10/28/05 11/28/05 12/27/05 11/28/05 11/29/05 09/27/06 10/27/06 03/29/06 10/30/06 04/28/06 05/31/06 11/01/06 11/30/06 01/25/06 03/09/07 02/23/07 03/28/07 05/30/07
Date Form 8-K Attaching PSA 12/07/05 01/13/06 10/14/05 11/14/05 12/14/05 01/13/06 12/15/05 12/12/05 10/13/06 11/13/06 04/13/06 11/13/06 05/15/06 06/14/06 11/14/06 12/14/06 02/09/06 03/27/07 03/09/07 04/13/07 06/14/07
B. 53.
Defendants Participation in the Securitization Process Each of the Defendants played a role in the securitization process and the
marketing for some or all of the Certificates purchased by Freddie Mac, which included purchasing the mortgage loans from the originators, arranging the Securitizations, selling the mortgage loans to the depositor, transferring the mortgage loans to the trustee on behalf of the Certificateholders, underwriting the public offering of the Certificates, structuring and issuing the Certificates, and marketing and selling the Certificates to Freddie Mac. 54. The Defendants are liable, jointly and severally, as participants in the registration,
issuance and offering of the Certificates purchased by Freddie Mac, including issuing, causing, or making materially misleading statements in the Registration Statements, and omitting material
20
facts required to be stated therein or necessary to make the statements contained therein not misleading. 1. 55. Ally
Defendant Ally wholly owns GMACM and RFS and is also the ultimate parent of
GMACM, ResCap, GMAC-RFC, RFC, RALI, RASC and RAMP. The chart below indicates the corporate structure of the relevant GMAC entities. Ally j RFS
(underwriter)
GMACM ResCap GMAC-RFC
RALI (depositor) 2. 56. RFC
RAMP (depositor)
RASC (depositor)
RFC
(sponsor)
RFC was formed in 1985 as a wholly-owned subsidiary of GMAC-RFC for the
purpose of issuing mortgage-backed securities through its affiliates RALI, RASC and RAMP. RFC was a leading sponsor of mortgage-backed securities at all relevant times based largely in part on GMAC-RFC becoming one of the largest issuers of mortgage-backed securities in the world. According to Inside Mortgage Finance, GMAC-RFC issued (i) $42.336 billion of nonagency mortgage-backed securities in 2004, (ii) $56.93 billion in 2005, making it the fifth largest issuer in 2005; (iii) $66.19 billion in 2006, making it the fourth largest issuer in 2006; and
21
(iv) $32.4 billion in 2007, which still made GMAC-RFC the eighth largest issuer in 2007.7 2011 Mortgage Market Statistical Annual, Vol. II (Inside Mortgage Finance Publns, Inc., 2011) 57. Defendant RFC was the sponsor of all 21 Securitizations. In that capacity, RFC
determined the structure of the Securitizations, initiated the Securitizations, purchased the mortgage loans to be securitized, determined distribution of principal and interest, and provided data to the rating agencies to secure investment grade ratings for the Certificates sold to Freddie Mac. RFC also selected RALI, RASC and RAMP as the special-purpose vehicles that would be used to transfer the mortgage loans from RFC to the trusts, and selected RFS or the Non-GMAC Underwriter Defendants for the Securitizations, including Defendant RFS. In its role as sponsor, RFC knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing such loans would be issued by the relevant trusts. 58. For all 21 Securitizations that it sponsored, RFC also conveyed the mortgage
loans to RALI, RASC and RAMP, as depositor, pursuant to an Assignment and Recognition Agreement or a Mortgage Loan Purchase Agreement. In these agreements, RFC made certain representations and warranties to RALI, RASC and RAMP regarding the groups of loans collateralizing the Certificates purchased by Freddie Mac. These representations and warranties were assigned by RALI, RASC and RAMP to the trustees for the benefit of the Certificateholders.
Agency mortgage-backed securities are guaranteed by a government agency or government-sponsored enterprise such as Fannie Mae or Freddie Mac, while non-agency mortgage-backed securities are issued by banks and financial companies not associated with a government agency or government-sponsored enterprise.
22
3. 59.
RALI, RASC and RAMP
Defendants RALI, RASC and RAMP have been engaged in the securitization of
mortgage loans as depositors since their incorporation in 1995, 1994, and 1999, respectively. They are special-purpose entities formed solely for the purpose of purchasing mortgage loans, filing registration statements with the SEC, forming issuing trusts, assigning mortgage loans and all of their rights and interests in such mortgage loans to the trustee for the benefit of certificateholders, and depositing the underlying mortgage loans into the issuing trusts. 60. RALI was the depositor for six of the 21 Securitizations, RASC was the depositor
for 10 Securitizations, and RAMP was the depositor for five Securitizations. In their capacity as depositors, RALI, RASC and RAMP purchased the mortgage loans from RFC (as sponsor) pursuant to an Assignment and Recognition Agreement or a Mortgage Loan Purchase Agreement. RALI, RASC and RAMP then sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trusts. Together with the other Defendants, RALI, RASC and RAMP were also responsible for preparing and filing the Registration Statements pursuant to which the Certificates purchased by Freddie Mac were offered for sale. The trusts, in turn, held the mortgage loans for the benefit of the Certificateholders, and issued the Certificates in public offerings for sale to investors, including Freddie Mac. 4. 61. RFS
Defendant RFS was formed in 1990 and is a wholly-owned subsidiary of Ally.
Defendant RFS is an investment bank, solely operating as a registered broker-dealer with respect to the issuance and underwriting of residential and commercial mortgage-backed securities. At all relevant times, RFS was one of the leading underwriters of mortgage and other asset-backed securities in the United States. According to Inside Mortgage Finance in 2004, RFS underwrote over $8.9 billion of non-agency mortgage-backed securities. In 2005, the data shows that RFS
23
underwrote $14.5 billion, and in 2006 and 2007, RFS underwrote $12.4 billion and $10.2 billion in non-agency mortgage-backed securities, respectively. 62. Defendant RFS was the co-lead and selling underwriter for five of the 21
Securitizations and an underwriter for an additional six Securitizations. In that role, it was responsible for underwriting and managing the offer and sale of the Certificates to Freddie Mac and other investors. RFS was also obligated to conduct meaningful due diligence to ensure that the Registration Statements did not contain any material misstatements or omissions, including as to the manner in which the underlying mortgage loans were originated, transferred and underwritten. 5. 63. GMAC-RFC
GMAC-RFC employed its wholly-owned subsidiaries, RFC, RALI, RASC and
RAMP, in the key steps of the securitization process. Unlike typical arms length securitizations, the Securitizations involved various Ally subsidiaries and affiliates at virtually each step in the chain. For all 21 Securitizations, RFC was the sponsor and either RALI, RASC or RAMP was the depositor. 64. GMAC-RFC, as the sole corporate parent of RFC, RALI, RASC and RAMP had
the practical ability, in connection with the Securitizations, and the issuance and sale of the Certificates to Freddie Mac, to direct and control the actions of RFC, RALI, RASC and RAMP, and in fact exercised such direction and control over these activities. 6. 65. Ally, GMACM and ResCap
Defendant ResCap wholly owns GMAC-RFC and Defendant GMACM wholly
owns ResCap. ResCap, as the sole corporate parent of GMAC-RFC, had the practical ability to direct and control the actions of GMAC-RFC, and in fact, exercised such direction and control over the activities of this entity related to the issuance and sale of the Certificates to Freddie
24
Mac. GMACM, as the sole corporate parent of ResCap, had the practical ability to direct and control the actions of ResCap, and in fact, exercised such direction and control over the activities of this entity related to the issuance and sale of the Certificates to Freddie Mac. 66. As detailed, supra, the Securitizations involved all of the GMAC Defendants at
virtually every step in the process, and Ally profited substantially from this vertically integrated approach to mortgage-backed securitization. Furthermore, ResCap shared overlapping management with the other GMAC entities. For example, in 2007, David Applegate served as President of GMACM; the COO of ResCap, GMACMs direct subsidiary; the Chairman and CEO of GMAC-RFC, ResCaps direct subsidiary; and Principal Executive Officer of RALI, GMAC-RFCs direct subsidiary, for which he signed a Shelf Registration and amendment thereto. Similarly, Bruce Paradis served as CEO of GMAC-RFC and then CEO of ResCap, while also serving as the Director, President, and CEO of RALI, RAMP, and RASC -- in which capacity he signed three Shelf Registration Statements and amendments thereto. 7. 67. Non-GMAC Underwriters
The Non-GMAC Underwriters were the nations largest non-agency mortgage-
backed securities underwriters between 2004 through 2007. The Non-GMAC Underwriter Defendants were the co-lead underwriters for twelve Securitizations and underwriters for an additional seven Securitizations. In those roles, the Non-GMAC Defendants were responsible for underwriting and managing the offer and sale of the Certificates to Freddie Mac. The NonGMAC Underwriter Defendants also were obligated to conduct due diligence to ensure that the Registration Statements did not contain any material misstatements or omissions, including as to the manner in which the underlying mortgage loans were originated, transferred and underwritten.
25
68.
Further, through their positions at GMAC, including Defendants GMACM,
ResCap, GMAC-RFC, RFS, RFC, RAMP, RALI, and RASC, certain persons had the practical ability to direct and control the actions of the GMAC Defendants in issuing and selling the Certificates, and in fact, exercised such direction and control over the activities of these entities in connection with the issuance and sale for the Certificates to Freddie Mac. Many people simultaneously held management positions at GMACM, ResCap, GMAC-RFC, RFS, and/or RFC while also holding management positions at RAMP, RALI and RASC. C. 69. Statements in the Prospectus Supplements Plaintiff relies on its claims, in part, upon the Registration Statements in their
entirety. Specific representations and warranties in the Registration Statements that form the basis for the claims herein are set forth for each Securitization in Appendix A hereto. 1. 70. Compliance with Underwriting Guidelines
descriptions of the underwriting guidelines used to originate the mortgage loans included in the Securitizations. Because payment on, and the value of, the Certificates is based on the cash flows from the underlying mortgage pool, representations concerning compliance with the stated underwriting guidelines were material to reasonable investors. Investors, including Freddie Mac, did not have access to information concerning the collateral pool, and were required to rely on the representations in the Prospectus Supplements concerning that collateral. 71. Among other consequences, the failure to originate mortgage loans in accordance
with stated guidelines diminished the value of the Certificates by increasing the significant risk that an investor will not be paid its principal and interest. Misrepresentations concerning, or failing accurately to disclose, borrower, loan, and property characteristics bearing on the risk of default by the borrower as well as the severity of losses given default can artificially inflate the
26
perceived value of the securities. Without accurate information regarding the collateral pool, reasonable investors, including Freddie Mac, are unable to accurately and independently assess whether the price of an RMBS adequately accounts for the risks they are assuming when they purchase the security. 72. The Prospectus Supplements for each of the Securitizations contained several key
statements with respect to the loan purchasing and underwriting standards of the entities that originated the loans in the Securitizations. For example, with respect to the RAMP 2005-EFC7 Securitization, for which EquiFirst Corporation (EquiFirst) was originator, RFS was a counderwriter, and RASC was the depositor, the Prospectus Supplement states: All of the mortgage loans included in the trust were originated by EquiFirst, generally in accordance with [EquiFirsts] underwriting criteria (emphasis added) and that EquiFirsts underwriting standards are primarily intended to assess the ability and willingness of the borrower to repay the debt, and to evaluate the adequacy of the mortgaged property as collateral for the mortgage loan. 73. With respect to the information evaluated by the originator (in this example,
EquiFirst), the Prospectus Supplement stated that: EquiFirst considers, among other things, a mortgagors credit history, repayment ability and debt service-to-income ratio (Debt Ratio), as well as the value, type and use of the mortgaged property. (emphasis added) The Credit Bureau Risk Score is used along with, but not limited to, mortgage payment history, seasoning on bankruptcy and/or foreclosure, and is not a substitute for the underwriters judgment. EquiFirsts underwriting staff fully reviews each loan to determine whether EquiFirsts guidelines for income, assets, employment and collateral are met. (Emphasis added). 74. states: The Prospectus Supplement for the RAMP 2005-EFC7 Securitization further
27
EquiFirsts guidelines comply with applicable federal and state laws and regulations and generally require an appraisal of the mortgaged property which conforms to Freddie Mac and/or Fannie Mae standards. All loans are subject to EquiFirsts appraisal review process. Appraisals are provided by qualified independent appraisers licensed in their respective states. 75. The Prospectus Supplements for each of the Securitizations made similar
representations with respect to the underwriting guidelines employed by each of the originators in the Securitizations, which included: Aegis Mortgage Corporation, Decision One Mortgage Company, LLC, EFC Holdings Corporation and its subsidiary EquiFirst Corporation, Finance America, LLC, First National Bank of Nevada, Home123 Corporation, Homefield Financial Inc., Mortgage Lenders Network USA, Inc., New Century Mortgage Corporation, Ownit Mortgage Solutions Inc., Peoples Choice Home Loan, Inc., Pinnacle Financial Corporation and SCME Mortgage Bankers, Inc. See Appendix A. 76. Contrary to those representations, however, these originators routinely and
egregiously departed from, or abandoned completely, their stated underwriting guidelines, as discussed in Section I.D.2, infra. As a result, the representations concerning compliance with underwriting guidelines and the inclusion and descriptions of those guidelines in the Prospectus Supplements were false and misleading, and the actual mortgages underlying each Securitization exposed the purchasers, including Freddie Mac, to a materially greater risk to investors than that represented in the Prospectus Supplements. 77. As reflected more fully in Appendix A, for the vast majority of the
Securitizations, the Prospectus Supplements included representations that: (i) the mortgage loans were underwritten in accordance with each originators underwriting guidelines in effect at the time of origination, subject only to limited exceptions; and (ii) the origination and collection
28
practices used by the originator with respect to each mortgage note and mortgage were in all respects legal, proper and customary in the mortgage origination and servicing business. 78. The inclusion of these representations in the Prospectus Supplements had the
purpose and effect of providing assurances to investors regarding the quality of the mortgage collateral underlying the Securitizations. These representations were material to a reasonable investors decisions to purchase the Certificates, and they were material to Freddie Mac. As alleged more fully below, Defendants representations were materially false. 2. 79. Occupancy Status of Borrower
the occupancy status of the borrowers of the loans underlying the Securitization; that is, whether the property securing a mortgage is (i) the borrowers primary residence; (ii) a second home; or (iii) an investment property. This information was presented in tables, typically titled Occupancy Status of the Mortgage Loans, that assigned all the properties in the collateral group to one of the following categories: (i) Primary, or Owner-Occupied; (ii) Second Home, or Secondary; and (iii) Investor or Non-Owner. For each category, the table stated the number of loans purportedly in that category. Occupancy statistics for the Supporting Loan Groups for each Securitization were reported in the Prospectus Supplements as follows:8
Each Prospectus Supplement provides the total number of loans and the number of loans in the following categories: owner-occupied, investor, and second home. These numbers have been converted to percentages for ease of comparison.
29
Table 4
Transaction RALI 2005-QO4 RALI 2006-QO4 RALI 2006-QO4 RALI 2006-QO5 RALI 2006-QO8 RALI 2006-QO9 RALI 2007-QH5 RAMP 2005-EFC6 RAMP 2005-EFC7 RAMP 2005-NC1 RAMP 2005-RS9 RAMP 2006-RS1 RASC 2005-EMX3 RASC 2005-KS10 RASC 2005-KS11 RASC 2006-EMX8 RASC 2006-EMX9 RASC 2006-KS3 RASC 2006-KS9 RASC 2007-EMX1 RASC 2007-KS2 RASC 2007-KS3 Tranche IA1 IA1 IA2 IA1 IIA IIA AII AII AII AII AII AII AII AII AII AII AII AII AII AII AII AII Supporting Loan Group Group I Group I Group I Group I Group II Group II Group II Group II Group II Group II Group II Group II Group II Group II Group II Group II Group II Group II Group II Group II Group II Group II Primary or OwnerOccupied 81.68% 79.14% 79.14% 81.13% 81.78% 80.99% 77.36% 98.15% 100.00% 83.96% 65.80% 78.45% 93.92% 94.42% 89.88% 100.00% 100.00% 99.24% 95.82% 93.65% 95.23% 95.56% Second Home / Secondary 1.71% 5.53% 5.53% 4.10% 3.41% 4.05% 5.74% 0.37% 0.00% 5.56% 1.35% 2.11% 2.29% 0.85% 2.53% 0.00% 0.00% 0.76% 2.81% 1.98% 0.71% 1.27% Investor 16.61% 15.33% 15.33% 14.76% 14.81% 14.97% 16.90% 1.48% 0.00% 10.48% 32.85% 19.44% 3.79% 4.72% 7.59% 0.00% 0.00% 0.00% 1.36% 4.37% 4.05% 3.17%
80.
As Table 4 makes clear, the Prospectus Supplements reported that 17 of the 22
Supporting Loan Groups contained at least 80 percent owner-occupied loans, and 11 of the 22 Supporting Loan Groups contained at least 90 percent owner-occupied loans. 81. Because information about occupancy status is an important factor in determining
the credit risk associated with a mortgage loan -- and, therefore, the securitization that it backs -the statements in the Prospectus Supplements concerning occupancy status were material to a
30
