Download - Stichting Pens Complaint
SUPREME COURT OF THE STATE OF NEW YORK NEW YORK COUNTY
STICHTING PENSIOENFONDS ABP,
Plaintiff,
v.
CREDIT SUISSE GROUP AG; CREDIT SUISSE AG; CREDIT SUISSE (USA), INC.; CREDIT SUISSE HOLDINGS USA, INC.; ASSET BACKED SECURITIES CORP.; CREDIT SUISSE FIRST BOSTON MORTGAGE SECURITIES CORP.; CREDIT SUISSE SECURITIES (USA) LLC; DLJ MORTGAGE CAPITAL, INC.; CREDIT SUISSE FINANCIAL CORP.; SELECT PORTFOLIO SERVICING, INC.; JEFFREY A. ALTABEF; JOSEPH M. DONOVAN; EVELYN ECHEVARRIA; JULIANA JOHNSON; BRUCE KAISERMAN; ANDREW A. KIMURA; MICHAEL A. MARRIOTT; CARLOS ONIS; GREG RICHTER; and THOMAS ZINGALLI
Defendants.
Index No. Date Index No. Purchased: December 29, 2011 SUMMONS The basis of the venue is each of the defendants either resides in New York or conducts continuous and systematic business in New York. (CPLR §§ 301 & 302)
TO THE ABOVE-NAMED DEFENDANTS
Credit Suisse Group AG Uetlibergstrasse 231, P.O. Box 900 Zurich Switzerland CH 8070
Credit Suisse AG Paradeplatz 8, P.O. Box 1 Zurich, Switzerland CH 8070
Credit Suisse (USA) Inc. Attn: Litigation Department Eleven Madison Avenue New York, New York 10010
Credit Suisse Holdings USA, Inc. Attn: Litigation Department Eleven Madison Avenue New York, New York 10010
Asset Backed Securities Corp. Attn: Litigation Department Eleven Madison Avenue New York, New York 10010
Credit Suisse First Boston Mortgage Securities Corp. Attn: Litigation Department Eleven Madison Avenue New York, New York 10010
FILED: NEW YORK COUNTY CLERK 12/29/2011 INDEX NO. 653665/2011
NYSCEF DOC. NO. 1 RECEIVED NYSCEF: 12/29/2011FILED: NEW YORK COUNTY CLERK 04/25/2012 INDEX NO. 653665/2011
NYSCEF DOC. NO. 8-1 RECEIVED NYSCEF: 04/25/2012
Credit Suisse Securities (USA) LLC Attn: Litigation Department Eleven Madison Avenue New York, New York 10010
Credit Suisse Financial Corp. 302 Carnegie Center, 2nd Floor, Princeton, New Jersey 08540
DLJ Mortgage Capital, Inc. Attn: Litigation Department Eleven Madison Avenue New York, New York 10010
Select Portfolio Servicing Inc. 3815 South West Temple, Salt Lake City, Utah 84115
Jeffrey A. Altabef 148 Hardscrabble Lake Drive Chappaqua, New York 10514
Joseph M. Donovan 19 Frog Rock Road Armonk, New York 10504
Evelyn Echevarria 9549 Greyson Heights Drive Charlotte, NC 28277
Juliana Johnson 5540 Fallon Court Charlotte, NC 28226
Bruce Kaiserman 92 2nd Street Garden City, New York 11530
Andrew A. Kimura 104 Fargo Lane Irvington, New York 10533
Michael A. Marriott 325 West End Ave, Apt 6A New York, New York 10023
Carlos Onis
Greg Richter 18 Gladwin Place Bronxville, NY 10708
Thomas Zingalli
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 the Plaintiff’s attorney within twenty (20) days after the service of this summons,
exclusive of the date of service (or within thirty (30) days after service is complete if this
summons is not personally delivered to you within the State of New York); and in case of your
failure to appear or answer, judgment will be taken against you by default for the relief
demanded in the Complaint.
SUPREME COURT OF THE STATE OF NEW YORK NEW YORK COUNTY
STICHTING PENSIOENFONDS ABP,
Plaintiff,
v.
CREDIT SUISSE GROUP AG; CREDIT SUISSE AG; CREDIT SUISSE (USA), INC.; CREDIT SUISSE HOLDINGS USA, INC.; ASSET BACKED SECURITIES CORP.; CREDIT SUISSE FIRST BOSTON MORTGAGE SECURITIES CORP.; CREDIT SUISSE SECURITIES (USA) LLC; DLJ MORTGAGE CAPITAL, INC.; CREDIT SUISSE FINANCIAL CORP.; SELECT PORTFOLIO SERVICING, INC.; JEFFREY A. ALTABEF; JOSEPH M. DONOVAN; EVELYN ECHEVARRIA; JULIANA JOHNSON; BRUCE KAISERMAN; ANDREW A. KIMURA; MICHAEL A. MARRIOTT; CARLOS ONIS; GREG RICHTER; and THOMAS ZINGALLI
Defendants.
Index No.
COMPLAINT JURY TRIAL DEMANDED
GRANT & EISENHOFER P.A. 485 Lexington Avenue, 29th Floor
New York, New York 10017 Jay W. Eisenhofer, Esq. Geoffrey C. Jarvis, Esq. Deborah A. Elman, Esq. Robert D. Gerson, Esq.
Telephone: (646) 722-8500 Facsimile: (646) 722-8501
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TABLE OF CONTENTS INTRODUCTION .......................................................................................................................... 1
NATURE OF ACTION .................................................................................................................. 2
JURISDICTION AND VENUE ..................................................................................................... 6
PARTIES ........................................................................................................................................ 6
A. PLAINTIFF ................................................................................................................ 6
B. DEFENDANTS ........................................................................................................... 7
C. RELEVANT NON-PARTIES ...................................................................................... 13
SUBSTANTIVE ALLEGATIONS .............................................................................................. 14
I. THE SECURITIZATION PROCESS GENERALLY...................................................... 14
II. THE SECURITIZATIONS ASSOCIATED WITH THE PLAINTIFF’S CERTIFICATES AND ITS INVESTMENTS IN THE CERTIFICATES....................... 17
III. IMPORTANT FACTORS IN THE DECISION OF INVESTORS SUCH AS PLAINTIFF TO INVEST IN THE CERTIFICATES ...................................................... 21
IV. DEFENDANTS KNOWINGLY MISREPRESENTED THE QUALITY OF THE SECURITIES THEY ORIGINATED OR ACQUIRED AND PACKAGED FOR SALE TO INVESTORS SUCH AS ABP......................................................................... 25
A. CREDIT SUISSE DISREGARDED UNDERWRITING GUIDELINES AND APPRAISAL STANDARDS IN ITS OWN VERTICALLY INTEGRATED MORTGAGE LENDING OPERATIONS........................................................................................... 29
1. DLJ Mortgage Capital, Inc. ...................................................................... 30
2. Credit Suisse Financial Corp. ................................................................... 33
3. Lime Financial Services Ltd. .................................................................... 33
B. CREDIT SUISSE WAS AWARE THAT THIRD-PARTY ORIGINATORS WERE ABANDONING THEIR UNDERWRITING GUIDELINES AND APPRAISAL STANDARDS ........................................................................................................... 35
1. Credit Suisse Ignored Evidence of Underwriting Failures From Its Due Diligence Vendor .............................................................................. 35
2. Credit Suisse Knew Of Underwriting Failures Through Its “Repricing” Activities............................................................................... 38
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3. Credit Suisse Knew Of Underwriting Failures Through Its Servicing Activities................................................................................... 41
C. CREDIT SUISSE KNEW OF DECLINING UNDERWRITING STANDARDS THROUGH ITS MONITORING OF THE HOUSING MARKET ....................................... 43
D. DEFENDANTS CREDIT SUISSE GROUP, CREDIT SUISSE USA AND CREDIT SUISSE HOLDINGS CONTROLLED THE CREDIT SUISSE SECURITIZATION PROCESS ................................................................................................................ 47
V. A SIGNIFICANT NUMBER OF THE MORTGAGE LOANS UNDERLYING PLAINTIFF’S CERTIFICATES WERE MADE AS A RESULT OF THE SYSTEMATIC ABANDONMENT OF PRUDENT UNDERWRITING GUIDELINES AND STANDARDS ................................................................................ 50
A. DEFENDANTS CSFC AND DLJ ABANDONED THEIR UNDERWRITING GUIDELINES AND APPRAISAL STANDARDS............................................................ 51
B. THE THIRD-PARTY ORIGINATORS OF THE MORTGAGE LOANS UNDERLYING PLAINTIFF’S CERTIFICATES ABANDONED THEIR UNDERWRITING GUIDELINES AND APPRAISAL STANDARDS............................................................ 52
1. Accredited Home Lenders Inc. ................................................................. 54
2. Aegis Mortgage Corporation .................................................................... 55
3. Ameriquest Mortgage Company............................................................... 56
4. Argent Mortgage Company, LLC............................................................. 59
5. Decision One Mortgage Company, LLC.................................................. 61
6. Encore Credit Corp. .................................................................................. 63
7. EquiFirst Corporation ............................................................................... 64
8. Finance America, LLC.............................................................................. 66
9. Nationstar Mortgage LLC......................................................................... 67
10. OwnIt Mortgage Solutions, Inc................................................................. 69
11. Residential Funding Company, LLC ........................................................ 72
VI. A SIGNIFICANT NUMBER OF THE MORTGAGE LOANS WERE MADE TO BORROWERS WHO DID NOT OCCUPY THE PROPERTIES IN QUESTION......... 74
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VII. DEFENDANTS MISREPRESENTED THE LTV RATIOS OF THE MORTGAGE LOANS AND THE NUMBER OF PROPERTIES WORTH LESS THAN THE OUTSTANDING LOANS........................................................................... 77
VIII. THE CREDIT RATINGS ASSIGNED TO THE CERTIFICATES MATERIALLY MISREPRESENTED THE CREDIT RISK OF THE CERTIFICATES............................................................................................................... 83
IX. DEFENDANTS MISREPRESENTED THE EXTENT OF CREDIT ENHANCEMENT INCLUDED IN THE CERTIFICATES............................................ 88
X. DEFENDANTS FAILED TO ENSURE THAT TITLE TO THE UNDERLYING MORTGAGE LOANS WAS EFFECTIVELY TRANSFERRED................................... 90
XI. DEFENDANTS’ SPECIFIC MATERIAL MISSTATEMENTS AND OMISSIONS IN THE OFFERING DOCUMENTS......................................................... 93
A. DEFENDANTS MADE FALSE AND MISLEADING STATEMENTS REGARDING UNDERWRITING STANDARDS AND PRACTICES ...................................................... 97
B. DEFENDANTS MADE FALSE AND MISLEADING STATEMENTS REGARDING UNDERWRITING EXCEPTIONS................................................................................. 99
C. DEFENDANTS MADE UNTRUE STATEMENTS AND OMISSIONS REGARDING LOAN-TO-VALUE RATIOS AND APPRAISALS ....................................................... 101
D. DEFENDANTS MATERIALLY MISREPRESENTED THE ACCURACY OF THE CREDIT RATINGS ASSIGNED TO THE CERTIFICATES ............................................ 104
E. DEFENDANTS MADE UNTRUE STATEMENTS REGARDING THE CREDIT ENHANCEMENTS APPLICABLE TO THE CERTIFICATES ......................................... 105
F. DEFENDANTS MADE UNTRUE STATEMENTS REGARDING OWNER-OCCUPANCY STATISTICS...................................................................................... 108
G. DEFENDANTS MADE UNTRUE STATEMENTS REGARDING THE TRANSFER OF TITLE TO THE ISSUING TRUSTS............................................................................ 110
XII. DEFENDANTS KNEW THAT THE OFFERING DOCUMENTS CONTAINED MATERIAL MISSTATEMENTS AND OMISSIONS.................................................. 112
XIII. PLAINTIFF JUSTIFIABLY RELIED ON DEFENDANTS’ MISREPRESENTATIONS TO ITS DETERIMENT .................................................... 113
XIV. PLAINTIFF HAS SUFFERED LOSSES AS A RESULT OF ITS PURCHASES OF THE CERTIFICATES.............................................................................................. 115
CAUSES OF ACTION............................................................................................................... 120
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FIRST CAUSE OF ACTION Common Law Fraud (Against the Corporate Defendants)......... 120
SECOND CAUSE OF ACTION Fraudulent Inducement (Against the Corporate Defendants) ..................................................................................................................... 122
THIRD CAUSE OF ACTION Aiding and Abetting Fraud (Against All Defendants) .............. 123
FOURTH CAUSE OF ACTION Negligent Misrepresentation (Against All Defendants) ........ 125
PRAYER FOR RELIEF ............................................................................................................. 126
JURY DEMAND........................................................................................................................ 127
INTRODUCTION
Plaintiff Stichting Pensioenfonds ABP (“ABP” or “Plaintiff”), by its attorneys, Grant &
Eisenhofer P.A., brings this action pursuant to the common law. This action is brought against
Defendants Credit Suisse Group AG (“Credit Suisse Group”); Credit Suisse AG (“CSAG”);
Credit Suisse (USA), Inc. (“Credit Suisse USA”); Credit Suisse Holdings USA, Inc. (“Credit
Suisse Holdings”); Asset Backed Securities Corp. (“ABS”); Credit Suisse First Boston Mortgage
Securities Corp. (“CSFB Mortgage”); Credit Suisse Securities (USA) LLC (“Credit Suisse
Securities”); DLJ Mortgage Capital, Inc. (“DLJ”); Credit Suisse Financial Corp. (“CSFC”);
Select Portfolio Servicing, Inc. (“SPS”, and collectively, “Credit Suisse” or the “Credit Suisse
Defendants”); Jeffrey A. Altabef; Joseph M. Donovan; Evelyn Echevarria; Juliana Johnson;
Bruce Kaiserman; Andrew A. Kimura; Michael A. Marriott; Carlos Onis; Greg Richter; and
Thomas Zingalli (collectively, the “Defendants”).
Plaintiff makes the allegations in this Complaint based upon personal knowledge as to
matters concerning Plaintiff and its own acts, and upon information and belief as to all other
matters. This information is derived from the investigation by Plaintiff’s counsel, which has
included a review and analysis of annual reports and publicly filed documents, reports of
governmental investigations by the United States Securities and Exchange Commission (the
“SEC”), the Financial Crisis Inquiry Commission (the “FCIC”), the United States Department of
Justice (the “DOJ”), the United States Senate Permanent Subcommittee on Investigations (the
“PSI”), and numerous investigations by other federal and state governmental units, as well as
press releases, news articles, analysts’ statements, conference call transcripts and presentations,
and transcripts from speeches and remarks given by Defendants. In addition, Plaintiff’s counsel
conferred with counsel for other plaintiffs who have filed other complaints against these
Defendants based on the same or similar activities. Based on the foregoing, Plaintiff believes
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that substantial additional evidentiary support exists for the allegations herein, which Plaintiff
will find after a reasonable opportunity for discovery.
NATURE OF ACTION
1. This action arises out of Plaintiff’s purchases of certain residential mortgage-
backed securities (“RMBS”), as evidenced in the form of “Certificates”, in reliance on the false
and misleading statements that were made by Defendants. Based on these material
misrepresentations and omissions, ABP purchased securities that were far riskier than had been
represented, backed by mortgage loans worth significantly less than had been represented, that
had been made to borrowers who were much less creditworthy than had been represented.
2. The securities purchased by Plaintiff were collateralized against mortgages
originated through Credit Suisse subsidiaries or purchased from the third-party originators
defined in ¶¶ 146-206 below by Credit Suisse (collectively the “Originators”). Credit Suisse did
not, however, hold the mortgage loans it originated and/or acquired. Rather, taking advantage of
an unprecedented boom in the securitization industry, Credit Suisse deposited the loans into
special purpose entities or “trusts,” and then repackaged the loans for sale to investors in the
form of RMBS. Defendant Credit Suisse Securities, as underwriter, then sold the RMBS to
Plaintiff.
3. The Certificates entitled investors to receive monthly distributions of interest and
principal on cash flows from the mortgages held by the trusts. The Certificates issued by each
trust were divided into several classes (or “tranches”) that had different seniority, priorities of
payment, exposure to default, and interest payment provisions. Rating agencies, such as
Moody’s Investors Service, Inc. (“Moody’s”), Standard & Poor’s Corporation (“S&P”), DBRS,
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Inc. (“DBRS”) and/or Fitch, Inc., (“Fitch”)1 rated the investment quality of all tranches of
Certificates based upon information provided by the Defendants about the quality of the
mortgages in each mortgage pool and the seniority of the Certificate among the various
Certificates issued by each trust. These ratings, in part, determined the price at which these
Certificates were offered to investors.
4. In selling the Certificates, the Defendants prepared and filed with the SEC certain
registration statements (the “Registration Statements”), prospectuses (the “Prospectuses”) and
prospectus supplements (the “Prospectus Supplements”), which together are collectively referred
to as the “Offering Documents.” In these Offering Documents, Defendants repeatedly touted the
strength of their underwriting guidelines and standards or those of the relevant third-party
originators; the fact that the underwriting guidelines and standards were designed to ensure the
ability of the borrowers to repay the principal and interest on the underlying loans and the
adequacy of the collateral; and that the mortgages underlying the Certificates were originated in
accordance with those underwriting guidelines and standards. Defendants emphasized the
quality control procedures that the Originators supposedly implemented, such as re-underwriting
random samples of mortgage loans to assure asset quality.
5. In addition, in the Offering Documents, Defendants repeatedly assured investors
as to the soundness of the appraisals used to arrive at the value of the underlying properties and,
specifically, that the real estate collateralizing the loans had been subjected to objective and
independent real estate appraisals that complied with Uniform Standards of Professional
Appraisal (“USPAP”). Defendants made numerous other representations regarding the high
1 Moody’s, S&P, DBRS and Fitch are approved by the SEC as “Nationally Recognized Statistical Rating Organizations” and provide credit ratings that are used to distinguish among grades of creditworthiness of various securities under the federal securities laws.
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quality of the loan pool, including clean transfer of title, high owner-occupancy rates, low loan-
to-value and combined loan-to-value ratios, high credit ratings, and the existence of credit
enhancements.
6. Plaintiff and other investors did not have access to the underlying mortgage loan
files. Instead, the Defendants were responsible for gathering and verifying information about the
credit quality and characteristics of the loans that were deposited into each trust, and for
presenting this information in the Offering Documents prepared for potential investors. This due
diligence process was a critical safeguard for investors such as ABP, who relied on this
information in making their investment decisions, and is a fundamental legal obligation of the
Defendants.
7. As set forth below, the Offering Documents in fact contained material
misstatements and omitted material information. Contrary to Defendants’ assurances, the
originators of the underlying loans had not followed their touted underwriting guidelines and
standards when originating and/or acquiring the mortgage loans, and Defendants had neither
maintained nor conducted quality control procedures.
8. Specifically, as set forth below, Defendants knew of the wholesale and systematic
abandonment of underwriting guidelines both by Credit Suisse’s own affiliated originators as
well as by various third-party originators. Because Credit Suisse’s affiliated lenders, CSFC and
DLJ, operated primarily to generate loans for Credit Suisse’s RMBS operations and not to hold
the loans for their own portfolios, they intentionally granted mortgage loans to borrowers they
knew did not satisfy the eligibility criteria as described in the Offering Documents. Faced with
Credit Suisse’s demands for as many loans as possible to securitize, and driven by their desire to
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earn massive fees, the third-party originators also offered loans to unqualified borrowers,
knowing that Credit Suisse could securitize even risky, low-quality loans.
9. In addition, Defendants knew that the mortgages underlying the Certificates had
been extended based on collateral appraisals that were not independent or performed in
accordance with stated guidelines such that the value of the underlying properties and the amount
of credit enhancements built into the Certificates were overstated, thereby exposing investors
such as Plaintiff to additional losses in the event of foreclosure. In many cases, Defendants also
failed to deliver good title to the Issuing Trusts (defined below) in a timely manner, severely
undermining the Issuing Trusts’ capacity to manage the assets that were supposed to be
underlying the Certificates. When Defendants did discover problems in the loan pools, they
deliberately overlooked them.
10. Indeed, numerous governmental entities have launched investigations into the
subprime mortgage lending industry and subprime mortgage lending practices by major banks
and companies, including Credit Suisse. In May 2010, New York State Attorney General
Andrew Cuomo issued subpoenas to Credit Suisse and seven other banks, seeking information
regarding whether they deceived rating agencies as to the risks of the RMBS they sold. In March
2011, Credit Suisse Group agreed to pay $70 million to settle a class action lawsuit alleging that
the bank artificially inflated its stock price by misleading investors about its mortgage holdings.
Credit Suisse has also been sued for securities fraud by the Federal Housing Finance Agency
(“FHFA”), which analyzed numerous individual mortgage loans underlying dozens of Credit
Suisse RMBS and uncovered evidence that Credit Suisse consistently misrepresented their true
risks. On September 28, 2011, the FINANCIAL TIMES reported that the SEC had launched an
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investigation into whether Credit Suisse misled its own shareholders about the number of
defaulted loans it might be forced to repurchase.
