DEXIA Complaint

8/3/2019 DEXIA Complaint

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SUPREME COURT OF THE STATE OF NEW YORKCOUNTY OF NEW YORK

DEXIA SA/NV; DEXIA HOLDINGS, INC.;FSA ASSET MANAGEMENT LLC; DEXIACRDIT LOCAL SA,

Plaintiffs,

v.

BEAR STEARNS & CO. INC., THE BEARSTEARNS COMPANIES, INC., BEARSTEARNS ASSET BACKED SECURITIES ILLC, EMC MORTGAGE LLC (f/k/a EMCMORTGAGE CORPORATION),STRUCTURED ASSET MORTGAGEINVESTMENTS II INC., J.P. MORGANACCEPTANCE CORPORATION I, J.P.

MORGAN MORTGAGE ACQUISITIONCORPORATION., J.P. MORGANSECURITIES LLC (f/k/a J.P. MORGANSECURITIES INC.), WAMU ASSETACCEPTANCE CORP., WAMU CAPITALCORP., WASHINGTON MUTUALMORTGAGE SECURITIES CORP., LONGBEACH SECURITIES CORP., JPMORGAN

CHASE & CO., and JPMORGAN CHASEBANK, N.A.,

Defendants.

Index No.

COMPLAINT

JURY TRIAL DEMANDED

FILED: NEW YORK COUNTY CLERK 01/19/2012NYSCEF DOC. NO. 2 RECEIV


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TABLE OF CONTENTS

I. PRELIMINARY STATEMENT .......................................................................

II. JURISDICTION AND VENUE ........................................................................

III. THE PARTIES...................................................................................................

A. Plaintiffs .................................................................................................

B. Defendants .............................................................................................

IV. BACKGROUND FACTS AND NATURE OF THE FRAUD..........................

A. The Securitization Process .....................................................................

B. Defendants Unique and Non-Public Knowledge About The Securitize

Mortgages ..............................................................................................1. Defendants Control and Unique Knowledge of the Loan Origi

2. Defendants Control and Unique Knowledge of the Loan PoolsBacking the RMBS ....................................................................

C. Defendants Fraudulently Included Poor Quality Loans in the Securitiz

1. Bear Stearns ...............................................................................

2. Washington Mutual ....................................................................

3. JPMorgan ...................................................................................

D. Defendants Manipulated the RMBS Credit Ratings ..............................

1. Defendants Knowingly Supplied False Information to the RatinAgencies .....................................................................................

2. Defendants Exerted Improper Pressure over the Rating Agenci

3. The RMBS Have All Been Downgraded to Junk ......................


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B. False and Misleading Statements Concerning Defendants Loan Selecand Due Diligence Practices ..................................................................

C. Defendants False and Misleading Statements Regarding the Risk of D

1. Defendants False and Misleading Statements Concerning BorCredit Quality.............................................................................

2. Bear Stearns False and Misleading Statements Concerning EaPayment Defaults .......................................................................

D. Defendants False and Misleading Statements Concerning the Value oMortgage Collateral ...............................................................................

E. Defendants False and Misleading Statements Concerning the RMBS Ratings ...................................................................................................

VI. PLAINTIFFS REASONABLY RELIED ON DEFENDANTSREPRESENTATIONS ......................................................................................

VII. ADDITIONAL ALLEGATIONS DEMONSTRATING SCIENTER ..............

A. Defendants Are Securitization Experts Who Consciously Included PooQuality Loans in the Securitizations ......................................................

B. Numerous Confidential Witnesses Have Independently Confirmed thaDefendants Were Deliberately Securitizing Poor Quality Loans ..........

C. Defendants Profited Enormously from their Fraud ...............................

D. Bear Stearns Deliberately Purged Its Due Diligence Records ...............

VIII. PLAINTIFFS SUFFERED LOSSES BECAUSE OF DEFENDANTSFRAUDULENT CONDUCT .............................................................................

IX. CAUSES OF ACTION ......................................................................................PRAYER FOR RELIEF ................................................................................................

JURY DEMAND ...........................................................................................................


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Plaintiffs Dexia SA/NV, Dexia Holdings, Inc., FSA Asset Management LLC

Crdit Local SA (collectively, Dexia or Plaintiffs) hereby bring this complaint law fraud, fraud in the inducement, aiding and abetting fraud, negligent misreprese

successor liability (Complaint) against Bear Stearns & Co. Inc., The Bear Stearns

Inc., Bear Stearns Asset Backed Securities I LLC, EMC Mortgage LLC (f/k/a EM

Corporation), Structured Asset Mortgage Investments II Inc., J.P. Morgan

Corporation I, J.P. Morgan Mortgage Acquisition Corporation, J.P. Morgan Securitie

J.P. Morgan Securities Inc.), WaMu Asset Acceptance Corp., WaMu Capital Corp.,

Mutual Mortgage Securities Corp., Long Beach Securities Corp., JPMorgan Chase

JPMorgan Chase Bank, N.A. (collectively, Defendants).1

The allegations herein are made on personal knowledge as to Plaintiffs own

information and belief as to all other matters, such information and belief having be

through the investigation conducted by, and under the supervision of, Plaintif

Bernstein Litowitz Berger & Grossmann LLP (Counsel), the materials refere

Complaint, and Counsels interviews and consultations with numerous former e

Defendants and other percipient witnesses. Many of the facts related to Plaintiffs al

known only by Defendants or are exclusively within their custody or control. Form

including document discovery and depositions of relevant witnesses, is expected

additional evidentiary support for the allegations herein. By and through Couns

allege as follows:


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mortgage-backed securities (RMBS) collateralized by loans that they knew to be e

badmany of which were originated by Defendants themselveswhile givinimpression and making false statements asserting that their RMBS were prudent

Bear Stearns quickly securitized defectively originated loans before they suffered

payment defaults (a clear indication of mortgage fraud) to transfer default risks

purposefully undermined the due diligence process to increase volume at the

mortgage quality, and allowed into its securitizations 50% of the mortgages that

diligence vendor had marked as fatally defective. JPMorgan similarly waived in

mortgages that its due diligence vendor had marked as fatally defective and secu

quality JPMorgan Chase mortgages after falsely assuring investors that they

conservatively underwritten. Washington Mutual knowingly securitized fraudulen

and off-loaded exceptionally poor loans from its balance sheet into securitiz

determining that those mortgages were of exceptionally poor quality and likely

Indeed, Washington Mutual also waived in 29% of the mortgage loans that its d

provider flagged as failing to comply with the originators underwriting guidelines

sufficient compensating factors. In sum, Defendants knowingly included mortgage

risk of default into the mortgage pools that they securitized, concealed this cours

from investors and credit rating agencies, and falsely sold Plaintiffs supposedly

RMBS.

2. Plaintiffs purchased over $1.7 billion worth of Defendants RMBS in


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designated pools, including the borrowers ability to make their mortgage payments a

of the collateral supporting the mortgages.3. The mortgage industry has developed various metrics for assessing th

mortgages and the related risks of default and loss. Among other things, loan

investment banks, credit rating agencies, and RMBS investors typically assess bor

scores, loan-to-value ratios, level of early payment defaults (EPDs), and level

documentation, to assess the risk that borrowers will not make their mortgage payme

and the potential losses suffered by the mortgage pool in case of borrower default. T

of these metrics depends on the loan origination and underwriting practices that w

originate the mortgages in the mortgage pool. For example, credit scores a

borrowers credit quality are only reliable if the loan files reflect the true FICO scor

value ratios assessing the level of borrower equity in the collateral and, thereby, the

mortgage pool suffers a loss in case of default, are only reliable if the mortgage app

loan files are accurate. For these reasons, strict adherence to loan origination and

standardsincluding verification of the borrowers ability and incentives to make th

payments, and the value of the collateralis essential for determining the quality and

the mortgage pool.

4. Undisclosed violations of loan origination and underwriting stadevastating consequences for investors. The drastic consequences of undis

origination and underwriting practices are well-known to investment bank executive


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FICO credit scores.2 The investment banks that selected, purchased and securitize

dollars in mortgage pools each year were paid millions of dollars to act as gatensuring that the loan originators adhered to their origination and underwriting stand

rejecting mortgages that they discovered to be defective. This fraud action

Defendants scheme to do the exact opposite.

5. Defendants are sophisticated financial institutions which collectivelapproximately$325 billion in mortgages from 2005 to 2007. Throughout this time

were active in every aspect of the mortgage securitization business, including loan

and underwriting, creating, sponsoring and issuing RMBS, and underwriting and se

to investors. For example, from 2005 to 2007, Bear Stearns was one of the largest

of RMBS in the country, and securitized at least $162 billion in loans. During thi

WaMu similarly securitized at least $103 billion in loans, while JPMorgan securit

$62 billion in loans.

6. As the creators and underwriters of the RMBS, Defendants had exclto information about the quality of the mortgage pools that supported the securities, i

loan files and the results of their own due diligence. By contrast, Plaintiffs and ot

did not have access to the loan files or Defendants due diligence results, and could

similar due diligence themselves. Plaintiffs therefore reasonably relied on

disclosures regarding the quality of the mortgage pools backing the RMBS in

registration statements, term sheets, prospectuses, draft prospectus supplements


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risks of default and loss, including representations about borrower credit scores, l

ratios, and level of EPDs. The Offering Materials also contained representations aboratings of the RMBS. Defendants provided the Offering Materials to Plaintiffs t

purchase of Defendants RMBS.