reasonable investors decision to invest in the Certificates, and they were material to Freddie Mac. These statements were material because, among other reasons, borrowers who live in mortgaged properties are substantially less likely to default and more likely to care for their primary residence than borrowers who purchase properties as second homes or investments and live elsewhere. For example, as stated in the Prospectus Supplement for the RALI 2005-QO4 Securitization: [T]he rate of default on mortgage loans or manufactured housing contracts that are secured by investment properties . . . may be higher than on other mortgage loans or manufactured housing contracts. Accordingly, the percentage of loans in the collateral group of a securitization that are secured by mortgage loans on owner-occupied residences is an important measure of the risk of the certificates sold in that securitization. 82. Other things being equal, the lower the percentage of loans secured by owner-
occupied residences, the greater the risk of loss to Certificateholders. Even modest differences in the percentages of primary/owner-occupied, second home/secondary, and investment properties in the collateral group of a securitization can have a significant effect on the risk of each certificate sold in that securitization, and thus, are important to the decision of a reasonable investor whether to purchase any such certificate. As discussed infra at paragraphs 94 through 98, the Prospectus Supplements for each Securitization materially overstated the percentage of loans in the Supporting Loan Groups that were owner-occupied, thereby misrepresenting the degree of risk of the Certificates purchased by Freddie Mac. 3. 83. Loan-to-Value Ratios
generally the lower of the purchase price or the appraised value of the property. In a refinancing
31
or home-equity loan, there is no purchase price to use as the denominator, so the denominator is often equal to the appraised value at the time of the origination of the refinanced loan or homeequity loan. Accordingly, an accurate appraisal is essential to an accurate LTV ratio. In particular, an inflated appraisal will understate, sometimes greatly, the credit risks associated with a given loan. 85. The Prospectus Supplements for the Securitizations contain information about the
LTV ratio for each Supporting Loan Group. Table 5 below reflects two categories of important information reported in the Prospectus Supplements concerning the LTV ratios for each Supporting Loan Group: (i) the percentage of loans with an LTV ratio of 80 percent or less; and (ii) the percentage of loans with an LTV ratio greater than 100 percent. 9 Table 5
Supporting Loan Group Group II Group II Group II Group II Group II Group II Group I Group II Group II Group II Group II Group II Group I Group I % of Loans, by Aggregate Principal Balance, with LTV Less than or Equal to 80% 57.86% 71.74% 47.33% 45.62% 61.19% 57.07% 94.77% 53.93% 53.72% 41.34% 61.60% 45.21% 94.37% 95.44% % of Loans, by Aggregate Principal Balance, with LTV Greater than 100% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Transaction
RAMP 2005-EFC6 RAMP 2005-EFC7 RASC 2005-EMX3 RASC 2005-KS10 RASC 2005-KS11 RAMP 2005-NC1 RALI 2005-QO4 RAMP 2005-RS9 RASC 2006-EMX8 RASC 2006-EMX9 RASC 2006-KS3 RASC 2006-KS9 RALI 2006-QO4 (IA1 & IA2) RALI 2006-QO5
32
Transaction
Supporting Loan Group Group II Group II Group II Group II Group II Group II Group II
RALI 2006-QO8 RALI 2006-QO9 RAMP 2006-RS1 RASC 2007-EMX1 RASC 2007-KS2 RASC 2007-KS3 RALI 2007-QH5
% of Loans, by Aggregate Principal Balance, with LTV Less than or Equal to 80% 95.56% 93.89% 44.73% 52.14% 44.68% 43.00% 93.70%
% of Loans, by Aggregate Principal Balance, with LTV Greater than 100% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
86.
loan for several reasons. First, the LTV ratio is a strong indicator of the likelihood of default because a higher LTV ratio makes it more likely that a decline in the value of a property will completely eliminate a borrowers equity, and will incentivize the borrower to stop making mortgage payments and abandon the property. Second, the LTV ratio is a strong predictor of the severity of loss in the event of a default because the higher the LTV ratio, the smaller the equity cushion, and the greater the likelihood that the proceeds of foreclosure will not cover the unpaid balance of the mortgage loan. 87. Thus, LTV ratios are material to a reasonable investors investment decision with
respect to the Certificates, and they were material to Freddie Mac. Even small differences between the LTV ratios of the mortgage loans in the collateral group of a securitization have a significant effect on the likelihood that collateral groups will generate sufficient funds to pay certificateholders in that securitization. Such differences are important to the decision of a reasonable investor on whether to purchase any such certificate, and they affect the intrinsic value of the certificate. 88. As Table 5 makes clear, the Prospectus Supplements for the majority of the
Securitizations reported that the majority of the mortgage loans in the Supporting Loan Groups
33
had an LTV ratio of 80 percent or less. The Prospectus Supplements also reported that none of the Supporting Loan Groups contained a single loan with an LTV ratio over 100 percent. 89. As discussed infra at paragraphs 99 through 104, the Prospectus Supplements for
the Securitizations materially overstated the percentage of loans in the Supporting Loan Groups with an LTV ratio at or less than 80 percent, and materially understated the percentage of loans in the Supporting Loan Groups with an LTV ratio over 100 percent, thereby misrepresenting the degree of risk to Certificateholders. 4. 90. Credit Ratings
the credit rating agencies, including Standard & Poors, Moodys Investor Service, and Fitch Ratings. Each credit rating agency uses its own scale with letter designations to describe various levels of risk. In general, AAA or its equivalent ratings are at the top of the credit rating scale and are intended to designate the safest investments. C and D ratings are at the bottom of the scale and refer to investments that are currently in default and exhibit little or no prospect for recovery. At the time Freddie Mac purchased the Certificates, investments with AAA or its equivalent ratings historically experienced a loss rate of less than .05 percent. Investments with a BBB rating, or its equivalent, historically experienced a loss rate of less than one percent. As a result, securities with credit ratings between AAA or its equivalent through BBB- or its equivalent were generally referred to as investment grade. 91. Rating agencies determine the credit rating for each tranche of a mortgage-backed
securitization by comparing the likelihood of contractual principal and interest repayment to the credit enhancements available to protect investors. Rating agencies determine the likelihood of repayment by estimating cash flows based on the quality of the underlying mortgages by using sponsor-provided loan-level data. Credit enhancements, such as subordination, represent the
34
amount of cushion or protection from loss incorporated into a given securitization.10 This cushion is intended to improve the likelihood that holders of highly-rated certificates receive the interest and principal to which they are contractually entitled. The level of credit enhancement offered is based on the composition of the loans in the underlying collateral group and entire securitization. Riskier loans underlying the securitization necessitate higher levels of credit enhancement to insure payment to senior certificate holders. If the collateral within the deal is of a higher quality, then rating agencies require less credit enhancement for an AAA or its equivalent rating. 92. For almost a hundred years, investors like pension funds, municipalities,
insurance companies, and university endowments have relied heavily on credit ratings to assist them in distinguishing between safe and risky investments. 93. Each tranche of the Securitizations received a credit rating before issuance, which
purported to describe the riskiness of that tranche. Defendants reported the credit ratings for each tranche in the Prospectus Supplements. For each of the Certificates purchased by Freddie Mac was AAA or its equivalent the credit rating provided. The accuracy of these ratings was material to a reasonable investors decision to purchase the Certificates, and it was material to Freddie Mac. Among other things, the ratings provided additional assurance that investors in the Certificates would receive the expected interest and principal payments. As set forth in Table 8, infra at paragraph 126, the ratings for the majority of the Securitizations were severely downgraded after Freddie Macs purchase of the Certificates. Upon information and belief, the
10
Subordination refers to the fact that the certificates for a mortgage-backed securitization are issued in a hierarchical structure, from senior to junior. The junior certificates are subordinate to the senior certificates in that, should the underlying mortgage loans become delinquent or default, the junior certificates suffer losses first. These subordinate certificates thus provide a degree of protection to the senior certificates from certain losses on the underlying loans.
35
initial ratings were based in substantial part upon the materially inaccurate and incomplete information in the Registration Statements and related information provided to the ratings agencies. D. Falsity of Statements in the Registration Statements and Prospectus Supplements 1. The Statistical Data Provided in the Prospectus Supplements Concerning Owner-Occupancy and Loan-to-Value Ratios was Materially False
94.
A review of loan-level data was conducted to assess whether the statistical
information provided in the Prospectus Supplements was true and accurate. For each Securitization, the review included an analysis either of: (i) a sample of 1,000 loans randomly selected from the Supporting Loan Group; or (ii) all the loans in the Supporting Loan Group if there were fewer than 1,000 such loans. The review of sample data has confirmed, on a statistically-significant basis, that the data provided in the Prospectus Supplements concerning owner-occupancy and LTV ratios was materially false, and that the Prospectus Supplements contained material misrepresentations with respect to the underwriting standards employed by the originators, and certain key characteristics of the mortgage loans across the Securitizations. a. 95. Owner-Occupancy Data was Materially False
Prospectus Supplements were materially false and inflated. Indeed, the Prospectus Supplements overreported the number of underlying properties that were occupied by their owners, and underreported the number of underlying properties held as second homes or investment properties. 96. To determine whether a given borrower actually occupied the property as
claimed, a number of tests were conducted, including, inter alia, whether, months after the loan
36
closed, the borrowers tax bill was being mailed to the property or to a different address, whether the borrower had claimed a tax exemption on the property, and whether the mailing address of the property was reflected in the borrowers credit reports, tax records, or lien records. Failing two or more of these tests constitutes strong evidence that the borrower did not live at the mortgaged property and instead used it as a second home or an investment property, rendering it much more likely that a borrower will not repay the loan. 97. For each Securitization, a significant number of the underlying loans failed two or
more of these tests, demonstrating that the owner-occupancy statistics provided to Freddie Mac were materially false and misleading. For example, the Prospectus Supplement for the RAMP 2005-EFC6 Securitization -- for which RFC was the sponsor and RFS was a co-underwriter -stated that 1.85 percent of the underlying properties by loan count in the Supporting Loan Group were not owner-occupied. But the data review revealed that the true percentage of non-owneroccupied properties was 13.67 percent,11 approximately 700 percent greater than the percentage reported in the Prospectus Supplement because for 12.04 percent of the properties represented as owner-occupied, the owners lived elsewhere. 98. The data review revealed that for each Securitization, the Prospectus Supplement
misrepresented the percentage of non-owner-occupied properties. The true percentage of nonowner-occupied properties, as determined by the data review, versus the percentage stated in the Prospectus Supplement for each Securitization, is reflected in Table 6 below. Table 6
11
The true percentage of non-owner-occupied properties (Table 6 Column C) is calculated by adding the percentage reported in the Prospectus Supplement (Table 6 Column A) to the product of owner-occupied properties reported in the Prospectus Supplement (100 minus Column A) and the percentage of properties reported as owner-occupied but with strong indication of non-owner-occupancy (Table 6 Column B).
37
demonstrates that the Prospectus Supplements for each Securitization significantly understated the percentage of non-owner-occupied properties. Table 6
A Reported % of NonOwnerOccupied Properties 1.85% 0.00% 6.08% 5.58% 10.12% 16.04% 18.32% 34.20% 0.00% 0.00% 0.76% 4.18% 20.86% 18.87% 18.22% 19.01% 21.55% 6.35% 4.77% 4.44% 22.64% B Percentage of Properties As OwnerOccupied Misrepresented in the Registration Statements 12.04% 11.88% 9.03% 11.97% 11.41% 10.72% 14.93% 13.42% 12.38% 12.52% 13.20% 9.06% 14.86% 13.14% 13.18% 13.84% 11.66% 9.44% 10.28% 11.10% 15.76% C Actual % of NonOwnerOccupied Properties 13.67% 11.88% 14.56% 16.88% 20.38% 25.04% 30.52% 43.03% 12.38% 12.52% 13.86% 12.86% 32.62% 29.53% 29.00% 30.22% 30.69% 15.19% 14.56% 15.05% 34.83% D Understatement of Non-OwnerOccupied Properties in the Offering Materials 11.82% 11.88% 8.48% 11.30% 10.26% 9.00% 12.19% 8.83% 12.38% 12.52% 13.10% 8.68% 11.76% 10.66% 10.78% 11.21% 9.15% 8.84% 9.79% 10.60% 12.20%
Transaction
RAMP 2005-EFC6 RAMP 2005-EFC7 RASC 2005-EMX3 RASC 2005-KS10 RASC 2005-KS11 RAMP 2005-NC1 RALI 2005-QO4 RAMP 2005-RS9 RASC 2006-EMX8 RASC 2006-EMX9 RASC 2006-KS3 RASC 2006-KS9 RALI 2006-QO4 (IA1 & IA2) RALI 2006-QO5 RALI 2006-QO8 RALI 2006-QO9 RAMP 2006-RS1 RASC 2007-EMX1 RASC 2007-KS2 RASC 2007-KS3 RALI 2007-QH5
Group II Group II Group II Group II Group II Group II Group I Group II Group II Group II Group II Group II Group I Group I Group II Group II Group II Group II Group II Group II Group II
b. 99.
Loan-to-Value Data was Materially False
Prospectus Supplements were materially false and understated, as more specifically set out below. For each of the sampled loans, an industry standard automated valuation model (AVM) was used to calculate the value of the underlying property at the time the mortgage loan was originated. AVMs are routinely used in the industry as a way of valuing properties during prequalification, origination, portfolio review, and servicing. AVMs rely upon similar
38
data as appraisers -- primarily county assessor records, tax rolls, and data on comparable properties. AVMs produce independent, statistically-derived valuation estimates by applying modeling techniques to this data. 100. Applying the AVM to the available data for the properties securing the sampled
loans shows that the retroactive appraised value given to such properties was significantly higher than the actual value of such properties. The result of this overstatement of property values is a material understatement of LTV. That is, if a propertys true value is significantly less than the value used in the loan underwriting, then the loan represents a significantly higher percentage of the propertys value. This, of course, increases the risk a borrower will not repay the loan and the risk of greater losses in the event of a default. As stated in the Prospectus Supplement for RALI 2005-QO4: The rate of default . . . on mortgage loans or manufactured housing contracts with higher LTV ratios may be higher than for other types of mortgage loans or manufactured housing contracts. 101. For example, for the RALI 2005-QH5 Securitization, for which RFC was the
sponsor and RFS was a co-underwriter, the Prospectus Supplement stated that no LTV ratios for the Supporting Loan Group were above 100 percent. In fact, 18.26 percent of the sample of loans included in the data review had LTV ratios above 100 percent. In addition, the Prospectus Supplement stated that 93.70 percent of the loans had LTV ratios at or below 80 percent. The data review indicated that only 45.89 percent of the loans had LTV ratios at or below 80 percent. 102. The data review revealed that for each Securitization, the Prospectus Supplement
misrepresented the percentage of loans with an LTV ratio above 100 percent, as well the percentage of loans that had an LTV ratio at or below 80 percent. Table 7 reflects (i) the true percentage of mortgages in the Supporting Loan Group with LTV ratios above 100 percent,
39
versus the percentage reported in the Prospectus Supplement; and (ii) the true percentage of mortgages in the Supporting Loan Group with LTV ratios at or below 80 percent, versus the percentage reported in the Prospectus Supplement. The percentages listed in Table 7 were calculated by aggregated principal balance. Table 7
PROSPECTUS DATA REVIEW True % of Loans with LTV Ratio at or Less than 80% 35.31% 38.91% 29.10% 31.29% 44.25% 44.83% 61.17% 36.91% 30.69% 21.70% 44.12% 27.87% 57.25% 53.64% 46.48% 48.39% 29.46% 27.06% 28.40% 27.04% 45.89% PROSPECTUS DATA REVIEW True % of Loans with LTV Ratio Over 100% 16.70% 13.32% 19.47% 17.94% 14.41% 13.01% 8.18% 17.27% 26.94% 33.84% 11.68% 26.92% 8.43% 11.09% 11.62% 13.12% 22.23% 26.46% 28.40% 29.22% 18.26%
Transaction
% of Loans Reported to have LTV Ratio at or Less than 80% 57.86% 71.74% 47.33% 45.62% 61.19% 57.07% 94.77% 53.93% 53.72% 41.34% 61.60% 45.21% 94.37% 95.44% 95.56% 93.89% 44.73% 52.14% 44.68% 43.00% 93.70%
% of Loans Reported to have LTV Ratio Over 100% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.03% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 2.60% 0.00% 0.00% 0.00% 0.00%
RAMP 2005-EFC6 RAMP 2005-EFC7 RASC 2005-EMX3 RASC 2005-KS10 RASC 2005-KS11 RAMP 2005-NC1 RALI 2005-QO4 RAMP 2005-RS9 RASC 2006-EMX8 RASC 2006-EMX9 RASC 2006-KS3 RASC 2006-KS9 RALI 2006-QO4 (IA1 & IA2) RALI 2006-QO5 RALI 2006-QO8 RALI 2006-QO9 RAMP 2006-RS1 RASC 2007-EMX1 RASC 2007-KS2 RASC 2007-KS3 RALI 2007-QH5
Group II Group II Group II Group II Group II Group II Group I Group II Group II Group II Group II Group II Group I Group I Group II Group II Group II Group II Group II Group II Group II
103.
As Table 7 demonstrates, the Prospectus Supplements for all the Securitizations
falsely reported that only two of the Supporting Loan Groups had mortgage loans with an LTV ratio over 100 percent: the data review revealed that at least eight percent of the mortgage loans for every Securitization had an LTV ratio over 100 percent, and for most Securitizations this figure was much larger. Indeed, for 19 of the 21 Securitizations, the data review revealed that
40