11. As a result of the untrue statements and omissions in the Offering Documents,
Plaintiff purchased Certificates that were far riskier than represented and that were not equivalent
to other investments with the same credit ratings. The rating agencies have now significantly
downgraded the Certificates purchased by Plaintiff, all of which were represented in the Offering
Documents to be Aaa instruments, the highest possible rating on the Moody’s scale, or AAA, the
highest possible rating on the S&P scale, at the time of purchase. The Certificates, therefore, are
no longer marketable near the purchase prices paid by Plaintiff. As a consequence, Plaintiff has
suffered losses on its purchases of the Certificates.
JURISDICTION AND VENUE
12. This Court has personal jurisdiction over all of the Defendants pursuant to New
York Civil Practice Law and Rules (“CPLR”) §§ 301 and 302.
13. Venue is proper in this Court pursuant to CPLR § 503. Many of the acts and
transactions alleged herein, including the negotiation, preparation and dissemination of many of
the material misstatements and omissions contained in the Registration Statements, Prospectuses,
and Prospectus Supplements, filed in connection with the Offerings, occurred in substantial part
in this State. Additionally, the Certificates were actively marketed and sold in this State.
PARTIES
A. PLAINTIFF
14. Plaintiff ABP is an independent administrative pension fund established under the
laws of the Kingdom of the Netherlands. ABP serves as the pension fund for public employees
in the governmental and education sectors in the Netherlands. With assets under management of
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approximately € 250 billion, ABP is one of the three largest pension funds in the world. ABP
purchased the Certificates from the trusts listed in the table in ¶ 54 below.
B. DEFENDANTS
15. Defendant Credit Suisse Group is a Swiss company located in Zurich,
Switzerland, that conducts significant business in the United States and in New York, including
maintaining an office in New York, New York. Credit Suisse Group is a public global financial
services company that provides a comprehensive range of banking, investment banking, asset
management and insurance products and services. Credit Suisse Group is the parent company
and controlling entity of Defendants Credit Suisse USA, Credit Suisse Holdings, ABS, CSFB
Mortgage, Credit Suisse Securities, and CSFC.
16. Defendant CSAG is a Swiss company located in Zurich, Switzerland that is a
banking subsidiary of Defendant Credit Suisse Group. CSAG is an integrated global bank. The
governance of Credit Suisse Group and CSAG are fully aligned. The Board of Directors and the
Executive Board of each company are comprised of the same individuals. CSAG conducts
significant business in the United States and in New York, including maintaining an office in
New York, New York. CSAG is the parent company of ABS, Credit Suisse Holdings, Credit
Suisse Securities, Credit Suisse USA, CSFB Mortgage, CSFC, DLJ, and SPS.
17. Defendant Credit Suisse USA is an integrated investment bank providing a wide
range of products and services. Credit Suisse USA is a wholly-owned indirect subsidiary, and
part of the banking businesses, of Credit Suisse Group. Credit Suisse USA is incorporated in
Delaware and has its principal place of business in New York. Credit Suisse USA is the parent
company of Credit Suisse Securities, the underwriter of the RMBS at issue in this litigation, and
of SPS, the servicer of many loans underlying the RMBS at issue in this litigation.
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18. Defendant Credit Suisse Holdings is a wholly-owned indirect subsidiary of Credit
Suisse Group and operates as a holding company through which Credit Suisse Group holds
ownership and operates its United States subsidiaries and affiliates. Credit Suisse Holdings is
incorporated in Delaware and has its principal place of business in New York. Credit Suisse
Holdings is the parent company of Credit Suisse USA, ABS, CSFB Mortgage, Credit Suisse
Securities, DLJ, CSFC and SPS.
19. Defendant ABS is a Delaware corporation with its principal place of business in
New York. ABS acted as depositor and issuer for all of the Asset Backed Securities Corporation
Home Equity Loan Trust (“ABSC”) offerings at issue. ABS is a wholly-owned indirect
subsidiary of Credit Suisse Group and an affiliate of Credit Suisse USA and was formed to,
among other things, facilitate the sale of residential mortgage loans through securitizations.
20. Defendant CSFB Mortgage is a Delaware corporation that maintains its principal
place of business in New York. CSFB Mortgage is an indirect, wholly-owned subsidiary of
Credit Suisse Group and an affiliate of Credit Suisse USA. CSFB Mortgage was the depositor
and issuer for all of the Home Equity Asset Trust (“HEAT”), Home Equity Mortgage Trust
(“HEMT”) and CSAB Mortgage-Backed Trust (“CSAB”) offerings at issue.
21. Defendant Credit Suisse Securities, formerly known as Credit Suisse First Boston
LLC, is a limited liability company organized under the laws of Delaware with its principal place
of business in New York. Credit Suisse Securities is a wholly-owned subsidiary of Credit Suisse
USA and an indirectly-owned subsidiary of Credit Suisse Group. Defendant Credit Suisse
Securities was the underwriter in the sale of all of the offerings at issue in this case.
22. Defendant DLJ is a Delaware corporation with its principal place of business in
New York. DLJ is an indirectly owned subsidiary of Credit Suisse Group and an affiliate of
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Credit Suisse USA. It acquired the residential loans from the Originators and sponsored the
securitization of all of the mortgage loans at issue in this case. In addition to acting as a
securitization sponsor, DLJ was also an originator of loans that were pooled into the CSAB
Mortgage-Backed Trust 2006-3 securitization, whose Certificates were purchased by Plaintiff.
23. Defendant CSFC is a Delaware corporation with its principal executive offices
located in New Jersey. CSFC, an indirectly owned subsidiary of Credit Suisse Group and an
affiliate of Credit Suisse USA, conducts lending through wholesale loan production offices and
has been involved in the business of originating mortgage loans since 2003. CSFC conducts
business in all fifty states and the District of Columbia, originating approximately $3.2 billion in
mortgage loans between 2003 and 2005. CSFC was also an originator of loans that were pooled
into the CSAB Mortgage-Backed Trust 2006-3 securitization, whose Certificates were purchased
by Plaintiff. On information and belief, CSFC makes loans and conducts business in the state of
New York.
24. Defendant SPS is a Utah corporation with its principal executive offices located in
Utah. SPS is an indirectly owned subsidiary of Credit Suisse Group and Credit Suisse USA. It
was founded in 1989 and purchased by Defendant Credit Suisse USA in 2005. SPS services
mostly subprime residential mortgage loans for clients such as mortgage companies, banks, and
bond insurers. It also performs loss recovery and contingency collections, and offers valuation
services. SPS serviced some or all of the mortgage loans underlying the Certificates purchased
by ABP.
25. Defendant DLJ is referred to as the “Sponsor Defendant.”
26. ABS and CSFB Mortgage are collectively referred to as the “Issuing Defendants.”
27. Defendant Credit Suisse Securities is referred to as the “Underwriter Defendant.”
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28. Defendants DLJ and CSFC are collectively referred to as the “Originator
Defendants.”
29. All Defendants identified in ¶¶ 15-24 are hereinafter collectively referred to as the
“Corporate Defendants.”
30. The diagram below depicts the corporate relationships between Credit Suisse
Group, CSAG, Credit Suisse Credit Suisse USA, Credit Suisse Holdings, ABS, CSFC, CSFB
Mortgage, Credit Suisse Securities, DLJ, and SPS.
31. Defendant Jeffrey A. Altabef (“Altabef”) is an individual residing in New York
who served, at relevant times, as Vice President and Director of CSFB Mortgage. Altabef was
also a managing director for real estate finance and securitization at Credit Suisse USA. Altabef
signed the Registration Statements for all of the HEAT, HEMT and CSAB securitizations at
issue in this action.
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32. Defendant Joseph M. Donovan (“Donovan”) is an individual residing in New
York who served, at relevant times, as the Principal Executive Officer, President and Director of
ABS. Donovan was also the chairman of asset-backed securities and debt financing at Credit
Suisse USA. Donovan signed the Registration Statements for all of the ABSC securitizations at
issue in this action.
33. Defendant Evelyn Echevarria (“Echevarria”) is an individual residing in North
Carolina. She served, at relevant times, as a Director of CSFB Mortgage. Echevarria signed the
Registration Statements for all of the HEAT, HEMT and CSAB securitizations at issue in this
action.
34. Defendant Juliana Johnson (“Johnson”) is an individual residing in North
Carolina. She served, at relevant times, as a Director of ABS. Johnson signed the Registration
Statements for all of the ABSC securitizations at issue in this action.
35. Defendant Bruce Kaiserman (“Kaiserman”) is an individual residing in New
York. Kaiserman signed the Registration Statements for all of the HEAT, HEMT and CSAB
securitizations at issue in this action. In addition to serving as an officer of CSFB Mortgage,
Kaiserman was also a Director and Vice President of Defendant DLJ.
36. Defendant Andrew A. Kimura (“Kimura”) is an individual residing in New York.
He served, at relevant times, as President and Director of CSFB Mortgage. Kimura was also a
managing director and co-head of structured products at Credit Suisse USA. Kimura signed the
Registration Statements for all of the HEAT, HEMT and CSAB securitizations at issue in this
action.
37. Defendant Michael A. Marriott (“Marriott”) is an individual residing in New
York. He served, at relevant times, as a Director of CSFB Mortgage. Marriott was also a
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managing director and co-head of structured products at Credit Suisse USA. Marriott signed the
Registration Statements for all of the HEAT, HEMT and CSAB securitizations at issue in this
action.
38. Defendant Carlos Onis (“Onis”) is an individual residing in Connecticut. He
served, at relevant times, as Vice President and Director of ABS. Onis was also a managing
director, and senior finance officer of the Investment Banking Division of Credit Suisse USA.
Onis signed the Registration Statements for all of the ABSC securitizations at issue in this action.
39. Defendant Greg Richter (“Richter”) is an individual residing in New York. He
served, at relevant times, as Vice President of ABS. Richter was also a managing director and
co-head of the asset finance group at Credit Suisse USA. Richter signed the Registration
Statements for all of the ABSC securitizations at issue in this action.
40. Defendant Thomas Zingalli (“Zingalli”) is an individual residing in New York.
Zingalli was, at relevant times, Principal Accounting Officer and Controller of CSFB Mortgage
and Principal Financial Officer, Principal Accounting Officer, Vice President and Controller of
ABS. Zingalli signed the Registration Statements for all of the securitizations at issue in this
action.
41. Defendants Altabef, Donovan, Echevarria, Johnson, Kaiserman, Kimura, Onis,
Marriott, Richter and Zingalli are collectively referred to as the “Individual Defendants.” The
Individual Defendants signed the Registration Statements listed in the table below.
Issuing Trust(s) Document Date
File No. Signatories
HEMT 2005-5
December 7, 2005
333-127872 Jeffrey A. Altabef Evelyn Echevarria Andrew A. Kimura Michael A. Marriott Thomas Zingalli
HEAT 2006-5 March 31, 2006 333-130884 Jeffrey A. Altabef
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Issuing Trust(s) Document Date
File No. Signatories
HEAT 2006-6
Evelyn Echevarria Andrew A. Kimura Michael A. Marriott Thomas Zingalli
ABSC 2006-HE6 ABSC 2006-HE7 ABSC 2007-HE1 ABSC 2007-HE2
March 15, 2006 333-131465 Joseph M. Donovan Juliana Johnson Carlos Onis Thomas Zingalli
CSAB 2006-3 HEAT 2006-7 HEAT 2006-8 HEAT 2007-1
August 10, 2006
333-135481 Jeffrey A. Altabef Evelyn Echevarria Andrew A. Kimura Michael A. Marriott Thomas Zingalli
C. RELEVANT NON-PARTIES
42. Non-parties, the “Issuing Trusts,” are New York common law trusts. The Issuing
Trusts were created and structured by the Originator Defendants, Issuing Defendants and their
affiliated entities to issue billions of dollars worth of RMBS. The Issuing Trusts issued the
Certificates purchased by Plaintiff. The non-party Issuing Trusts are:
• ABSC Loan Trust, Series MO 2006-HE6
• ABSC Loan Trust, Series AMQ 2006-HE7
• ABSC Loan Trust, Series RFC 2007-HE1
• ABSC Loan Trust, Series AMQ 2007-HE2
• CSAB Mortgage-Backed Trust 2006-3
• HEAT 2006-5
• HEAT 2006-6
• HEAT 2006-7
• HEAT 2006-8
• HEAT 2007-1
14
• HEMT 2005-5
(together, the “Issuing Trusts”)
SUBSTANTIVE ALLEGATIONS
I. THE SECURITIZATION PROCESS GENERALLY
43. Traditionally, the process for extending mortgage loans to borrowers involved a
lending institution (the loan originator) making a loan to a home buyer in exchange for a
promise, documented in the form of a promissory note, by the home buyer to repay the principal
and interest on the loan. The loan originator obtained a lien against the home as collateral in the
event the home buyer defaulted on its obligation. Under this simple model, the loan originator
held the promissory note until it matured and was exposed to the risk that the borrower might fail
to repay the loan. As such, the loan originator had a financial incentive to ensure that the
borrower had the financial wherewithal to repay the loan, and that the underlying property had
sufficient value to enable the originator to recover its principal and interest in the event that the
borrower defaulted.
44. Beginning in the 1990s, however, banks and other mortgage lending institutions
increasingly used securitization to finance the extension of mortgage loans to borrowers. Under
the securitization process, after a loan originator issues a mortgage to a borrower, the loan
originator sells the mortgage to a third-party financial institution, or sometimes to a related
corporate entity. By selling the mortgage, the loan originator not only obtains fees, but receives
the proceeds from the sale of the mortgage up front, and thereby has new capital with which to
issue more mortgages. The financial institutions which purchase the mortgages then pool the
mortgages together and securitize the mortgages into what are commonly referred to as
residential mortgage-backed securities or RMBS. In this manner, unlike the traditional process
for extending mortgage loans, the loan originator is no longer subject to the risk that the
15
borrower may default; that risk is transferred with the mortgages to investors who purchase the
RMBS.
45. The securitization of residential mortgage loans, and the creation of RMBS
collateralized against these loans, typically follows the same structure and pattern in each
transaction. First, a loan originator, such as a mortgage lender or bank, originates the underlying
residential mortgage loans. After a loan has been made, a “sponsor” or “seller” (which either
originated the loans itself or acquired the loans from other loan originators) sells the mortgage
loans to a “depositor.” The depositor pools these loans and deposits them into a special purpose
entity or “trust” created by the depositor. One trust is established to hold the pool of mortgages
for each proposed offering. In order to facilitate multiple offerings of RMBS, a depositor sets up
multiple trusts to hold the different pools of mortgages that are to be securitized. With respect to
each offering, in return for the pool of mortgages acquired from the depositor, the trust issues
and distributes RMBS certificates to the depositor. The depositor then works with an
underwriter to price and sell the certificates to investors. Thereafter, a servicer is appointed to
service the mortgage loans held by the trust, i.e., to collect the mortgage payments from the
borrower in the form of principal and interest, and to remit them to the trust for administration
and distribution to the RMBS investors. The diagram below illustrates the typical structure of a
securitization:
16
46. In selling the certificates to investors, the depositor and underwriters disseminate
to investors various disclosure or offering documents describing the certificates being sold. The
offering documents including: (1) a “shelf” registration statement (under SEC Rule 415, an
issuer may file one registration statement covering several offerings of securities made during a
period of up to three years after the filing of the registration statement); (2) a “base” prospectus
and (3) a “prospectus supplement.” The depositor files one shelf registration statement and one
base prospectus that apply to multiple trusts that the depositor proposes to establish. With
respect to each particular trust, the depositor also files a prospectus supplement. Thus, for any
given offering of securities, the relevant offering documents will typically be a shared
registration statement and shared base prospectus, as well as a trust-specific prospectus
supplement.
17
47. Each investor who purchases an RMBS certificate is entitled to receive monthly
payments of principal and interest from the trust. The order of priority of payment to each
investor, the interest rate to be paid to each investor, and other payment rights accorded to each
investor depend on which class or tranche of certificates the investor purchases.
48. The highest or senior tranche is the first to receive its share of the mortgage
payments and is also the last to absorb any losses should mortgage borrowers become delinquent
or default on their mortgages. Accordingly, these senior tranches receive the highest investment
rating by the rating agencies, usually Aaa. After the senior tranche, the middle tranches (referred
to as mezzanine tranches) next receive their share of the proceeds. These mezzanine tranches are
generally rated from Aa2 to Ba2 by the rating agencies. The process of distributing the mortgage
proceeds continues down the tranches through to the bottom tranches, referred to as equity
tranches. This process is repeated each month and all investors receive the payments owed to
them so long as the mortgage borrowers are current on their mortgages. All of the Certificates
purchased by Plaintiff were also represented to be overcollateralized, so payments could be made
in the event that mortgage borrowers fell behind.
II. THE SECURITIZATIONS ASSOCIATED WITH THE PLAINTIFF’S CERTIFICATES AND ITS INVESTMENTS IN THE CERTIFICATES
49. In this case, the Issuing Trusts and the Certificates purchased by Plaintiff were
structured and sold by Credit Suisse Group and its affiliated entities. As such, the transactions
between the sponsor/seller, depositors, underwriter, and the Issuing Trusts were not arm’s length
transactions, as all of the entities involved in the transactions were related.
50. Depositor Defendant ABS created the following Issuing Trusts (1) ABSC 2006-
HE6; (2) ABSC 2006-HE7; (3) ABSC 2007-HE1; and (4) ABSC 2007-HE2. Defendant CSFB
Mortgage then purchased mortgage loans from another Defendant, DLJ, to place into these
18
trusts. In addition, the Certificates issued by these Issuing Trusts were underwritten by
Defendant Credit Suisse Securities.
51. Similarly, all of the entities that structured the remaining Certificates purchased
by Plaintiff ABP were controlled by Credit Suisse. Depositor Defendant CSFB Mortgage, a
Credit Suisse entity, created the Issuing Trusts (1) CSAB 2006-3; (2) HEAT 2006-5; (3) HEAT
2006-6; (4) HEAT 2006-7; (5) HEAT 2006-8; (6) HEAT 2007-1; and (7) HEMT 2005-5.
CSFB Mortgage then purchased mortgage loans from another Credit Suisse entity, the Sponsor
Defendant DLJ, to place into the trust. DLJ and another Credit Suisse entity, Defendant CSFC,
originated some of the mortgages pooled into the CSAB 2006-3 Trust. In addition, the
Certificates issued by all of these trusts were underwritten by another Credit Suisse entity:
Defendant Credit Suisse Securities.
52. In connection with their role as the depositors for the Issuing Trusts that are the
subject of this action, Defendants ABS and CSFB Mortgage prepared and filed with the SEC the
following shelf registration statements, signed by the Individual Defendants, to which the
Certificates purchased by Plaintiff are traceable:
ABS
Registration Statement Date Filed Amount Registered
333-131465 March 15, 2006 $14,235,812,010
CSFB Mortgage
Registration Statement Date Filed Amount Registered
333-135481 August 10, 2006 $13,000,000,000
19
Registration Statement Date Filed Amount Registered
333-130884 March 31, 2006 $18,019,457,044
333-127872 December 7, 2005 $25,999,000,000
53. At the time of filing, the Registration Statements, which were signed by the
Individual Defendants, contained an illustrative form of a Prospectus Supplement that would be
used in the various offerings of Certificates. At the effective date of a particular offering of
Certificates, Credit Suisse Securities, in its role as the underwriter for the Certificates, prepared
and filed a final Prospectus Supplement with the SEC containing a more specific description of
the mortgage pool for that particular offering of Certificates, and the underwriting standards by
which the mortgages were originated. Credit Suisse Securities then marketed and sold the
Certificates pursuant to these Prospectus Supplements.
54. The following chart summarizes and identifies (1) each Issuing Trust that issued
and sold the Certificates purchased by Plaintiff; (2) the dates of the Registration Statements and
Prospectus Supplements pursuant to which the Certificates were issued and sold; and (3) the
identities of the depositor, the issuer, underwriters, and the sponsor/seller for each offering.