7. Defendants representations about the quality of the mortgages in Materials were false and misleading. The mortgage pools backing the RMBS w

poorer quality, and the related risks of default and loss were much higher, than

represented because Defendants purposefully securitized defectively originated mo

they knew or recklessly disregarded to be of exceptionally poor quality.

8. Defendants Offering Materials also contained false and representations about the credit ratings of the RMBS. Unbeknownst to Plaintiffs

provided the credit rating agencies with the same false information about the qu

mortgage pools discussed above. Defendants also coerced the credit rating a

providing favorable credit ratings, including by threatening to withhold future b

targeting individual analysts who were not sufficiently attuned to Defendants dem

Witt, former managing director at Moodys Investors Service, Inc. (Moodys) tes

the National Commission on the Causes of the Financial and Economic Crisis in

States (the Financial Crisis Inquiry Commission or FCIC) that investment

Defendants threatened to withdraw their business if they did not get their desired ra

All the time. I mean, thats routine. I mean, they would threaten you all the tim


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transfer. Here, Defendants used their power over the rating agencies to improp

mortgage default and loss risks to RMBS investors, including Plaintiffs.

9. Defendants fraudulent strategy resulted in RMBS that were muchrepresented to investors, including the 53 securitizations at issue here. Defendan

when they sold their RMBS to Plaintiffs. As a former regional Vice-President

explained to The New York Times: The bigwigs of the corporations knew this, but

were going to make billions out of it, so who cares? The government is going to

And the problem loans will be out of here, maybe even overseas. By contrast, the

Defendants scheme was not known, and could not have been known, to Plaintiffs un

published the findings of its investigation in January 2011 (the FCIC Report) a

Senate Permanent Subcommittee on Investigations published its report titled, Wall S

Financial Crisis: Anatomy of a Financial Collapse (the Senate Investigations Repo

13, 2011. Together, these reports revealed for the first time that Defendants were

selling RMBS backed by mortgage pools that they knew, or at the very lea

disregarded, to be much riskier than they represented to Plaintiffs and other investors

10. The consequences of Defendants actions have been devastating, rescollapse and subsequent takeover of Bear Stearns and WaMu by Defendant

Defendants actions also contributed to substantial losses being suffered by Plai

action seeks to hold Defendants and their successors-in-interest liable for the damag

their fraud.


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York County. This Court has jurisdiction over each of the non-domiciliary Defend

each of them regularly and systematically does business within the State of New Y

them transacts business within the State of New York within the meaning of CPLR

and each of them committed a tortious act inside the State of New York or outside

New York causing injury within the State of New York within the meaning o

302(a)(2) and 302(a)(3). The amount in controversy exceeds $150,000.

12. Venue is proper in this Court because Plaintiffs (other than Dexia Dexia Crdit Local SA) maintain their principal places of business in New York C

number of Defendants maintain their principal places of business in New York

detailed below.

III. THE PARTIES

A. Plaintiffs13. Dexia SA/NV is a Limited Company organized under Belgian l

principal place of business in Belgium.

14. Dexia Crdit Local SA (DCL) is a French banking institution havingNew York which is licensed by the New York State Banking Department. DCL

owned subsidiary of Dexia SA/NV.

15. Dexia Holdings, Inc. (DHI) is a Delaware corporation with its princbusiness in New York, New York. DHI is an indirect wholly owned subsidiary of D

is a subsidiary of DCL, and is an affiliate of DCLs New York branch.


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17. Dexia SA/NV, DHI and DCL (through both its New York branch anoffice) have economic interests in and have substantial losses on sales of the

purchased by FSAM in accordance with intercompany agreements among thes

FSAM, which purchased the RMBS, has assigned all right, title and interest i

assets, and thereby assigned all rights to this litigation and the remedies being sough

Dexia plaintiffs pursuant to the terms of intercompany agreements. FSAM, as the the RMBS, is a proper plaintiff under the Federal Rules of Civil Procedure.

B. Defendants18. Defendant Bear Stearns & Co. Inc. was, at all relevant times, an SE

broker-dealer incorporated in Delaware, with its principal place of business at 3

Avenue, New York, New York 10179. Bear Stearns & Co. Inc. was a wholly-owne

of The Bear Stearns Companies, Inc., and served as the lead underwriter fo

securitizations at issue here. Bear Stearns & Co. Inc. directed the activities of its af

Mortgage LLC, Structured Asset Mortgage Investments II Inc. and Bear Stearns A

Securities I LLC. On or about October 1, 2008, following the merger effective M

Bear Stearns & Co. Inc. merged with J.P. Morgan Securities LLC. All allegations

Stearns & Co. Inc. are also made against its successor-in-interest, J.P. Morgan Securi

19. Defendant EMC Mortgage LLC (f/k/a EMC Mortgage Corporationrelevant times, a Delaware corporation with its principal place of business at 2780

Drive, Lewisville, Texas 75067. EMC Mortgage LLC (EMC Mortgage) was a


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company, The Bear Stearns Companies, Inc., and against JPMorgan Chase & Co. (a

in-interest to The Bear Stearns Companies, Inc.).

20. Defendant Structured Asset Mortgage Investments II Inc. (SAMI IIrelevant times, a Delaware corporation with its principal place of business at 3

Avenue, New York, New York 10179. SAMI II was a wholly-owned subsidiary

Stearns Companies, Inc., and served as depositor for four of the securitizations at isa result of the merger between The Bear Stearns Companies, Inc. and JPMorgan C

SAMI II became a wholly-owned subsidiary of JPMorgan Chase & Co. All allega

SAMI II are also made against its controlling parent company, The Bear Stearns

Inc., and against JPMorgan Chase & Co. (as successor-in-interest to The B

Companies, Inc.).

21. Defendant Bear Stearns Asset Backed Securities I LLC (BSABS Irelevant times, a Delaware limited liability company with its principal place of bus

Madison Avenue, New York, New York 10179. BSABS I was a limited purp

subsidiary of The Bear Stearns Companies, Inc., and an affiliate of Bear Stearns

BSABS I served as the depositor for seven of the securitizations at issue here. As a

merger between The Bear Stearns Companies, Inc. and JPMorgan Chase & Co

became a wholly-owned subsidiary of JPMorgan Chase & Co. All allegations agai

are also made against its controlling parent company, The Bear Stearns Compani

against JPMorgan Chase & Co. (as successor-in-interest to The Bear Stearns Compan


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subsidiaries and, at the time of the securitizations at issue here, was the sole owner o

Bear Stearns & Co. Inc., BSABS I, EMC Mortgage, and SAMI II. On March 16, 20

Stearns Companies, Inc. entered into an agreement and plan of merger (the M

JPMorgan Chase & Co., making The Bear Stearns Companies, Inc. a wholly-owned

JPMorgan Chase & Co. All allegations against The Bear Stearns Companies, Inc. a

against its successor-in-interest JPMorgan Chase & Co.23. Defendants Bear Stearns & Co., EMC Mortgage, SAMI II, BSABS

Stearns Companies, Inc., and J.P. Morgan Securities LLC (as successor-in-inte

Stearns & Co. Inc.) are collectively hereinafter referred to as Bear Stearns or the

Defendants.

24. At all relevant times, Washington Mutual Bank was a federal savingthat provided financial services to consumer and commercial clients. At the

securitizations, Washington Mutual Bank was the sole owner of Defendants W

Acceptance Corporation, WaMu Capital Corporation, Washington Mutual Mortgag

Corporation, Long Beach Securities Corp, and non-party Long Beach Mortgag

Washington Mutual Bank was also the sponsor of two of the securitizations at iss

September 25, 2008, JPMorgan Chase Bank, N.A. entered into a purchase and

agreement (the PAA) with the FDIC, under which JPMorgan Chase Bank, N.A

assume substantially all of Washington Mutual Banks liabilities and purchase substa

Washington Mutual Banks assets including WaMu Asset Acceptance Corpora


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25. Defendant WaMu Capital Corporation (WaMu Capital) was, at times, an SEC-registered broker-dealer incorporated under Washington law, with

place of business at 1301 Second Avenue, WMC 3501A, Seattle, Washington 98

Capital was a wholly-owned subsidiary of Washington Mutual Bank, and se

underwriter for 13 of the securitizations at issue here. WaMu Capital is not curren

with Washington Mutual Bank and is now a wholly-owned subsidiary of JPMorgan N.A.

26. Defendant WaMu Asset Acceptance Corporation (WaMu Asset)relevant times, a wholly-owned subsidiary of Washington Mutual Bank incorpo

Delaware law, with its principal place of business at 1301 Second Avenue, WMC 350

Washington 98101. WaMu Asset served as the depositor for six of the securitizat

here. WaMu Asset is not currently affiliated with Washington Mutual Bank a

wholly-owned subsidiary of JPMorgan Chase Bank, N.A., successor-in-interest to

Mutual Bank.