more than 10 percent of the mortgages in the Supporting Loan Group had a true LTV ratio over 100 percent. For 12 Securitizations, the data review revealed that more than 15 percent of the mortgages in the Supporting Loan Group had a true LTV ratio over 100 percent and for seven Securitizations, the data review revealed that more than 20 percent of the mortgages in the Supporting Loan Group had a true LTV ratio over 100 percent. 104. These misrepresentations with respect to reported LTV ratios also demonstrate
that the representations in the Registration Statements relating to appraisal practices were false, and that the appraisers, in many instances, furnished appraisals that they understood were inaccurate and that they knew bore no reasonable relationship to the actual value of the underlying properties. Indeed, independent appraisers following proper practices, and providing genuine estimates as to valuation, would not systematically generate appraisals that deviate so significantly (and so consistently upward) from the true values of the appraised properties. The Financial Crisis Inquiry Commission (FCIC), created by Congress to investigate the mortgage crisis and attendant financial collapse in 2008, identified inflated appraisals as a pervasive problem during the period of the Securitizations, and determined through its investigation that appraisers were often pressured by mortgage originators, among others, to produce inflated results. (See FCIC, Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (2011) (FCIC Report), at 91.) 2. 105. The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines
The Prospectus Supplements each contained material misstatements and
omissions concerning the underwriting guidelines used by the originators of the loans included in the Securitizations, defined herein as the Non-Party Originators. Among other things, the Prospectus Supplements stated that the Non-Party Originators underwrote all loans in
41
compliance with their respective underwriting guidelines. See Appendix A, Sections I-XXI at Subsections B. 106. The Non-Party Originators -- companies such as New Century, Decision One, and
others -- systematically disregarded their respective underwriting guidelines, as confirmed not only by the pervasively false owner-occupancy and LTV figures alleged supra, but also by: (1) government investigations and private actions relating to their underwriting practices, which have revealed widespread abandonment of their reported underwriting guidelines during the period of the Securitizations; (2) the collapse of the credit ratings of Certificates purchased by Freddie Mac; and (3) the surge in delinquencies and defaults in the mortgages in the Securitizations. a. Government and Private Investigations Confirm That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines
107.
reports and investigations, confirms that the originators whose loans were included by the Defendants in the Securitizations abandoned their loan origination guidelines throughout the period of the Securitizations. 108. For example, in November 2008, the Office of the Comptroller of the Currency
(OCC), an office within the United States Department of the Treasury, issued a report identifying the Worst Ten mortgage originators in the Worst Ten metropolitan areas. The worst originators were defined as those with the largest number of non-prime mortgage foreclosures for 2005-2007 originations. Aegis, Decision One, New Century, Ownit, 12 and
12
Ownit, which originated loans for one of the Securitizations, was identified by the OCC as the fifteenth worst subprime lender in the country based on the delinquency rates of the mortgages it originated in the ten metropolitan areas between 2005 and 2007 with the highest
42
Peoples Choice -- the companies that originated loans for eight of the Securitizations at issue here -- were all on that list. See Worst Ten in the Worst Ten, Office of the Comptroller of the Currency Press Release, November 13, 2008. Several of the Non-Party Originators -- including New Century, HFN and MLN -- have been the target of government investigations or private actions that allege a complete abandonment of their reported underwriting guidelines. i. 109. New Century Violated Its Underwriting Guidelines
New Century and its subsidiary, Home123, originated loans for at least four of the
Securitizations. As stated in the Prospectus Supplement for the RAMP 2005-NC1 Securitization, [f]or the quarter ending September 30, 2005, New Century Financial Corporation originated $40.4 billion in mortgage loans. By the end of 2006, Inside Mortgage Finance reports that New Century was the second largest subprime mortgage loan originator in the United States, with a loan production volume that year of $51.6 billion. Before its collapse in the first half of 2007, New Century was one of the largest subprime lenders in the country. New Century filed for protection from its creditors under Chapter 11 of the federal Bankruptcy Code on April 2, 2007. 110. In 2010, the OCC identified New Century as the worst subprime lender in the
country based on the delinquency rates of the mortgages it originated in the 10 metropolitan areas between 2005 and 2007 with the highest rates of delinquency. See Worst Ten in the Worst Ten: Update, Office of the Comptroller of Currency Press Release, March 22, 2010. Further, in January 2011, the FCIC Report detailed, among other things, the collapse of mortgage underwriting standards and subsequent collapse of the mortgage market and wider economy. See FCIC Report. The FCIC Report singled out New Century for its role:
rates of delinquency. See Worst Ten in the Worst Ten: Update, Office of the Comptroller of Currency Press Release, March 22, 2010.
43
New Centuryonce the nations second-largest subprime lender ignored early warnings that its own loan quality was deteriorating and stripped power from two risk-control departments that had noted the evidence. In a June 2004 presentation, the Quality Assurance staff reported they had found severe underwriting errors, including evidence of predatory lending, federal and state violations, and credit issues, in 25% of the loans they audited in November and December 2003. In 2004, Chief Operating Officer and later CEO Brad Morrice recommended these results be removed from the statistical tools used to track loan performance, and in 2005, the department was dissolved and its personnel terminated. The same year, the Internal Audit department identified numerous deficiencies in loan files; out of nine reviews it conducted in 2005, it gave the companys loan production department unsatisfactory ratings seven times. Patrick Flanagan, president of New Centurys mortgage-originating subsidiary, cut the departments budget, saying in a memo that the group was out of control and tries to dictate business practices instead of audit. 111. On February 29, 2008, after an extensive document review and conducting over
100 interviews, Michael J. Missal, the Bankruptcy Court Examiner for New Century, issued a detailed report on the various deficiencies at New Century, including lax mortgage standards and a failure to follow its own underwriting guidelines. Among his findings, the Examiner reported: New Century had a brazen obsession with increasing loan originations without due regard for the risks associated with that business strategy. . . . Although the primary goal of any mortgage banking company is to make more loans, New Century did so in an aggressive manner that elevated the risks to dangerous and ultimately to fatal levels. New Century also made frequent exceptions to its underwriting guidelines for borrowers who might not otherwise qualify for a particular loan. A Senior Officer of New Century warned in 2004 that the number one issue is exceptions to the guidelines. Moreover, many of the appraisals used to value the homes that secured the mortgages had deficiencies. New Century . . . layered the risks of loan products upon the risks of loose underwriting standards in its loan originations to high risk borrowers.
44
Final Report of Michael J. Missal, Bankruptcy Examiner, In re New Century TRS Holdings, Inc., No. 07-10416 (KJC) (Bankr. Del. Feb. 29, 2008). 112. On December 9, 2009, the SEC charged three of New Centurys top officers with
violations of federal securities laws. The SECs complaint details the blatant falsity of New Centurys representations regarding its underwriting guidelines, for example, its representations that it was committed to adher[ing] to high origination standards in order to sell [its] loan products in the secondary market and to only approv[ing] subprime loan applications that evidence a borrowers ability to repay the loan. 113. New Centurys failure to adhere to its underwriting guidelines is further reflected
in allegations in the Assurance of Discontinuance signed by Morgan Stanley and the Attorney General of Massachusetts (the Assurance of Discontinuance), in In re: Morgan Stanley & Co. Inc., Civil Action No. 10-2538 (Suffolk Cnty. Super. Ct. June 24, 2010). The Massachusetts Attorney General alleged: New Century stretch[ed] underwriting guidelines to encompass or approve loans not written in accordance with the guidelines. (Id. 17, 23.) One recurring issue identified by Morgan Stanley was New Centurys origination of loans that violated Massachusetts Division of Banks borrowers best interest standard []. (Id. 18.) During the period 2006-2007, 91 percent of the loans approved for securitization that did not meet New Centurys underwriting guidelines did not have sufficient compensating factors to offset such exceptions. (Id. 27.) In the last three quarters of 2006, Morgan Stanley waived more than half of all material exceptions found by Clayton . . ., and purchased a substantial number of New Century loans found by Clayton to violate guidelines without sufficient compensating factors. (Id. 28.) The loans originated by New Century were unfair loans to Massachusetts borrowers and were in violation of Massachusetts law . . . . (Id. 43-44.)
45
114.
As a result, on or about June 24, 2010, Morgan Stanley paid $102 million to settle
the claims asserted by the Attorney General and also agreed to drastic changes in its underwriting practices. 115. Patricia Lindsay, a former Vice President of Corporate Risk at New Century,
testified before the FCIC in April 2010 that, beginning in 2004, underwriting guidelines had been all but abandoned at New Century. Ms. Lindsay further testified that New Century systematically approved loans with 100 percent financing to borrowers with extremely low credit scores and no supporting proof of income. (See Written Testimony of Patricia Lindsay for the FCIC Hearing, April 7, 2010 (Lindsay Testimony), http://fcic-static.law.stanford.edu/cdnmedia/fcic.testimony/2010-0407-Lindsay.pdf, at 3.) 116. Ms. Lindsay also testified that appraisers fear[ed] for their livelihoods, and
therefore cherry-picked data that would help support the needed value rather than finding the best comparables to come up with the most accurate value. (See Written Testimony of Patricia Lindsay to the FCIC, April 7, 2010, at 5.) Indeed, on May 7, 2007, The Washington Post reported that a former New Century appraiser, Maggie Hardiman, recounted how she didnt want to turn away a loan because all hell would break loose and that, when she did reject a loan, her bosses often overruled her and found another appraiser to sign off on it. (David Cho, Pressure at Mortgage Firm Led to Mass Approval of Bad Loans, The Washington Post (May 7, 2007).) ii. 117. HFN Violated Its Underwriting Guidelines
HFN originated loans for 13 of the Securitizations -- as discussed infra, HFN was
the GMAC entity responsible for the origination of all of GMACs residential mortgage loans during the relevant time period.
46
118.
MBIA Insurance Corporation, which insured mortgage-backed securities issued
by GMAC, has filed two actions against GMACM and RFC, both parents of HFN, alleging, among other things, that GMACM and RFC made fraudulent representations regarding adherence to GMACs loan origination underwriting guidelines. MBIA alleged that it performed an extensive a review of loan files in advance of making its allegations. Its complaint explains that it performed a review of loan files associated with 4,104 delinquent or charged off loans and that its review revealed that [a]t least 89% of the 4,104 delinquent or charged off loans . . . were not originated in material compliance with GMAC Mortgages Underwriting Guidelines. (Complaint at 6, MBIA Insurance Corp. v. GMAC Mortgage, LLC (f/k/a GMAC Mortgage Corporation), No. 6008737-2010 (N.Y. Sup. Ct.) (filed Compl. Apr. 1, 2010).) MBIAs complaint further alleges that MBIA, or the experts that performed its review, found that a significant number of mortgage loans were made on the basis of stated incomes that were grossly unreasonable or were approved despite [debt-to-income] or CLTV ratios in excess of the limits stated in GMAC Mortgages Underwriting Guidelines, and that, contrary to its Underwriting Guidelines, GMAC Mortgage failed in many cases to verify the borrowers employment when required to do so or to verify prior rental or mortgage payment history, approved mortgage loans with ineligible collateral, approved mortgage loans to borrowers with ineligible credit scores, and approved loans without verifying that the borrower had sufficient funds or reserves. (Id. at 76.) 119. In its complaint against RFC, the direct parent of HFN, MBIA also asserted a
claim for fraud, among other things, alleging that MBIAs review [o]f the 1,847 mortgage loans [revealed that] . . . only 129 mortgage loans -- less than 7% of the mortgage loans reviewed -were originated or acquired in material compliance with RFCs representations and warranties
47
. . . with respect to the underwriting of the mortgage loans contributed to the RFC transactions. (Complaint at 46, MBIA Insurance Corp. v. Residential Funding Co., LLC, No. 603552-2008 (N.Y. Sup. Ct.) (filed Compl. Dec. 4, 2008).) 120. Further, on June 29, 2011, the SEC and the DOJ launched investigations of,
among other things, potential fraud related to the origination and/or underwriting of mortgage loans by GMAC. As an originator of residential mortgage loans for the GMAC entities, the scope of the SEC and the DOJs investigation will likely include a review of HFNs compliance with its own loan origination underwriting guidelines. iii. 121. MLN Violated Its Underwriting Guidelines
Mortgage Loan Networks USA, Inc. (MLN), which originated the loans for
four of the Securitizations, filed for bankruptcy on February 5, 2007, and on January 6, 2011, the Liquidating Trustee for MLN filed a motion seeking to destroy certain MLN records and releasing the Trustee from responding to any future requests concerning those records. The United States Attorney objected to the Trustees motion on the basis that federal law enforcement records indicate that [MLNs] loans are the subject of many ongoing investigations. As a result, [MLNs] records, including but not limited to the loan files and loan related information . . . , may be relevant to pending federal criminal investigations into mortgage fraud. (Objection to Debtors Motion for the Destruction for Certain Records, In re Mortgage Lenders Network USA, Inc., No. 07-10146-PJW (Bankr. Del.) (Dkt. 3281).) Accordingly, upon information and belief, government investigations into MLNs origination of loans and compliance with its own underwriting guidelines are ongoing. 122. The originators of the mortgage loans underlying the Securitizations went beyond
the systematic disregard of their own underwriting guidelines. The FCIC found that mortgage loan originators throughout the industry pressured appraisers, during the period of the
48
Securitizations, to issue inflated appraisals that met or exceeded the amounts needed for the subject loans to be approved, regardless of the accuracy of such appraisals, and especially when the originators aimed at putting the mortgages into a package of mortgages that would be sold for securitization. Upon information and belief, these inflated appraisals resulted in inaccurate LTV ratios. b. The Collapse of the Certificates Credit Ratings Further Shows that the Mortgage Loans were not Originated in Adherence to the Stated Underwriting Guidelines
123.
The total collapse in the credit ratings of the Certificates invested in by Freddie
Mac, typically from AAA or its equivalent to non-investment speculative grade, is further evidence of the originators systematic disregard of underwriting guidelines, underscoring that these Certificates were impaired from the start. 124. The Certificates purchased by Freddie Mac originally were assigned credit ratings
of AAA or its equivalent, which purportedly reflected the description of the mortgage loan collateral and underwriting practices set forth in the Registration Statements. Those ratings artificially were inflated, however, upon information and belief, in part as a result of the same misrepresentations that the Defendants made to investors in the Prospectus Supplements. 125. Upon information and belief, GMAC provided information at the loan level to the
rating agencies, including LTV ratios, owner-occupancy rates, and other loan characteristics, that the rating agencies used in part to calculate the assigned ratings of the Certificates purchased by Freddie Mac. Upon information and belief, because the information that GMAC provided, which information included among other things the Registration Statements or portions thereof, the ratings were inflated. As a result, the Certificates were offered and purchased at prices suitable for investment grade securities when in fact the Certificates actually carried a severe risk of loss and inadequate credit enhancement.
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126.
Since the issuance of the Certificates, the ratings agencies dramatically have
Transaction RAMP 2005-EFC6 RAMP 2005-EFC7 RASC 2005-EMX3 RASC 2005-KS10 RASC 2005-KS11 RAMP 2005-NC1 RALI 2005-QO4 RAMP 2005-RS9 RASC 2006-EMX8 RASC 2006-EMX9 RASC 2006-KS3 RASC 2006-KS9 RALI 2006-QO4 RALI 2006-QO4 RALI 2006-QO5 RALI 2006-QO8 RALI 2006-QO9 RAMP 2006-RS1 RASC 2007-EMX1 RASC 2007-KS2 RASC 2007-KS3 RALI 2007-QH5 Tranche AII AII AII AII AII AII IA1 AII AII AII AII AII IA1 IA2 IA1 IIA IIA AII AII AII AII AII Rating at Issuance (Moodys/S&P/Fitch) Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/-Aaa/AAA/-Rating at July 31, 2011 (Moodys/S&P/Fitch) A1/AAA/-Ca/D/-Aa1/AAA/-Baa3/AAA/-Ba1/AAA/-Ca/D/-Caa3/CCC/C Ca/D/-Ca/CCC/-Caa3/CCC/-Caa1/AA/-Ca/CCC/C Ca/CCC/-Ca/D/-Caa3/AA-/-Ca/D/-Ca/D/-Caa3/CCC/-Ca/D/-Caa3/CCC/CC Caa3/CCC/-Ca/CC/--
c.
The Surge in Mortgage Delinquency and Default Further Demonstrates that the Mortgage Loans were not Originated in Adherence to the Stated Underwriting Guidelines
127.
significant percentage of the mortgage loans backing the Certificates have defaulted, have been
13
Applicable ratings are shown in sequential order separated by forward slashes: S&P/Moodys/Fitch. A double-hyphen indicates that the relevant agency did not provide a rating at issuance.