Amended
Registration Statement
Date
Issuing Trust Prospectus Supplement
Date
Depositor Underwriter(s) Sponsor/ Seller
12/7/2005 Home Equity Mortgage Trust 2005-5 12/29/2005 CSFB
Mortgage Credit Suisse
Securities DLJ
20
Amended Registration Statement
Date
Issuing Trust Prospectus Supplement
Date
Depositor Underwriter(s) Sponsor/ Seller
Home Equity Asset Trust 2006-5
7/6/2006 CSFB Mortgage
Credit Suisse Securities DLJ
3/31/2006
Home Equity Asset Trust 2006-6
8/1/2006 CSFB Mortgage
Credit Suisse Securities DLJ
Asset Backed Securities Corp. Home Equity Loan Trust, Series MO 2006-HE6
12/1/2006 ABS Credit Suisse Securities DLJ
Asset Backed Securities Corp. Home Equity Loan Trust, Series AMQ 2006-HE7
12/1/2006 ABS Credit Suisse Securities DLJ
Asset Backed Securities Corp. Home Equity Loan Trust, Series RFC 2007-HE1
2/6/2007 ABS Credit Suisse Securities DLJ
4/3/2006
Asset Backed Securities Corp. Home Equity Loan Trust, Series AMQ 2007-HE2
6/4/2007 ABS Credit Suisse Securities DLJ
8/10/2006 Home Equity Asset Trust 2006-7 10/3/2006 CSFB
Mortgage Credit Suisse
Securities DLJ
21
Amended Registration Statement
Date
Issuing Trust Prospectus Supplement
Date
Depositor Underwriter(s) Sponsor/ Seller
CSAB Mortgage-Backed Trust 2006-3 10/30/2006 CSFB
Mortgage Credit Suisse
Securities DLJ
Home Equity Asset Trust 2006-8 12/4/2006 CSFB
Mortgage Credit Suisse
Securities DLJ
Home Equity Asset Trust 2007-1 2/1/2007 CSFB
Mortgage Credit Suisse
Securities DLJ
III. IMPORTANT FACTORS IN THE DECISION OF INVESTORS SUCH AS PLAINTIFF TO INVEST IN THE CERTIFICATES
55. In purchasing the Certificates, Plaintiff, like other investors, attached critical
importance to: (a) the underwriting standards used to originate the loans underlying the
Certificates; (b) the value of the properties securing the underlying mortgage loans and the
appraisal methods used to determine this value; (c) the ratings assigned to the Certificates;
(d) the level of credit enhancement applicable to the Certificates; and (e) the ability of the Issuing
Trusts to establish legal title to the underlying loans.
56. Sound underwriting was critically important to Plaintiff because the ability of
borrowers to repay principal and interest was the fundamental basis upon which the investments
in the Certificates were valued. Reflecting the importance of the underwriting standards, the
Offering Documents contained representations concerning the purportedly rigorous standards
used to originate the mortgages held by the Issuing Trusts.
22
57. For example, each of the Registration Statements issued by CSFB Mortgage
represented that: “The depositor expects that the originator of each of the loans will have
applied, consistent with applicable federal and state laws and regulations, underwriting
procedures intended to evaluate the borrower’s credit standing and repayment ability and/or the
value and adequacy of the related property as collateral.” Each of the Registration Statements
issued by ABS similarly indicated the importance of loan underwriting.
58. In addition, the Prospectus Supplements indicated that the underwriting guidelines
were 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.
59. With respect to loans acquired from third-party originators, the Prospectus
Supplements represented that the originators’ guidelines required the mortgages to have been
underwritten in accordance with a view toward the resale of the loans in the secondary mortgage
market. The Prospectus Supplements represented that the originators’ guidelines required the
originators to consider, among other things, the mortgagor’s credit history, repayment ability,
and debt-to-income ratio, as well as the type and use of the mortgaged property. In addition, the
Prospectus Supplements represented that in order to submit loan packages, each of the third-
party originators must have met certain minimum underwriting standards, and that the loans must
have been in compliance with the terms of a signed mortgage loan purchase agreement.
60. Real estate appraisals are governed by USPAP, which are the generally accepted
standards for professional appraisal practice in North America promulgated by the Appraisal
Standards Board of the Appraisal Foundation, as authorized by Congress. With respect to real
estate appraisals, USPAP requires the following:
An appraiser must perform assignments with impartiality, objectivity, and independence, and without accommodation of
23
personal interests. An appraiser must not accept an assignment that includes the reporting of predetermined opinions and conclusions.
* * * * *
It is unethical for an appraiser to accept an assignment, or to have a compensation arrangement for an assignment, that is contingent on any of the following:
1. the reporting of a predetermined result (e.g., opinion of value);
2. a direction in assignment results that favors the cause of the client;
3. the amount of a value opinion;
4. the attainment of a stipulated result; or
5. the occurrence of a subsequent event directly related to the appraiser’s opinions and specific to the assignment’s purpose.2
61. Reflecting the importance of independent and accurate real estate appraisals to
investors such as ABP, the Offering Documents contained extensive disclosures concerning the
value of the collateral underlying the mortgages pooled in the Issuing Trusts, and the appraisal
methods by which such values were obtained.
62. For example, the Offering Documents represented that the properties securing the
mortgages were to be appraised by qualified, independent appraisers in conformity with USPAP
and/or using market value analyses based on recent sales of comparable homes nearby.
63. Independent and accurate real estate appraisals were also critically important to
investors such as Plaintiff because they ensured that the mortgage loans underlying the
Certificates were not under-collateralized, thereby protecting RMBS investors in the event that a
borrower defaulted on a loan. As such, by allowing RMBS investors to assess the degree to
2 Unless otherwise noted, all emphases are added and internal citations are omitted.
24
which a mortgage loan was adequately collateralized, accurate appraisals provided investors such
as Plaintiff with a basis for assessing the price and risk of the Certificates.
64. One measure that uses the appraisal value to assess whether mortgage loans are
under-collateralized is the loan-to-value (“LTV”) ratio. The LTV ratio is a mathematical
calculation that expresses the amount of a mortgage as a percentage of the total value of the
property, as obtained from the appraisal. For example, if a borrower seeks to borrow $900,000
to purchase a house worth $1,000,000, the LTV ratio is $900,000/$1,000,000, or 90%. If,
however, the appraised value of the house is artificially increased to $1,200,000, the LTV ratio
drops to just 75% ($900,000/$1,200,000).
65. From the perspective of lenders, and investors such as Plaintiff, the higher the
LTV ratio, the riskier the loan, because it indicates that the borrower has a lower equity stake,
and a borrower with a lower equity position has less to lose if s/he defaults on the loan. The
LTV ratio is a significant measure of credit risk because both the likelihood of default and the
severity of loss are higher when borrowers have less equity to protect in the event of foreclosure.
Worse, particularly in an era of falling housing prices, a high LTV ratio creates the heightened
risk that, should the borrower default, the amount of the outstanding loan may exceed the value
of the property.
66. The rating assigned to each of the Certificates was another important factor in
Plaintiff’s decisions to purchase the Certificates. Plaintiff relied on the ratings as an indicator of
the safety and likelihood of default of the mortgage loans underlying a particular Certificate.
Consistent with its conservative corporate investment guidelines, Plaintiff purchased the
Certificates because they all were rated Aaa.
25
67. In purchasing the Certificates, Plaintiff further relied on the ability of each of the
Issuing Trusts to be able to show that it in fact had legal title to the underlying mortgage loans.
Plaintiff would never have purchased any of the Certificates from Defendants if there was any
doubt as to whether the Issuing Trusts had legal title to any of the mortgage loans that were
pooled for each offering because without that, the Issuing Trusts, and therefore investors, had no
right to the income streams the principal and interest payments should have generated.
68. Finally, the Prospectus Supplements represented the level of credit enhancement,
or loss protection, associated with the Certificates. Credit enhancements impact the overall
credit rating that a Certificate receives. The amount of credit enhancements built into the
Certificates was overstated, which exposed Plaintiff to additional losses. These levels of credit
enhancement were material to Plaintiff.
IV. DEFENDANTS KNOWINGLY MISREPRESENTED THE QUALITY OF THE SECURITIES THEY ORIGINATED OR ACQUIRED AND PACKAGED FOR SALE TO INVESTORS SUCH AS ABP
69. In the late 1990s and early 2000s, an unprecedented boom in the housing market
began to unfold. Between 1994 and 2006, the housing market experienced a dramatic rise in
home ownership, as more than 12 million more Americans became homeowners. Likewise, the
subprime market grew dramatically, enabling more and more borrowers to obtain credit who
traditionally would have been unable to access it. According to INSIDE MORTGAGE FINANCE,
from 1994 to 2006, subprime lending increased from an estimated $35 billion, or 4.5% of all
one-to-four family mortgage originations, to $600 billion, or 20% of originations.
70. To ride this housing boom, financial firms aggressively pushed into the complex,
high-margin business of securitization, i.e., packaging mortgages and selling them to investors as
RMBS. This aggressive push created a boom for the mortgage lending industry. Mortgage
originators generated profits primarily through the sale of their loans to financial firms such as
26
Credit Suisse, and the originators were therefore driven to originate and to sell as many loans as
possible. Increased demand for mortgages by financial institutions like Credit Suisse led to
increased volume in mortgage originations. Originators began to borrow money from the same
large banks that were buying their mortgages in order to fund the origination of even more
mortgages. By buying and packaging mortgages, Wall Street firms enabled the lenders to extend
credit even as the number of creditworthy borrowers sank and dangers in the housing market
grew. This emphasis on volume over sound underwriting led to predictable results. The FBI
reported that an analysis of more than 3 million loans revealed that between 30 and 70 percent
of early payment defaults (“EPDs”), or defaults which occur within a few months of the loan’s
origination, were linked to significant misrepresentations in the original loan applications. When
a borrower fails to make payments so soon after taking out a loan, it is a strong sign that the loan
should never have been made in the first place and a possible indicia of fraud.
71. In the instant action, the players that structured the Certificates purchased by
Plaintiff were Credit Suisse and its affiliated entities. Credit Suisse embarked on a scheme to
profit from the housing boom by acquiring or partnering with subprime lenders, such as the
originators described in ¶¶ 146-206 below, and then directing or encouraging these lenders to
originate and purchase large numbers of mortgage loans, regardless of the borrowers’ ability to
pay, so that the loans could then be quickly flipped at a profit on to an unsuspecting secondary
market (that is, RMBS investors such as ABP).
72. Credit Suisse reaped billions of dollars in profits from its RMBS activities during
the U.S. housing boom. Credit Suisse was a vertically integrated business with a hand in nearly
every stage of the mortgage securitization business, including originating, purchasing, and
selling residential mortgage loans, bundling mortgages into RMBS, and selling them to
27
investors. The company garnered enormous profits at each of these steps. In addition, Credit
Suisse pocketed the difference between what it paid to originate or to purchase a pool of
mortgage loans, and what it received from selling those loans into a securitization. Credit Suisse
Securities also obtained underwriting fees and commissions from selling the RMBS it had
securitized to investors. According to Credit Suisse Group’s Form 20-F Annual and Transition
Report, filed on March 20, 2008, for the period ending December 31, 2007, Credit Suisse Group
received gains of 218 million Swiss francs (approximately $197 million) from its RMBS
activities between 2005 and 2007.
73. Unlike arm’s-length securitizations where the loan originator, depositor,
underwriters, and issuers are unrelated third parties, here the transactions among the sponsor
(DLJ); the depositor (ABS or CSFB Mortgage); the underwriter (Credit Suisse Securities); and
the Issuing Trusts were not arm’s-length transactions at all, as Credit Suisse Group controlled
every aspect of the securitization process.
74. The mortgage loans underlying the Certificates were originated by the Credit
Suisse-controlled entities, DLJ and CSFC, or by a third-party originator, and acquired by the
sponsor, DLJ. Credit Suisse Group’s indirect subsidiaries ABS and CSFB Mortgage were
corporations structured as limited purpose entities to acquire mortgage loans from DLJ and to
transfer the loans to the Issuing Trusts for sale to investors as RMBS. As the depositors, ABS
and CSFB Mortgage were shell corporations with no assets of their own, and had the same
directors and officers as other Credit Suisse entities. Through these directors/Credit Suisse
executives, Credit Suisse Group exercised actual day-to-day control over ABS and CSFB
Mortgage. Revenues flowing from the issuance and sale of the Certificates were passed through
to Credit Suisse Group.
28
75. The Depositor Defendants, ABS and CSFB Mortgage, in turn created the Issuing
Trusts. Like the Depositor Defendants, the Issuing Trusts were shell entities that were
established for the sole purpose of holding the pools of mortgage loans assembled by the
Depositor Defendants, and issuing Certificates collateralized against these mortgage pools to
underwriters for sale to the public. Through the Depositor Defendants, Credit Suisse Group also
exercised actual control over the Issuing Trusts.
76. Once the Issuing Trusts issued the Certificates, the Certificates were purchased by
Credit Suisse Securities, another indirect subsidiary of Credit Suisse Group. In sum, Credit
Suisse Group maintained a high level of day-to-day scrutiny and control over its subsidiaries,
and controlled the entire process leading to the sale of the Certificates to ABP.
77. Credit Suisse had direct insight into the true quality of the loans underlying the
Certificates it issued to Plaintiff. As a Credit Suisse analyst stated in a research report dated
March 12, 2007:
In the past five years, subprime purchase originators have more than doubled in share to approximately 20% of the total in 2006. Over this time period, subprime lenders eased underwriting standards in an effort to gain market share. As one private builder indicated to us, in the past nine months anybody with a pulse that was interested in buying a home was able to get financing, which certainly helps explain the poor performance thus far of 2006 loan vintages.
78. Similarly, in May 2007, Defendant Marriott commented at a roundtable
discussion at a Mortgage Banker Association conference that, “There’s no way we could have
had the [mortgage default] storm we had without fraud being a part of it.” Credit Suisse knew
of the poor quality of the loans in its own RMBS pools through, inter alia, its ownership and
control of CSFC and DLJ – two of the originators that produced low-quality loans underlying
ABP’s RMBS; its course of dealings with third-party originators; the due diligence that Credit
29
Suisse performed on the loans; its servicing activities, which allowed it to track loan
performance; and its monitoring of the housing market.
79. Prior to underwriting and selling the Certificates to investors such as Plaintiff,
Defendants had identified but failed to disclose the widespread underwriting and appraisal
deficiencies by the Originators, including Defendants CSFC and DLJ, which were wholly owned
and controlled by Credit Suisse, as described above. This was in direct contradiction to the
representations in the Offering Documents accompanying the Certificates sold to Plaintiff.
80. As has now come to light, contrary to the representations in the Offering
Documents, Defendants CSFC and DLJ, and the third-party originators, all of which originated
the mortgages underlying the Certificates, knowingly departed from the underwriting and
appraisal standards that were represented in the Offering Documents. Credit Suisse Group,
CSAG, Credit Suisse USA, Credit Suisse Holdings, the Issuing Defendants, Sponsor Defendant,
and Underwriter Defendant were all aware of these departures from sound lending practices, but
nonetheless continued to package defective loans into securitizations and sell them to
unsuspecting investors such as Plaintiff.
A. CREDIT SUISSE DISREGARDED UNDERWRITING GUIDELINES AND APPRAISAL STANDARDS IN ITS OWN VERTICALLY INTEGRATED MORTGAGE LENDING OPERATIONS
81. Credit Suisse itself participated in mortgage loan origination through subsidiaries
such as CSAG, CSFC, DLJ and Lime Financial Services Ltd. (“Lime Financial”), which it
controlled as part of a vertically integrated mortgage lending and securitization business. It has
since come to light that these entities, like the other originators that contributed loans to Credit
Suisse securitizations, disregarded their stated underwriting guidelines so as to generate more
loans for resale to RMBS investors like Plaintiff.
30
1. DLJ Mortgage Capital, Inc.
82. DLJ’s unscrupulous lending practices have also resulted in numerous lawsuits. In
May 2007, Sterling Federal Bank (“Sterling”) brought a securities action against DLJ and several
other Credit Suisse entities in the Northern District of Illinois, alleging that defendants sold the
plaintiff securities that suffered from a series of ratings downgrades shortly after they were
purchased, resulting in significant losses. Specifically, Sterling claimed that defendants knew
that many of the mortgage loans underlying the securities were:
(a) originated with inadequate underwriting criteria; (b) originated in such a way as to result in excessive risk to [plaintiff]; (c) originated with a large volume of poor quality loans; (d) originated by wholesale originators who were openly and actively engaging in improper lending practices; (e) originated as adjustable rate mortgages to subprime borrowers by qualifying the borrowers with low initial payments without an appropriate analysis of the borrowers’ ability to make payments at the fully indexed rate; (f) originated as to borrowers without considering appropriate documentation and/or verification of their income; (g) originated containing features requiring frequent refinancing; (h) originated to borrowers with inadequate debt-to-income ratios; and (i) originated without properly considering borrowers’ ability to meet their overall level of indebtedness.
Further, Sterling alleged that defendants withheld material information from Moody’s that
resulted in Moody’s issuing a higher than warranted rating. See Sterling Federal Bank, F.S.B., v.
Credit Suisse First Boston Corp., No. 07-cv-2922 (N.D. Ill. filed May 2007). The litigation
settled in July 2009.
83. DLJ has also been sued by its own insurers. In January 2010, Ambac Assurance
Corp. (“Ambac”), a bond insurer, sued DLJ and Credit Suisse Securities in New York State court,
alleging that they had misled Ambac regarding a pool of over 2,000 mortgage loans in 2007
which had since “defaulted at a remarkable rate.” Ambac reviewed a sample of 744 loan files for
the underlying mortgages, and found that 593 of them – approximately 80% of the sample –
31
breached DLJ’s representations and warranties. The breaches included failure to determine
whether stated incomes were reasonable, lending to borrowers with debt-to-income and LTV
ratios above the allowed maximums, failures of borrowers to accurately disclose their liabilities,
and misrepresentations of borrower income, assets, employment, or intent to occupy the
property. See Ambac Assurance Corp. v. DLJ Mortgage Capital, Inc., No. 600070/2010 (Sup.
Ct. N.Y. Co. filed Jan. 12, 2010).
84. DLJ was sued by Massachusetts Mutual Life Insurance Co. (“Mass Mutual”) and
Allstate Insurance Company (“Allstate”) in February 2011, each alleging that DLJ originated or
acquired loans on the basis of overstated incomes, inflated appraisals, false verifications of
employment, and exceptions to underwriting criteria that had no proper justification. Mass
Mutual conducted a loan-level review which revealed that the loans sampled contained
drastically higher LTV ratios and drastically lower owner-occupancy rates than the rates
proffered by defendants in the offering documents. In particular, Mass Mutual’s review
determined that 43% of the loans tested had appraisals that were inflated by 10% or more.
Allstate conducted a loan-level analysis of over 11,000 mortgage loans across eight different
offerings and likewise found evidence of lower owner-occupancy rates, higher debt-to-income
ratios, and higher LTV ratios than those disclosed in the offering documents. See Massachusetts
Mut. Life Ins. Co. v. DLJ Mortgage Capital, Inc., No. 11-cv-30047-MAP (D. Mass filed Feb. 25,
2011); Allstate Ins. Co. v. Credit Suisse Securities (USA) LLC, No. 650547/2011 (Sup. Ct. N.Y.
Co. filed Feb. 28, 2011).
85. MBIA Insurance Corp. (“MBIA”), another of Credit Suisse’s insurers, conducted
an investigation into loan files for HEMT 2007-1, a DLJ originated RMBS from the same series
and time period as some of the RMBS purchased by ABP, after it was asked to make payments
32
on insurance policies. MBIA’s investigation revealed that 87% of the defaulted or delinquent
loans in those securitizations contained breaches of DLJ’s representations and warranties.
86. During the course of MBIA’s subsequent suit against DLJ for fraud and breach of
contract, MBIA revealed that the SEC had commenced an investigation of Credit Suisse,
subpoenaing documents related to the standards under which Credit Suisse securitized loans. See
Jody Shenn & Shannon Harrington, SEC Subpoenas Credit Suisse Over Mortgages, MBIA Says,
BLOOMBERG, May 5, 2011.
87. In a related filing, MBIA stated that Credit Suisse has produced emails that prove
that as early as February 2006, Credit Suisse itself had become aware that the mortgage loans
that it was pooling for securitization had been originated in violation of the applicable
underwriting guidelines. See Pl.’s Mem. Further Supp. of Mot. to Compel at 9, MBIA Ins. Corp.
v. Credit Suisse Sec., No. 603751/2009 (Sup. Ct. N.Y. Co. May 5, 2011).
88. In October 2011, DLJ was sued by Assured Guaranty Municipal Corporation
(“Assured”), another insurer, in New York State court. Assured alleged that DLJ had breached
its obligations under the Pooling and Servicing Agreements (“PSA”) of securitizations that
Assured had purchased from DLJ. Specifically, Assured alleged that 93 percent of reviewed
loans breached one or more of DLJ’s representations regarding underwriting. See Assured Guar.
Mun. Corp. v. DLJ Mortgage Capital, Inc., No. 652837/2011 (Sup. Ct. N.Y. Co. filed Oct. 17,
2011). Thus, a number of independent reviews of DLJ mortgage pools have consistently
uncovered evidence of large-scale misrepresentations and underwriting failures.
89. On information and belief, the loans underlying the Certificates purchased by
ABP suffer from the same or similar deficiencies as those described above. As DLJ was part of
33
Credit Suisse’s vertically integrated securitization operation, Credit Suisse had unique insight
into the scope and scale of the problems with its subsidiary and the loans it originated.
2. Credit Suisse Financial Corp.
90. CSFC is engaged in the business of originating and funding residential mortgage
loans and/or purchasing already closed residential mortgage loans from mortgage lenders.
CSFC’s questionable lending practices have made it the target of many lawsuits. In March 2008,
CSFC was sued in New York for allegations that it engaged in a scheme to defraud
unsophisticated, low-income, minority borrowers by targeting and inducing them to buy
dilapidated properties at intentionally over-appraised and fraudulently inflated prices. The
complaint alleged that CSFC and the other defendants proffered the properties as a “good deal,”
required no down payment, and never collected any employment or salary information from the
borrower. See Martin v. Fitzpatrick Neil St. Hill Dodson, Esq., No. 08-cv-1311 (E.D.N.Y. filed
Mar. 31, 2008). CSFC settled the case on June 2, 2009.