27. Defendant Washington Mutual Mortgage Securities Corp. (WaMu Sa Delaware corporation and was, at all relevant times, a wholly-owned, special purpo

Washington Mutual Bank with its principal offices located in Vernon Hills, Illin

Securities was the sponsor for four of the securitizations at issue here. WaMu Sec

currently affiliated with Washington Mutual Bank and is now a wholly-owned s

JPMorgan Bank, N.A., successor-in-interest to Washington Mutual Bank.


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29. Long Beach Mortgage Company was one of the largest subprime othe country. Long Beach Mortgage Company was acquired by Washington

(WMI) in 1999. At all relevant times, WMI was a savings and loan holdi

incorporated in Washington State, subject to regulation by the Office of Thrift

(OTS), and was the parent company of Washington Mutual Bank. From Decem

March 2006, Long Beach Mortgage Company operated as a subsidiary of WMI. In Long Beach Mortgage Company became a wholly-owned subsidiary of Washin

Bank. From March 2006 to July 2006, Long Beach Mortgage operated as a s

Washington Mutual Bank and was its primary subprime originator. In July 2006,

Mortgage Company was wholly integrated into its parent company and became a

Washington Mutual Bank, operating as its Specialty Wholesale Lending channel.

Mortgage Company served as sponsor for seven of the securitizations at issue here.

Mutual Bank shut down Long Beach Mortgage Company in 2007. The liabilities as

Long Beach Mortgage Companys securitization activities were assumed by JPM

Bank, N.A., successor-in-interest to Washington Mutual Bank and Long Beac

Company. Therefore, this action is brought against JPMorgan Chase Bank, N.A. as t

to Washington Mutual Bank and Long Beach Mortgage. WMI, Washington Mutu

Long Beach Mortgage Company are not defendants in this action.

30. Defendant Long Beach Securities Corporation (Long Beach SecuDelaware corporation and was, at all relevant times, a wholly-owned subsidiary of


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and is now a wholly-owned subsidiary of JPMorgan Chase Bank, N.A, successor-

Washington Mutual Bank.

31. Long Beach Securities and Long Beach Mortgage Company are referred to herein as Long Beach

32. Long Beach Securities and JPMorgan Chase Bank, N.A. (as Washington Mutual Bank and Long Beach Mortgage Company) are collectivelyherein as the Long Beach Defendants.

33. Defendant JPMorgan Chase & Co. is a financial holding company under Delaware law with its principal place of business at 270 Park Avenue, New

York 10017. JPMorgan Chase & Co. is one of the largest banking institutions i

States and is the ultimate owner of Defendants JPMorgan Chase Bank, N.A.,

Securities LLC (f/k/a J.P. Morgan Securities Inc.), J.P. Morgan Acceptance Corpo

J.P. Morgan Mortgage Acquisition Corp. JPMorgan Chase & Co. is also the

interest to The Bear Stearns Companies, Inc.

34. Defendant JPMorgan Chase Bank, N.A. is a national banking asubsidiary of JPMorgan Chase & Co., and the sole owner of J.P. Morgan Mortgage

Corp. JP Morgan Chase Bank, N.A.s main office is located in Columbus, Ohio

Chase Bank, N.A. is the successor-in-interest to Defendant Washington Mutual

allegations against JPMorgan Chase Bank, N.A. are also made against its contro

company, JPMorgan Chase & Co.


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issue here. All allegations against J.P. Morgan Securities LLC are also made

controlling parent company, JPMorgan Chase & Co.

36. Defendant J.P. Morgan Mortgage Acquisition Corporation is corporation with its principal place of business at 270 Park Avenue, New York

10017. J.P. Morgan Mortgage Acquisition Corporation is a direct, wholly-owned

JPMorgan Chase Bank, N.A., and served as the sponsor for 13 of the securitizations aAll allegations against J.P. Morgan Mortgage Acquisition Corporation are also mad

controlling parent company, JPMorgan Chase Bank, N.A.

37. Defendant J.P. Morgan Acceptance Corporation I, is a Delaware corpits principal place of business at 270 Park Avenue, New York, New York 10017.

Acceptance Corporation I is a direct, wholly-owned subsidiary of J.P. Morga

Holdings LLC which, in turn, is a direct, wholly-owned subsidiary of JPMorgan C

J.P. Morgan Acceptance Corporation I served as the depositor for 13 of the secu

issue here. All allegations against J.P. Morgan Acceptance Corporation I are also m

its ultimate controlling parent company JPMorgan Chase & Co.

38. Defendants JPMorgan Chase & Co., JPMorgan Chase Bank, N.A., Securities LLC, J.P. Morgan Mortgage Acquisition Corporation, and J.P. Morgan

Corporation I are collectively hereinafter referred to as JPMorgan or the

Defendants.

IV. BACKGROUND FACTS AND NATURE OF THE FRAUD


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mortgage pools. Payments from the underlying borrowers are collected by a loan

distributed, through the issuing trust, to holders of the certificates at regular distributi

Accordingly, the value of the RMBS depends on the quality of the mortgages in th

pools, including the borrowers ability to make their mortgage payments and the

collateral supporting the mortgages.

40.

Although the structure and underlying collateral of the mortgages matrust to trust, they all function in a similar manner: the cash flow from the borrower

interest and principal payments on their mortgages is passed through to certificate

Plaintiffs. Accordingly, failure by borrowers to make their mortgage payments dire

the value of the RMBS. Defaults that are not cured will result in foreclosure, causin

take possession or sell the collateral for the loan. Foreclosures will result in higher

trust (and therefore to the RMBS investors) if the value of the collateral is lower than

for example because the mortgage appraisals overstated the value of the collatera

reasons, proper loan origination and underwriting of the mortgages underlying th

including verification of the borrowers ability and incentives to make their mortgag

and the value of the collateralis essential for ensuring that the RMBS perform acco

representations made to investors like Plaintiffs.

41. The process of securitizing mortgages into RMBS involves a numbFirst, a sponsor creates a loan pool from mortgages the sponsor has originat

mortgages that the sponsor has purchased from other financial institutions. Prior to


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force the seller to repurchase or replace loans that do not meet represented quality sta

purchasing a mortgage pool.

42. Second, the sponsor transfers the loans to a depositor, which segmflows and risks in the loan pool among different levels of investment or tranches.

cash flows from the payments by borrowers whose mortgages are in the loan pool a

order of seniority, going first to the most senior tranches. In addition, any losses to

due to defaults, delinquencies, foreclosure or otherwise, are applied in reverse order

and are applied first to the most junior tranches.

43. In the meantime, the sponsor provides information about the RMstructure, the expected cash flows from the designated mortgage pool, and the

collateral supporting the loans in the mortgage pool to credit rating agencies (C

Moodys and Standard & Poors Financial Services LLC (S&P). Certificates

senior tranches are often rated as the best quality or triple-A. Junior tr

subordinated rights to payment and are less insulated from risk, and therefore have

ratings. Plaintiffs RMBS were all rated as high grade investment grade securitie

of issuance, with all of the securities receiving the highest possible triple-A credit

least one CRA.

44. Third, the depositor transfers the mortgage pool to the issuing trust sbe used as collateral for RMBS that will be issued and sold to investors. Once the m

is deposited and the tranches are established, the issuing trust transfers the Certif


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underwriter of the securitization. At all relevant times, underwriters like Defenda

collected up to 1.5% in discounts, concessions, or commissions for serving as an un

an RMBS securitization. On the securitizations at issue in this case, these commis

have yielded Defendants up to $1 billion in underwriting fees. By serving as a

depositor of the securitizations, Defendants earned even more.

46. In sum, the steps in the securitization process can be depicted as follow

47. For 35 of the 53 securitizations at issue here, Defendants controlled the depositor, and the underwriter. As a result, Defendants controlled each

securitization process for such RMBS, including: (i) the selection and acquisition of

the pool; (ii) the creation of the securitization structure, including the segmentation o

and risks into tranches; (iii) providing critical information about the quality of the m

to the credit rating agencies as part of the process of obtaining investment grade cred

the RMBS; and (iv) the registration, underwriting and sale of the RMBS to Plaintif


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diligence results and detailed borrower information, including loan files, had access

responsible for creating the securitization, reviewing draft Offering Materials, and

directly or indirectly, Offering Materials to Plaintiffs.

49. Because of their central role in creating, issuing and selling Defendants had exclusive access to information about the highly risky nature of th

mortgage poolsinformation that Defendants fraudulently withheld from Plaintiff

Plaintiffs did not, and could not have known.

50. The investments and RMBS at issue in this case include:# Offering&Tranche

Original

Expenditure

Underwriter

DefendantTopOriginators

1 ARSI

2006M2A2D

$38,000,000 JPMorgan ArgentMortgageCo.LLC(91%)

AmeriquestMortgageCo.(9%)

2 ARSI

2006W4A2C


3 ARSI

2006W4A2D


4 CBASS

2007CB6

A3

$24,179,000 JPMorgan AmeriquestMortgageCo.(11%)

NewCentury

Mortgage

Corp.