50
foreclosed upon, or are delinquent, resulting in massive losses to the Certificateholders. The overall poor performance of the mortgage loans is a direct consequence of the fact that their underlying mortgage loans were not underwritten in accordance with applicable underwriting guidelines as represented in the Prospectus Supplements. 128. Loan groups that were underwritten properly and contained loans with the
characteristics represented in the Prospectus Supplements would have experienced substantially fewer delinquencies and substantially lower percentages of defaults, foreclosures, and delinquencies than occurred here. Table 9 reflects the percentage of loans in the Supporting Loan Groups that are in default, have been foreclosed upon, or are delinquent as of July 2011. Table 9
Transaction RAMP 2005-EFC6 RAMP 2005-EFC7 RASC 2005-EMX3 RASC 2005-KS10 RASC 2005-KS11 RAMP 2005-NC1 RALI 2005-QO4 RAMP 2005-RS9 RASC 2006-EMX8 RASC 2006-EMX9 RASC 2006-KS3 RASC 2006-KS9 RALI 2006-QO4 (IA1) RALI 2006-QO4 (IA2) RALI 2006-QO5 RALI 2006-QO8 RALI 2006-QO9 RAMP 2006-RS1 RASC 2007-EMX1 RASC 2007-KS2 RASC 2007-KS3 RALI 2007-QH5 Supporting Loan Group Group II Group II Group II Group II Group II Group II Group I Group II Group II Group II Group II Group II Group I Group I Group I Group II Group II Group II Group II Group II Group II Group II Percentage of Delinquent / Defaulted / Foreclosed Loans 33.5% 40.2% 36.6% 30.6% 28.8% 29.0% 42.3% 28.8% 53.0% 61.7% 34.0% 33.3% 39.2% 39.2% 39.9% 40.6% 40.7% 27.5% 43.4% 33.2% 37.9% 43.2%
129.
confirmed systematic underwriting failures by the originators responsible for the mortgage loans
51
across the Securitizations; and the extraordinary drop in credit rating and rise in delinquencies across those Securitizations all demonstrate that the mortgage loans in the Supporting Loan Groups, contrary to the representations in the Registration Statements, were not originated in accordance with the stated underwriting guidelines. E. 130. Freddie Macs Purchases of the Certificates Between September 23, 2005 and May 30, 2007, Freddie Mac purchased from
RFS, JPM, Credit Suisse, RBS, UBS, Bear Stearns, Citi, Barclays, Lehman Brothers and Goldman over $6 billion in RMBS issued in connection with the Securitizations. Table 10 reflects each of Freddie Macs purchases of the Certificates.14 To date, Freddie Mac has not sold any of the Certificates. Table 10
Settlement Date of Purchase by Freddie Mac 11/22/05 12/28/05 09/23/05 10/28/05 11/29/05 12/28/05 11/30/05 11/29/05 09/28/06 10/27/06 03/29/06 10/27/06 04/27/06 04/27/06 Initial Unpaid Principal Balance 163,581,000.00 199,376,000.00 267,481,000.00 495,741,000.00 547,641,000.00 405,004,000.00 143,428,800.00 494,922,000.00 236,806,000.00 197,896,000.00 232,006,000.00 153,311,000.00 327,356,000.00 81,838,000.00 Purchase Price (% of Par) 100 100 100 100 100 100 100 100 100 100 100 100 100 100
Transaction RAMP 2005-EFC6 RAMP 2005-EFC7 RASC 2005-EMX3 RASC 2005-KS10 RASC 2005-KS11 RAMP 2005-NC1 RALI 2005-QO4 RAMP 2005-RS9 RASC 2006-EMX8 RASC 2006-EMX9 RASC 2006-KS3 RASC 2006-KS9 RALI 2006-QO4 RALI 2006-QO4
Tranche AII AII AII AII AII AII IA1 AII AII AII AII AII IA1 IA2
CUSIP 76112BL32 76112BR85 75405MAE4 75405WAD4 76110W7C4 76112BR36 761118NL8 76112BL99 74924UAE1 74924VAE9 76113ABK6 75406YAE7 75114GAA7 75114GAB5 92911DAA4
Seller to Freddie Mac JPM RFS RFS JPM Credit Suisse Credit Suisse RBS Bear Stearns RFS RFS Citi Barclays RBS RBS
14
Purchases and holdings of securities in Table 10 are stated in terms of unpaid principal balance (UPB) of the relevant Certificates. Purchase prices are stated in terms of percentage of par. To date, Freddie Mac has not sold any of the Certificates it purchased as described in this section.
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Transaction RALI 2006-QO5 RALI 2006-QO8 RALI 2006-QO9 RAMP 2006-RS1 RASC 2007-EMX1 RASC 2007-KS2 RASC 2007-KS3 RALI 2007-QH5
Tranche IA1 IIA IIA AII AII AII AII AII
CUSIP 75114HAA5 75115FAT7 75115HAB2 76112BU24 74924XAE5 74924WAE7 74924YAE3 75116EAD4
Settlement Date of Purchase by Freddie Mac 05/30/06 10/31/06 11/30/06 01/25/06 03/12/07 02/23/07 04/19/07 05/30/07
Initial Unpaid Principal Balance 179,443,000.00 409,198,000.00 284,637,000.00 409,790,000.00 326,812,000.00 164,400,000.00 167,618,000.00 143,007,000.00
Purchase Price (% of Par) 100 100 100 100 100 100 99.96094 100
Seller to Freddie Mac UBS Lehman Brothers Lehman Brothers Credit Suisse RFS JPM JPM Goldman
F. 131.
Freddie Mac was Damaged by Defendants Violations of Sections 11, 12 and 15 of the Securities Act The statements and information in the Registration Statement regarding the credit
quality and characteristics of the mortgage loans underlying the Certificates, and the origination and underwriting practices pursuant to which the mortgage loans purportedly were originated, were material to a reasonable investor. But for the misrepresentations and omissions in the Registration Statement concerning those matters, Freddie Mac would not have purchased the Certificates. 132. Based upon sales of the Certificates or similar certificates in the secondary market
and other indications of value, Freddie Mac has incurred substantial losses on the Certificates due to a decline in value that is directly attributable to Defendants material misrepresentations and omissions. Among other things, the mortgage loans underlying the Certificates experienced defaults and delinquencies at a higher rate than would have been the case had the loans underlying the Certificates actually conformed to the origination guidelines, and had the Certificates merited the credit ratings set forth in the Registration Statement.
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133.
Defendants misstatements and omissions in the Registration Statement were the
direct, proximate and actual cause of Freddie Macs losses resulting from its purchase of the Certificates. The precise extent of Freddie Macs injuries will be proven at trial. 134. At the time it purchased the Certificates, Freddie Mac was unaware of the
Defendants misrepresentations, omissions, and/or untrue statements. Plaintiff was appointed Conservator of Freddie Mac less than one year after the discovery of the untrue statements and omissions contained in the Registration Statement and within three years of the Certificates being offered for sale to the public. Despite the exercise of reasonable diligence, Freddie Mac could not reasonably have discovered the untrue statements and omissions in the Registration Statement more than one year prior to the appointment of the Plaintiff as Conservator. This action is timely pursuant to 12 U.S.C. 4617(b)(12) & (13), which provides for extension or tolling of all statutory time periods applicable to the claims brought herein. II. ADDITIONAL FACTUAL ALLEGATIONS 135. The allegations in paragraphs 160 through 176 below concerning Defendants
knowledge or recklessness concerning the information set forth in or omitted from the Registration Statements and any other materials provided to Freddie Mac are made solely with respect to Plaintiffs common law claims, as are the allegations set forth in paragraphs 177 through 185 concerning Freddie Macs reliance on the material misrepresentations and omissions alleged herein. A. Defendants Were Incentivized to Fund Risky Residential Mortgage Loans and to Securitize and Sell Them to Investors Securitizing large volumes of loans was a highly lucrative and competitive
136.
business for the Defendants. All of the underwriter defendants engaged in this business on a massive scale, each doing multiple billions of dollars worth of securitizations during the period
54
when they sold the Certificates to Freddie Mac. Fees, which were a percentage of the balance of the loan pool being purchased, and other transaction revenues associated with the Certificates at issue here, and with the RMBS securitization business more generally, accounted for a substantial portion of the underwriter (and other) Defendants earnings in the relevant time period. The more and the larger the securitizations the Defendants arranged and participated in, the greater their earnings. This financial motive accounts for Defendants willingness, intentionally or recklessly, to make false statements in, or to omit material facts from, the Registration Statements and other offering materials. In furtherance of this motive, the Defendant underwriters took measures and entered into arrangements designed to ensure that a continuous and high volume of mortgage loans would be available for securitization. 137. Thus, among other things, the underwriters provided warehouse funding to
mortgage originators to enable these originators to make, and to continue to make, loans. These subprime mortgage originators used those funds to make large numbers of loans, which they then turned around and sold back to the underwriters whose funds enabled them to make the loans in the first place. The banks then securitized the loans they effectively had funded, and transferred the risk to investors like Freddie Mac through the sale of the RMBS resulting from the securitizations. 138. These arrangements between the underwriters and loan originators undermined
the underwriting process for the Certificates because the underwriters had no incentive to identify and exclude from the securitizations loans that did not conform to the loan originators stated guidelines. To the contrary, the underwriters had the motive to, and did, include loans that upon information and belief, they knew did not conform to those guidelines, and that lacked the characteristics or merited the ratings set forth in the Registration Statement.
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139.
Credit Suisse, Citi, Bear Stearns, Barclays, UBS and Goldman Sachs -- all of
whom were underwriters of the Securitizations -- provided billions of dollars of warehouse lending to New Century. From 2000 to 2010, Citi extended warehouse lines of credit of up to $7 billion to unaffiliated originators, including $950 million to New Century and over $3.5 billion to Ameriquest. (FCIC Report at 113.) Citi and JPM lent their own mortgage origination subsidiaries at least $26.3 billion and $30 billion, respectively, between 2005 and 2007. (See Who is Behind The Financial Meltdown: The Top 25 Subprime Lenders and their Wall Street Backers, The Center for Integrity, available at http://www.publicintegrity.org/investigations/economic_meltdown/the_subprime_25/.) As reported by the FCIC, Barclays provided at least $221 million in warehouse financing to New Century in connection with just a single financing. Upon information and belief, Barclays provided similar financing to originators in connection with several securitizations, leading to the same conflicts of interest. Upon information and belief, RBS also engaged in the same warehouse lending practices. 140. The practice was pervasive among investment banks. Thus, for example, Bear
Stearns kept its pipeline flowing by operating its own mortgage loan originators and loan servicers: EMC Mortgage Corporation (EMC), Bear Stearns Residential Mortgage Corporation, and Encore Credit Corp. As a result of its strategy, Bear Stearns fixed income net revenues were a record $4.0 billion in 2006, up 23 percent from $3.3 billion in 2005. Bear Stearns did not report how it manipulated its wholly-owed originators and servicers to push through non-compliant loans. A former EMC employee, who vetted loans for securitizations, told The Atlantic that Bear traders pushed EMC analysts to get loan analysis done in only one to three days. That way, Bear could sell them off fast to eager investors and didnt have to carry
56
the cost of holding these loans on their books. (More Corruption: Bear Stearns Falsified Information as Raters Shrugged, The Atlantic, by Teri Buhl, May 14, 2010.) EMC analysts fabricated data such as FICO scores if lenders did not provide real information quickly enough, and Bear Stearns analysts in New York, rather than EMC employees who had access to loan information, decided how to report and calculate the presence and quality of loan documentation without adequate research. (Id.) 141. GMAC itself was a fully, vertically-integrated RMBS operation that was
dependent on volume. GMACM and HFN originated subprime and Alt A loans; RFC sponsored securitizations of such loans and transferred them to affiliated depositors RALI, RAMP and RASC; and RFS marketed and sold the RMBS to investors. HFN, which originated loans for 13 of the Securitizations here, was under enormous pressure to extend risky loans. A former loan officer at HFN recounted that [t]he main focus was doing Alt A because thats where the money was, and [i]n order to keep your market share, you had to be more aggressive. (See Shaky loans may spur new foreclosure wave, The Portland Tribune (Oct. 30, 2009).) A mortgage broker confirmed such pressure, stating: The V.P.s came down to the office beating the drums about Option ARMs I had Wachovia march through here; I had GMAC. (Id.) 142. Defendants were motivated to churn out and securitize as many mortgages as
possible because they earned so much in revenues on both ends of the securitization process, while transferring the ultimate risk of default to investors, such as Freddie Mac. Indeed, several of the Defendants ranked in the top ten of the nations largest underwriters of RMBS between 2004 and 2007, according to Inside Mortgage Finance. The three underwriters that sold the Certificates to Freddie Mac -- JPM, Credit Suisse and RBS -- were especially prolific. By 2007, RBS ranked fifth with $50.3 billion in transactions, Credit Suisse ranked sixth with $44.1 billion,
57
and JPM ranked seventh with $43.5 billion. (2011 Mortgage Market Statistical Annual, Vol. II (Inside Mortgage Finance Publns, Inc., 2011).) B. 143. Defendants Material Misrepresentations and Omissions in the Offering Materials In connection with the sale of the Certificates, the selling underwriters RFS, JPM,
Credit Suisse, RBS, Citi, Barclays, UBS, and Goldman; the depositors RALI, RASC, and RAMP; and the sponsor RFC (together, the Fraud Defendants) each made misrepresentations and omissions of material fact to Freddie Mac in term sheets, Registration Statements, Prospectuses, Prospectus Supplements, and other draft and final written offering documents (the Offering Materials). These Offering Materials describe the credit quality and other characteristics of the underlying mortgage loans and were provided to investors, including Freddie Mac. 144. Accordingly, Freddie Mac required the Fraud Defendants to provide
representations and warranties regarding the origination and quality of the mortgage loans, including that the mortgage loans had been underwritten by the loan originators pursuant to extensive guidelines. 145. Through term sheets or other offering documents, the Fraud Defendants also
furnished Freddie Mac with anticipated credit ratings on the proposed pool of mortgage loans intended for securitization. 146. On information and belief, the Fraud Defendants solicited the anticipated ratings
from credit rating agencies based on misrepresentations by Defendants as to the credit quality of the mortgage loans and the amount of the overcollateralization in the deal. All of the Securitizations had shadow ratings of at least AAA or its equivalent.
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147.
Furthermore, the Fraud Defendants delivered Prospectus Supplements to Freddie
Mac that included more specific information about the loans underlying the Certificates in each Securitization. 148. The materially false and misleading information contained in the initial and final
Prospectus Supplements that the Fraud Defendants provided to Freddie Mac included reproductions of the same schedules that the Fraud Defendants provided to Freddie Mac, containing false data about LTV ratios and owner-occupancy statistics. 149. The Offering Materials, among other things: (1) misrepresented the loans and
loan originators adherence to the stated underwriting guidelines; (2) overstated the number of loans for owner-occupied properties; (3) understated the loan pools average LTV ratios; and (4) failed to disclose that the credit ratings of the Certificates were based on false information. Each misrepresentation and omission created an additional, hidden layer of risk well beyond that known to be associated with non-agency loans or subprime loans. 150. First, the Fraud Defendants statements regarding the mortgage pools
compliance with stated underwriting guidelines were false. The falsity of such representations is evident from disclosures concerning the originators systematic disregard of their stated underwriting guidelines, as well as the Certificates high default rates and plummeting credit ratings. Indeed, of the 15 originators whose loans were sold into the Securitizations, five were cited as among the worst ten in the worst ten metropolitan areas: Aegis, Decision One, New Century, Ownit, and Peoples Choice. Government and private investigations have confirmed that these originators failed to apply any standards at all when making high-risk loans. Moreover, the high default rates and low credit ratings confirm that the loans were not properly underwritten in the first place. As shown in Tables 8 and 9, the average rate of default
59
across the Securitizations is 38.03 percent, and although the Certificates invested in by Freddie Mac for all 21 of the Securitizations had been rated AAA (or its equivalent) at the time of purchase, by July 31, 2011, 18 had been downgraded, and most had been downgraded to junk or nearly junk-bond status, with eight downgraded to CCC (or its equivalent), the lowest rating above junk. See supra Section I.D.2.b. 151. These misstatements were material because, as discussed above, the quality of
loans in the pool determined the risk of the Certificates backed by those loans. Because a reasonable underwriting process had not been followed, the entire loan pool was much riskier and more prone to default and market losses than represented. The systemic underwriting failures decreased the reliability of all the information provided to Freddie Mac about the loans, and thus increased the actual risk to investors. As a result of those failures, the value of the Certificates was substantially lower than the price paid by Freddie Mac for those Certificates. 152. Second, as shown in Table 6, the Fraud Defendants materially understated the
non-owner-occupied status for each Securitization by an average of 10.73 percent. This information was material to Freddie Mac because high owner-occupancy rates reported to Freddie Mac should have made the Certificates purchased by Freddie Mac safer investments than certificates backed by second homes or investment properties. 153. Third, the Fraud Defendants understated the loan pools average LTV ratios,