91. CSFC has also faced lawsuits in California for its questionable practices there.
The suits alleged that CSFC qualified borrowers for loans based on inflated income statements
without the borrowers’ knowledge or consent, misrepresented the nature of adjustable rate
mortgages to unsophisticated borrowers, and engaged in purposeful predatory lending practices.
3. Lime Financial Services Ltd.
92. Lime Financial, founded in 1999, was a national wholesale subprime mortgage
lender that, at its peak originated over $2.1 billion in subprime loans. In November 2006, Lime
Financial expanded its business, acquiring a portion of the sales and operations staff of Meritage
Mortgage Corporation (“Meritage”), a subsidiary of NetBank.
93. Eager to keep pace with its competition, such as Lehman Brothers and
Countrywide Financial Corp., in the expanding industry of rapid origination, securitization and
34
sale of securities backed by residential mortgage loans to investors, Credit Suisse acquired Lime
Financial in October 2007. According to an April 18, 2007 article in AMERICAN BANKER, Credit
Suisse head of fixed income Jim Healy said that Credit Suisse had added origination and
servicing capacity to its mortgage securitization business as part of efforts to expand the
business, and that “Lime represents an opportunity to incrementally grow our platform.” Credit
Suisse also said that it would hire Lime Financial’s senior management team, marketing team,
and sales force. Lime Financial was an originator of mortgage loans pooled into RMBS
purchased by ABP, including HEAT 2006-6, HEAT 2006-7, HEAT 2006-8 and HEAT 2007-1.
94. Much of Lime Financial’s success in the subprime industry was the result of its
questionable lending practices. The company, like many of the other Originators, targeted
borrowers with low income or poor credit and provided them with loans that far exceeded what
they were able to afford. The company also routinely ignored its own underwriting guidelines in
order to ramp up loan originations and generate enormous profits.
95. As a result of this conduct, Lime Financial became the target of many lawsuits.
For example, in July 2008, a class action complaint was filed in the District of Oregon alleging
that Lime Financial violated the Truth-In-Lending-Act (“TILA”). See Ward v. Lime Fin. Servs.,
No. 08-cv-840-AC (D. Or. filed July 16, 2008). Plaintiffs claimed that Lime Financial failed to
disclose material information about the loans borrowers were receiving, including information
pertaining to finance charges and right-to-cancel notices. Plaintiffs sought rescission of the loan
agreements. Several other Lime Financial borrowers have also come forward, charging the
company with fraudulently inducing unqualified borrowers to take out loans that Lime Financial
knew they could not afford. See, e.g., Valenzuela v. Lime Fin. Servs., Ltd., No. 10-cv-00502-
35
RCJ-VPC (D. Nev. filed Aug. 10, 2010); Azurdia v. Lime Fin. Servs., No. 10-cv-00330-MHP
(N.D. Cal. filed Jan. 25, 2010).
96. Because these practices were occurring within Credit Suisse’s own affiliated
entities, Defendants had a unique insight into, but did not disclose the poor quality of the
underlying loans that were being included in the securitizations that were sold to investors such
as Plaintiff ABP.
B. CREDIT SUISSE WAS AWARE THAT THIRD-PARTY ORIGINATORS WERE ABANDONING THEIR UNDERWRITING GUIDELINES AND APPRAISAL STANDARDS
97. Before loans were pooled for securitization, Credit Suisse received reports from
its due diligence vendors indicating that many of them did not comply with underwriting
guidelines and possessed no grounds for making exceptions to the guidelines. Yet Credit Suisse
ignored that information and permitted many of the defective loans to be securitized anyway.
Credit Suisse required third-party originators to compensate it for defective loans, but did not
remove those loans from securitization pools or pass its recoveries on to the RMBS investors.
Furthermore, Credit Suisse was responsible for servicing many of the loans that it securitized by
collecting mortgage payments, forwarding payments to the Issuing Trusts for distribution to
investors, and foreclosing on delinquent properties. These activities brought Credit Suisse into
direct contact with borrowers, alerting it to the decline in underwriting standards and the fact that
many borrowers had been given inappropriate loans. Through these and other channels, Credit
Suisse learned that the third-party-originated loans in its securitization pools had not been
generated in accordance with the underwriting guidelines stated in the Offering Documents.
1. Credit Suisse Ignored Evidence of Underwriting Failures From Its Due Diligence Vendor
98. During the housing boom, Credit Suisse and other issuers of RMBS hired Clayton
Holdings LLC (“Clayton”) to conduct due diligence to review whether the loans to be included
36
in their RMBS offerings complied with the law and met the lending standards that the originators
said that they were using. Clayton’s Form 10-K filed on March 14, 2008, represented that
Clayton provides “services to the leading buyers and sellers of, and investors in, residential and
commercial loan portfolios and securities ... includ[ing] major capital markets firms, banks and
lending institutions, including the largest MBS issuers/dealers.”
99. On September 23, 2010, hearings were held by the FCIC in Sacramento,
California. Part of the hearings involved the role that Clayton played in the mortgage
securitization process. Clayton’s Senior Vice President of Transaction Management Vicki Beal
(“Beal”) suggested that, rather than directing due diligence firms to conduct thorough portfolio
reviews that would most likely identify defective loans, the investment banks, such as Credit
Suisse, pressured loan reviewers to disregard the problematic loans through the use of exceptions
and offsets, even in cases where such practices did not satisfy the applicable underwriting
guidelines.
100. Clayton reviewed approximately 911,000 loans for 23 investment or commercial
banks, including Credit Suisse, and summarized its findings in an internal report (the “Trending
Report”) which was first made publically available in September 2010 following the FCIC’s
hearings. The Trending Report covered roughly 10% of the total number of mortgages Clayton
was contracted to review. Clayton graded each loan for credit and compliance by using the
following grading scale: Event 1, loans that meet guidelines; Event 2, loans that do not meet
guidelines but have sufficient compensating factors; and Event 3, loans that do not meet
guidelines and have insufficient compensating factors. According to a September 30, 2010 letter
from Clayton to the FCIC, Trending Report data was available to Clayton’s clients (i.e., the
investment banks) but was not shared with rating agencies or investors.
37
101. The Trending Report contained the rejection and waiver rates for the loans that
were pooled into RMBS by Credit Suisse and sold to investors such as Plaintiff. Clayton found
that of the Credit Suisse loans that Clayton reviewed for underwriting compliance, 32% neither
met underwriting guidelines nor possessed compensating factors to justify an exception to be
included into securitizations i.e., were Event 3s. However, Credit Suisse ignored many of these
underwriting failures, waived 33% of those rejected loans back into its mortgage pools, and sold
RMBS containing these non-compliant loans to investors such as Plaintiff ABP, as summarized
in the following table:
1Q 2006 2Q 2006 3Q 2006 4Q 2006 1Q 2007 2Q 2007 Total Initial Rejection rate
57% 33% 33% 31% 34% 26% 32%
Waiver rate 33% 54% 42% 34% 20% 25% 33%
102. In its capacity as the underwriter for all of the Certificates purchased by Plaintiff,
Defendant Credit Suisse Securities had an obligation to conduct due diligence regarding the
accuracy and completeness of the Offering Documents prior to their dissemination to investors
such as ABP. In connection with that due diligence process, Credit Suisse Securities had access
to various sources of information, including data from Clayton, which should have alerted it to
the various originators’ systematic and widespread abandonment of stated underwriting
guidelines and appraisal methods. Defendant Credit Suisse Securities was supposed to play a
“gatekeeper” role for public investors such as Plaintiff, who did not have access to non-public
information through which to test the assertions in the Offering Documents. Moreover, RMBS
investors such as Plaintiff paid Credit Suisse Securities significant fees for carrying out this
function.
38
103. It is evident, however, that Credit Suisse Securities did not fulfill its obligation to
ensure that investors such as ABP were provided Offering Documents containing accurate and
complete information. For example, Ms. Beal told the FCIC in her prepared remarks, “[t]o our
knowledge, prospectuses do not refer to Clayton and its due diligence work.” She further stated
that “Clayton does not participate in the securities sales process, nor does it have knowledge of
our loan exception reports being provided to investors or the rating agencies as part of the
securitization process.” Additionally, D. Keith Johnson, the former President and Chief
Executive Officer of Clayton, confirmed to investigators that Clayton’s findings should have
been disclosed to investors. By cynically ignoring the results of its due diligence and waiving
loans that it knew to be defective into securitization pools, Credit Suisse Securities abandoned its
gatekeeper role, willfully abdicating a responsibility it had been paid to assume.
104. While Credit Suisse ignored Clayton’s findings that a significant number of loans
it had originated through its own subsidiaries or purchased from third-party originators were
flawed, and proceeded to bundle them into RMBS and sell them to investors such as Plaintiff, it
did not ignore Clayton’s reports insofar as it could turn them to its own advantage. As Ms. Beal
testified, Clayton’s clients used Clayton’s due diligence to “negotiate better prices on pools of
loans they [we]re considering for purchase, and negotiate expanded representations and
warranties in purchase and sale agreements from sellers.” These savings were not, however,
passed on to investors such as ABP.
2. Credit Suisse Knew Of Underwriting Failures Through Its “Repricing” Activities
105. In addition to the data it received from Clayton, Credit Suisse also maintained a
claims program through which it learned of underwriting failures on the part of third-party
originators from which it acquired mortgage loans. Credit Suisse maintained a “Put Back
39
System” database that it used to monitor loan performance and delinquency. When the system
identified a loan that experienced an early default or another breach of the seller’s
representations and warranties, Credit Suisse would demand that the third-party originator that
had sold it that loan provide compensation. For example, MBIA identified a December 2007
transaction in which Credit Suisse demanded that the third-party originator Decision One
Mortgage Company, LLC (“Decision One”) provide compensation because a particular stated-
income loan with a 100% LTV ratio “was not documented according to the applicable
underwriting guidelines.”3 Credit Suisse also asserted claims against third-party originators for
reasons such as failure to comply with underwriting guidelines, income and occupancy
misstatements, possible mortgage fraud, and EPDs.
106. Although Credit Suisse identified many loans with EPDs or other major faults and
demanded compensation from the third-party originators who had sold them, Credit Suisse did
not remove those loans from the securitization pools, pass its recoveries on to the Issuing Trusts
that owned them, or even notify RMBS investors such as Plaintiff. Instead, Credit Suisse
employed a strategy known as “repricing” whereby it would “sell” securitized loans back to the
third party originators while simultaneously “buying” them back at a much lower price, based
upon the defects that Credit Suisse had identified. Through this bookkeeping exercise, Credit
Suisse demanded and received compensation for the flaws in securitized mortgage loans that it
had already sold to investors such as Plaintiff, without passing along those savings.
107. MBIA identified a September 2007 repricing transaction with Decision One
whereby Credit Suisse “sold” Decision One seventeen defective loans that Decision One had
originated – sixteen of which were owned by an Issuing Trust – for approximately $1.3 million,
3 Decision One originated loans in the HEAT 2006-6 offering purchased by ABP.
40
and simultaneously “bought” the same loans back for approximately $215,000, bringing Credit
Suisse a quick profit of more than $1 million. However, Credit Suisse did not remit its net gain
to the Issuing Trust that actually owned the vast majority of the loans involved. Instead, the
money was deposited in a Credit Suisse trading account.
108. Another deceptive strategy employed by Credit Suisse involved reaching
settlement agreements with third-party originators. In such agreements, Credit Suisse would
agree to waive its right to make a third-party originator repurchase defective securitized loans in
exchange for cash consideration. For example, MBIA identified a January 2009 settlement in
which DLJ obtained $2.5 million for releasing Decision One of its obligation to repurchase
defective loans. Again, this consideration went directly into Credit Suisse accounts and was not
passed on to the appropriate Issuing Trusts or RMBS investors.
109. In a January 2007 email chain produced in connection with the MBIA litigation,
Credit Suisse Managing Director Peter Sack wrote to Credit Suisse Chief Credit Risk Officer
Robert Sacco, “[Put-Back Group]’s December year-to-date report describes 900 loans that were
‘repurchased from securities in 2006.’ However, I researched the loans and found that about 350
were not actually repurchased from deals – we rec’d a check from the originator based on
[repricing] but we did not repurchase the loan from the deal or pass the $ to the trust.”
110. Thus, while Credit Suisse was assuring RMBS investors that the third-party
originators it dealt with followed the underwriting guidelines described in the Offering
Documents, it was also collecting millions of dollars from those same third-party originators for
selling it hundreds of loans that defaulted within just a few months or were otherwise seriously
flawed. It is therefore beyond contention that Credit Suisse was aware of the true quality of the
loans the third-party originators were producing.
41
3. Credit Suisse Knew Of Underwriting Failures Through Its Servicing Activities
111. Even after its RMBS had been issued and sold to investors, Credit Suisse
continued to profit by collecting fees for servicing. Servicing involves collecting mortgage
payments, remitting those payments to the Issuing Trusts for distribution to investors, contacting
delinquent borrowers, and foreclosing on defaulted properties. In August 2005, Credit Suisse
purchased the subprime mortgage servicing company Defendant SPS.
112. Servicing securitized mortgages was a major source of revenue for Credit Suisse.
According to Credit Suisse Group’s Form 20-F Annual and Transition Report, filed on March
20, 2008, the fair value of the Credit Suisse Group’s mortgage servicing rights was 179 million
Swiss francs (approximately $162 million) as of December 31, 2007.
113. Because servicers are in regular, direct contact with borrowers, they are in a
unique position to evaluate the likelihood that loans will be repaid. The Prospectus Supplement
for the HEAT 2006-7 Trust states that:
The servicing of [Alt-A, subprime, and non-performing] assets requires a high level of experience and sophistication and involves substantial interaction with customers. This is particularly true when a customer is experiencing financial difficulty or when a loan has become delinquent. In such cases, SPS works with customers individually, encouraging them to make payments timely, working on missed payments, and structuring individual solutions when appropriate. In connection with delinquent mortgage loans, the quality of contact is critical to the successful resolution of the customer’s delinquency.
114. Because servicing involves property value assessment, servicers are also in a
unique position to detect inflated appraisal values. The Prospectus Supplement for the HEAT
2006-7 Trust, for example, states that:
In connection with handling delinquencies, losses, bankruptcies and recoveries, SPS has developed a sophisticated model, based upon updated property values, for projecting the anticipated net
42
recovery on each asset. Property valuations are generally ordered starting at the 63rd day of the default recovery process of the delinquent loan and then no more frequently than every six (6) months. The projected “net present value” is part of SPS’s proprietary loss mitigation automation and assists staff with determining an appropriate and reasonable strategy to resolve each defaulted loan on the basis of the information then available.
115. SPS was the servicer for many of the loans underlying the RMBS purchased by
Plaintiff. For example, the Prospectus Supplement for the HEAT 2006-7 Trust states that SPS
would be the servicer for 95% of the pooled loans. Through its ownership of SPS, Credit Suisse
had an incentive to wrongfully misrepresent the viability of loans that should have been
foreclosed or liquidated, and did so, at the expense of investors such as ABP, in order to collect
late payment fees and service charges on the servicing of those loans.
116. As a result of the insight into the true quality of the loans that it had securitized
and the likelihood of a collapse in the subprime industry gained from its servicing activities,
Credit Suisse increased its efforts to offload its mortgage portfolio onto investors such as
Plaintiff. David Mathers, an executive in Credit Suisse’s investment bank operations, told
EUROMONEY that, “[Credit Suisse] had our first conversations about scaling back our subprime
origination in 2006. We had a subprime servicer and saw signs of strain in the market. Market
events in the first quarter of 2007 added to our concerns and we both accelerated our position
reduction efforts and looked at specific hedging initiatives.” Credit Suisse did not pass on the
information it obtained from its servicing activities to its RMBS investors.
117. In addition, Credit Suisse has faced regulatory action for not accurately reporting
servicing data to investors. On May 26, 2011, the Financial Industry Regulation Authority
(“FINRA”) announced that Defendant Credit Suisse Securities had submitted a Letter of
Acceptance, Waiver and Consent (“AWC”) and agreed to a censure and fine of $4.5 million for
43
the inaccurate reporting of delinquency data related to the issuance of subprime securities.
Specifically, FINRA found that Credit Suisse had failed to provide accurate delinquency rates
with respect to 21 subprime securitizations that were referenced on the Company’s website in
2006. The AWC described how Credit Suisse had been informed by one of its master servicers
in November 2006 about the inaccurate delinquency rates and that, as a result, the inaccuracies
had the capacity to seriously impact investors’ assessment of future securitizations. FINRA
found that, although Credit Suisse knew of the inaccuracies, it did not sufficiently investigate the
delinquency errors, inform clients who had invested in the securitizations at issue of the specific
reporting discrepancies, or correct the information on the website. As a result, investors who
were evaluating the securities for potential purchase were unaware that some of the delinquency
information referenced on the website was inaccurate. The website also hyperlinked inaccurate
information for six of the 21 securitizations to four subsequent RMBS securitizations, resulting
in further impairment of investors’ ability to evaluate the true risks involved in making future
purchases. Plaintiff ABP purchased from two of the six affected securitizations, including
HEAT 2006-5 and HEAT 2006-6, and was affected in its purchase from one of the four
subsequent securitizations impacted by the inaccurate information, including HEAT 2006-8.
C. CREDIT SUISSE KNEW OF DECLINING UNDERWRITING STANDARDS THROUGH ITS MONITORING OF THE HOUSING MARKET
118. Credit Suisse maintained a sophisticated research operation, which conducted in-
depth monitoring and analysis of the housing industry for, inter alia, issuing recommendations
on the stock of homebuilding companies. Credit Suisse housing analysts and RMBS personnel
worked closely together to obtain an accurate picture of the market. Through these research and
monitoring activities, Credit Suisse learned of the widespread collapse of lending and
underwriting standards on the part of mortgage originators, the flaws inherent in exotic mortgage
44
products, and pervasive fraud in appraisals and low-documentation lending programs. Its
analysts alerted Credit Suisse to declining lending standards as early as 2003. Credit Suisse
nonetheless continued to originate, purchase, securitize, and sell mortgage loans suffering from
exactly the problems that its own research had identified.
119. On March 12, 2007, Credit Suisse’s Equity Research department released a report
entitled, “Mortgage Liquidity du Jour: Underestimated No More” (the “Mortgage Liquidity
Report”). This report, which was not made widely available or provided to RMBS investors
such as ABP, set forth a comprehensive analysis of the housing and mortgage markets, based on
data assembled by Credit Suisse housing analysts and a survey of private homebuilders and
mortgage lenders. Credit Suisse’s Asset-Backed Securities Team and Mortgage Backed
Securities Team both contributed to the preparation of the Mortgage Liquidity Report. The
Mortgage Liquidity Report contains many statements clearly demonstrating Credit Suisse’s
knowledge of declining underwriting standards, such as:
• “[W]e believe that there is considerable risk associated with the lax underwriting standards and exotic mortgage products utilized in [the Alt-A] segment of the market in recent years, both in the form of continued credit deterioration and reduced incremental demand resulting from tightening lending standards.”
• “While prime conforming conventional loans are still considered to be the safest credit risk, underwriting standards on these loans appeared to have eased in recent years, in-step with the broader mortgage market.”
• “Despite the easing underwriting criteria … delinquency rates on subprime loans remained at historically low levels throughout most of 2004 and 2005, as record home price appreciation provided marginal quality buyers with a buffer of equity used to either refinance into a more affordable mortgage or sell the home at a nice profit upon rate reset. This undoubtedly fueled even further easing of underwriting standards and growth in the subprime market.”
• “As new subprime lenders continued to pop up on a daily basis throughout the housing boom, underwriters continued to loosen lending standards in
45
an effort to gain market share; the effects of which are coming back to haunt the loan originators today in the form of early payment defaults.”
120. One especially risky underwriting practice identified by Credit Suisse involved
lenders offering adjustable rate mortgages (“ARMs”) or negative amortization mortgages to
borrowers who did not understand these complex products.4 Although originators had an
obligation to ensure that borrowers had income sufficient to pay their mortgages, some
borrowers were qualified for these loans based only on the initial, or “teaser” mortgage rates, and
thus found themselves unable to meet their payment obligations once the rates reset to a higher
level. The Mortgage Liquidity Report states that many buyers were qualified for these loans
only with regard to the “teaser” rates and that, “In our opinion, however, a more problematic
group of homebuyers that have utilized the interest-only or neg-am options have been those that
have used the initial monthly payments in order to qualify for a home above their means (or any
home in general.)”
121. Some of the loans underlying Credit Suisse RMBS were generated pursuant to
stated income and low documentation programs. However, the Mortgage Liquidity Report
demonstrates Credit Suisse’s knowledge that such programs were rife with fraud, and that many
such borrowers exaggerated their incomes so as to qualify for loans that they could not afford.
• “Low/no documentation loans increased from just 18% of total purchase originations in 2001 to 49% in 2006 according to Loan Performance…While many believe that buyers choose to provide limited or no documentation for convenience … a study by the Mortgage Asset Research Institute sampling 100 stated income (low/no documentation) loans found that 60% of borrowers had ‘exaggerated’ their income by more than 50%.”