(43%)

WilmingtonFinance,Inc.(28%)

5 INDX

2006AR29A5

$53,132,000 JPMorgan IndyMacBank,FSB(100%)

6 JPALT

2006A21A3

$14,605,000 JPMorgan JPMorganChaseBank,N.A.andChase

LLC(ChaseOriginators)(16%)*[[1]

CountrywideHomeLoans(27%)

M&TMortgageCorp.(17%)

PHHMortgage

Corp.

(24%)

7 JPALT

2006A21A5

$14,334,000 JPMorgan ChaseOriginators(16%)*CountrywideHomeLoans(27%)

M&TMortgageCorp.(17%)

PHHMortgageCorp.(24%)

8 JPALT $50 888 000 JP M h ( )*


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# Offering&TrancheOriginal

Expenditure

Underwriter


10

JPALT

2006A51A5$9,785,000

JP

Morgan Chase

Originators

(30%)*


PHHMortgageCorp.(26%)

GreenPointMortgageFunding,Inc.(15

11 JPALT

2006A61A5

$25,000,000 JPMorgan CountrywideHomeLoans(57%)

ChaseOriginators(17%)*PHHMortgageCorp.(16%)

12 JPALT

2006A7

1A4

$9,239,000 JPMorgan FlagstarBank,FSB(50%)

CountrywideHome

Loans

(20%)

ChaseOriginators(17%)*

13 JPALT

2006A71A5

$27,135,000 JPMorgan FlagstarBank,FSB(50%)


ChaseOriginators(17%)*

14 JPALT

2007A11A4

$35,000,000 JPMorgan ChaseOriginators(42%)*GreenPointMortgageFunding,Inc.(39


15 JPALT

2007A11A5

$15,000,000 JPMorgan ChaseOriginators(42%)*GreenPointMortgageFunding,Inc.(39


16 JPALT

2007A212A3

$20,228,000 JPMorgan ChaseOriginators(55%)*AmericanHomeMortgageCorp.(20%

GreenPointMortgageFunding,Inc.(13

17 JPMAC

2006CW1

A4

$22,000,000 JPMorgan CountrywideHomeLoans(100%)

18 JPMAC

2006HE3A5

$15,000,000 JPMorgan ResMAEMortgageCorp.(60%)

NovaStarMortgage,Inc.(20%)

FieldstoneMortgageCo.(18%)

19 JPMAC

2006NC1A4

$26,000,000 JPMorgan NewCenturyMortgageCorp.(100%)

20 JPMAC

2006NC1A5

$14,000,000 JPMorgan NewCenturyMortgageCorp.(100%)

21 JPMAC

2006RM1A5

$28,831,000 JPMorgan ResMAEMortgageCorp.(100%)

22 JPMAC

2006WMC2A4

$25,000,000 JPMorgan WMCMortgageCorp.(100%)

23 JPMAC $10 000 000 JP Morgan WMC Mortgage Corp (100%)


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Expenditure

Underwriter


27

BALTA

200671A2$19,734,000

Bear

Stearns Countrywide

Home

Loans

(51%)

EMCMortgageCo.(37%)*

HomeBancMortgageCorp.(5%)

28 BSABS

2006EC2A4

$7,069,000 BearStearns EncoreCreditCorp.(100%)

29 BSABS

2006HE81A3

$4,814,000 BearStearns EMCMortgageCo.(77%)*

BearStearnsResidentialMortgageCor

(20%)

30 BSABS2006HE821A3

$6,269,000 BearStearns EMCMortgageCo.(77%)*

BearStearnsResidentialMortgageCor

(20%)

31 BSABS

2006IM1A6

$20,730,000 BearStearns ImpacFundingCorp.(100%)

32 BSABS

2006IM1A7


33

BSABS20072A1

$35,784,000

BearStearns EquiFirst

Corp.

(14%)

PerformanceCreditCorp.(34%)

WellsFargoAssetSecuritiesCorp.(30%

34 CARR

2006NC3A4

$44,529,000 BearStearns NewCenturyMortgageCorp.andHom

(100%)

35 CARR

2006NC5A4

$24,222,000 BearStearns NewCenturyMortgageCorp.andHom

(100%)

36 CARR

2006RFC1

A3

$21,000,000 BearStearns EFCHoldingsCorp.(11%)

FMFCapital

LLC

(12%)

People'sChoiceHomeLoan,Inc.(16%

37 CARR

2006RFC1A4

$20,000,000 BearStearns EFCHoldingsCorp.(11%)

FMFCapitalLLC(12%)

People'sChoiceHomeLoan,Inc.(16%

38 CARR

2007FRE1A3

$20,000,000 BearStearns FremontInvestment&Loan(100%)

39 ELAT

20071A2B

$48,271,000 BearStearns FremontInvestment&Loan(100%)

40 IMM

2007AM1


41 IMSA

200621A12



24/121


Expenditure

Underwriter


46

NCMT

200712A3$19,250,000

Bear

Stearns Fremont

Investment

&

Loan

(100%)

47 NHELI

200712A4A

$16,167,000 BearStearns FirstNationalBankofNevada(18%)

SilverStateFinancialServices,Inc.,d/b

Mortgage(16%)

48 SACO

200622A

$71,300,000 BearStearns SunTrustMortgage,Inc.(15%)

WaterfieldMortgageCo.,Inc.(13%)

49 SAMI

2006AR7

A13B

$50,000,000 BearStearns CountrywideHomeLoans(100%)

50 SAMI

2006AR8A6B

$25,000,000 BearStearns CountrywideHomeLoans(52%)

SouthStarFundingLLC(24%)

51 LBMLT

2006112A2

$15,000,000 WaMu LongBeachMortgageCo.(100%)

52 LBMLT

2006112A2


53

LBMLT

200632A3$20,000,000

WaMu Long

Beach

Mortgage

Co.

(100%)

54 LBMLT

200632A4


55 LBMLT

200642A3


56 LBMLT

200642A4


57 LBMLT

200652A3


58 LBMLT

200652A4


59 LBMLT

200662A2


60 LBMLT

200662A4


61 LBMLT

200672A4


62 LBMLT

200682A4



25/121


Expenditure

Underwriter


65

WMABS

2007HE22A2$57,000,000

WaMu CIT

Group/Consumer

Finance,

Inc.

(19

LendersDirectCapitalCorp.(17%)

WMCMortgageCorp.(50%)

66 WMABS

2007HE22A3

$17,070,000 WaMu CITGroup/ConsumerFinance,Inc.(19

LendersDirectCapitalCorp.(17%)

WMCMortgageCorp.(50%)

67 WMALT

2007HY1A2B

$5,820,000 WaMu ArgentMortgageCo.,LLC(13%)

WashingtonMutualBank(71%)

68 WMALT2007OC2A2

$30,000,000 WaMu GreenPointMortgageFunding,Inc.(24

WashingtonMutualBank(60%)

69 WMHE

2007HE22A3

$50,000,000 WaMu WashingtonMutualBank(100%)

B. Defendants Unique and Non-Public Knowledge About The SecuriMortgages

1. Defendants Control and Unique Knowledge of the Loan Origi51. Bear Stearns, WaMu and JPMorgan were central actors in th

securitization industry. From 2005 to 2007, Bear Stearns securitized more than $1

loans, WaMu securitized more than $103 billion in loans, and JPMorgan securitize

$62 billion in loans that they then sold to investors.

52. Defendants had unique access to the senior management of tinstitutions that originated the loans in the mortgage pools at issue. The Offeri

identify Defendants and their wholly-owned affiliates as originators for a substanti

the loans backing 22 of the securitizations at issue, as illustrated in the table above.

these securitizations, Defendants and their affiliates originated the loans that were sec

RMBS and sold to Plaintiffs As a result Defendants had unique non public ins


26/121

Countrywide, Encore, GreenPoint, Impac, American Home, Fremont, and SouthS

among others. In November 2008, the Office of the Comptroller of the Currency

U.S. Treasury Department) issued an Index to the Worst Subprime Originators, b

number of foreclosures on 2005-2007 loan originations in the 10 worst metropolitan

included Long Beach Mortgage, Countrywide, New Century Mortgage, WM

Ameriquest, Fremont, ResMAE, American Home, IndyMac, GreenPoint, Peoples

Fieldstone, all originators at issue here.

54. Between 2005 and 2007, Bear Stearns securitized more than $1Countrywide-originated loans. During the same time, JPMorgan securitized nearly$

Countrywide-originated loans. JPMorgan also assisted Countrywide with raisinacting as a lead underwriter in Countrywides bond issuances, and served a

administrative agent to material credit agreements for Countrywide, including a $

364-day revolving credit facility. In these capacities and in fulfilling related d

obligations, Bear Stearns and JPMorgan obtained unique access to material

information about Countrywides operations, including its loan origination and loan

practices, loan quality and performance, and reserve methodologies for nonperformin

55. JPMorgan securitized more than $1.6 billion worth of GreenPoiloans. Former GreenPoint executive vice-president, Kevin Hughes, testified that

executives were in daily contact with large investors such as Defendants to provid

extensive loan level data on the mortgages that GreenPoint was originating.