which overstates the borrowers equity cushion in the property. As Table 7 demonstrates, on average, only 38.5 percent of the loans actually had LTV ratios of less than 80 percent, as opposed to 64.2 percent as represented in the Prospectus Supplements. Moreover, while all but two of the Certificates were represented to have no loans with an LTV over 100 percent, in reality, every deal contained at least eight percent loans with greater than 100 percent LTV, with
60
an average of 18.5 percent. In other words, in almost all of the Securitizations, a significant percentage of the mortgage loans either were under-secured or under water from the start. The understatement of LTV ratios was misleading because it misrepresented the risk of a borrower abandoning a property if the value dropped below the unpaid balance of the loan, as well as the risk that proceeds from a foreclosure sale would fail to cover the unpaid balance. 154. Further, the Fraud Defendants failed to disclose that the Certificates credit ratings
were false and misleading because Defendants provided to the ratings agencies the same misinformation contained in the Offering Materials in an attempt to manufacture predetermined ratings. In testimony before the Senate Permanent Subcommittee on Investigations, Susan Barnes, the North American Practice Leader for RMBS at S&P from 2005 to 2008, confirmed that the rating agencies relied upon investment banks to provide accurate information about the loan pools: The securitization process relies on the quality of the data generated about the loans going into the securitizations. S&P relies on the data produced by others and reported to both S&P and investors about those loans . . . . S&P does not receive the original loan files for the loans in the pool. Those files are reviewed by the arranger or sponsor of the transaction, who is also responsible for reporting accurate information about the loans in the deal documents and offering documents to potential investors. (SPSI hearing testimony, April 23, 2010) (emphasis added). As a result, the ratings failed to reflect accurately the actual risk underlying the Certificates purchased by Freddie Mac because the ratings agencies were analyzing a mortgage pool that had no relation to the pool that actually backed the Certificates purchased by Freddie Mac. 155. The AAA (or equivalent) anticipated and final credit ratings were material to
Freddie Mac, because the ratings provided additional assurances that Freddie Mac would receive
61
the expected interest and principal payments. Freddie Mac would not have purchased the Certificates without the proper ratings. 156. Each of the Fraud Defendants is responsible for the representations made in or
omitted from the Offering Materials. Specific false and misleading statements in the Registration Statements for the Certificates purchased by Freddie Mac are detailed in Sections I.C. and I.D., in paragraphs 69-134 supra and Appendix A, which are incorporated by reference. 157. Because payment on the Certificates ultimately was funded by payments from the
mortgagors, Freddie Mac faced a risk of non-payment if too many borrowers defaulted on their loans and the value of the mortgaged properties was insufficient to cover the unpaid principal balance. Accordingly, any representation bearing on the riskiness of the underlying mortgage loans was material to Freddie Mac. By misrepresenting the true risk profile of the underlying loan pools, the Fraud Defendants defrauded Freddie Mac. 158. As the FCIC found: The Commission concludes that firms securitizing mortgages failed to perform adequate due diligence on the mortgages they purchased and at times knowingly waived compliance with underwriting standards. Potential investors were not fully informed or were misled about the poor quality of the mortgages contained in some mortgage-related securities. These problems appear to have been significant. (FCIC Report at 187 (emphasis added).) C. The Fraud Defendants Knew or were Reckless in not Knowing that Their Representations were False and Misleading The Fraud Defendants knew or were reckless in not knowing that their
159.
representations in the Offering Materials were false, and that the information they omitted from documents rendered them materially misleading. The consistency of the misrepresentations and omissions across all of the 21 Securitizations is strong evidence that the Fraud Defendants did
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not innocently make materially false statements and omissions, but actually knew or were reckless in not knowing that (1) the loan originators systematically disregarded their own underwriting guidelines, (2) the LTV ratios presented in the Registration Statements were materially inaccurate, (3) the owner-occupancy rates presented in the Registration Statements were materially inaccurate, and (4) the credit ratings for the Certificates were based on incomplete and inaccurate information and were not believed by the ratings agencies when provided. 160. The Fraud Defendants financial interests and relationships with mortgage
originators compromised their approach to securitizing RMBS. Thus, for example, six of the Fraud Defendants -- Credit Suisse, Citi, Bear Stearns, Barclays, Goldman Sachs, and UBS -provided warehouse lines of credit to New Century, whose departure from its stated underwriting guidelines has now been extensively investigated and documented. Given all the revelations about New Centurys flagrant conduct and the Fraud Defendants disincentives to perform meaningful due diligence, the Fraud Defendants knew or were reckless in disregarding that New Century loans backing the Certificates were not originated in accordance with the sound underwriting practices. 161. In the case of GMAC, the GMAC entities were so closely integrated and the
abusive lending practices so rampant from the top down that the depositors (RALI, RAMP and RASC), the sponsor (RFC) and the underwriter (RFS), knew -- or were reckless in not knowing - that HFN -- a subsidiary of the sponsor -- systematically was disregarding prudent underwriting standards and that its loans lacked the characteristics represented in the Offering Materials. As detailed above, a sampling of GMACM loans conducted by MBIA has revealed a noncompliance rate of at least 89 percent.
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162.
Further, GMACMs abusive or reckless lending and servicing practices, including
commingling funds from custodial bank accounts and questionable and unlawful foreclosure practices, have also been revealed. (See Moodys downgrades $1.4 billion in GMAC subprime RMBS available at http://www.housingwire.com/2011/03/25/allstates-mbs-exposure-hits-2-78billion.) The GMAC entities also shared substantial overlapping management; for instance, David M. Applegate held simultaneous positions as the President and CEO of GMACM and the Principal Executive Officer of RALI, while Bruce Paradis was the CEO of GMAC-RFC, RALI, RAMP, and RASC. Given the overlapping management and the integrated structure, GMAC knew or was reckless in not knowing of the misrepresentations and omissions concerning HFNs underwriting guidelines. 163. Further, several of the Fraud Defendants knew that the mortgage loans they
securitized were non-compliant because they had been informed of such by third-party experts. Clayton Holdings, Inc. (Clayton) was a due diligence firm that sampled loans for many of the key players in the RMBS market.15 Clayton was hired to identify, among other things, whether the loans met the originators stated underwriting guidelines and, in some measure, to enable clients to negotiate better prices on pools of loans. (FCIC Report at 166 (footnote omitted).) Yet, upon information and belief, the Fraud Defendants routinely disregarded and manipulated Claytons findings. Clayton was the leading provider of third-party due diligence during the relevant time period. In 2006, Clayton analyzed over $418 billion in loans underlying mortgage-backed securities, which represented 22.8% of the total outstanding U.S. non-agency mortgage-backed securities for that year. (Clayton, Form 10-K.) During 2004, 2005, and 2006, Clayton worked with each of the ten largest non-agency mortgage-backed securities underwriters, as ranked by Inside MBS & ABS, which accounted for 73% to 78% of the total underwriting volume during those years. The belief that GMAC used Clayton for due diligence is based upon the information that GMAC and Clayton shared senior management. (See http://nationalmortgageprofessional.com/news16031/national-groups-expands-its-executiveteam.)
15
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164.
In January 2008, Clayton disclosed that it had entered into an agreement with the
New York Attorney General (NYAG) to provide documents and testimony regarding its due diligence reports, including copies of the actual reports provided to its clients. According to The New York Times, as reported on January 27, 2008, Clayton told the NYAG that starting in 2005, it saw a significant deterioration of lending standards and a parallel jump in lending expectations and some investment banks directed Clayton to halve the sample of loans it evaluated in each portfolio. Upon information and belief, the Fraud Defendants were included in that group of investment banks. Thus, these Defendants made a conscious decision not to avail themselves of comprehensive due diligence regarding the loans they were securitizing, which alone renders their misrepresentations concerning those loans knowing or reckless. 165. For the 18 month period ending on June 31, 2007, a significant percentage of the
loans sampled by Clayton at the direction of the Fraud Defendants failed to meet the various loan originators underwriting guidelines. This information was provided to the securities underwriters. Nonetheless, several of the Fraud Defendants overruled Claytons findings and waived in substantial percentages of these loans (approximately 51 percent for JPM, 29 percent for Bear Stearns, 33 percent for Credit Suisse, 53 percent for RBS, 31 percent for Citi, 28 percent for Barclays, 33 percent for UBS, and 29 percent for and Goldman). (See Clayton Trending Reports, available at http://fcic.law.stanford.edu/hearings/testimony/the-impact-of-thefinancial-crisis-sacramento#documents; FCIC Report, 167.) 166. Upon information and belief, these Defendants waived in these loans, found by
Clayton to be non-compliant with the relevant originators origination guidelines, without taking any adequate steps of their own to verify Claytons findings. These loans then found their way into RMBS that were sold to investors like Freddie Mac. See FCIC Report, 167; see September
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23, 2010 All Clayton Trending Reports, 1st Quarter 2006 -- 2nd Quarter 2007. Consequently, the Fraud Defendants were aware that the mortgage loans making up the pools for the Certificates were not as safe as had been represented, and were priced too high for the level of risk assumed. 167. Similarly, Citis knowledge concerning origination practices went far beyond a
general awareness that originators systematically were disregarding their own underwriting guidelines. Citi knew its representations to Freddie Mac were false. In April 2010, Richard M. Bowen III, an executive of a Citi affiliate testified before the FCIC that during the 2006-2007 time frame -- when Freddie Mac purchased Certificates -- 60 percent to 80 percent of the RMBS Citi sold were defective and in contravention to the representations and warranties made to those investors, including specifically Freddie Mac. (Written Testimony of Richard M. Bowen, III to the FCIC, April 7, 2010, at 1-2, 6.) 168. Freddie Mac: We currently purchase from mortgage companies and sell to third party investors . . . mortgage loans which have not been underwritten by us but which we rep and warrant to the investors (primarily Fannie/Freddie) that these files are complete and have been underwritten to our policy criteria. Our internal Quality Assurance function, which underwrites a small sample of these files post-purchase, has reflected since 2006 . . . that 40-60% of these files are either outside of policy criteria or have documentation missing from the files. QA for recent months indicate 80% of the files fall into this category. (Bowen Testimony, Ex. 1.) Citi retaliated against this whistleblower by decreasing the number of his direct reports from 220 people to two, slashing his bonus, and giving him poor performance reviews. (FCIC Report at 19.) In a November 3, 2007 e-mail, Mr. Bowen recounted Citis misrepresentations to
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169.
Defendant Goldman Sachs malfeasance in the RMBS market has also been
reviewed and reported in detail by the United States Senate. The SPSI Report found that in exchange for lucrative fees, Goldman Sachs helped lenders like Long Beach, Fremont, and New Century, securitize high risk, poor quality loans, obtain favorable credit ratings for the resulting RMBS, and sell the RMBS securities to investors, pushing billions of dollars of risky mortgages into the financial system. (See Sen. Levin, Carl and Sen. Coburn, Tom, U.S. Senate Permanent Subcommittee on Investigations, Wall Street and the Financial Crisis: Anatomy of a Financial Collapse (Committee on Homeland Security and Governmental Affairs, April 13, 2011) (SPSI Report), p. 377.) 170. Bear Stearns likewise participated in -- and therefore knew about -- the
origination practices behind the loans it securitized. As reported in The Atlantic, Bear Stearns manipulated its wholly-owned originators to push through non-compliant loans. A former EMC employee revealed that Bear traders pushed EMC analysts to get loan analysis done in only one to three days. That way, Bear could sell them off fast to eager investors and didn't have to carry the cost of holding these loans on their books. (More Corruption: Bear Stearns Falsified Information as Raters Shrugged, The Atlantic, by Teri Buhl, May 14, 2010.) EMC analysts fabricated data such as FICO scores if lenders did not provide real information quickly enough, and Bear Stearns analysts in New York, rather than EMC employees who had access to loan information, decided how to report and calculate the presence and quality of loan documentation without adequate research. (Id.) 171. As active participants in fraudulent origination practices, the Fraud Defendants
knew or were reckless in disregarding the falsity of their statements in the Offering Materials concerning underwriting guidelines.
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172.
The Fraud Defendants also knew or recklessly disregarded that the owner-
occupancy statistics and LTV ratios reported in the Offering Materials were false and misleading. Given their role as underwriters of the securities, the relationships they had with loan originators, and this expertise in underwriting and securitizing RMBS, the Fraud Defendants had the practical ability to gain access to loan files and the ability and resources to test the reported data points, such as owner-occupancy rates and LTV ratios. They intentionally elected not to do so, rendering their representations concerning those data knowingly or recklessly false. 173. Moreover, upon information and belief, underwriters, including certain of the
Fraud Defendants, influenced the appraisals used to determine LTV ratios. Government investigations have uncovered widespread evidence of appraisers being pressured to overvalue properties so more loans could be originated. For instance, several witnesses, ranging from the President of the Appraisal Institute to appraisers and lenders on the ground, confirmed that appraisers felt compelled to come in at value -- i.e., at least the amount needed for the loan to be approved -- or face losing future business or their livelihoods. Given the systemic pressure applied to appraisers, upon information and belief, the appraisers themselves, the originators, and the underwriters did not believe that the appraised values of the properties -- and therefore LTV ratios -- were true and accurate at the time they communicated the information to potential investors, including the GSEs. 174. Further, the Fraud Defendants knew or were reckless in not knowing that the
credit ratings reported for the Certificates failed to reflect the actual risk of the securities, and that the ratings agencies had no basis to believe in the accuracy of those ratings. Not only did these Defendants provide the ratings agencies false, loan-level information, but they also routinely engaged in ratings shopping -- i.e., pressuring the ratings agencies for favorable
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ratings and playing the rating agencies off one another with the threat of withholding future business if the sponsoring bank was not given favorable treatment. As detailed in the SPSI Report: At the same time Moodys and S&P were pressuring their RMBS and CDO analysis to increase market share and revenues, the investment banks responsible for bringing RMBS and CDO business to the firms were pressuring those same analysts to ease rating standards. Former Moodys and S&P analysts and managers interviewed by the Subcommittee described, for example, how investment bankers pressured them to get their deals done quickly, increase the size of the tranches that received AAA ratings, and reduce the credit enhancements protecting the AAA tranches from loss. They also pressed the CRA analysts and managers to ignore a host of factors that could be seen as increasing credit risk. Sometimes described as ratings shopping, the analysts described how some investment bankers threatened to take their business to another credit rating agency if they did not get the favorable treatment they wanted. The evidence collected by the Subcommittee indicates that the pressure exerted by investment banks frequently impacted the ratings process, enabling the banks to obtain more favorable treatment than they otherwise would have received. (SPSI Report, at 278.) 175. As one S&P director put it in an August 8, 2006 e-mail: [Our RMBS friends
have] become so beholden to their top issuers for revenue [that] they have all developed a kind of Stockholm syndrome which they mistakenly tag as Customer Value creation. Ratings analysts who complained about the pressure, or did not do as they were told, were quickly replaced on deals or terminated. 176. Summarizing the intense pressure investment banks put on ratings analysts to
provide favorable ratings, a former Moodys VP and Senior Credit Officer testified before the FCIC that [t]he willingness to decline to rate, or to just say no to proposed transactions, steadily diminished over time. That unwillingness to say no grew in parallel with the companys share price and the proportion of total firm revenues represented by structured finance transactions . . .