4 Adjustable rate mortgages initially charge a low, teaser interest rate, which adjusts upwards after an initial period. Negative amortization mortgages allow borrowers to pay no principal costs and less in monthly payments than their interest costs, resulting in an increasing mortgage balance over time.
46
• “[L]ow/no documentation loans (stated income loans) represented a staggering 81% of total Alt-A purchase originations in 2006, up significantly from 64% just two years earlier. These loans are also sheepishly referred to as ‘liar loans’ by many in the industry due to the propensity for borrowers to exaggerate their income on loan applications.”
• “In the past five years, subprime purchase originations have more than doubled in share to approximately 20% of the total in 2006. Over this time period, subprime lenders eased underwriting standards in an effort to gain market share. Loans were made to first time homebuyers with little or no down payments, as 2006 subprime purchase originations posted an alarming 94% combined loan-to-value, on an average loan price of nearly $200,000. Even more distressing is the fact that roughly 50% of all subprime borrowers in the past two years have provided limited documentation regarding their incomes.”
122. Based in large part on the low underwriting standards, documentation failures and
proliferation of exotic mortgage products that Credit Suisse had identified in the mortgage
market, the Mortgage Liquidity Report accurately predicted a rising tide of delinquencies and
foreclosures, stating that:
Given the easing underwriting standards seen throughout the subprime and Alt-A markets in recent years (i.e. lower documentation requirements, less money down, proliferation of exotics), it should not be overly surprising to see escalating delinquency rates on these products now that home price appreciation has dissipated across most of the country. While we will defer any future performance outlook of these loans to credit analysts, we do not envision any immediate recovery given the poor underwriting in recent years, and persistent pressure on home prices due to aggressive builder incentives, rising resale inventories and escalating foreclosures.
123. The Mortgage Liquidity Report also contained discussion of appraisal fraud and
originators’ distortion of LTV values, as discussed in Section VII, infra.
124. Credit Suisse’s housing market research operations uncovered facts that were
critical to Credit Suisse’s RMBS activities. Credit Suisse personnel responsible for mortgage-
backed securitizations participated in and contributed to this research, and were thus aware of its
47
findings. Although Credit Suisse was aware of dangerously low underwriting standards in the
mortgage industry, it did not share its knowledge with RMBS investors such as ABP.
D. DEFENDANTS CREDIT SUISSE GROUP, CREDIT SUISSE USA AND CREDIT SUISSE HOLDINGS CONTROLLED THE CREDIT SUISSE SECURITIZATION PROCESS
125. Defendant Credit Suisse Group was at the very top of the Credit Suisse vertically
integrated corporate structure. As such, Credit Suisse Group was in a position to and in fact
controlled each of Defendants CSAG, ABS; Credit Suisse USA; Credit Suisse Holdings; CSFB
Mortgage; Credit Suisse Securities; CSFC; DLJ; and SPS. Defendant Credit Suisse Group
operated its consolidated subsidiaries as a collective enterprise, making significant strategic
decisions for its subsidiaries, monitoring enterprise-wide risk, and maximizing profit for Credit
Suisse Group.
126. In its SEC filings, Credit Suisse Group discussed its practice of securitizing loans
by acting through its subsidiaries. For example, Credit Suisse Group’s Form 20-F Annual and
Transition Report, filed on March 20, 2008 for the period ending December 31, 2007, states,
inter alia, that:
• We finance and acquire principal positions in a number of real estate and real estate-related products, both for our own account and for major participants in the commercial and residential real estate markets, and originate loans, including subprime loans, secured by commercial and residential properties. We also securitize and trade in a wide range of commercial and residential real estate and real estate-related whole loans, mortgages, and other real estate and commercial assets and products, including residential and commercial mortgage-backed securities.
* * * * *
• The majority of [Credit Suisse Group]’s securitization activities involve mortgages and mortgage-related securities and are predominantly transacted using QSPEs [Qualified Special Purpose Entities].…These QSPEs issue commercial mortgage-backed securities (CMBS), residential mortgage-backed securities (RMBS), and asset-backed securities (ABS), that are collateralized by the assets transferred to the QSPE and that pay a
48
return based on the returns on those assets ... [Credit Suisse Group] is an underwriter of, and makes a market in, these securities.
* * * * *
• Structured products trades, originates, securitizes, syndicates, underwrites, and provides research for all forms of securities that are based on underlying pools of assets, including commercial mortgage-backed securities (CMBS), residential mortgage-backed securities (RMBS), collateralized debt obligations (CDO) and other asset-backed securities (ABS).
127. Credit Suisse Group culpably participated in the violations of its subsidiaries
discussed above. Credit Suisse Group approved the manner in which it sold the loans it elected
to securitize and controlled the disclosures made in connection with those securitizations.
Among other misconduct, Credit Suisse Group oversaw the actions of its subsidiaries, including
Defendants CSAG, ABS, Credit Suisse Securities, CSFB Mortgage, and DLJ, and allowed them
to misrepresent the mortgage loans’ characteristics in the Offering Documents.
128. Defendant CSAG is an entity through which Credit Suisse Group, which had the
same Board of Directors and Executive Board as CSAG, exercised control over its U.S.
subsidiaries and U.S. securitization activities. Defendant CSAG controlled each of its
subsidiaries Defendants ABS; Credit Suisse USA; Credit Suisse Holdings; CSFB Mortgage;
Credit Suisse Securities; CSFC; DLJ; and SPS. CSAG operated its consolidated subsidiaries as a
collective enterprise, making significant strategic decisions for its subsidiaries, monitoring
enterprise-wide risk, and maximizing profit for its parent corporation, Credit Suisse Group.
CSAG also exercised control over its subsidiaries by providing them with funds so as to
capitalize on opportunities identified by management.
129. CSAG culpably participated in the violations of its subsidiaries discussed below.
CSAG approved the manner in which it sold the loans it elected to securitize and controlled the
disclosures made in connection with those securitizations. Among other misconduct, CSAG
49
oversaw the actions of its subsidiaries and allowed them, including Defendants ABS, Credit
Suisse Securities, and CSFB Mortgage, to misrepresent the mortgage loans’ characteristics in the
Offering Documents.
130. Defendant Credit Suisse USA was an entity through which Credit Suisse Group
exercised control over its U.S. subsidiaries and U.S. securitization activities. As discussed
below, the majority of the officers of the Issuing Defendants ABS and CSFB Mortgage were also
employees of Credit Suisse USA. Through these executives, Credit Suisse USA exercised
control over its affiliates. Defendant Credit Suisse USA was in a position to and in fact
controlled each of Defendants ABS; CSFB Mortgage; Credit Suisse Securities; CSFC; DLJ; and
SPS.
131. Like Credit Suisse Group, Credit Suisse USA discussed its practice of securitizing
loans by acting through its subsidiaries and affiliated Credit Suisse entities in its SEC filings.
For example, Credit Suisse USA’s Form 10-Q, filed on November 14, 2006 for the period ending
September 30, 2006, states, inter alia, that:
• We originate commercial mortgages and originate and purchase residential mortgages … and sell these assets directly or through affiliates to special purpose entities that are, in most cases, qualified special purpose entities, or QSPEs. These QSPEs issue securities that are backed by the assets transferred to the QSPEs and pay a return based on the returns on those assets ... These QSPEs are generally sponsored by our subsidiaries. Our principal broker-dealer subsidiary, [Credit Suisse Securities], underwrites and makes markets in these mortgage-backed and asset-backed securities.
* * * * *
• The Company originates and purchases residential mortgages and originates commercial loans for the purpose of securitization. The Company sells these mortgage loans to securitization trusts[.]
* * * * *
• The following table presents the proceeds and gains related to the securitization of commercial mortgage loans, residential mortgage loans
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and other asset-backed loans for the nine months ended September 30, 2006 and 2005. The gain on securitizations includes underwriting revenues, deferred origination fees and expenses, gains or losses on the sale of the collateral to the QSPE or VIE and gains or losses on the sale of the newly issued securities to third parties[.]
132. Credit Suisse USA culpably participated in the violations of its affiliates and its
subsidiary, Credit Suisse Securities, discussed below. Credit Suisse USA approved the manner
in which its affiliates sold the loans they elected to securitize and controlled the disclosures made
in connection with those securitizations. Among other misconduct, Credit Suisse USA oversaw
the actions of its subsidiaries and affiliates, including Defendants ABS, Credit Suisse Securities,
and CSFB Mortgage, and allowed them to misrepresent the mortgage loans’ characteristics in the
Offering Documents.
133. Defendant Credit Suisse Holdings was another entity through which Credit Suisse
Group exercised control over its U.S. subsidiaries and U.S. securitization activities. Defendant
Credit Suisse Holdings controlled Defendants ABS; CSFB Mortgage; Credit Suisse USA; Credit
Suisse Securities; CSFC; DLJ; and SPS, each of them a wholly-owned subsidiary of Credit
Suisse Holdings. Among other misconduct, Credit Suisse Holdings oversaw the actions of its
subsidiaries, including Defendants ABS, Credit Suisse Securities, and CSFB Mortgage, and
allowed them to misrepresent the mortgage loans’ characteristics in the Offering Documents.
V. A SIGNIFICANT NUMBER OF THE MORTGAGE LOANS UNDERLYING PLAINTIFF’S CERTIFICATES WERE MADE AS A RESULT OF THE SYSTEMATIC ABANDONMENT OF PRUDENT UNDERWRITING GUIDELINES AND STANDARDS
134. Contrary to the representations in the Offering Documents, the mortgage loans
underlying Plaintiff’s Certificates not only did not comply with the underwriting standards as
represented, but these standards were knowingly and systemically ignored by Credit Suisse in
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order to achieve its goal of originating and securitizing as many loans as possible in order to
maximize its fees.
135. As represented in the Offering Documents, Defendants’ underwriting guidelines
were primarily intended to assess the ability and willingness of the borrower to repay the
mortgage loan, apart from the adequacy of the mortgaged property as collateral for the loan.
Accordingly, the underwriting guidelines required the consideration of, among other things, the
borrower’s assets, liabilities, income, employment history and credit history. These items of
information were used to calculate the borrower’s debt-to-income ratio.
136. Notwithstanding these explicit requirements in their underwriting guidelines, the
originators extended numerous loans even though the borrower’s information did not qualify
them for the requested loan, was not provided, or even if it was, where that information was
patently false and the underwriters knew that the borrower was misrepresenting her or his
income, occupation and other information, and was engaged in outright mortgage fraud.
137. Because Credit Suisse operated a vertically integrated mortgage securitization
business, with subsidiaries involved in every step of the process from originating loans, pooling
the loans it had originated through its own subsidiaries or purchased from third-party
originators, underwriting and conducting due diligence on RMBS offerings, and servicing
pooled loans, it knew that originators that it owned or did business with were not adhering to
their underwriting standards, or was reckless for not so knowing.
A. DEFENDANTS CSFC AND DLJ ABANDONED THEIR UNDERWRITING GUIDELINES AND APPRAISAL STANDARDS
138. The majority of the mortgage loans underlying the CSAB 2006-3 Trust were
originated by Credit Suisse subsidiaries CSFC and DLJ, and no more than 10 percent were
issued by any other single originator. These loans were generated as part of Credit Suisse’s
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vertical integration strategy specifically so that they could be securitized and sold to investors
such as Plaintiff. As Credit Suisse USA stated in its Form 10-Q filed on November 14, 2006,
“The Company originates and purchases residential mortgages and originates commercial loans
for the purpose of securitization.” As such, Credit Suisse set lending and underwriting
standards at these entities with an eye towards selling the loans, and any accompanying risk, into
the RMBS market.
139. Defendants CSFC and DLJ originated a majority of the underlying mortgages
pooled into the CSAB 2006-3 securitization purchased by Plaintiff. As discussed in ¶¶ 82-91,
supra, these companies routinely and systematically disregarded their own underwriting
guidelines in order to ramp up loan originations for Credit Suisse securitizations, and extended
loans to borrowers who were unqualified and had little ability to repay the loans.
140. For example, as noted in ¶ 308, infra, the CSAB 2006-3 Trust has performed
worse than almost any of the other Credit Suisse RMBS purchased by Plaintiff, with a shocking
42.14% delinquency rate and a 28.49% foreclosure rate, and has been downgraded to junk
status by both S&P and Moody’s. It is now clear that the securitizations over which Credit
Suisse had the most influence and control, and which were based primarily on loans generated
by Credit Suisse subsidiaries, were comprised of some of the riskiest and least rigorously
underwritten loan pools.
B. THE THIRD-PARTY ORIGINATORS OF THE MORTGAGE LOANS UNDERLYING PLAINTIFF’S CERTIFICATES ABANDONED THEIR UNDERWRITING GUIDELINES AND APPRAISAL STANDARDS
141. As discussed above, many of the underlying mortgage loans that the Defendants
packaged into the securities sold to Plaintiff were originated by third-party institutions and then
sold to Defendants ABS or CSFB Mortgage. The Offering Documents associated with each of
Plaintiff’s Certificates purported to describe each of the specific originators’ underwriting
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guidelines, and represented that the underlying mortgage loans were originated in compliance
with the underwriting and appraisal standards of the originators and in accordance with Credit
Suisse’s underwriting guidelines.
142. Several of the relevant originators involved in these transactions are now known
to have, among other things, ignored their own underwriting guidelines and used inflated
appraisals during loan generation. The questionable practices that were employed by many of
these originators have led to numerous allegations and investigations into their operations. In
fact, as noted below, faulty underwriting has led to the downfall of several of the originators
whose loans Defendants bundled in these offerings.
143. In addition, Defendants received due diligence on the mortgage loans they
acquired from third parties which should have enabled them to ensure that faulty mortgages were
not included in the Certificates they underwrote and sold. See ¶¶ 98-102, supra.
144. As set forth above, Defendants were aware of a collapse in underwriting standards
on the part of the originators with whom they did business, including widespread failure to abide
by stated underwriting guidelines, permitting sales personnel and management to routinely
override underwriting decisions, pressuring appraisers to artificially inflate the values of
mortgaged properties, and making no efforts to verify the income of borrowers. Defendants
were also aware that, as a result of the Originators’ fraudulent appraisal practices, which made
the borrowers appear to have more collateral than they actually did, the LTV values of the loans
were inflated. However, rather than putting an end to these corrupt practices or refusing to
purchase these defective loans, Defendants urged the originators to make more and riskier loans.
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145. The third party originators of the mortgage loans underlying the Certificates that
departed from stated underwriting guidelines with respect to the mortgages underlying Plaintiff’s
Certificates included, but are not limited to the following:
1. Accredited Home Lenders Inc.
146. Accredited Home Lenders Inc. (“Accredited”) was an originator of loans that
were packaged into RMBS and purchased by ABP, including HEAT 2006-7 and HEAT 2006-8.
Accredited was a mortgage banking company that operated throughout the United States and
Canada, originating loans through a network of mortgage brokers and a retail unit. Accredited
expanded at a rapid pace as the subprime mortgage industry boomed, and the total volume of
loans the company originated increased from $1.5 billion in 2000 to $12.4 billion in 2004,
increasing even further through 2006.
147. Accredited achieved this breakneck pace of growth in large part by discarding its
underwriting standards. One witness, a corporate underwriter who worked at Accredited
between June 2004 and March 2005, described how underwriting decisions were frequently
overridden by managers on the sales side of the business. The witness noted that such loans
were tracked internally, and it was well-known they performed poorly. Moreover, according to
the witness, by no later than the early part of 2005, Accredited was approving risky loans that did
not comply with its own underwriting guidelines in an effort to reach monthly production targets.
Another witness, a corporate underwriter who worked at Accredited in Tampa, Florida between
August 2003 and February 2006, described how Operations Managers and Senior Operations
Managers constantly overrode decisions to reject loan applications.
148. Another former Accredited corporate underwriter claimed that the rejection of a
risky loan was often subject to an override. The former employee stated, “[t]he overrides were
rampant, especially during the last few days of each month when they wanted to ramp up
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production.” He continued, “If the borrower breathed, he got the loan.” The former Accredited
Chief Appraiser stated that by June 2006, “between 12% and 15% of [Accredited’s] business
was being done through management overrides.”
149. Not surprisingly, on May 1, 2009, Accredited filed for bankruptcy. Accredited
faced huge demands from banks that purchased loans from Accredited to repurchase the loans
based on the discovery of various defects in the loans. In bankruptcy filings, Accredited stated
that it faced more than $200 million in repurchase claims.
2. Aegis Mortgage Corporation
150. Aegis Mortgage Corporation (“Aegis”) was another originator of mortgage loans
that were pooled into RMBS and purchased by ABP, including HEAT 2007-1. Aegis started as a
privately held mortgage banking company owned by three individuals. By 1998, the company
was generating $1 billion in annual loan volume. In 1998 and 1999, Cerberus Capital
Management, LP (“Cerberus”) made a $45 million investment in Aegis. With this cash, Aegis
acquired two extremely distressed mortgage production operations, UC Lending and New
America Financial. These and subsequent acquisitions enabled Aegis to grow from 150
employees in nine locations in 1999 to 3,800 employees in over 100 locations in 2005. By 2006,
Aegis was ranked as the 13th largest subprime lender in the country, generating close to $20
billion in annual originations. In eight years, the company’s subprime originations grew by an
incredible 1,750%.
151. Aegis’ astronomic growth was fueled by an insatiable appetite for high fee, high-
risk mortgages. “In late 2006, the company … couldn’t issue mortgages fast enough for the Wall
Street machine that used them to create high-risk, very profitable bonds.” Katie Benner, The
Darker Side of Buyout Firms, FORTUNE, Aug. 20, 2007. To satisfy its enormous appetite, Aegis
loosened its loan underwriting standards to the point of near abandonment by 2006. A large
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portion of the loans Aegis originated during this time were in fact purchased from unlicensed
mortgage brokers. Because Aegis was selling all the loans it originated to investment banks like
Credit Suisse for securitization, underwriting standards were thrown by the wayside. Quantity
became more important than quality, as guidelines were consistently ignored and more and more
loans approved.
152. Eventually, the bad loans caught up with Aegis. A news report issued on August
6, 2007, announced that Aegis could not meet all of its existing funding obligations. Alistair
Blair, Aegis Mortgage Suspends All Loan Originations, MARKET WATCH, Aug. 6, 2007. On
August 13, 2007, the company was forced to file for bankruptcy protection. Jonathan Stempel,
Aegis Mortgage Files for Chapter 11 Bankruptcy, REUTERS, Aug. 13, 2007.
153. In November of 2008, the Office of the Comptroller of the Currency (“OCC”)
compiled an analysis of the ten mortgage originators with the highest rate of non-performing
subprime and Alt-A loans, originated from 2005 to 2007, in the ten U.S. metropolitan areas with
the highest foreclosure rates in the first half of 2008. This report was titled “Worst Ten in the
Worst Ten.” Alarmingly, only 21 mortgage originators, in various combinations, occupied the
“Worst Ten” slots in the “Worst Ten” metropolitan areas with the highest foreclosure rates.
Aegis was named one of the “Worst Ten” in this report. By the first half of 2008, 2,058
subprime or Alt-A mortgage loans originated by Aegis, in the ten metropolitan areas hardest-hit
by foreclosures, were already in foreclosure.
3. Ameriquest Mortgage Company
154. Ameriquest Mortgage Company (“Ameriquest”) also originated mortgage loans
that were pooled into securitizations and purchased by ABP, including ABSC 2007-HE2, ABSC
2006-HE6 and ABSC 2006-HE7. Ameriquest was a wholly-owned retail lending subsidiary of
ACC Capital Holdings Corporation (“ACC Capital”), the nation’s largest subprime lender, as
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well as an affiliate of Argent Mortgage Company, LLC, another third-party originator discussed
below.
155. At one time the nation’s largest subprime mortgage lender, Ameriquest’s apparent
success in the subprime lending market was characterized by the company’s complete
abandonment of prudent underwriting guidelines. As revealed by a multi-state investigation,
Ameriquest made stated income or low documentation loans where Ameriquest employees
fabricated or inflated the borrowers’ income and/or assets in order to qualify the borrowers for
the loans.
156. Former Ameriquest employees have spoken out regarding Ameriquest’s business
practices. A NATIONAL PUBLIC RADIO newscast from May 14, 2007, described how employees
were encouraged to conceal rate terms and to make fake fixed-loan documents pushing
customers into loans that they could not afford. One former Ameriquest employee, Tyson
Russum, stated that the “impression [he] got was that … it’s basically make the sale at any cost.”
Russum, a loan officer who worked in Tampa, Florida, recalled observing some co-workers
applying white-out to income numbers on W-2s and bank statements and filling in “bigger
amounts basically to qualify people for loans that they couldn’t afford,” a practice that was
referred to as “taking the loan to the art department.” Such practices were not isolated incidents
but rather occurred at Ameriquest branches across the country.
157. An August 20, 2007, BUSINESSWEEK article entitled “Did Big Lenders Cross the
Line?” reported the emergence of a growing number of lawsuits pertaining to subprime mortgage
lending, suggesting that some big lenders, like Ameriquest, had been colluding to “falsify loan
documents by beefing up income and lowballing outstanding debts” in an effort to “keep up loan
volume and generate sales.”