27/121

Impac-originated loans and more than $350 million of American Home-originate

addition, between 2005 and 2007, Bear Stearns provided a $2.5 billion credit facility

Home and approximately $300 million in loans to Impac Mortgage, thereby all

mortgage originators to originate and fund new mortgages that Bear Stearns could s

sell to investors. In these capacities, and to protect its own interests, Bear Stearns co

diligence and reviewed material, non-public information about American Homes

loan origination and underwriting practices, loan quality and performance,

methodologies for nonperforming loans. As a major creditor of American Home

Bear Stearns had the power to cut off hundreds of millions of dollars of operatio

thereby ensuring that Bear Stearns had continuing access to material non-public inall relevant times.

58. Bear Stearns also had a close connection to SouthStar Funding. Bprovided SouthStar Funding with millions of dollars in credit that SouthStar Fun

originate mortgages for Bear Stearns securitizations. A search of SEC filings yiel

Stearns securitizations of mortgages that were originated by SouthStar Funding b

2002 and April 2007almost one securitization per month for close to five years. A

market participant, Bear Stearns would not have provided SouthStar Funding with

line of credit without having conducted a thorough due diligence audit. SouthS

depended on Bear Stearns credit facility for its corporate survival, thereby en

Stearns access to senior management and non-public information about SouthSta


28/121

Encore in October 2006. Following the acquisition, Bear Stearns merged Encore

affiliate, Bear Stearns Residential Mortgage Corporation. As a major business partn

owner of the firm, Bear Stearns had daily contact with Encore executives, co

diligence, and reviewed material, non-public information about Encores loan ori

underwriting practices, loan quality and performance, and reserve method

nonperforming loans.

2. Defendants Control and Unique Knowledge of the Loan Poolsthe RMBS

60. Defendants utilized three methods to securitize the mortgages into RMto investors. Specifically, Defendants either: (1) acted as sponsor, depositor and un

RMBS backed by mortgages that their own affiliates had originated; (2) acted

depositor and underwriter of RMBS backed by mortgages that they had selected an

from other loan originators; or (3) acted as underwriter for RMBS backed by mortgag

securitized by other financial institutions.

61. Defendants acted as a sponsor, depositor and underwriter for 35 of that issue here (herein referred to as a principal securitization). For these se

Defendants had exclusive control over the selection of the mortgage pools. In additi

the securitizations, Defendants affiliates originated a substantial number of th

backing the RMBS. For these securitizations, Defendants also had exclusive con

loan origination and loan underwriting practicesDefendants own personnel or

loans and monitored compliance with loan underwriting guidelines Unlik


29/121

securitizations as well as to detailed due diligence results for the loans ba

securitizations. Moreover, because of their close relationships with the originators

backing these securitizations, Defendants had unique, non-public knowledge

origination and underwriting standards that were used to originate the mortgages b

RMBS.

63. Before purchasing loans, Defendants performed due diligence on tloan pools by examining three areascredit, compliance, and valuation. Credit d

involved examining a sample of the individual loans to assess their quality and com

the originators loan underwriting guidelines, and is a critical tool for evaluating the

borrowers of the mortgages in the pool will not make their mortgage paymenCompliance diligence focused on whether the loans were originated in complianc

federal and local laws, including predatory lending and truth-in-lending statutes

diligence used automated valuation models (AVMs) to verify the accuracy

valuations of the collateral backing the mortgages in the pool. The value of the

critical for determining the amount of equity a borrower has in the collaterala k

determining whether the borrower will continue to make the mortgage payme

potential recovery in case of default.

64. Defendants routinely used outside third-party due diligence providClayton Holdings, Inc. (Clayton), the Bohan Group (Bohan), and Watterson Pr

perform due diligence on the mortgage pools they would purchase for securitization


30/121

individual asset summary (IAS) reports on a daily basis. Bear Stearns also recei

reports showing the kinds of exceptions that were commonly discovered for Defenda

originators. Claytons senior vice president, Vicki Beal, testified before the F

developing these reports, Clayton received a lot of feedback from Bear Stearns of

would be helpful to them. CW 1, a former EMC Associate Vice-President who w

company in various due diligence and compliance roles from 1998 to 2008 in Fort W

confirmed that Bear Stearns knew the intimate details of each loan that was rev

due diligence process. Defendants did not extrapolate the due diligence results fo

reviewed by the due diligence vendors to the mortgage pools they purchased.

65. Defendants due diligence efforts and access to the individual loan filematerial, non-public knowledge about the loans that were included in the securitizati

Defendants due diligence efforts and access to the loan files also provided comfort

that Defendants only securitized mortgage pools which conformed to the stated loan

and underwriting standards. Investors did not have access to the loan files or Def

diligence information, and could not conduct similar due diligence themselves

therefore relied on Defendants disclosure of the quality of the mortgage pools

RMBS. As the Attorney General for the State of Massachusetts explained, there are

information asymmetries that arise from the RMBS structure:

First, investment banks, through their diligence process, maydiscover that loans have poorer quantifiable criteria than present onthe loan tape (for example, if the banks review calls into questionthe quality of the appraisals underlying the calculation of the loan


31/121

C. Defendants Fraudulently Included Poor Quality Loans in the Secu1. Bear Stearns

66. Defendant EMC Mortgage was established to facilitate the purchase aof whole loan portfolios. Since its inception in 1990, EMC had purchased over $1

residential loans and servicing rights. As stated in the BSABS 2006-HE8 prospectus

when EMC purchased loans, it was with the ultimate strategy of securitization into

Bear Stearns securitizations. From 2003 to 2006, EMC securitized nearly $20

residential mortgage loans.

67. EMC Mortgage was the sponsor for nine of the Bear Stearns securissue. The Offering Materials also identified EMC Mortgage as the originator for

percentage of the loans backing three of those securitizations, as illustrated in the tabl

68. Although identified as the originator of the loans in thresecuritizations, EMC Mortgage did not originate any of the loans in the securitizati

Instead, EMC Mortgage purchased loans from unidentified financial institu

representing in the Offering Materials that those loans were originated in accorda

underwriting guidelines established by [EMC]. Former senior managing director

of Bear Stearns mortgage finance department, Mary Haggerty, confirmed in testi

the FCIC that EMC Mortgage did not originate loans, explaining that EMC Mopurchased loans while making its underwriting guidelines available to financial ins

wanted to sell loans to Bear Stearns: EMC was a purchaser and seller of loans. E


32/121

EPD periodtypically between 30 and 90 days after Bear Stearns purchased the l

originatorBear Stearns could force the originator to repurchase the loan, to replace

to provide alternative compensation. Early payment defaults are recognized in t

industry an indicator of mortgage fraud and borrower inability to pay.

70. Starting in 2005, to increase the volume of its securitization businesprofitability, Bear Stearns changed its EPD policy to allow for securitization of

expiration of the EPD period. Bear Stearns revised EPD policy greatly increased th

loss risks of the mortgage pools backing Bear Stearns RMBS. At the same time

EPD policy transferred the default and loss risks from Bear Stearns to investors lik

while ensuring that Bear Stearns could continue to collect the sponsor, de

underwriting fees for each securitization. This created a strong financial incent

Stearns to churn out as many securitizations as possible, regardless of the qu

supporting mortgage pools.

71.

After changing the EPD policy, senior Bear Stearns executives pre

Stearns personnel to securitize acquired loans as quickly as possible regardless of

and in any event before expiration of the EPD period. For example, a June 13, 200

senior managing director and head of whole loan trading, Jeffrey L. Verschleiser, rem

Stearns personnel of the need to be certain we can securitize the loans with 1 mont

the epd period expires. When his directive was not followed, Verschleiser d

explanation as to why loans were dropped from deals and not securitized before thei


33/121

Bear traders pushed EMC analysts to get loan analysis done inonly one to three days. That way, Bear could sell them off fast toeager investors and didn't have to carry the cost of holding these

loans on their books.

72. Bear Stearns did not disclose to Plaintiffs and other investors that it hdeliberate policy to securitize loans before expiration of the EPD period or that it wa

its employees to quickly securitize mortgages regardless of loan quality. It was for

investors who purchased Bear Stearns RMBS would suffer losses as a result.

b. Bear Stearns Deliberately Undermined the DueDiligence Process

73. As the sponsor, EMC Mortgage was responsible for selecting and evmortgage pools for each of the Bear Stearns securitizations at issue. EMC Mortg

under the strict supervision and control of Bear Stearns. CW 2, an assistant

manager at EMC from 2006-2008 in Carrollton, Texas, stated that the EMC M

selection process was closely overseen by Bear Stearns, noting that EMC was bas

company of Bear Stearns in New York, and of course they had a day to day influenc

was being purchased from the various sellers. CW 2 further stated that I know cre

and such were made out of New York. CW 3, a Senior Underwriter at Bear Stearn

JPMorgan from 2000-2009 in Dallas, Texas, independently confirmed CW 2s acc

that Bear Stearns made all the decisions. Thats the mother ship right there. They

who ran the show.

74. In addition to reducing its exposure to poor quality loans by changi


34/121

a Senior Product Guide Analyst at EMC Mortgage from 2005-2007 in Lewisville, T

that the Bear Stearns mindset was The more volume, the more money.