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coincident with the steady drive toward commoditization of the instruments we were rating . . . . The threat of losing business . . . even if not realized, absolutely tilted the balance away from independent arbiter of risk towards a captive facilitator of risk transfer . . . . The message from management was . . . Must say yes. (See Written Testimony of Richard Michalek (FCIC Hearing, June 2, 2010), available at http://fcic-static.law.stanford.edu/cdn_media/fcictestimony/2008-0602-Michalek-corrected-oral.pdf; see also Written Statement of Eric Kolchinsky, Managing Director, Moodys Derivatives Group (Managers of rating groups were expected by their supervisors and ultimately the Board of Directors . . . to build, or at least maintain, market shares. It was an unspoken understanding that loss of market share would cause a manager to lose his or her job; [L]owering credit standards . . . was one easy way for a managing director to regain market share.), available at http://hsgac.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=bd65f802-961c4727-b176-72ece145baef.) D. Freddie Mac Justifiably Relied on the Misrepresentations and Omissions in the Offering Materials and was Damaged by Defendants Fraudulent Conduct Freddie Mac is a government-sponsored enterprise chartered by Congress to
177.
provide liquidity, stability, and affordability to the U.S. housing and mortgage markets. In furtherance of this mission, Freddie Mac purchases mortgages and invest in RMBS. 178. Generally when purchasing RMBS, Freddie Mac requires compliance with their
investment requirements, as well as various representations and warranties concerning, among other things, the credit quality of the underlying loans, evaluation of the borrowers ability to pay, the accuracy of loan data provided, and adherence to applicable local, state and federal law. Such representations and warranties were material to Freddie Macs decision to purchase RMBS, including the Certificates.
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179.
The Fraud Defendants intended for investors, including Freddie Mac, to rely on
their representations of material facts about the assets backing the Certificates. These Defendants regularly provided prospective RMBS investors with information concerning the volume of their annual securitization business to assure investors that, by virtue of their expertise in and share of the RMBS market, Freddie Mac should rely upon the representations and warranties in their Offering Materials. See, e.g., Prospectus Supplement for the RALI 2006-QO8 Securitization. 180. The Fraud Defendants knew that Freddie Mac had specific requirements for
investing in non-agency mortgage-backed securities and intended for Freddie Mac to rely on their fraudulent misstatements as shown by their provision of representations, warranties and shadow credit ratings in connection with the Certificates, and their repetition of false loan statistics in term sheets, free writing prospectuses, and Prospectus Supplements, among other materials. 181. In fact, Freddie Mac did rely, to its detriment, on the Fraud Defendants
misrepresentations and material omissions in the Offering Materials. 182. Freddie Macs reliance was justifiable because Freddie Mac necessarily was
required to rely upon the Fraud Defendants to provide accurate information regarding the loans. Freddie Mac lacked access to the actual loan files, and the loan-level data essential to perform the necessary statistical tests with respect to, among other things, owner-occupancy and LTV ratios. 183. Freddie Macs reliance also was justifiable because industry practice was for an
investor to rely upon the representations and warranties of the sponsors and underwriters regarding the quality of the mortgage loans and the standards under which they were originated.
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Information regarding the originators compliance with underwriting guidelines, owneroccupancy rates, LTV ratios, and the information provided to credit ratings agencies, was peculiarly within the knowledge of the Fraud Defendants. 184. Freddie Mac was induced into buying the Certificates based on the false and
misleading Offering Materials. Freddie Mac would not have purchased the Certificates had it known the truth concerning the matters alleged herein. Alternatively, Freddie Mac suffered damages because the price it paid for the Certificates was higher than their actual value. 185. From the day Freddie Mac purchased the Certificates, it suffered injury. As a
result of Defendants misrepresentations, the true value of the Certificates on the date of purchase was far lower than the price paid for them by Freddie Mac. FIRST CAUSE OF ACTION Violation of Section 11 of the Securities Act of 1933 (Against Defendants RALI, RASC, RAMP, RFS, JPM, Credit Suisse, RBS, Citi, Barclays, UBS and Goldman Sachs) 186. Plaintiff realleges paragraphs 1 through 134 above as if fully set forth herein. For
purposes of this cause of action, Plaintiff hereby expressly excludes any allegation that could be construed as sounding in fraud. 187. This claim is brought by FHFA pursuant to Section 11 of the Securities Act of
1933 and is asserted on behalf of Freddie Mac, which purchased the Certificates issued pursuant to the Registration Statements for the Securitizations listed in paragraph 43. 188. This claim is for strict liability based on the material misstatements and omissions
in the Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005 for the 21 Securitizations (as specified in Table 1, supra at paragraph 44), and is asserted against RALI, RASC, RAMP, RFS, JPM, Credit Suisse, RBS, Citi, Barclays, UBS, and Goldman Sachs (together, the Section 11 Defendants).
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189.
RFS, JPM, Credit Suisse, RBS, Citi, Barclays, UBS, and/or Goldman Sachs (the
Underwriter Defendants) acted as underwriter in connection with the sale of the Certificates for each of the 21 Securitizations (as specified in Table 1, supra at paragraph 44), directly and indirectly participated in distributing the Certificates, and directly and indirectly participated in drafting and disseminating the Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005. The Underwriter Defendants were underwriters for the Certificates, and are strictly liable for the misstatements and omissions in the Registration Statements under Section 11 of the Securities Act. 190. Depositors RALI, RASC, and RAMP (the Depositor Defendants) filed Shelf
Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005 (as specified in Table 2, supra at paragraph 50) pursuant to which the Securitizations were carried out, and are the issuers of the Certificates issued pursuant to the Registration Statements within the meaning of Section 2(a)(4) of the Securities Act, 15 U.S.C. 77b(a)(4), and in accordance with Section 11(a), 15 U.S.C. 77k(a). 191. At the time that they became effective, each of the Registration Statements, as set
forth above, contained material misstatements of fact and omitted information necessary to make the facts stated therein not misleading. The facts misstated or omitted were material to a reasonable investor in the securities sold pursuant to the Registration Statements. 192. The untrue statements of material facts and omissions of material fact in the
Registration Statements are principally those set forth herein in Section IV, and pertain to purported compliance with underwriting guidelines, occupancy status, loan-to-value ratios and credit ratings.
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193.
Freddie Mac purchased or otherwise acquired the Certificates pursuant to the false
and misleading Registration Statements and in the primary market. At the time it purchased the Certificates, Freddie Mac was unaware of the false and misleading statements and omissions alleged herein, and if Freddie Mac had known those facts, it would not have purchased the Certificates. 194. The Section 11 Defendants were obligated to make a reasonable investigation of
the statements contained in the Registration Statements at the time they became effective to ensure that such statements were true and correct, and that there were no omissions of material facts required to be stated in order to make the statements contained therein not misleading. 195. The Section 11 Defendants did not exercise such due diligence and failed to
conduct a reasonable investigation. In the exercise of reasonable care, these Defendants should have known of the false statements and omissions contained in or omitted from the Registration Statements filed in connection with the Securitizations, as set forth herein. In addition, although the performance of due diligence is not an affirmative defense available to the Depositor Defendants on this strict liability claim, they nonetheless also failed to take reasonable steps to ensure the accuracy of the representations made in the Registration Statements. 196. By virtue of the foregoing, Freddie Mac sustained substantial damages, including
depreciation in the value of the securities, as a result of the misstatements and omissions in the Registration Statements. Plaintiff is entitled to damages, jointly and severally, from each of the Section 11 Defendants. 197. Based on the foregoing, the Section 11 Defendants are jointly and severally liable
for their wrongdoing.
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SECOND CAUSE OF ACTION Violation of Section 12(a)(2) of the Securities Act of 1933 (Against Defendants RALI, RASC, RAMP, RFS, JPM, Credit Suisse, RBS, Citi, Barclays, UBS and Goldman Sachs) 198. Plaintiff realleges paragraphs 1 through 134 as if fully set forth herein. For
purposes of this cause of action, Plaintiff hereby expressly excludes any allegation that could be construed as sounding in fraud. 199. This claim is brought by Plaintiff pursuant to Section 12(a)(2) of the Securities
Act of 1933 and is asserted on behalf of Freddie Mac, which purchased the Certificates issued pursuant to the Registration Statements in the Securitizations listed in paragraph 43. 200. The Underwriter Defendants are prominently identified as underwriters in each of
the Prospectuses used to sell the Certificates. The Underwriter Defendants offered, promoted, and/or sold the Certificates publicly, including selling to Freddie Mac their Certificates, as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. The Underwriter Defendants offered, promoted, and/or sold the Certificates to Freddie Mac as specified in Table 2, supra at paragraph 50. 201. The Underwriter Defendants offered, promoted, and/or sold the Certificates to
Freddie Mac by means of the Prospectuses that contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. The Underwriter Defendants successfully solicited Freddie Macs purchases of the Certificates, and generated millions of dollars in commissions in connection with the sale of the Certificates. 202. The Underwriter Defendants offered the Certificates for sale, sold them, and
distributed them by the use of means or instruments of transportation and communication in interstate commerce.
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203.
The Depositor Defendants are prominently identified in the Prospectuses for the
Securitizations carried out under the Registration Statements that they filed. These Prospectuses were the primary documents each used to sell the Certificates for the 21 Securitizations under those Registration Statements. The Depositor Defendants offered the Certificates publicly and actively solicited their sale, including to Freddie Mac. 204. With respect to the Securitizations for which they filed Registration Statements,
the Depositor Defendants offered the Certificates to Freddie Mac by means of Prospectuses that contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. Upon information and belief, the Depositor Defendants reviewed and participated in drafting the Prospectuses. 205. The Depositor Defendants offered the Certificates for sale by the use of means or
instruments of transportation and communication in interstate commerce. 206. The Underwriter Defendants and Depositor Defendants (together, the Section 12
Defendants) actively participated in the solicitation of Freddie Macs purchase of the Certificates, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and/or assisting in marketing and selling the Certificates. 207. Each of the Prospectuses contained material misstatements of fact and omitted
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208.
Registration Statements, which include the Prospectuses, are set forth above in Section IV and pertain to compliance with underwriting guidelines, occupancy status, and loan-to-value ratios. 209. The Section 12 Defendants offered and sold the Certificates offered pursuant to
the Registration Statements directly to Freddie Mac, pursuant to the false and misleading Prospectuses. 210. The Section 12 Defendants owed to Freddie Mac a duty to make a reasonable and
diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. The Section 12 Defendants failed to exercise such reasonable care, and in the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above. 211. Freddie Mac did not know of the misstatements and omissions contained in the
Prospectuses at the time they purchased the Certificates. If Freddie Mac had known of those misstatements and omissions, it would not have purchased the Certificates. 212. Prospectuses. 213. Freddie Mac sustained substantial damages in connection with its investments in Freddie Mac acquired the Certificates in the primary market pursuant to the
the Certificates and has the right to rescind and recover the consideration paid for the Certificates, with interest thereon. Plaintiff hereby seeks rescission and makes any necessary tender of its Certificates. In the alternative, Plaintiff seeks damages according to proof.
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THIRD CAUSE OF ACTION Violation of Section 15 of the Securities Act of 1933 (Against RFC, GMAC-RFC, ResCap, GMACM and Ally) 214. Plaintiff realleges paragraphs 1 through 134 above as if fully set forth herein. For
purposes of this cause of action, Plaintiff hereby expressly excludes any allegation that could be construed as sounding in fraud. 215. This claim is brought under Section 15 of the Securities Act of 1933, 15 U.S.C.
77o (Section 15), against RFC, GMAC-RFC, ResCap, GMACM, and Ally for controllingperson liability with regard to the Section 11 and Section 12(a)(2) causes of actions set forth above. 216. RFC was the sponsor for all 21 Securitizations carried out pursuant to the
Registration Statements filed by RALI, RAMP, and RASC (as specified in Table 1, supra at paragraph 44), and culpably participated in their violations of Sections 11 and 12(a)(2) by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting the Depositors as special-purpose vehicles, and selecting RFS or the Non-GMAC Underwriters as underwriters. In its role as sponsor, RFC knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the mortgages would be issued by the relevant trusts. 217. RFC sold the mortgage loans to the Depositor Defendants (as specified in Table 1,
supra at paragraph 44), and conveyed the mortgage loans to the Depositor Defendants pursuant to an Assignment and Recognition Agreement or a Mortgage Loan Purchase Agreement. RFC controlled all aspects of the business of the Depositor Defendants, who were special-purpose entities created for the purpose of acting as a pass-through for the issuance of the Certificates.
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Upon information and belief, the officers and directors of RFC overlapped with the officers and directors of the Depositor Defendants. In addition, RFC was able to, and did in fact, control the contents of the Registration Statements filed by the Depositors, including the Prospectuses and Prospectus Supplements that contained material misstatements of fact and omitted facts necessary to make the contents therein not misleading. 218. Defendant GMAC-RFC is the corporate parent of, and controlled the business
operations of, RFC and the Depositor Defendants. As the sole corporate parent of RFC and the Depositor Defendants, GMAC-RFC had the practical ability to direct and control the actions of RFC and the Depositor Defendants in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of RFC and the Depositor Defendants. 219. GMAC-RFC culpably participated in the violations of Section 11 and 12(a)(2) set
forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as the Depositors and the issuing trusts to serve as conduits for the mortgage loans. 220. Defendant ResCap wholly owns GMAC-RFC and is thus, a parent of RFC and the
Depositor Defendants. ResCap culpably participated in the violations of Section 11 and 12(a)(2) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as the Depositor Defendants and the issuing trusts to serve as conduits for the mortgage loans. 221. Defendant GMACM wholly owns ResCap, and is thus, a parent of GMAC-RFC,
RFC, and the Depositor Defendants. GMAC-RFC culpably participated in the violations of
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Section 11 and 12(a)(2) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as the Depositor Defendants and the issuing trusts to serve as conduits for the mortgage loans. 222. Defendant Ally wholly owns GMACM and RFS and is the ultimate parent of
GMAC-MG, ResCap, GMAC-RFC, RFC, and the Depositor Defendants. As the sole corporate parent of RFS, Ally had the practical ability to direct and control the actions of RFS in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of RFS in connection with the issuance and sale of the Certificates. Ally culpably participated in the violations of Section 11 and 12(a)(2) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as the Depositor Defendants and the issuing trusts to serve as conduits for the mortgage loans. 223. Ally, GMACM, ResCap, and GMAC-RFC are controlling persons within the
meaning of Section 15 by virtue of their actual power over, control of, ownership of, and/or directorship of RFC, RFS, and the Depositor Defendants at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 224. Freddie Mac purchased the Certificates in the primary market, which were issued
pursuant to the Registration Statements, including the Prospectuses and Prospectus Supplements, in the primary market which at the time they became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements.
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225.
Statements; had Freddie Mac known of those misstatements and omissions, it would not have purchased the Certificates. 226. Freddie Mac has sustained damages as a result of the misstatements and
omissions in the Registration Statements, for which it is entitled to compensation. FOURTH CAUSE OF ACTION Primary Violations of the Virginia Securities Act (Against RALI, RASC, RAMP, RFS, JPM, Credit Suisse, RBS, Citi, Barclays, UBS and Goldman Sachs) 227. Plaintiff realleges paragraphs 1 through 134 above as if fully set forth herein. For
purposes of this cause of action, Plaintiff hereby expressly excludes any allegation that could be construed as sounding in fraud. 228. This claim is brought by Plaintiff pursuant to Section 13.1-522(A)(ii) of the