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158. The article described one such lawsuit filed by Mary Overton. Overton’s
complaint alleged that loan officers at a Brooklyn, New York, branch of Ameriquest “coerced
[her] into signing a loan”, but “[u]nbeknownst to Ms. Overton, Ameriquest created fake tax
returns, employment records, and a 401(k)—to make it appear that the loan was affordable.”
The article reported that at least 40 other borrowers alleged that Ameriquest doctored loan
documents or increased borrowers’ income in an effort to boost loan generation and sales.
159. According to written testimony provided in March 2009 by Illinois Attorney
General Lisa Madigan to the House Committee on Financial Services:
Ameriquest [] received its funding line from Wall Street firms. These same firms bought and securitized the subprime loans Ameriquest sold. For those of us on the state level, the Ameriquest investigation marks the moment when we began to see the underwriting practices of mortgage lenders erode at a disturbingly accelerated pace. In 2002, Ameriquest was originating loans with an average loan-to-value ratio of 74 percent. Two years later, the ratio had risen to 81 percent. Ameriquest had also ramped up its originations of stated income loans, that is, loans that permit the borrower merely to state his or her income without further review. By 2003, Ameriquest was originating almost 30 percent of its loans – which were all subprime – as stated-income or limited-documentation loans.
Our multistate investigation of the nation’s largest subprime mortgage lender revealed that Ameriquest engaged in the kinds of fraudulent practices that other predatory lenders subsequently emulated on a wide scale. These practices included: inflating home appraisals … Ameriquest also locked borrowers into costly loans by including three-year prepayment penalties on loans with a two-year introductory rate that reset to a higher rate at the end of two years. [T]hese penalties were added because Wall Street investors preferred and paid more for loans with prepayment penalties.
160. Ameriquest entered into a nationwide settlement in 2006 under which it agreed to
injunctive relief and monetary payments totaling $325 million. Among other things, Ameriquest
agreed to use independent loan closers for all subprime loans, to ensure that each loan provided
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an actual benefit to the borrower, and not to fabricate or inflate income or assets or sign any
documents on behalf of a borrower.
161. In October 2007, Wachovia Bank N.A. (“Wachovia”) filed a lawsuit against
Ameriquest for failure to comply with repurchase requests on loans with fraudulent files.
Wachovia paid Ameriquest almost $129 million for loans purchased on December 29, 2005, but
later identified at least 135 loans that Ameriquest misrepresented, including loans with
documentation containing “incorrect credit scores, false employment status and misstatements of
the kind of home being financed.”
162. A class action complaint was also filed in the United States District Court for the
Northern District of Illinois in December 2005 against Ameriquest, its sister company Argent,
and parent ACC Holdings, which was later consolidated along with 14 other class action cases
before the Judicial Panel on Multidistrict Litigation (the “MDL Panel”). The complaint alleged
that Ameriquest violated numerous federal and state laws, including TILA, breach of contract,
unjust enrichment, and state Consumer Protection and Deceptive Trade Practices Acts, by
engaging in a uniform common plan and scheme to prey upon unsuspecting consumers by
routinely causing borrowers to enter into residential loans with unfavorable terms, misleading
and inappropriate “discount” fees, high and adjustable interest rates, prepayment penalties, and
excessive loan principal compared to equity and ability to pay.
163. In January 2010, Ameriquest and its affiliate defendants participated in a $22
million settlement of these claims.
4. Argent Mortgage Company, LLC
164. Argent Mortgage Company, LLC (“Argent”) also originated loans packaged into
RMBS and purchased by ABP, including ABSC 2007-HE2, ABSC 2006-HE6 and ABSC 2006-
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HE7. Argent was incorporated in 2001 and was a wholly-owned subsidiary of ACC Capital,
operating as one of the nation’s largest subprime lenders.
165. Argent’s success in the mortgage-lending market was attributable to its loan
originations using fraudulent loan applications and its departure from sound underwriting
practices. In 2005, the Florida Attorney General initiated an investigation against Argent after
numerous complaints alerted the office that Argent was providing mortgages to homeowners for
home repair projects using fraudulent documents and loan applications. Investigators discovered
nearly 130 loans funding nearly $13 million that were approved based on fraudulent applications.
As a result of these investigations, Argent’s former vice president Orson Benn was sentenced to
18 years in prison in September 2008, for racketeering, mortgage fraud and grand theft.
166. According to a December 7, 2008, article describing its investigation into
Argent’s dismal lending practices, the MIAMI HERALD discovered that several former Argent
employees engaged in mortgage fraud, including Benn, who actively assisted mortgage brokers
in falsifying borrowers’ financial information by “tutoring … mortgage brokers in the art of
fraud.” Benn himself stated that the “accuracy of loan applications was not a priority,” but
rather, the company made money by bundling mortgages and selling them to investors on Wall
Street. To increase the flow of loans generated, Benn taught brokers to prepare phony income
statements and doctor credit reports.
167. During the course of its investigation, the MIAMI HERALD obtained every loan
application generated by one Argent broker between May 2004 and September 2005. In a
December 7, 2008 article, the paper revealed that out of 129 applications, 103 contained “red
flags,” such as “non-existent employers, grossly inflated salaries and sudden, drastic increases in
the borrower’s net worth.” The article stated that the “simplest way for a bank to confirm
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someone’s income is to call the employer. But in at least two dozen cases, the applications
show[ed] bogus telephone numbers for work references.” Argent’s verification process was so
deficient that a “borrower [who] claimed to work a job that didn’t exist … got enough money to
buy four houses.” Another borrower “claimed to work for a company that didn’t exist – and got
a $170,000 loan.”
168. The CLEVELAND PLAIN DEALER also reported in a May 11, 2008, article that
industry leaders believed that “lower-echelon employees of companies like Argent actively
participated in fraud.” For example, Jacqulyn Fishwick, who worked for over two years as an
underwriter and account manager at an Argent loan-processing center near Chicago, had
personally seen “some stuff [she] didn’t agree with” and witnessed some Argent employees who
“played fast and loose with the rules.” Fishwick also saw “[Argent] account managers remove
documents from files and create documents by cutting and pasting them.”
169. In April 2010, the FCIC heard testimony from several former Citigroup
executives as part of the FCIC’s investigation regarding the causes of the subprime lending
meltdown. Richard Bowen, Citigroup’s former chief underwriter for CitiMortgage, told the
FCIC panel in his April 7, 2010, testimony that warned management of the company’s mortgage
risk beginning in 2006 when he discovered that more than 60% of the mortgages being bought
and sold by Argent were defective; advice apparently not heeded, since Citigroup acquired
Argent in 2007.
5. Decision One Mortgage Company, LLC
170. Decision One Mortgage Company, LLC (“Decision One”) also originated
mortgage loans purchased by ABP, including HEAT 2006-6 and HEAT 2006-8. Decision One,
which was acquired by HSBC Finance Corp. (“HSBC”) in March 2003, operated as a wholesale
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lender in the area of non-conforming residential loans and specialized in catering to borrowers
with poor credit.
171. Decision One routinely ignored its underwriting guidelines in favor of cashing in
on increased loan originations. The company provided stated income loans to borrowers with
risky credit histories and conducted little or no due diligence regarding the borrowers’ ability to
repay the loans. Decision One also intentionally overstated borrowers’ income on loan
documentation in order to generate more loans. These unscrupulous lending practices eventually
led to Decision One’s collapse. In September 2007, HSBC announced that it would be closing
Decision One, resulting in an $880 million goodwill impairment and another $65 million in
restructuring costs to HSBC.
172. Credit Suisse was aware of Decision One’s shoddy underwriting practices. On
multiple occasions, Credit Suisse demanded that Decision One provide compensation for selling
Credit Suisse loans that did not conform to stated underwriting guidelines. The breaches were
not minor. In one September 2007 transaction identified by MBIA, Credit Suisse demanded and
received, through a sale and repurchase transaction, compensation for seventeen defective loans
totaling approximately eighty four percent of the original purchase price.
173. Decision One has also faced numerous consumer lawsuits as a result of its
fraudulent and deceptive business practices. For example, in January 2009, an action was
removed from San Diego Superior Court to the Southern District of California, claiming that
Decision One engaged in predatory lending practices by knowingly providing loans to borrowers
that drastically exceeded their monthly income. The plaintiff claimed that Decision One
fraudulently overstated her income in order to get the loan approved, disregarded sound
underwriting criteria, required no documentation to support the information contained in the loan
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documentation, and conducted no due diligence regarding the plaintiff’s income and employment
status. The complaint also alleged that defendants gave risky loans to unqualified borrowers,
often requiring little or no down payments for the loans. See Watts v. Decision One Mortgage
Co., No. 09-cv-0043-JM-BLM (S.D. Cal. filed Jan. 12, 2009). A number of other Decision One
borrowers have made similar charges against the company in connection with their own TILA
suits. See, e.g., Bogdan v. Decision One Mortgage Co., No. 09-cv-01055-AWI-SMS (E.D. Cal.
filed June 16, 2009); Kimura v. Decision One Mortgage Co., No. 09-cv-01970-GMN-GWF (D.
Nev. filed Aug. 5, 2009); Monahan v. Decision One Mortgage Co., No. 10-cv-2078-H-RBB
(S.D. Cal. filed Oct. 06, 2010); Rolfes v. Decision One Mortgage Co., No. 10-cv-00066-D
(E.D.N.C. filed Dec. 22, 2010).
6. Encore Credit Corp.
174. Encore Credit Corporation (“Encore”) originated mortgage loans pooled into
securitizations purchased by ABP, including HEAT 2006-5, HEAT 2006-6, HEAT 2006-7 and
HEAT 2006-8. Encore, founded in 2002, was a mortgage lender specializing in subprime
mortgage loans, originating over $2 billion in nonconforming loans during its first year of
business. In May 2009, Encore was listed as number 17 on the Center for Public Integrity’s list
of top 25 subprime lenders responsible for the subprime economic meltdown, based on over $22
billion in high-risk, high-interest loans that the company originated between 2005 and 2007.
175. Encore was a wholly-owned subsidiary of ECC Capital Corporation (“ECC
Capital”), a mortgage finance real estate investment trust (“REIT”) that originated and invested
in residential mortgage loans.
176. Encore has faced a number of TILA lawsuits alleging a host of deceptive loan
origination practices. Allegations against Encore include predatory lending, failing disclose
material terms of the loan, improperly inflating appraisals, forcing homebuyers to sign blank
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loan documents, and altering documents without borrowers’ consent. See Lindsay v. Encore
Credit Corp., No. 10-cv-2464-TWT (N.D. Ga. filed Aug. 6, 2010); Pieleanu v. Mortgage Elec.
Reg. Sys., No. 08-cv-07404 (N.D. Ill. filed Dec 29, 2008); Smith v. Encore Credit Corp., No. 08-
cv-01462-DAP (N.D. Ohio filed June 17, 2008); Welch v. Countrywide Home Loans, No. 09-cv-
00168-LKK-DAD (E.D. Cal. filed Jan. 20, 2009); Martinez v. Encore Credit Corp., No. 09-cv-
05490-AHM-AGR (C.D. Cal. filed July 27, 2009).
7. EquiFirst Corporation
177. EquiFirst Corporation (“EquiFirst”) originated mortgage loans that were pooled
into RMBS and purchased by ABP, including HEAT 2006-5 and HEAT 2007-1. EquiFirst was
engaged in the business of originating and selling “non-conforming” loan products, including
subprime, Alt-A, and jumbo mortgage loans collateralized by one-to-four family residential
properties. For 2006, EquiFirst’s subprime and Alt-A residential mortgage originations totaled
approximately $10.7 billion. In 2007, EquiFirst was the twelfth-largest subprime wholesale
mortgage originator in the United States, originating $3.8 billion of subprime home loans.
178. EquiFirst focused on “innovative” subprime products that relied on, among other
things, inappropriately lax underwriting standards and temporary payment reductions, offering
loans to borrowers with credit scores as low as 520. As a consequence, EquiFirst’s residential
loan portfolio (including subprime mortgages), significantly deteriorated. Regions Financial
Corporation (“Regions”), the then-parent company of EquiFirst, recorded $142 million in after-
tax losses which it later attributed to significant and rapid deterioration of the subprime market
during the first three months of 2007. Additionally, Regions’ 2007 Form 10-K revealed loan
losses from continuing operations (including subprime mortgages made by EquiFirst) that more
than tripled from 2006 levels, increasing from $142.4 million by the end of 2006 to $555 million
by the end of 2007.
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179. On January 19, 2007, Barclays Bank, PLC announced that it had entered into an
agreement with Regions to acquire EquiFirst for $76 million. Regions CEO Dowd Ritter later
said, “I would have given [EquiFirst] away. If we didn’t get rid of it, the whole company would
be gone by now.” On February 17, 2009, less than two years after the acquisition, Barclays shut
down EquiFirst due to the decline in the market for subprime mortgages.
180. In September 2011, U.S. Bank N.A. initiated a lawsuit in federal court in
Minneapolis against EquiFirst and others, alleging that EquiFirst falsely assured buyers of the
creditworthiness of the loans being offered, and that as of June 2011, over 45% of the original
loan balance had been liquidated, while over 30% of the remaining loans were delinquent.
According to a September 6, 2011, article in BLOOMBERG by Margaret Fisk about the case, one
investor reviewed 200 loan files related to the securities at issue, and identified material breaches
of representations or warranties in 150, or 75% of them. In 55 of the loans, according to the
article, the investor found misrepresentations of borrower income and/or employment. In one
example, a borrower’s loan application stated that he earned over $14,000 per month for
performing “account analysis.” According to the borrower’s income tax returns, however, he
earned $1,548 per month as a taxi driver.
181. These allegations are echoed in a September 2, 2011, complaint filed by the
FHFA, which states that EFC Holdings, through its EquiFirst unit, routinely and egregiously
departed from its stated underwriting guidelines when originating subprime mortgages. This led,
the suit alleges, to material false and misleading statements or omissions regarding compliance
with underwriting guidelines in the Prospectus Supplements for several securities purchased by
Freddie Mac, in violation of federal securities laws.
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8. Finance America, LLC
182. Finance America, LLC (“Finance America”) originated loans that were pooled
into RMBS purchased by Plaintiff, including HEMT 2005-5. Finance America was a wholesale
subprime lender owned by Lehman Brothers, Inc. and was particularly known for its practices of
charging “high-rate” interest on a majority of the loans that it originated.
183. In 2005, several class action lawsuits were filed against Finance America alleging
that it had violated the Fair Credit Reporting Act (“FCRA”) by unlawfully accessing individuals’
credit reports in order to target potential borrowers with poor credit or those who had recently
filed for bankruptcy for subprime loans. See Fisher v. Finance Am., LLC, No. 05-cv-00888
(C.D. Cal. filed Sept. 13, 2005); Murray v. Finance Am., LLC, No. 05-cv-01255 (N.D. Ill. filed
Mar. 2, 2005).
184. Another class action, filed in February 2008 in the Eastern District of Arkansas,
alleged that Finance America violated the Racketeer Influenced and Corrupt Organizations Act
(“RICO”) by engaging in a scheme to defraud consumers relating to the origination of mortgage
loans. See Reichert v. UB Mortgage, LLC, et al., No. 08-cv-00158 (E.D. Ark. filed Feb. 21,
2008). The complaint claimed that Finance America “intentionally structured its broker
premium fees to encourage brokers to negotiate loans at above market rates and permit[ted] an
inference that the lender knew it was persuading clients to borrow at above market rates and was
aware of the broker’s fraud.”
185. Finance America has also faced TILA claims. Suits against Finance America
have alleged predatory lending, failing to disclose material terms of loans, “baiting” borrowers
with intentionally providing false and inaccurate information and then “switching” to a more
costly loan at closing, as well as charging exorbitant broker and lender fees. See Ferrell v.
Finance Am., LLC, et al., No. 10-cv-00715 (S.D. W.Va. filed May 7, 2010); Brannon v. Finance
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Am., LLC et al., No. 06-cv-00996 (M.D. Ala. filed Nov. 2, 2006); Ricotta v. Finance Am., LLC et
al., No. 06-cv-01502 (D. Colo. filed Aug. 2, 2006); Anderson v. Ocwen Fin. Corp. et al., No. 05-
cv-00243 (N.D. Miss. filed Oct. 31, 2005).
9. Nationstar Mortgage LLC
186. Nationstar Mortgage LLC (“Nationstar”) was another originator of mortgage
loans pooled into RMBS purchased by ABP, including ABSC 2006-HE6. Nationstar, founded in
1997, was formerly known as Centex Home Equity Corporation (“Centex”).5 In March 2006,
Fortress Investment Group (“Fortress”), a large hedge fund, purchased Centex for $575 million.
Shortly after the purchase, Fortress changed Centrex’s name to Nationstar.
187. Nationstar was one of the ten largest subprime lenders in the country, originating
$4.4 billion in the first quarter of 2007 before the market evaporated. The company provided
non-prime mortgages and home loans directly to consumers and indirectly through mortgage
brokers and bankers. Much of Nationstar’s success came as a result of the company’s loose
underwriting standards and lending practices. Nationstar routinely provided loans to borrowers
without regard for their ability to repay, required little or no documentation for loans, and used
fraudulently inflated appraisals. These risky lending practices resulted in serious financial
trouble for Nationstar after the subprime market went bust. In September 2007, Nationstar
announced that it was shutting down its wholesale loan origination business for good.
188. In January 2008, Nationstar agreed to pay a $105,000 settlement to the Kentucky
Office of Financial Institutions (“OFI”) in order to resolve claims that Nationstar had employed
numerous unregistered loan officers in violation of state law. The OFI also directed Nationstar
to make refunds to customers, to reinstate and reduce interest rates and fees on mortgage loans,
5 Centex was also known as Centex Home Equity Company, LLC.
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and to adjust several customers’ loans where there were potential violations surrounding
refinance terms.
189. As a result of its loose lending practices, Nationstar became the target of a
number of lawsuits. A lawsuit filed in July 2008 in the Eastern District of Virginia alleged that
Nationstar had violated the TILA by preparing the plaintiff’s loan application using an
intentionally fraudulent stated income. See Flores v. Nationstar Mortgage LLC, No. 08-cv-
00675-LMB-TRJ (E.D. Va. filed July 1, 2008). Specifically, the borrower told Nationstar that he
made $2,800 per month, but the Nationstar broker inflated the borrower’s income to $6,000 per
month in the loan documentation without the borrower’s knowledge. As a result, Nationstar
collected high brokers’ fees and closing costs, and the borrower was left with a loan that he could
not afford. The parties agreed to settle the case in early 2009.
190. In September 2008, a class action was filed in San Diego Superior Court, alleging
that Nationstar and its predecessor Centex had coerced the plaintiffs into entering bad loans that
destroyed plaintiffs’ credit and resulted in numerous foreclosures. See Richter v. Nationstar
Mortgage, LLC, No. 37-2008-00092170-CU-BT-CTL (Cal. Super. filed Sept. 23, 2008). The
complaint claimed that Nationstar knew that its San Diego branch manager, Cindy Kelly, was
fraudulently selling unregistered securities to customers and that Nationstar encouraged her to
ignore sound underwriting guidelines and to complete loan applications using false and
incomplete information. Moreover, the defendants had promised borrowers that excess proceeds
from their loans would be used as investments in Stonewood Consulting, Inc., a fraudulent
investment firm that later became the target of an SEC proceeding in the Central District of
California.
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191. Another borrower brought an action against Nationstar in February 2010 in the
Northern District of Illinois Bankruptcy Court in connection with a foreclosure proceeding.
Kemoy T.A. Liburd-Chow v. Nationstar Mortgage, LLC, et al, No. 10-02653 (Bankr. N.D. Ill.
filed Feb. 16, 2010). The plaintiff alleged that Nationstar fraudulently induced him into entering
a mortgage transaction that was contrary to his stated intentions and resulted in him receiving a
loan that he could not afford. Specifically, the plaintiff claimed that Nationstar knowingly issued
him a mortgage based on a fraudulently inflated property appraisal. This case was later
dismissed in October 2010 by agreement of the parties.
192. Similarly, in September 2010, a complaint was filed in the State of Florida’s
Circuit Court in Sarasota County, alleging violations of TILA based on Nationstar’s failure to
disclose material terms of the plaintiffs’ mortgage. McClendon v. Nationstar Mortgage, LLC,
No. 2010 CA 009303 NC (Fl. Cir. Ct., filed Sept. 3, 2010). The borrowers claimed that
Nationstar failed to verify their ability to repay the loan before extending them credit and that the
loan application contained no information about the plaintiffs’ monthly income. As a result,
plaintiffs were saddled with a multitude of miscellaneous fees and ended up with a loan that they
could not afford.
10. OwnIt Mortgage Solutions, Inc.
193. Ownit Mortgage Solutions, Inc. (“Ownit”) originated mortgage loans that were
pooled in securitizations and purchased by Plaintiff, including HEAT 2006-5, HEAT 2006-6,
HEAT 2006-7, HEAT 2006-8 and HEAT 2007-1. Ownit, formerly known as Oakmont
Mortgage Company, Inc., was a wholesale mortgage lender founded in 1989. Ownit was well-
known in the industry for its practices of originating 100%-financed subprime loans and
providing loans to borrowers with poor credit and limited income. NONPRIME NEWS ranked
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Ownit as the 11th largest issuer of subprime mortgages in the United States, originating $5.46
billion in loans in the first half of 2006 alone.