75. Bear Stearns ensured the loan volume for its securitizations in a numFirst, Bear Stearns pressured its employees to purchase loans regardless of the q

mortgage pools. For example, on April 4, 2006, EMC senior vice president Jo-Kar

informed her staff that she would hold them personally accountable if EMC Mortg

meet Bear Stearns loan acquisition targets, stating:

I refuse to receive any more emails from [senior managing directorand head of whole loan trading, Jeffrey L. Verschleiser] (or anyoneelse) questioning why were not funding more loans each day.Imholding each of you responsible for making sure we fund at least500 each and every day. . . .

[I]f we have 500+ loans in this office we MUST find a way tounderwrite them and buy them. . . . I was not happy when I saw thefunding numbers and I knew that NY would NOT BE HAPPY. Iexpect to see 500+ each day. . . . Ill do whatever is necessary tomake sure youre successful in meeting this objective.

76. Second, EMC Mortgage did not do any due diligence on loanoriginated by Bear Stearns Residential Mortgage Corporation (BSRM), inclu

securitization in which BSRM mortgages constituted a substantial portion of the m

at issue here.

77.

Third, Bear Stearns limited the due diligence for subprime loan oriwere selling Bear Stearns large volumes of loans, such as Countrywide, Encore

SouthStar. On February 11, 2005, Bear Stearns associate director Biff Rogers f


35/121

co-head of mortgage finance Baron Silverstein similarly testified that, Bear St

evaluate our due diligence strategy, depending upon who the seller was

78. CW 2, an assistant underwriting manager at EMC Mortgage fromexplained how this worked in practice, stating that there were certain major lend

few of those loans were audited, they were just reviewed in bulk. According to

Mortgage limited the due diligence sample for such major lenders to 10% of th

Moreover, CW 2 stated that EMC Mortgage would not conduct credit due diligence

loans in the 10% sample, using part of the sample only for a valuation review of th

CW 2s statements were confirmed by internal Bear Stearns audit reports dated F

2006, and June 22, 2006, which concluded that Bear Stearns had reduced the numbe

the loan samples that were reviewed as part of the due diligence process, was con

diligence only after the loans were processed (post-closing due diligence), ha

internal reports on defective loans, and was conducting no due diligence if such d

would interfere with mortgage pools being securitized. In combination with Brevised EPD policy, this meant in many instances that Bear Stearns conducted no d

before securitizing and selling the loans to Plaintiffs and other investors.

79. Finally, Bear Stearns pressured its due diligence vendors to limit thloans that were identified as defective. As such, according to one contract underwr

previously employed by Clayton and cited in the book, Chain of Blame by Paul

Mathew Padilla, the number of defective loans reviewed by Clayton may have been e


36/121

80. As alleged in a complaint filed on behalf of Allstate Insurance ComDeutsche Bank, Clayton materially understated the number of deficient loans due

from clients such as Bear Stearns. See Allstate Insurance Company v. ACE Securit

al., No. 650431/2011 Dkt. 34 (1st Dept, filed Sept. 29, 2011) (the ACE Comp

alleged in the ACE Complaint, an Underwriting Project Lead at Clayton from 2003 u

2006 stated that approximately 20-25% of loans reviewed by Clayton that it

properly originated should have been flagged as a grade 3 loans to be ki

securitizations, but Claytons project managers were being pressured by all of

approve as many loans as possible. Further, the Underwriting Project Lead estimate

the loans initially rated 3, managed to be upgraded because missing document

somehow miraculously appear. As alleged in the ACE Complaint, the Underwr

Lead understood that Clayton did not want to assign too many failing grades to lo

clients such as Bear Stearns would take their business elsewhere. In just one e

Underwriting Project Lead explained that one Clayton client sought to fire a Claytonwho was an expert on appraisals because the underwriter failed too many loa

appraisal issues. The ACE Complaint further alleges that a contract underwriter at C

2003 to 2004 who later served as a transaction specialist from 2005 to 2007 stated t

wanted to purchase grade 3 loans, the grade may be changed upon the receipt o

documents, but also sometimes merely by stipulation.

81. CW 5, a due diligence underwriter at Clayton and Bohan from 2


37/121

and vendor management instructed Bear Stearns due diligence vendor not to review

not to verify occupancy status of the residence and employment, and not

misrepresentations regarding the occupancy of the property to Bear Stearns, stating:

Effective immediately, in addition to not ordering occupainspections and review appraisals, DO NOT PERFOREVERIFICATIONS OR RETRIVE CREDIT REPORTS ON TSECURITIZATION BREACH AUDITS.

Do not make phone calls on employment, and Occupancy misrep is not a securitization breach.

82. Bear Stearns never disclosed to investors that it pressured its persondiligence vendors to approve loans regardless of credit quality, that it encouraged fa

information, that it limited the due diligence for numerous loan originators, or that

any due diligence on loans that were originated by BSRM.

c. Bear Stearns Knowingly Included Poor Quality Loain the Securitizations

83. Bear Stearns knew that numerous loans that it included in securitizatimeet the stated loan origination and underwriting standards, and were based on infla

values. For example, CW 4, an auditor at EMC Mortgage from 2005 to 2007, rev

loan files in which the stated income was way overstated and the property value

overinflatedcausing both the borrowers ability to pay and the value of the col

overstated. EMC Mortgage would nevertheless approve and purchase those loans

stated, as long as it was not totally ridiculous, we took it.


38/121

During this time, Clayton further determined that 18% of the loans did not meet the

guidelines but had compensating factors, and that 28% of the loans were fatally d

should not be purchased. Discussing this data during his testimony before the FCI

former President and Chief Operating Officer, Keith Johnson, said: That 54% to m

[was] a quality control issue in the factory for mortgage-backed securities. Bear

one of Claytons largest customers and no exception to the quality control issues in th

85. Bear Stearns routinely overruled its due diligence vendors and materially defective loans. Claytons data showed for the 18 months that ended Ju

that EMC Mortgage waived in 50% of the loans that failed to meet credit and

underwriting standardsone of the highest waiver rates in the industry. Johnso

during a June 8, 2010 interview with FCIC investigators that, of all the RMBS i

Stearns wasthe worst on exceptions.

86. Loan traders, whose compensation depended in large measure on thloans that Bear Stearns purchased and securitized, made the decision to waive in defCW 2, assistant underwriting manager at EMC Mortgage, stated that the decision

materially defective loans was made by Bear Stearns traders in New York, statin

would be contacted as to whether an exception would be made. Between 2005 an

Stearns securitized more than $14 billion of Countrywide loans, and its loan trad

willing to jeopardize this lucrative business relationship (and their bonuses) by rej

defective loans for due diligence reasons.


39/121

issued and sold 49 securitizations with SouthStar Funding mortgages. Moreover,

extended hundreds of millions of dollars in credit to Impac Mortgage and SouthS

Claytons Keith Johnson explained to the FCIC that the practice of waiving in def

was particularly prevalent among investment banks, such as Bear Stearns, th

warehouse lines of credit. To explain why, Johnson offered a hypothetical showi

securitizers had a conflict of interest: either the securitizer could reject the loan and f

originator to take it backresulting in a loss because the rejection would be finan

warehouse line of credit extended by the securitizeror the securitizer could waive

the pool and pass the loss on to the RMBS investor. As Johnson explained:

if Bob was originating for me as the client and I had a warehouseline to Bob, I think what happened is a conflict of interest. That ifI put back loans to you, Bob and you dont have the financialcapability to honor those, then Im kind of caught; right? [] Imgoing to take a loss on the warehouse line.

88. As a result, Bear Stearns included a startlingly high percentage of dein loan pools that were securitized and sold to Plaintiffs and other investors. Bear S

disclosedand investors did not know, and could not have knownthat Bear

diligence vendors reported numerous defective loans in the loan pools that B

purchased for securitization, or that Bear Stearns waived in 50% of the loans that fa

minimum credit and compliance standards.d. Bear Stearns Kept Hundreds of Millions of Dollars

Payments for the Poor Quality Loans That It Sold toInvestors


40/121

technology, and that the reporting system was very innovative. CW 1 further st

system would generate report cards for the loan sellers, and that this report card was

a host of people, including to senior managing director and co-head of Bear Stearn

finance department, Mary Haggerty. According to CW 1, these report cards we

during meetings to discuss delinquent loans.

90. Over the course of 2006 and 2007, Bear Stearns noticed that increasof the loans it purchased and securitized were experiencing early payment defaults.

notified loan originators that their loans were suffering from EPDs. Bear Stearns di

the originators that the loans had already been securitized, or that it was seeking

behalf of the securitization trust. Instead of demanding that the loan originator re

loan or replace the loan in the securitization at full value, Bear Stearns p

accommodate the loan originators by requesting payment of a fraction of the purch

reflect the decrease in value caused by the EPDa so-called down bid.

91.