Virginia Code and is asserted on behalf of Freddie Mac with respect to those Certificates identified in Table 10 above that were purchased by Freddie Mac and issued pursuant to the Registration Statements. 229. The Depositor Defendants (as specified in Table 1, supra) made false and
materially misleading statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as Prospectuses) for each Securitization. The Underwriter Defendants (as specified in Table 1, supra) made false and materially misleading statements in the Prospectuses for the Securitizations effected under the Shelf Registration Statements. 230. The Underwriter Defendants are prominently identified in the Prospectuses, the
primary documents that they used to sell the Certificates. The Underwriter Defendants offered
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the Certificates publicly, including selling to Freddie Mac the Certificates, as set forth in the Method of Distribution or equivalent underwriting section of each Prospectus. 231. The Underwriter Defendants offered and sold the Certificates to Freddie Mac by
means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. The Underwriter Defendants reviewed and participated in drafting the Prospectuses. 232. The Underwriter Defendants successfully solicited Freddie Macs purchases of
the Certificates. The Underwriter Defendants were paid a substantial commission based on the amount it received from the sale of the Certificates to the public. 233. The Underwriter Defendants offered the Certificates for sale, sold them, and
distributed them to Freddie Mac in the State of Virginia. 234. The Depositor Defendants are prominently identified in the Prospectuses for the
Securitizations carried out under the Registration Statements. These Prospectuses were the primary documents used to sell Certificates for the Securitizations pursuant to the Registration Statements. The Depositor Defendants offered the Certificates publicly and actively solicited their sale, including to Freddie Mac. The Depositor Defendants were paid a percentage of the total dollar amount of the offering upon completion of the Securitizations effected pursuant to the Shelf Registration Statements. 235. With respect to the Securitizations for which it filed the Shelf Registration
Statements, including the related Prospectus Supplements, the Depositor Defendants offered the Certificates to Freddie Mac by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of
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the circumstances under which they were made, not misleading. The Depositor Defendants reviewed and participated in drafting the Prospectuses. 236. Each of the Underwriter Defendants and the Depositor Defendants actively
participated in the solicitation of the Freddie Macs purchase of the Certificates, and did so in order to benefit itself. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the Certificates. 237. Each of the Prospectuses contained material misstatements of fact and omitted
Registration Statements, which include the Prospectuses, are set forth above, and include compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 239. The Underwriter Defendants and the Depositor Defendants offered and sold the
Certificates directly to Freddie Mac pursuant to the materially false, misleading, and incomplete Prospectuses. 240. The Underwriter Defendants owed to Freddie Mac, as well as to other investors in
these trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. The Depositor Defendants owed the same duty with respect to the Prospectuses for the Securitizations effected under the Shelf Registration Statements.
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241.
The Underwriter Defendants and the Depositor Defendants failed to exercise such
the Certificates and has the right to rescind and recover the consideration paid for the Certificates, with interest thereon. Plaintiff hereby seeks rescission and makes any necessary tender of its Certificates. In the alternative, Plaintiff seeks damages according to proof. FIFTH CAUSE OF ACTION Controlling Person Liability Under the Virginia Securities Act (Against RFC, GMAC-RFC, ResCap, GMACM and Ally) 244. Plaintiff realleges paragraphs 1 through 134 above as if fully set forth herein. For
purposes of this cause of action, Plaintiff hereby expressly excludes any allegation that could be construed as sounding in fraud. 245. This claim is brought under Section 13.1-522(C) of the Virginia Code and is
asserted on behalf of Freddie Mac, which purchased the Certificates (identified in Table 10, supra) that were issued pursuant to the Registration Statements. This claim is brought against RFC, GMAC-RFC, ResCap, GMACM, and Ally (the Control Persons) for controlling-person liability with regard to the claim brought by Plaintiff pursuant to Section 13.1-522(A)(ii).
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246.
RFC was the sponsor for all 21 Securitizations carried out pursuant to the
Registration Statements filed by the Depositor Defendants (as specified in Table 1, supra), and culpably participated in their violations of Section 13.1-522(A)(ii) by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting the Depositors as special-purpose vehicles, and selecting RFS or the Non-GMAC Underwriters as underwriters. In its role as sponsor, RFC knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the mortgages would be issued by the relevant trusts. 247. RFC sold the mortgage loans to the Depositor Defendants (as specified in Table 1
supra), and conveyed the mortgage loans to the Depositor Defendants pursuant to an Assignment and Recognition Agreement or a Mortgage Loan Purchase Agreement. RFC controlled all aspects of the business of the Depositor Defendants, who were special-purpose entities created for the purpose of acting as a pass-through for the issuance of the Certificates. Upon information and belief, the officers and directors of RFC overlapped with the officers and directors of the Depositor Defendants. In addition, RFC was able to, and did in fact, control the contents of the Registration Statements filed by the Depositors, including the Prospectuses and Prospectus Supplements that contained material misstatements of fact and omitted facts necessary to make the contents therein not misleading. 248. Defendant GMAC-RFC is the corporate parent of, and controlled the business
operations of, RFC and the Depositor Defendants. As the sole corporate parent of RFC and the Depositor Defendants, GMAC-RFC had the practical ability to direct and control the actions of
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RFC and the Depositor Defendants in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of RFC and the Depositor Defendants. 249. GMAC-RFC culpably participated in the violations of Section 13.1-522(A)(ii) set
forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as the Depositor Defendants and the issuing trusts to serve as conduits for the mortgage loans. 250. Defendant ResCap wholly owns GMAC-RFC and is thus, a parent of RFC and the
Depositor Defendants. ResCap culpably participated in the violations of Section 13.1-522(A)(ii) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as the Depositor Defendants and the issuing trusts to serve as conduits for the mortgage loans. 251. Defendant GMACM wholly owns ResCap, and is thus, a parent of GMAC-RFC,
RFC, and the Depositor Defendants. GMAC-RFC culpably participated in the violations of Section 13.1-522(A)(ii) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as the Depositor Defendants and the issuing trusts to serve as conduits for the mortgage loans. 252. Defendant Ally wholly owns GMACM and RFS and is the ultimate parent of
GMAC-MG, ResCap, GMAC-RFC, RFC, and the Depositor Defendants. As the sole corporate parent of RFS, Ally had the practical ability to direct and control the actions of RFS in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of
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RFS in connection with the issuance and sale of the Certificates. Ally culpably participated in the violations of Section 13.1-522(A)(ii) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as the Depositor Defendants and the issuing trusts to serve as conduits for the mortgage loans. 253. Ally, GMACM, ResCap, and GMAC-RFC are controlling persons within the
meaning of Section 13.1-522(C) of the Virginia Code by virtue of their actual power over, control of, ownership of, and/or directorship of RFC, RFS, and the Depositor Defendants at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 254. Freddie Mac purchased the Certificates, which were issued pursuant to the
and omissions in the Registration Statements, for which it is entitled to compensation, and for which the Control Persons are jointly and severally liable.
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SIXTH CAUSE OF ACTION (Common Law Fraud Against RALI, RAMP, RASC, RFC, RFS JPM, Credit Suisse, RBS, Citi, Barclays, UBS and Goldman Sachs) 257. 258. Plaintiff realleges paragraphs 1 through 185 as if fully set forth herein. Freddie Mac was fraudulently induced to purchase the Certificates by the Fraud
Defendants misrepresentations and omissions of material facts. 259. The material representations set forth above and in Appendix A were fraudulent,
and the Fraud Defendants representations falsely and misleadingly misrepresented and omitted material statements of fact. The representations at issue are identified in Sections I.C. and I.D. and in Appendix A. 260. The Fraud Defendants knew their representations and omissions were false and/or
misleading at the time they were made, or made such representations and omissions recklessly without knowledge of their truth or falsity. 261. Each of the Fraud Defendants made the misleading statements with the intent and
for the purpose of inducing Freddie Mac to purchase the Certificates. 262. Freddie Mac justifiably relied on the Fraud Defendants false representations and
misleading omissions. 263. But for the Fraud Defendants fraudulent misrepresentations and omissions
regarding the Fraud Defendants underwriting practice and quality of the loans making up the securitizations, Freddie Mac would not have purchased the Certificates. 264. As a result of the foregoing, Freddie Mac has suffered damages in an amount to
be proven at trial. Plaintiff hereby demands rescission and makes any necessary tender of the Certificates.
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265.
Because the Fraud Defendants defrauded Freddie Mac willfully and wantonly,
and because, by their acts, the Fraud Defendants knowingly affected the general public, including but not limited to all persons with interest in the Certificates, Plaintiff is entitled to recover punitive damages. SEVENTH CAUSE OF ACTION (Aiding and Abetting Fraud Against Ally, GMACM, GMAC-MG, ResCap, GMAC-RFC, RFC, RALI, RASC and RAMP) 266. 267. Plaintiff realleges paragraphs 1 through 185 as if fully set forth herein. This is a claim for aiding and abetting fraud, in the alternative, should it be found
that the Underwriting Defendants alone are liable for fraud. This claim is brought against Ally, GMACM, GMAC-MG, ResCap, GMAC-RFC, RFC, the Depositor Defendants, arising from the intentional and substantial assistance each rendered to the Underwriter Defendants to advance the fraud on Freddie Mac. 268. Through overlapping personnel, strategies, and intertwined business operations,
and the fluid transfer of information among the Defendants, each of Ally, GMACM, GMACMG, ResCap, GMAC-RFC, RFC, the Depositor Defendants knew of the Fraud Defendants and fraudulent scheme to offload the credit risks of non-agency loans to investors, including Freddie Mac. Each of these Defendants acted in concert to defraud Freddie Mac. 269. Ally, GMACM, GMAC-MG, ResCap, GMAC-RFC, RFC, the Depositor
Defendants, through their employees and representatives, substantially assisted in, among other things: (a) the extension of warehouse loans to originators; (b) acquiring the underlying mortgage loans from the originators; (c) packaging up those loans into pools which were deposited into the Trust; (d) waiving into the collateral pools of the Trusts loans previously rejected by Clayton or otherwise non-compliant loans, despite the lack of compensating factors;
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(e) creating and structuring the Trusts whose Certificates would be sold to investors including Freddie Mac; and (f) preparing the Registration Statements which would be used to market the Certificates. 270. The Underwriter Defendants would not have been able to implement their fraud
against Freddie Mac without such substantial assistance. 271. Through overlapping personnel, strategies, and intertwined business operations,
and the fluid transfer of information among the Defendants, each of the Defendants knew of the fraud perpetrated on Freddie Mac. 272. The Underwriter Defendants could not have perpetrated their fraud without the
substantial assistance of each other defendant, and they all provided financial, strategic, and marketing assistance for their scheme. Defendants are highly intertwined and interdependent businesses and each benefitted from the success of the scheme. Through the fraudulent sale of the Certificates to the Freddie Mac, the Selling Underwriters were able to materially improve their financial condition by reducing their exposure to declining subprime-related assets and garnering millions of dollars in fees from the structuring and sale of the Certificates. 273. As a direct, proximate, and foreseeable result of the conduct of Ally, GMACM,
GMAC-MG, ResCap, GMAC-RFC, RFC, and the Depositor Defendants, Freddie Mac has suffered and will continue to suffer damages in an amount to be proven at trial. Plaintiff hereby demands rescission and makes any necessary tender of the Certificates. 274. Because the Fraud Defendants defrauded Freddie Mac willfully and wantonly,
and because, by their acts, the Fraud Defendants knowingly affected the general public, including but not limited to all persons with interest in the Certificates, Plaintiff is entitled to recover punitive damages.
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EIGHTH CAUSE OF ACTION (Negligent Misrepresentation Against RALI, RASC, RAMP, RFC, RFS, JPM, Credit Suisse, RBS, Citi, Barclays, UBS and Goldman Sachs) 275. 276. Plaintiff realleges paragraphs 1 through 185 as if fully set forth herein. Between September 23, 2005 and May 30, 2007, RALI, RASC, RAMP, RFC,
RFS, JPM, Credit Suisse, RBS, Citi, Barclays, UBS, Goldman Sachs (the Negligent Misrepresentation Defendants) sold the Certificates Freddie Mac as described above. Because the Depositor Defendants owned and then conveyed the underlying mortgage loans to the issuing trusts, the Depositor Defendants had unique, exclusive, and special knowledge about the mortgage loans in the Securitizations through their possession of the loan files and other documentation. 277. Likewise, as underwriters of the Securitizations, the Underwriter Defendants had
the access to and ability to review loan file information and were obligated to perform adequate due diligence to ensure the accuracy of the Offering Materials. Accordingly, the Underwriter Defendants had unique, exclusive, and special knowledge about the underlying mortgage loans in the Securitizations. 278. The Negligent Misrepresentation Defendants also had unique, exclusive, and
special knowledge of the work of third-party due diligence providers, such as Clayton, who identified significant failures of originators to adhere to the underwriting standards represented in the Registration Statements. Freddie Mac lacked access to borrower loan files prior to the closing of the Securitizations and their purchase of the Certificates. Accordingly, when determining whether to purchase the Certificates, Freddie Mac could not evaluate the underwriting quality or the servicing practices of the mortgage loans in the Securitizations on a loan-by-loan basis. Freddie Mac therefore reasonably relied on the knowledge and
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representations of the Negligent Misrepresentation Defendants regarding the underlying mortgage loans. 279. The Negligent Misrepresentation Defendants were aware that Freddie Mac
reasonably relied on these Defendants for complete, accurate, and timely information. The standards under which the underlying mortgage loans were actually originated were known to these Defendants and were not known, and could not be determined, by Freddie Mac prior to the closing of the Securitizations. Freddie Mac reasonably relied upon these Defendants misrepresentations and omissions in the Offering Materials. 280. The Negligent Misrepresentation Defendants breached their duty of disclosure by
making false or misleading statements of material facts to Freddie Mac when they knew or should have known of the falsity of their statements. The misrepresentations are set forth in Sections I.C. and I.D. above and Appendix A.; 281. In addition, having false or misleading representations about the underlying
collateral in the Securitizations and the facts bearing on the riskiness of the Certificates, the Negligent Misrepresentation Defendants had a duty to correct the misimpressions left by their statements, including with respect to any half truths. The Negligent Misrepresentation Defendants failed to correct in a timely manner any of their misstatements or half truths. 282. Freddie Mac reasonably relied on the information provided by the Selling
Negligent Misrepresentation Defendants, and as a result, Freddie Mac suffered damages in an amount to be determined at trial.
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PRAYER FOR RELIEF WHEREFORE Plaintiff respectfully requests that judgment be entered: An award in favor of Plaintiff against all Defendants, jointly and severally, for: a. Rescission and recovery of the consideration paid for the Certificates, with interest thereon (in connection with this request for rescission, the Certificates are hereby tendered to the Defendants); b. Freddie Macs monetary losses, including any diminution in value of the Certificates, as well as lost principal and lost interest payments thereon; c. Punitive damages; d. Attorneys fees and costs; e. Prejudgment interest at the maximum legal rate; and f. Such other and further relief as the Court may deem just and proper. DATED: New York, New York September 2, 2011 KASOWITZ, BENSON, TORRES & FRIEDMAN LLP
By: /s/ Marc E. Kasowitz Marc E. Kasowitz (mkasowitz@kasowitz.com) Hector Torres (htorres@kasowitz.com) Michael S. Shuster (mshuster@kasowitz.com) Christopher P. Johnson (cjohnson@kasowitz.com) Michael Hanin (mhanin@kasowitz.com) Kanchana W. Leung (kleung@kasowitz.com) 1633 Broadway New York, New York 10019 (212) 506-1700 Attorneys for Plaintiff Federal Housing Finance Agency
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Feds Sue Financial Institutions Over Bad Mortgages