194. In September 2005, Ownit sold a 20% share in the company to Merrill Lynch &
Co., Inc. (“Merrill Lynch”) for $100 million. According to Ownit founder and CEO William
Dallas (“Dallas”), Merrill Lynch instructed Ownit to lower its underwriting standards and to
originate more higher-yield, riskier loans, using its ownership stake and its $3.5 billion credit
line to Ownit as leverage. Ownit complied with Merrill Lynch’s directive, originating $6 billion
in loans from September 2005 to December 2006, including “crazy” 45-year adjustable rate
mortgages and no-income-verification loans. Dallas stated, “The market [was] paying me to do a
no-income-verification loan more than it [was] paying me to do the full documentation loans.”
195. A May 8, 2007 article from the NEW YORK TIMES entitled East Coast Money Lent
Out West reported how Ownit increased loan volume by weakening underwriting standards and
originating more “liar” loans for which no documentation was requested or required to
substantiate the borrowers’ oral representations of their annual earnings.
196. Ownit also lowered the credit scores it required of its borrowers. The most
widely accepted measure of creditworthiness in the credit industry is the “FICO” score,
developed by the Fair Isaac Corporation.6 The Federal Deposit Insurance Corporation defines a
“subprime” loan as one for which the borrower has a FICO score of 660 or below. Ownit’s
average new borrower FICO score dropped from 690 to approximately 630.
6 Under the FICO scoring system, borrowers are assigned a credit score (the FICO score) ranging from 300 to 850, with 850 being the most creditworthy. In determining the borrower’s overall creditworthiness, the FICO score primarily takes into account the borrower’s payment history, current indebtedness, length of credit history, recently established credit and types of credit used. According to Fitch Ratings, FICO scores are the “best single indicator” of mortgage default risk. Thus, the lower the FICO score, the greater risk of borrower default.
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197. The intentional weakening of underwriting standards had an immediate and direct
impact upon the performance of Ownit’s loans. From December 2005 through May 2006, Ownit
began to experience first payment defaults and “early payment defaults” (i.e., defaults on any
one of the first three mortgage repayments). According to a December 8, 2006 article in
WORKOUT WIRE entitled BuyBacks Appear to Shutter Two Firms, Ownit, unsurprisingly, filed
for bankruptcy “amid reports that the subprime lender had been hit by huge loan buyback
requests from an investor.”
198. Several consumer lawsuits followed soon thereafter. On May 5, 2009, a TILA
lawsuit was filed against Ownit alleging that the company had made misrepresentations to the
borrower regarding the terms of a loan, including the interest rate, payment amount and the
borrower’s ability to refinance if the loan became unaffordable. See Vanduzen v. Homecomings
Fin. et al., No. 09-cv-01237 (E.D. Cal. filed May 5, 2009). The complaint stated that Ownit
“regularly approved loans to unqualified borrowers, and implemented practices … ranging from
questionable to criminal.” Moreover, Ownit “employed brokers and loan officers [who] worked
on commissions, meaning the more loans they sold, the more bonus money they received,” and
these brokers and loan officers steered borrowers “into loans with less favorable terms” or into
loans the borrowers were not qualified for in order to make more money.
199. In October 2009, a lawsuit was filed against Ownit in the District of Nevada
alleging that the company lured unqualified borrowers into subprime mortgages “while knowing
many of the loans would result in foreclosure.” See Youngren v. Ownit Mortgage Solutions, Inc.,
No. 09-cv-00595 (D. Nev. filed Oct. 5, 2009). The complaint stated that Ownit and its brokers
and agents issued mortgages to borrowers “who were incapable of paying the mortgages
throughout the life of the loan,” such as those with poor credit scores and inadequate income to
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afford the loan, and utilized “numerous fees and penalties” that increased the risk of default and
foreclosure. The lawsuit included claims for unfair lending practices and fraud.
11. Residential Funding Company, LLC
200. Residential Funding Capital LLC (“Residential”) originated mortgage loans
pooled into RMBS purchased by ABP, including ABSC 2007-HE1. Residential is a wholly-
owned subsidiary of Residential Capital Corporation, itself a wholly-owned subsidiary of
General Motors Acceptance Corporation. In 2010, GMAC LLC was rebranded as Ally Financial
Inc. Residential originates mortgage loans through its affiliates or purchases them from a
network of individual mortgage originators, and also acts as a servicer for mortgage loans. From
2002 through the first quarter of 2007, Residential sponsored securitizations of more than 1.3
million first lien mortgage loans with an aggregate principal balance of more than $243 billion.
201. MBIA, a company that had sold financial guaranty insurance policies for five
securitization transactions sponsored by Residential, conducted a review of 1,847 delinquent
loans that Residential had originated, and found that a mere 7% of the mortgage loans it
reviewed had been originated or acquired in material compliance with Residential’s
representations and warranties.
202. MBIA’s review uncovered widespread failures in underwriting standards on the
part of Residential. Residential had failed to verify its borrowers’ income or assets, failed to
review its borrowers’ credit histories, failed to obtain property appraisals, and granted
underwriting exceptions without any justification for doing so. For example, in November 2006
Residential made a $140,000 loan to a borrower on a non-owner occupied property with an
original appraisal value of $740,000 and a senior loan balance of $513,567. The borrower, who
was employed as the owner of a liquor store, claimed an income of $500,000 per year but
demonstrated no liquid assets. In 2007, the borrower filed for bankruptcy, claiming that he or
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she had earned $0 for 2006. Furthermore, the appraisal indicated that the mortgaged property
did not meet legal standards.
203. In another lawsuit, MBIA alleged that Residential had entered into “negotiated
commitments” with a number of loan originators, whereby Residential agreed that it would
purchase mortgage loans from originators in the future even if those loans did not comply with
Residential’s underwriting guidelines. See MBIA Ins. Corp. v. Residential Funding Co., No.
603552/2008 (Sup. Ct. N.Y. Co. filed Dec. 4, 2008). Residential then proceeded to securitize
these loans while falsely representing that they had been underwritten in substantial compliance
with its underwriting guidelines.
204. MBIA also claimed that Residential had engaged in a “bulk purchase program,”
whereby Residential agreed to purchase a bulk amount of mortgage loans that had already been
originated without re-underwriting the loans being acquired or otherwise confirming that they
complied with Residential’s underwriting guidelines. Again, Residential securitized these loans
while falsely representing that they had been underwritten in substantial compliance with its
underwriting guidelines.
205. MBIA further alleged that Assetwise, the computer program that Residential
underwriting personnel used in deciding whether or not to approve individual loans for purchase,
did not in fact apply the stated Residential underwriting guidelines, and that numerous mortgage
loans approved through Assetwise did not comply with underwriting guidelines.
206. A securities lawsuit filed by the West Virginia Investment Management Board
quoted a former Residential employee as saying that Residential “needed to continue to purchase
more loans for the securitizations, or they would have been out of business.” West Virginia Inv.
Mgmt. Board v. Residential Accredited Loans, Inc., No. 10-c-412 (W. Va. Cir. Ct filed Mar. 4,
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2010). The employee said that Residential’s President and CEO Bruce Paradis would directly
encourage Residential traders with reservations about loan quality to buy the loans anyway so as
to maintain good relations with the vendors from that Residential bought billions of dollars of
loans from.
VI. A SIGNIFICANT NUMBER OF THE MORTGAGE LOANS WERE MADE TO BORROWERS WHO DID NOT OCCUPY THE PROPERTIES IN QUESTION
207. The Offering Documents contained information regarding the purported
occupancy status of the mortgaged properties including whether they were primary homes,
investment property, or second homes. These representations were material to investors such
as Plaintiff because high owner-occupancy rates would have made the Certificates safer
investments than Certificates backed by second homes or investment properties. Thus,
Defendants had an incentive to overstate the owner-occupancy rates of the underlying
mortgages to make them appear more secure.
208. Fraudulent representations regarding the owner-occupancy status of pooled
mortgages were widespread in the securitization industry. As noted in a January 2011 article in
BUSINESSWEEK, at least 23% of U.S. mortgages that were described as being secured by
“owner occupied” properties when bundled into securities either were not occupied by
borrowers, or were occupied for a short time and quickly vacated.
209. In connection with lawsuits against Credit Suisse Securities and other Credit
Suisse entities, two other companies, Mass Mutual and Allstate, both conducted forensic
reviews of the mortgage loans underlying RMBS issued by Credit Suisse entities, which
included loans from the same series and time period as offerings in which ABP invested. For
each of the RMBS that Mass Mutual and Allstate examined, DLJ was the sponsor, CSFB
Mortgage or ABS was the depositor, and Credit Suisse Securities was the underwriter. DLJ or
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CSFC originated many of the loans at issue. Mass Mutual’s and Allstate’s analyses included
testing to determine if the owner-occupancy ratios in the Offering Documents were accurate,
by, for example, investigating whether borrowers were having tax statements and bills sent to
the addresses of the mortgaged properties and whether property records showed that the
borrowers owned multiple houses.
210. Allstate examined 800 defaulted loans and 800 randomly sampled loans from
each of eight Credit Suisse securitizations, including HEMT 2005-5 which ABP purchased, and
HEMT 2006-2, part of the same series of offerings in which ABP invested. Allstate discovered
that the offering documents overstated the owner-occupancy ratio by between 9.61% and
14.88% for each of the RMBS that it analyzed. On information and belief, the Offering
Documents of the Credit Suisse securities purchased by ABP suffer from similar defects as
those identified by Allstate.
211. Mass Mutual examined the 29,705 loans underlying nine Credit Suisse
securitizations, and discovered that the offering documents overstated the owner-occupancy
ratio by up to 16.9% for each of the RMBS that it analyzed. Mass Mutual’s analysis involved
four offerings which were part of the CSAB series of offerings in which ABP invested, and on
information and belief, the Offering Documents of the CSAB securities purchased by ABP
suffer from similar defects as those identified by Mass Mutual.
212. The FHFA performed a similar analysis of individual loan files in connection
with its lawsuit against Credit Suisse. Its analysis covered 43 RMBS – which included loans
from the same series and time period as offerings in which ABP invested – and revealed that in
each case, the offering documents had overstated the owner-occupancy rates by as much as
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17.46%. Nine of the RMBS that the FHFA investigated were also purchased by Plaintiff, all of
which overstated owner-occupancy rates by at least 8% as set forth below:
Issuing Trust Percentage Owner-Occupancy Rate Overstated
ABSC 2006-HE6 9.04%
ABSC 2006-HE7 9.95%
ABSC 2007-HE1 9.12%
HEAT 2006-5 8%
HEAT 2006-6 10.65%
HEAT 2006-7 13.04%
HEAT 2006-8 10.4%
HEAT 2007-1 12.73%
213. The Certificates purchased by Plaintiff were secured by different subgroups of
mortgage loans than the Certificates that were the subject of the FHFA Complaint. However, on
information and belief, the mortgage loans underlying all of the Certificates purchased by
Plaintiff suffer from similar deficiencies as the mortgage loans underlying the Certificates
reviewed by Mass Mutual, Allstate and the FHFA. Three separate analyses covering dozens of
separate offerings and tens of thousands of underlying mortgage loans have revealed that Credit
Suisse consistently overstated the owner-occupancy rates in the offering documents for its
RMBS.
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VII. DEFENDANTS MISREPRESENTED THE LTV RATIOS OF THE MORTGAGE LOANS AND THE NUMBER OF PROPERTIES WORTH LESS THAN THE OUTSTANDING LOANS
214. As discussed in Section III, supra, the LTV ratio is one of the most important
measures of the riskiness of a loan. Loans with high LTV ratios are more likely to default
because the owner has less of an interest in the property. Furthermore, if a borrower does default
and the property enters foreclosure, the Issuing Trust is much more likely to recover the
outstanding balance on the loan through a foreclosure sale if the LTV ratio is low.
215. Mortgage loans that are “underwater” – that is to say, those where the LTV ratio
is greater than 100% because the value of the outstanding loan exceeds the value of the collateral
– are extremely risky investments. In these cases, the borrower has a strong incentive to default,
the possibility that the borrower will be capable of refinancing is virtually nil, and if the
mortgage enters foreclosure, the Issuing Trust will definitely incur a loss. Indeed, Defendants
recognized the importance of the LTV ratio. The Mortgage Liquidity Report discussed in
Section IV.C. characterized loans with combined LTV ratios of 94% or greater as “alarming.”
216. Some appraisers were openly instructed to alter their valuations for the benefit of
the mortgage lenders. On October 24, 2007, Alan Hummel, the chair of the Appraisal Institute’s
Government Relations Committee, testified before the House Committee on Financial Services
on “Legislative Proposals on Reforming Mortgage Practices” as follows: “Unfortunately, these
parties with a vested interest in the transaction are often the same people managing the appraisal
process within many financial institutions, and therein is a terrible conflict of interest ... [I]t is
common for a client to ask an appraiser to remove details about the material condition of the
property to avoid problems” in the underwriting process. A 2007 study conducted by the
October Research Corporation reported that 90% of appraisers had been pressured to raise
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property valuations so that deals could go through, and that 75% of appraisers reported “negative
ramifications” if they did not alter their appraisals accordingly.
217. Even absent explicit coercion or collusion, mortgage originators could inflate
apparent home values simply by offering work only to compliant appraisers. According to the
April 7, 2010 testimony of Richard Bitner (“Bitner”), a former executive of a subprime mortgage
originator, before the FCIC, “[B]rokers didn’t need to exert direct influence. Instead they picked
another appraiser until someone consistently delivered the results they needed.”
218. Widespread and systematic overvaluations by mortgage originators set into
motion a snowball effect that inflated housing prices all across the country and further distorted
the RMBS market. As Bitner testified,
If multiple properties in an area are overvalued by 10%, they become comparable sales for future appraisals. The process then repeats itself. We saw it on several occasions. We’d close a loan in January and see the subject property show up as a comparable sale in the same neighborhood six months later. Except this time, the new subject property, which was nearly identical in size and style to the home we financed in January, was being appraised for 10% more ... In the end, the subprime industry’s willingness to consistently accept overvalued appraisals significantly contributed to the run-up in property values experienced throughout the country.
219. In instances where LTV values have been distorted by faulty appraisals, RMBS
investors may be unaware of the true value of their collateral until default and foreclosure occur.
The FCIC Report discussed this problem.
As the housing market expanded, another problem emerged, in subprime and prime mortgages alike: inflated appraisals. For the lender, inflated appraisals meant greater losses if a borrower defaulted. But for the borrower or for the broker or loan officer who hired the appraiser, an inflated value could make the difference between closing and losing the deal. Imagine a home selling for $200,000 that an appraiser says is actually worth only $175,000. In this case, a bank won’t lend a borrower, say, $180,000 to buy the home. The deal dies. Sure enough, appraisers
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began feeling pressure. One 2003 survey found that 55% of the appraisers had felt pressed to inflate the value of homes; by 2006, this had climbed to 90%.
220. It is clear that Credit Suisse knew of the appraisal abuses that were occurring.
The Mortgage Liquidity Report states that, “As lenders are getting clobbered by bad loans made
on properties with inflated appraisal values, many are finally pulling the reigns [sic] on some of
the lax appraisal methods used in recent years (some have gone as far as calling it fraud in
extreme cases).” The Mortgage Liquidity Report also discusses how originators distorted LTV
values through the use of “piggyback loans” in which a loan for approximately 80% of the
home’s value was combined with a simultaneous second loan for the remainder. Because
mortgages in which the borrower puts no money down are very risky, such borrowers were
traditionally required to purchase private mortgage insurance. By splitting a loan with an LTV
ratio of 100% (or more) into two loans, the originator could make the loan appear safer than it
actually was and sidestep the insurance requirement. The Mortgage Liquidity Report states that,
The widespread popularity of second mortgages (piggybacks) in recent years, which are not included in traditional loan-to-value calculations, has made these LTV datapoints particularly misleading and almost irrelevant. Based on data from SMR Research, approximately 40% of home purchase mortgages in 2006 involved piggyback loans through the third quarter, compared to 20% in 2001 ... In its infancy, piggyback loans were primarily used to avoid paying mortgage insurance. In recent years, however, the share of loans with piggybacks has skyrocketed in markets that have seen the greatest price increases, indicating that the mortgage product has evolved into a tool used by homebuyers to purchase a home potentially above their means.
221. Defendants had a responsibility to ensure that the LTV figures they presented in
the Offering Documents were not the product of fraudulent appraisals. As the Levin Report
stated, “Whether appraisals are conducted internally by the bank or through a vendor, the bank
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must take responsibility for establishing a standard process to ensure accurate, unbiased home
appraisal values.”
222. Numerous emails reflecting Credit Suisse employees’ knowledge of inadequate
appraisal practices and documentation became available as of March 25, 2011. One email chain
from August 2006 involved a boarded-up and gutted property that one Credit Suisse employee
described as a “crack house.” Another employee stated, “Had an agent in the area look into that
[redacted] property for me. Attached is the recent sale history. Looks like it was sold at a
foreclosure sale for $437,500 on 12/9/05 then came our first and second on 12/27 for
$645,000..nice little 200k pickup while doing nothing except paying an appraiser to look at the
wrong house. I say this because neighbors indicate the property was in the current condition for
at least nine months.”
223. Another email chain from 2007 discussing an appraisal for a loan file contains
statements such as: “I don’t feel this report was prepared according to USPAP … The appraisal
provided did not tell me what occurred to justify a $310K increase in 14 months … I don’t feel
the appraiser did an adequate job of supporting the $615K value given … I reviewed the other
appraisal…that was just supplied by the seller. This appraiser indicates 4 units for sale versus 69
reported a month later. That raises a huge red flag.”
224. The emails similarly articulated a lack of documentation regarding borrowers’
income. One email chain discussed the stated income contained in loan documentation for a
borrower who was employed as a stripper, which claimed that she made approximately $12,000
per month, or $142,800 per year, in a small North Carolina town. When the broker who
originated the deal attempted to defend the stated amounts, one Credit Suisse employee stated:
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“This is really asking for a second opinion,” to which another employee responded, “Agree that
it appears to be overstated. If it isn’t overstate[d], why can’t she give us bank statements?”
225. The forensic reviews of the loans underlying scores of Credit Suisse RMBS
conducted by Mass Mutual, Allstate and the FHFA revealed that, in addition to consistently
misrepresenting owner-occupancy rates, Credit Suisse also consistently misrepresented the LTV
ratios of the underlying mortgages and the number of properties with high LTV ratios. For each
loan they examined, Mass Mutual, Allstate and the FHFA used an industry standard automated
valuation model (“AVM”) to calculate the value of the mortgaged property at the time of
origination. AVMs are commonly used in the real estate industry and rely upon similar data as
that relied on by appraisers, including county records, tax records, and data on comparable
properties.
226. The FHFA’s review of 43 Credit Suisse RMBS revealed that in each case but one,
the offering documents overstated the percentage of loans with low LTV ratios (defined as LTV
ratios less than 80%) and by as much as 42.53%. The offering documents understated the
percentage of underwater loans (loans with LTV ratios greater than 100%) by as much as
40.52%. Specifically, with respect to the nine RMBS also purchased by Plaintiff:
Issuing Trust Overstated Percentage with Low LTV’s
Understated Percentage of Underwater Loans
ABSC 2006-HE6 13.8% 20.71%
ABSC 2006-HE7 9.72% 27.03%
ABSC 2007-HE1 16.77% 21.22%
HEAT 2006-5 26.17% 16.47%
HEAT 2006-6 23.49% 14.22%
HEAT 2006-7 22.38% 16.82%
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Issuing Trust Overstated Percentage with
Low LTV’s Understated Percentage of
Underwater Loans HEAT 2006-8 23.25% 17.78%
HEAT 2007-1 21.07% 19.21%
227. Although Mass Mutual and Allstate presented their data differently than the
FHFA did, their reviews also revealed significant misrepresentations of LTV data. Allstate
found that for six of the eight Credit Suisse RMBS it analyzed, the offering documents had
understated the weighted average LTV ratio by between 6.71% and 13.15%, understated the
percentage of loans with high LTV ratios (defined as LTV ratios greater than 90%) by between
15.71% and 30.27%, and understated the percentage of underwater loans by between 8.16% and
65.92%. Allstate’s review of the HEMT 2005-5 RMBS, which was also purchased by Plaintiff,
revealed that the offering documents understated the percentage of underwater loans by 62.27%.
228. Mass Mutual found that for each of the nine Credit Suisse RMBS it analyzed, the
offering documents had understated the weighted average LTV ratio by between 5.33% and
16.41% and understated the percentage of loans with high LTV ratios (defined as LTV ratios
greater than 90%) by between 4.7% and 20.99%.
229. On information and belief, the mortgage loans underlying all of the Certificates
purchased by Plaintiff – which included loans from the same series and time periods as offerings
that Mass Mutual, Allstate and the FHFA analyzed – suffer from similar deficiencies as the
mortgage loans underlying the Certificates reviewed by Mass Mutual, Allstate and the FHFA.