Bear Stearns received hundreds of millions of dollars in down bids floans that it had included in its securitizations. Documents and testimony obtai

litigation show, for example, that between April 2006 and April 2007, Bear Stearns r

billion in EPD claims against loan originators, and that the largest percenta

resolutions were settlements. Bear Stearns improperly pocketed the down bid

disclosed to Plaintiffs and other investors that it received payments from loan or

defective loans that it had securitized and sold. Bear Stearns improperly kept


41/121

92. Bear Stearns routinely acted as lead underwriter for RMBS that werother financial institutions, including Impac.

93. Bear Stearns knew, or at the very least recklessly disregarded the pothe mortgages backing those securitizations. As lead underwriter and repeat busine

the mortgage originators and the sponsors, Bear Stearns had access to: (i) uniqu

information concerning the quality of the mortgages backing the securitization

detailed loan information and due diligence results; (ii) personnel responsible for

mortgages and creating the securitizations.

94. Bear Stearns had strong financial incentives to ignore the toxic nmortgages backing those securitizations and to sell them as supposedly prudent in

Plaintiffs and other investors. Bear Stearns obtained substantial fees for underw

securitizations. Moreover, Bear Stearns was not willing to jeopardize its lucrat

relationships with the mortgage originators by sharing their non-public knowledg

toxic nature of the mortgages backing the securitizations with Plaintiffs or other inve

f. Bear Stearns Misconduct Had a Devastating ImpacPerformance of the RMBS Mortgage Pools

95. The Bear Stearns Defendants misconduct dramatically affected thpools underlying the RMBS purchased by Plaintiffs. As of December 2011, on ave

43% of the mortgage loans backing the Bear Stearns RMBS were over 60- or 90-day

in foreclosure, bankruptcy, or repossession as reflected by the chart below:

Collateral Performance of Securities Underwritten by Bear Stearns & Co. Inc.


42/121

Offering 1

Yr.

2

Yr.

3

Yr.

4

Yr.

5

Yr.

BSABS 2006-IM1 7.96 30.35 42.69 45.13 42.6

BSABS 2007-2 46.55 58.42 64.42 57.41 N/ACARR 2006-NC3 15.44 36.07 49.31 53.82 42.3

CARR 2006-NC5 20.51 42.88 53.92 52.41 44.3

CARR 2006-RFC1 11.04 32.75 37.44 51.22 44.4

CARR 2007-FRE1 24.03 49.59 67.43 72.98 N/A

ELAT 2007-1 22.32 37.86 54.49 51.39 N/A

IMM 2007-A 8.25 15.01 17.66 17.76 N/A

IMSA 2006-2 8.05 24.98 25.67 17.44 12.8

IMSA 2007-3 15.56 33.01 35.89 30.19 N/A

MSST 2007-1 28.78 49.71 50.61 31.18 N/A

NAA 2007-3 33.56 53.78 55.73 51.28 N/A

NCMT 2007-1 14.73 24.69 32.92 28.86 N/A

NHELI 2007-1 21.03 38.90 50.38 46.39 42.8

SACO 2006-2 8.36 13.38 16.71 20.43 16.8SAMI 2006-AR7 5.96 28.87 55.82 61.45 61.2

SAMI 2006-AR8 6.18 31.49 50.73 55.20 56.1

2. Washington Mutual96. Defendant WaMu Asset Acceptance Corporation (WaMu Asse

depositor of six securitizations at issue, and Defendant Long Beach Securities C

Beach Securities) served as the depositor for seven of the securitizations at issue

affiliate, Defendant WaMu Capital Corporation (WaMu Capital) was the securitiz

Washington Mutual Bank (WaMu Bank) and acted as the underwriter for the RM

Bank, along with Defendants Washington Mutual Mortgage Securities Cor

Securities) and Long Beach Mortgage Company (Long Beach Mortgage), were

of the securitizations and WaMu Bank and Long Beach Mortgage originated all or


43/121

LBMLT 2006-3 Long BeachMortgage

Long BeachSecurities

WaMu Capital Mortg

LBMLT 2006-4 Long Beach

Mortgage

Long Beach

Securities

WaMu Capital

MortgLBMLT 2006-5 Long BeachMortgage


WaMu CapitalMortg



WaMu CapitalMortg



WaMu CapitalMortg

LBMLT 2006-8 Long Beach

Mortgage

Long Beach

Securities

WaMu Capital

MortgWAMU 2006-AR7 WaMu

BankWaMu Asset WaMu Capital WaMu B

WMABS 2006-HE2 WaMuSecurities

WaMu Asset WaMu CapitalMor

Home

LimServicesMandala

WMABS 2007-HE2 WaMuSecurities

WaMu Asset WaMu Capital WM

Grou

FinanceLeCapital

WMALT 2007-HY1 WaMuSecurities

WaMu Asset WaMu Capital WaMu ArgeCo.,

WMALT 2007-OC2 WaMuSecurities

WaMu Asset WaMu Capital WaMu

Mortga

WMHE 2007-HE2 WaMuBank

WaMu Asset WaMu Capital WaMu B


44/121

Killinger, stated that WaMus financial targets for the next five years would be t

asset base and revenues by approximately 10% per year while limiting our expens

about 5%, in order to achieve an average [return on equity] of at least 18%

[earnings per share] growth of at least 13%.

98. WaMu understood that it would undertake significant new risKillingers ambitious goals. As Killingers June 1, 2004 memorandum stated: It

that we all focus on growth initiatives and risk taking. Above average creation of

value requires significant risk taking. In this regard, Killingers memorandu

residential nonprime and adjustable rate mortgages as key drivers for achievi

financial targets, noting that there is a good opportunity to expand the origination o

residential first and second mortgages through both our consumer banking and

stores.

99. On January 18, 2005, WaMus board of directors approved WaMusLending Strategy. WaMu implemented the High Risk Lending Strategy and immed

to accelerate the origination and securitization of subprime and adjustable rate

WaMus subprime mortgage subsidiary, Long Beach Mortgage, was instrumental in

expansion. WaMus financial targets required Long Beach to originate $30 billion

mortgages in 2005 and $36 billion in 2006.100. As WaMu aggressively expanded the origination of highly risky loan

effort to implement adequate oversight over its loan origination and underwriting p


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processes. Our multiple origination platforms have led to very poorefficiency. Our goal is to increase automated underwriting to 80%or more, which we expect to have a positive effect on the cost of

origination.101. As a result, WaMu lost its ability to properly originate and underwrit

For example, WaMus Chief Credit Officer warned Killinger in June 2005 that WaM

was growing so fast that it could not catch up and quantify the risk. This was par

for the increased origination of subprime mortgages by Long Beach Mortgage. An i

dated September 21, 2005 (publicly disclosed in April 2011 with the Senate In

Report) noted serious problems in Long Beach Mortgages loan underwritin

including:

Underwriting guidelines established to mitigate the risk of unsoundcredit decisions were not always followed, and the decisioningmethodology was not always fully documented.

The majority of exceptions resulted from using unverified incomeor the unsupported exclusion of debt items in the debt-to-incomecalculation.

Controls within the loan origination system can be overridden toallow employees without documented authority to approve loans.

The loan approval forms documenting the clearing of conditionswere not fully completed in 60%of the files reviewed.

102. WaMu never addressed Long Beach Mortgages inadequate loanpractices. An internal audit dated September 28, 2007 (publicly disclosed in April 2

Senate Investigations Subcommittee Report) continued to note serious problems in

Mortgages subprime loan underwriting practices, stating:


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106. The Senate Investigations Report documents how WaMus perculture, ambitious financial targets, and lack of risk controls resulted in sho

practices that produced billions of dollars in poor quality loans. WaMus lend

included: (i) offering high risk borrowers large loans; (ii) steering borrowers to high

(iii) accepting loan applications without verifying the borrowers income; (iv) usin

low teaser rates to entice borrowers to take out larger loans; and (v) promoti

amortization loans which led to many borrowers increasing rather than paying dow

over time. Numerous confidential witnesses who worked at WaMu during the r

period support these findings. For example:

107. CW 7, a senior loan consultant at WaMu from 2005-2007 in Riversidestated that WaMus commission guidelines for loan origination personnel cont

commissions for teaser rate loans. CW 7 also recalled emails about commission s

granted increased commissions for riskier non-conforming or subprime loans.

108. CW 8, a WaMu loan closing coordinator from 2003-2007 in BPennsylvania, stated that mortgages were not explained properly to the buyer, so

know the [interest] rate was going to go up.

109. CW 9, a senior loan coordinator at WaMu from 2006-2007 in San Anreported tremendous pressure from the sales guys to approve loans and thinvolvement of WaMu management, even questionable loans usually got taken car

or another. CW 9 further explained that WaMus loan sales personnel and ma

di if h id d h l i d li A l i d


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credit score if they provided three alternative trade lines. An alternative trad

anything that did not appear on the borrowers credit report, including document

insurance payments, verification of rent payment, or a note from a person claiming

had repaid a personal debt. CW 10 stated that by the end of 2006 these mortgages

majority of first payment defaultsloans on which the borrower failed to make e

paymentand that It was just a disaster.

111. CW 11, a senior underwriter at Long Beach from 2004 to 2007 in Ilthat WaMus companywide culture required employees to do. CW 11 stated that

were no restrictions to approve a loan. For example, according to CW 11, Wa

salespeople to give interest-rate exceptions to borrowers to push loans through. C

that WaMus rate exceptions were ridiculous, and some really bad loans went t

attitude at WaMu was push, push, pushBasically, sales is what ran Long Beach

wasnt the Operations part.