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Feds Sue Financial Institutions Over Bad Mortgages

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UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK FEDERAL HOUSING FINANCE AGENCY, AS CONSERVATOR FOR THE

___ CIV. ___ (___)

COMPLAINT JURY TRIAL DEMANDED

Defendants Failed To Conduct Proper Due Diligence ..........................................32

Series 2006-E (FHLT 2006-E);

GSAA Home Equity Trust 2005-11, Asset-Backed Certificates,

2005-HE5 (GSAMP 2005-HE5);

GSAMP Trust 2005-HE6, Mortgage Pass-Through Certificates,

Series 2006-HE8 (GSAMP 2006-HE8);

GSAMP Trust 2006-NC2, Mortgage Pass-Through Certificates,

Through Certificates, Series 2005-AR18 (INDX 2005-AR18); and

IndyMac INDX Mortgage Loan Trust 2005-AR27, Mortgage Pass-

Defendant Robert J. Christie served at the time of the Securitizations as a Director

Asset-backed securitization distributes risk by pooling cash-producing financial

A mortgage servicer is necessary to manage the collection of proceeds from the

Lead Underwriter Goldman, Sachs & Co.

Principal Amount Issued $165,000,000

Date of Issuance May 25, 2006

Supporting Loan Group Group 1

Goldman, Sachs & Co.

May 25, 2006

Goldman, Sachs & Co.

November 22, 2005

Goldman, Sachs & Co.

September 29, 2005

Goldman, Sachs & Co.

September 28, 2006

Goldman, Sachs & Co.

Goldman, Sachs & Co.

September 29, 2005

Goldman, Sachs & Co.

November 22, 2005

Goldman, Sachs & Co.

November 22, 2005

Goldman, Sachs & Co.

December 29, 2005

Goldman, Sachs & Co.

June 30, 2006

Goldman, Sachs & Co.

Goldman, Sachs & Co.

Goldman, Sachs & Co.

March 30, 2006

Goldman, Sachs & Co.

April 28, 2006

Goldman, Sachs & Co.

May 30, 2007

Lead Underwriter Goldman, Sachs & Co.

Principal Amount Issued

Date of Issuance December 28, 2005

Supporting Loan Group Group 1

Goldman, Sachs & Co.

November 22, 2005

Goldman, Sachs & Co.

December 29, 2005

Goldman, Sachs & Co.

November 23, 2005

Goldman, Sachs & Co.

December 28, 2005

Goldman, Sachs & Co.

April 27, 2006

Goldman, Sachs & Co.

September 29, 2006

Goldman, Sachs & Co.

December 21, 2006

_ CIV. _ (___)