112. CW 12, a mortgage underwriter at Long Beach from 2005 to 20Oswego, Oregon, stated that there was always a sense of working the underwriting g

close loans, rather than to mitigate credit risk. CW 12 said that there was simply an

to approve, approve, approve and that any exception that was needed to approve a

only done, but was sought after. CW 12 felt that Long Beach consistently punderwriters to find a way to make it work.

113. CW 13, a senior underwriter at WaMu from 2003 through 2007 in

h f ll If th b thi d h d h tb t ld b


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approach as follows: If they were breathing and had a heartbeat, you could prob

loan done.

114. Numerous additional witnesses who came forward after WaMcorroborate these accounts. For example, The New York Times published an ar

Steven M. Knobel, founder of an appraisal company that did business with WaMu

If you were alive, [WaMu] would give you a loan. Actually, I think if you wer

would still give you a loan.

c. WaMu Pressured Appraisers to Increase the StatedValue of the Collateral

115. Accurate appraisals are critical for properly evaluating the risk and mloss in case of borrower default. If the appraisal is artificially inflated, investors will

mistaken impression that the collateral supporting their investment is worth more tha

116. Starting in 2006, WaMu outsourced the vast majority of its residenappraisal work to two appraisal companies, First American eAppraiseIT (eAppraise

Appraisal (LSI). WaMu instructed eAppraiseIT and LSI to only use appraisers f

pre-approved appraisers. This WaMu appraiser list was created and continually

WaMu sales personnel with a financial interest in purchasing more mortgages rega

quality of the collateral.

117. Appraisers who submitted appraisals that were too low to get loans aptold to inflate their appraisals or risk exclusion from the WaMu appraiser list. For e

14, a chief appraiser at WaMu from 1990 to 2002, who later worked for

get loans approved the same WaMu Vice President for appraisal oversight told he


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get loans approvedthe same WaMu Vice-President for appraisal oversight told he

informed another appraisal company that it would Get the work if you can make t

noise stop. CW 14s statements are confirmed by internal WaMu documents th

recently been disclosed, including an April 27, 2007 email from former WaMu over

Sabina Senorans who discussed the WaMu appraiser list as follows:

The sales people finally got their way at WAMU. The appraisal

list that Eappraiseit and LSI is using has been totally scrubbed, butinstead of keeping good appraisers, they went for the Badd [sic]onesSo many appraisers have been knocked off the listI didmanage to salvage a few in Nassau County, but other areas, forgetabout it. Now sales can easily threaten to take an appraiser offtheir list if they cannot get what they want. Scary, huh?

118. After awarding appraisal contracts, WaMu continued to pressure companies, including eAppraiseIT, to change appraisals by increasing the value of t

CW 15, a senior loan coordinator and mortgage processor at WaMu in 2007 in

Florida, recalled meetings between WaMu senior managers and eAppraiseIT because

concerned that the appraisals were coming out too low. One of CW 15s manager

those meetings, telling CW 15 that WaMu management had met with eAppraiseIT

less resistance against WaMus efforts to obtain higher appraisal values, and that

were going to do everything possible within reason to accommodate [WaMus] ne

of the appraised values.

119. WaMus senior management also pressured WaMu employees to value of appraisals for WaMu mortgages. CW 16, a loan coordinator at WaMu f

120 CW 17 an appraisal coordinator at WaMu from 2001-2006 in Florid


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120. CW 17, an appraisal coordinator at WaMu from 2001-2006 in Floridhow this worked in practice. When the appraised value was too low to support th

WaMu sales personnel submitted a reconsideration of value or ROV to th

Appraisers routinely complied with WaMus reconsideration of value submissio

stated thataround 80% of the time when an ROV was requested by WaMu, the app

was increased. CW 17 stated that reconsiderations of value were done constant

compared with the number of ROVs between 2002 and 2005, the number of ROV

tripled during the period between 2005 and 2007.

121. WaMu also paid appraisers to increase the value of their appraisalmortgages. CW 18, a loan consultant at WaMu from 2003 to 2005 in Largo, Mar

that many appraisers received kickbacks from loan consultants to provide the desire

describing the WaMu appraisal process as corrupt and dysfunctional.

122. WaMus strategy allowed WaMu and its divisions to originate billioin additional mortgages, but undermined the accuracy of the valuation of the collatera

those mortgages. WaMu transferred this risk to Plaintiffs and other investors by inc

mortgages into securitizations, including into the WaMu securitizations at issue h

New York Attorney General stated in a complaint against eAppraiseIT dated Novemb

The integrity of our mortgage system depends on independentappraisers. Washington Mutual compromised the fairness of this system by illegally pressuring appraisers to provide inflatedvalues.

123 It was foreseeable that WaMus improper appraisal strategy w

underwriting guidelines and lacked sufficient compensating factors Strikingly WaM


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underwriting guidelines and lacked sufficient compensating factors. Strikingly, WaM

approximately 29% of such defectively originated loans and securitized them into

were sold to investors like Plaintiffs. As described above, the percentage of mortgag

to meet guidelines and accordingly, the percentage of defective loans being included

securitizations was, in truth, likely far higher than reported because investment ba

WaMu pressured their due diligence vendors to provide the desired results.

125. Further, the Senate Investigations Report revealed that WaMu origvolumes of fraudulent mortgages, involving at least five separate WaMu loa

California alone. For example, in 2005, WaMu launched an internal investigation

origination practices of two loan offices in Southern California that originated nume

mortgages, following a sustained history of confirmed fraud findings over the past

A November 2005 memorandum summarizing the investigation stated that the i

uncovered an extensive level of loan fraud virtually all of it stemming from

circumventing bank policy surrounding loan verification and review. The

discovered that 42% of the loans reviewed contained suspect activity or fraud, virt

attributable to some sort of employee malfeasance or failure to execute company

November 16, 2005 presentation by WaMus Credit Risk Management stated th

primarily involved misrepresentations of loan qualifying data, including misrepre

income and employment, false credit letters and appraisal issues. WaMu undertook

address the fraud problems in these two officesthe persons responsible for the fra

is believed to have been used in two separate loans. A WaMu sales employee sta


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s be eved to ave bee used two sepa ate oa s. Wa u sa es e p oyee sta

was too late to call the borrower, sales associates would take bank statements from ot

cut and paste the current borrowers name and address onto old bank statements. I

was discovered that sales employees would manufacture asset statements from p

documents. As the sales employee explained, the pressure was tremendous, and th

to get the loans funded with whatever it took.

127. Documents uncovered by the Senate Investigations Subcommittee athat WaMu had no effective internal controls to prevent the securitization o

mortgages. Indeed, the Senate Investigations Subcommittee established that WaM

mortgages after WaMu determined that they contained fraudulent information. Fo

WaMu Internal Corporate Credit Review memorandum discovered by the Senate In

Subcommittee stated:

The controls that are intended to prevent the sale of loans that havebeen confirmed [...] to contain misrepresentations or fraud are notcurrently effective. There is not a systematic process to prevent a

loan [...] confirmed to contain suspicious activity from being soldto an investor.

* * *

Of the 25 loans tested, 11 reflected a sale date after the completionof the investigation which confirmed fraud. There is evidence thatthis control weakness has existed for some time.

As a result, the Senate Investigations Report determined that even loans marked wi

red flag indicating fraud were being sold to investors.

selling these mortgages into securitizations. Documents discovered by the Senate I


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g g g y

Subcommittee show that, in the meantime, WaMu closely monitored the delinquenci

portfolio. For example, on February 14, 2007, WaMu research and portfolio exec

Chen sent an email to the head of Defendant WaMu Capital, David Beck, informin

the delinquencies in the HFI option-arm portfolio, noting that Low fico, low doc

vintages are where most of the delinquency comes from. Beck immediately sent

WaMu Home Loans President David Schneider and the Chief Risk Officer of Wa

Loans Division, Cheryl Feltgen, urging the sale of HFI option-arm mortgages that

holding for investment, stating in part:

The performance of newly minted option arm loans is causing us

problems. Cheryl can validate but my view is our alt a (highmargin) option arms [are] not performing well.

We should address selling 1Q [first quarter] as soon as we canbefore we loose [sic] the oppty. We should have a figure out howto get this feedback to underwriting and fulfillment.

129. In light of its analysis that HFI option-arm loans were rapidly dWaMu no longer wanted to treat those loans as investments it would keep, bu

Schneider and Feltgen agreed. Moreover, Feltgen informed Beck and Schneider

CEO Kerry Killinger had also expressed interest in the idea of selling HFI option-ar

offered to help in analyzing the impact of selling certain groupings of Option-Arm

delinquencies. By removing delinquency-prone loans from WaMus HFI option-a

WaMu would be reducing the overall delinquencies. In response, Schneider formula

review, WaMu executives discussed a review of the 2007 high margin production (


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so far) and the seasoned COFI [Cost of Funds Index] book.

130. On February 20, 2007 Feltgen informed her team that WaMu was cothe sale of a larger portion of our Option Arms than we have in the recent past, a

their recommendations as which loans were particularly delinquency-prone and

included in upcoming