The loan-level analyses reveal that Defendants have engaged in a systematic practice of
understating LTV ratios and the number of underwater properties.
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VIII. THE CREDIT RATINGS ASSIGNED TO THE CERTIFICATES MATERIALLY MISREPRESENTED THE CREDIT RISK OF THE CERTIFICATES
230. The AAA credit ratings of the Certificates were an important factor in Plaintiff’s
decision to purchase the Certificates. Because Plaintiff is a conservative institutional investor,
it purchased only investment grade Certificates, all of which were rated AAA.
231. Investment grade securities are understood by investors to be stable, secure and
safe. A rating of AAA denotes high credit quality, and is the same rating as those typically
assigned to bonds backed by the full faith and credit of the United States Government, such as
treasury bills. Historically, before 2007, investments with AAA ratings had an expected
cumulative loss rate of less than 0.5 percent, with an annual loss rate of close to zero.
According to S&P, the default rate on all investment grade corporate bonds (including AA, A
and BBB) from 1981 to 2007, for example, averaged about .094% per year and was not higher
than 0.41% in any year.
232. The Defendants well understood (and banked on) the importance that purchasers
of mortgage-backed securities attached to credit ratings. In most cases, the purchasers were
institutional investors such as Plaintiff who did not have the knowledge, means or wherewithal
to independently analyze the mortgage pools underlying any particular offering to verify for
themselves that the ratings were accurately determined.
233. Accordingly, Defendants featured the ratings prominently in the Offering
Documents and discussed at length the ratings assigned to the Certificates, and the basis for the
ratings. Each Prospectus Supplement stated that the issuance of each tranche of the Certificates
was conditioned on the assignment of particular ratings, and listed the ratings in a chart. All of
the Certificates purchased by Plaintiff were AAA-rated securities.
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234. Unbeknownst to ABP, at all relevant times, Defendants knew that the ratings
were not reliable because those ratings were bought and paid for and were supported by flawed
information provided by Defendants to the rating agencies. In fact, Credit Suisse manipulated
the rating agencies to obtain the desired ratings for the Certificates.
235. Specifically, the ratings of the Certificates were significantly compromised by
the misinformation provided by Credit Suisse to the rating agencies. Among other matters,
Credit Suisse did not disclose to the rating agencies that the originators, including Credit
Suisse-affiliated entities, had abandoned their underwriting standards by, among other things,
manipulating the assets, liabilities, income and other important information concerning
borrowers; using false metrics to qualify borrowers; and aggressively using exceptions to
qualify borrowers. Credit Suisse did not disclose its knowledge that, in obtaining appraisals to
value the underlying collateral, the originators used inflated appraisals that departed from
industry-approved standards. Credit Suisse did not otherwise disclose its knowledge of the
pervasive fraud that affected the mortgages underlying the Certificates.
236. Apart from supplying incomplete and false information to the rating agencies,
Credit Suisse also manipulated its relationship with the rating agencies in order to achieve the
desired ratings. The rating agencies received enormous revenues from the issuers who paid
them for rating their securities. Because the desired rating of a securitized product was the
starting point for any securities offering, the rating agencies were actively involved in helping
Credit Suisse structure the products to achieve the requested rating. As a result, the rating
agencies essentially worked backwards, starting with Credit Suisse’s target rating and then
working toward a structure that would yield the desired rating. Among other things, the rating
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agencies instructed Credit Suisse on how much “credit enhancement” to provide to each
tranche of the Certificates, in order to secure the desired ratings.
237. In this manner, Credit Suisse was able to manipulate the rating agencies to
achieve the inflated ratings it desired. Through repeated communications with the rating
agencies, Credit Suisse effectively was able to reverse engineer aspects of the ratings models
and then modify the structure of an offering to improve the ratings without actually improving
the underlying credit quality.
238. In a July 2008 report entitled “Summary Report of Issues Identified in the
Commission Staff’s Examinations of Select Credit Rating Agencies,” the SEC confirms that
the issuers and the rating agencies worked together so that securities would receive the highest
ratings:
[T]ypically, if the analyst concludes that the capital structure of the RMBS does not support the desired ratings, this preliminary conclusion would be conveyed to the arranger. The arranger could accept that determination and have the trust issue the securities with the proposed capital structure and the lower rating or adjust the structure to provide the requisite credit enhancement for the senior tranche to get the desired highest rating. Generally, arrangers aim for the largest possible senior tranche, i.e., to provide the least amount of credit enhancement possible, since the senior tranche -- as the highest rated tranche -- pays the lowest coupon rate of the RMBS’ tranches and, therefore, costs the arranger the least to fund.
239. The rating process was further compromised by the practice of “rating shopping.”
Credit Suisse did not pay for the credit rating agencies’ services until after the agencies
submitted a preliminary rating. Essentially, this practice created bidding wars in which the
issuers would hire the agency that was providing the highest rating for the lowest price. The
credit rating agencies were only paid if they delivered the desired investment grade ratings, and
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only in the event that the transaction closed with those ratings. “Ratings shopping” jeopardized
both the integrity and independence of the rating process.
240. The FCIC Report also discussed how investment bankers, such as Credit Suisse,
would apply pressure to ratings agencies such as Moody’s in order to get the desired ratings for
asset-backed securities. For example, one Moody’s employee testified that bankers would
provide the agencies with relatively little notice, few documents and practically no time to make
adequate analyses of the deals in question. In another example, a director at Credit Suisse sent
an email to a Moody’s employee stating, “I’m going to have a major political problem if we
can’t make this [deal rating] short and sweet because, even though I always explain to investors
that closing is subject to Moody’s timelines, they often choose not to hear it.”
241. The Levin Report reported that, because of the pressure received from Credit
Suisse and other banks, the ratings agencies embarked on a slippery slope of not maintaining
appropriate standards in their ratings analyses. For example, one Moody’s analyst described the
difficulty involved in allowing an exception for a rating once and then demanding different
conduct in the future: “I am worried that we are not able to give these complicated deals the
attention they really deserve, and that they [Credit Suisse] are taking advantage of the ‘light’
review and the growing sense of ‘precedent’.”
242. Credit Suisse took the pressure applied on ratings agencies a step further by
barring diligent ratings analysts from working on its deals. Richard Michalek, a Moody’s
analyst, testified before the FCIC that he was prohibited from working on RMBS transactions for
several banks, including Credit Suisse, because he examined the deals too closely. He stated:
“During my tenure at Moody’s, I was explicitly told that I was ‘not welcome’ on deals structured
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by certain banks…I was told by my then-current managing director in 2001 that I was ‘asked to
be replaced’ on future deals by … [CSFB Mortgage], and then at Merrill Lynch.”
243. Credit Suisse’s business dealings with the ratings agencies subsequently became
the subject of an investigation by the New York State Attorney General’s Office (“NYAG”), In
May 2010, the NYAG sought to determine whether Credit Suisse, along with seven other banks,
was providing misleading information to credit rating agencies and whether proper disclosures
were being made about the securities. The NEW YORK TIMES reported on May 13, 2010, that the
ratings agencies had been “widely criticized for overstating the quality of many mortgage
securities that ended up losing money once the housing market collapsed,” but the NYAG
questioned whether “the agencies may have been duped by one or more of the targets of his
investigation,” including Credit Suisse.
244. As a result, the Certificates were not worthy of the investment grade ratings given
to them, as evidenced most clearly by the fact that many of the Certificates – all initially awarded
the highest possible ratings – have now been downgraded to junk, a vast number of the
underlying loans have been foreclosed upon, and the remaining underlying loans are suffering
from crippling deficiencies and face serious risks of default. The collective downgrade of AAA-
rated Certificates indicates that the ratings set forth in the Offering Documents were false,
unreliable and inflated.
245. By including and endorsing the AAA and other investment grade ratings
contained in the Offering Documents, Defendants falsely represented that they actually believed
that the ratings were an accurate reflection of the credit quality of the Certificates.
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IX. DEFENDANTS MISREPRESENTED THE EXTENT OF CREDIT ENHANCEMENT INCLUDED IN THE CERTIFICATES
246. Defendants used a variety of credit enhancements to make the Certificates seem
like more attractive and less risky investments. Credit enhancement represents the amount of
“cushion” or protection from loss exhibited by a given security. This cushion is intended to
improve the likelihood that holders of highly rated Certificates receive the interest and principal
they expect based on the Offering Documents. The level of credit enhancement offered is based
on the makeup of the loans in the underlying collateral pool. Riskier pools necessarily need
higher levels of credit enhancement to ensure payment to senior certificate holders. Credit
enhancements for a given trust also impact the overall credit rating that a given tranche of
Certificates receives. The level of credit enhancement for the Certificates was material to
Plaintiff because it represented the protection purportedly afforded from loss.
247. The most common form of credit enhancement in the Offering Documents was
“subordination” in which the Defendants created a hierarchy of loss absorption among the
tranches of securities. To create that hierarchy, Defendants placed the pool’s tranches in an
order, with the lowest tranche required to absorb any losses first, before the next highest tranche.
Losses might occur, for example, if borrowers defaulted on their mortgages and stopped making
mortgage payments into the pool. Lower level tranches most at risk of having to absorb losses
typically received noninvestment grade ratings from the credit rating agencies, while the higher
level tranches that were protected from loss typically received investment grade ratings. One
key task for both Defendants and the credit rating agencies was to calculate the amount of
“subordination” required to ensure that the higher tranches in a pool were protected from loss
and could be given Aaa or other investment grade ratings.
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248. A second common form of credit enhancement was “over-collateralization.” In
this credit enhancement, the Defendants represented that the revenues expected to be produced
by the assets in a pool would exceed the revenues designated to be paid out to each of the
tranches. That excess amount provided a financial cushion for the pool and was used to create an
“equity” tranche, which was the first tranche in the pool to absorb losses if the expected
payments into the pool were reduced. This equity tranche was subordinate to all the other
tranches in the pool and did not receive any credit rating. The larger the excess, the larger the
equity tranche, and the larger the cushion created to absorb losses and protect the more senior
tranches in the pool. In some pools, the equity tranche was also designed to pay a relatively
higher rate of return to the party or parties who held that tranche, due to its higher risk.
249. Still another common form of credit enhancement was the creation of “excess
spread,” which involved designating an amount of revenue to pay the pool’s monthly expenses
and other liabilities, but ensuring that the amount was slightly more than what was likely needed
for that purpose. Any funds not actually spent on expenses would provide an additional financial
cushion to absorb losses, if necessary.
250. According to the Levin Report, former ratings agency analysts and managers told
the PSI that investment banks 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.
251. As set forth below, representations regarding the inclusion and scope of these
credit enhancements were made in all of the Offering Documents for the Certificates ABP
purchased. These representations were false and misleading because all of the purported
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“enhancements” depended on or derived from inflated appraisals of the mortgaged properties,
which caused the listed LTV ratios and levels of credit enhancement to be untrue.
X. DEFENDANTS FAILED TO ENSURE THAT TITLE TO THE UNDERLYING MORTGAGE LOANS WAS EFFECTIVELY TRANSFERRED
252. A fundamental aspect of the mortgage securitization process is that the issuing
trust for each offering must obtain good title to the mortgage loans comprising the pool for that
offering. This is necessary in order for the holders of the RMBS, such as Plaintiff, to be legally
entitled to enforce the mortgage loans in the event of default. Two documents relating to each
mortgage loan must be validly transferred to the trust as part of the securitization process – a
promissory note and a security instrument (either a mortgage or a deed of trust).
253. The rules for these transfers are governed by the law of the state where the
property is located, by the terms of the PSAs for each securitization, and by the law governing
the issuing trust (with respect to matters of trust law). In general, state laws and the PSAs
require the promissory note and security instrument to be transferred by indorsement, in the same
way that a check can be transferred by indorsement, or by sale. In addition, state laws generally
require that the trustee of the issuing trust have physical possession of the original, manually-
signed promissory note in order for the loan to be enforceable by the trustee against the borrower
in the event of the borrower’s default.
254. In order to preserve the bankruptcy-remote status of the issuing trusts in RMBS
transactions, the notes and security instruments are generally not directly transferred from the
mortgage loan originator to the trust. Rather, the notes and security instruments are initially
transferred from the originator to the depositor, either directly or via one or more special-purpose
entities. After this initial transfer to the depositor, the depositor transfers the notes and security
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interests to the issuing trust for the particular securitization. Each of these transfers must be
valid under applicable state law in order for the trust to have good title to the mortgage loans.
255. To ensure that the trust qualifies as a tax-free real estate mortgage investment
conduit, the PSA generally requires the transfers to the trust to be completed within a strict time
limit after formation of the trust. Furthermore, the applicable trust law in each state generally
requires strict compliance with the trust documents, including the PSA, so that failure to comply
strictly with the timeliness, indorsement, physical delivery, and other requirements of the PSA
with respect to the transfers of the notes and security instruments means that the transfers would
be void and the trust would not have good title to the mortgage loans. Adam Levitin, a professor
of law at Georgetown University, testified before the United States House Subcommittee on
Housing and Community Opportunity, that, “If the notes and mortgages were not properly
transferred to the trusts, then the mortgage-backed securities that the investors purchased were in
fact non-mortgage backed securities.”
256. On November 18, 2010, Professor Levitin testified about the importance of the
chain of title to investors and the consequences of faulty transfers before a hearing of the House
Financial Services Committee:
Concerns about securitization chain of title also go to the standing question; if the mortgages were not properly transferred in the securitization process (including through the use of MERS to record the mortgages), then the party bringing the foreclosure does not in fact own the mortgage and therefore lacks standing to foreclose. If the mortgage was not properly transferred, there are profound implications too for investors, as the mortgage-backed securities they believed they had purchased would, in fact be non-mortgage-backed securities, which would almost assuredly lead investors to demand that their investment contracts be rescinded[.]
* * *
Securitization is the legal apotheosis of form over substance, and if securitization is to work it must adhere to its proper, prescribed
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form punctiliously. The rules of the game with securitization, as with real property law and secured credit are, and always have been, that dotting “i’s” and crossing “t’s” matter, in part to ensure the fairness of the system and avoid confusions about conflicting claims to property. Close enough doesn’t do it in securitization; if you don’t do it right, you cannot ensure that securitized assets are bankruptcy remote and thus you cannot get the ratings and opinion letters necessary for securitization to work. Thus, it is important not to dismiss securitization problems as merely “technical;” these issues are no more technicalities than the borrower’s signature on a mortgage. Cutting corners may improve securitization’s economic efficiency, but it undermines its legal viability.
257. On October 27, 2010, Katherine Porter, then a visiting a professor at Harvard Law
School specializing in consumer credit, consumer protection regulation, and mortgage servicing,
provided similar testimony before the Congressional Oversight Panel:
The implications of problems with transfer are serious. If the [securitization] trust does not have the loan, homeowners may have been making payments to the wrong party. If the trust does not have the note or mortgage, it may not have standing to foreclose or legal authority to negotiate a loan modification. To the extent that these transfers are being completed retroactively, it raises issues about honesty in creating and dating the assignments/transfers and about what parties can do, if anything, if an entity in the securitization chain, such as Lehman Brothers or New Century, is no longer in existence. Moreover, retroactive transfers may violate the terms of the trust, which often prohibit the addition of new assets, or may cause the trust to lose its REMIC status, a favorable treatment under the Internal Revenue Code. Chain of title problems have the potential to expose the banks to investor lawsuits and to hinder their legal authority to foreclose or even to do loss mitigation.
* * *
I want to share with the Panel that the lawyers that I have met over years of my research on mortgage servicing both creditor lawyers and debtor lawyers have nearly universally expressed that they believe a very large number (perhaps virtually all) securitized loans made in the boom period in the mid-2000s contain serious paperwork flaws, did not meet underwriting or other requirements of the trust, and have not been serviced properly as to default and foreclosure.
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258. The Offering Documents for the Certificates represented in substance that the
Issuing Trust for the respective offering had obtained good title to the mortgage loans comprising
the pool underlying the offering. In fact, however, the third-party originators and Defendants
routinely and systematically failed to comply with the requirements of applicable state laws and
the PSAs for valid transfers of the notes and security instruments.
259. For example, a July 7, 2011, MSNBC.com article, “‘Robo-Signing Foreclosures
Haven’t Gone Away,” discusses an attempt by Defendant DLJ to foreclose on Mary Arthur of
Dobbs Ferry, New York. The loan servicer, Defendant SPS, filed to foreclose on DLJ’s behalf,
thereby incurring additional fees for itself and reducing the amount available for investors to
recover. In separate cases in state court and bankruptcy court, DLJ filed what it purported to be
authentic copies of Mrs. Arthur’s promissory note. Since they were supposedly copies of the
same document, the indorsements should have been identical. However, they had completely
different indorsements, each naming different owner banks and signed by different people.
XI. DEFENDANTS’ SPECIFIC MATERIAL MISSTATEMENTS AND OMISSIONS IN THE OFFERING DOCUMENTS
260. Defendants’ representations regarding the mortgage loans underlying the
Offerings were highly material to investors such as Plaintiff. Because the revenue paid to
investors is derived from the stream of payments received from the mortgage loan borrowers, the
value of an investment is necessarily tied to the perceived risk of default in the mortgage loan
pool. In other words, the market value of a Certificate decreases as the perceived risk of the
underlying pool increases. Plaintiff therefore closely examined the representations made by the
Defendants regarding the mortgage loans underlying each of the Offerings at issue here.
261. Moreover, Defendants went above and beyond the specific representations to
warrant that if any material pool characteristic differed by 5% or more from the description in
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the Offering Documents, they would provide notice and repurchase those Certificates.
Defendants also made assurances as to how the specific loans were selected for inclusion in the
mortgage pools:
(a) In the event that Mortgage Loans are added to or deleted from the Mortgage Pool after the date of the related prospectus supplement but on or before the date of issuance of the Notes or the Certificates, if any material pool characteristic differs by 5% or more from the description in the prospectus supplement, revised information will be provided either in a supplement or in a Current Report on Form 10-D or 8-K filed with the Commission.
The above misstatement, in identical or substantially similar language, was contained in the
following Offering Documents: Prospectus Supplement for ABSC 2006-HE7 (Form 424B5), at
136 (Dec. 1, 2006); Prospectus Supplement for ABSC 2006-HE6 (Form 424B5), at 166 (Dec. 1,
2006); Prospectus Supplement for ABSC 2007-HE1 (Form 424B5), at 157 (Feb. 6, 2007);
Prospectus Supplement for ABSC 2007-HE2 (Form 424B5), at 146 (June 4, 2007); Prospectus
Supplement for CSAB 2006-3 (Form 424B5), at 26 (Oct. 30, 2006); Prospectus Supplement for
HEAT 2006-5 (Form 424B5), at 26 (July 6, 2006); Prospectus Supplement for HEAT 2006-6
(Form 424B5), at 26 (Aug. 1, 2006); Prospectus Supplement for HEAT 2006-7 (Form 424B5), at
26 (Oct. 3, 2006); Prospectus Supplement for HEAT 2006-8 (Form 424B5), at 26 (Dec. 4, 2006);
Prospectus Supplement for HEMT 2005-5 (Form 424B5), at 25 (Dec. 29, 2005); Prospectus
Supplement for HEAT 2007-1 (Form 424B5), at 140 (Feb. 1, 2007); Registration Statement
(333-131465) filed by ABS Corp. (Form S-3/A, Am. 1), at 215 (Mar. 15, 2006); Registration
Statement (333-135481) filed by CSFB Mortgage (Form S-3/A, Am. 2), at 250 (Aug. 10, 2006).
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(b) Certain information with respect to the mortgage loans is set forth in this prospectus supplement. Prior to the closing date, mortgage loans may be substituted therefor. Certain of the mortgage loans may prepay in full, or may be determined not to meet the eligibility requirements for the final pool of the mortgage loans acquired by the trust on the closing date. The Depositor believes that the information set forth in this prospectus supplement is representative of the characteristics of the mortgage pool as it will be constituted at the closing date, although certain characteristics of the mortgage loans may vary.
The above misstatement, in identical or substantially similar language, was contained in the
following Offering Documents: Prospectus Supplement for ABSC 2006-HE7 (Form 424B5), at
S-27 (Dec. 1, 2006); Prospectus Supplement for ABSC 2006-HE6 (Form 424B5), at S-27 (Dec.
1, 2006); Prospectus Supplement for ABSC 2007-HE1 (Form 424B5), at S-27 (Feb. 6, 2007);
Prospectus Supplement for ABSC 2007-HE2 (Form 424B5), at S-29 (June 4, 2007); Prospectus
Supplement for CSAB 2006-3 (Form 424B5), at S-21 (Oct. 30, 2006); Prospectus Supplement
for HEAT 2006-5 (Form 424B5), at S-19 (July 6, 2006); Prospectus Supplement for HEAT
2006-6 (Form 424B5), at S-19 (Aug. 1, 2006); Prospectus Supplement for HEAT 2006-7 (Form
424B5), at S-19 (Oct. 3, 2006); Prospectus Supplement for HEAT 2006-8 (Form 424B5), at S-19
(Dec. 4, 2006); Prospectus Supplement for HEAT 2007-1 (Form 424B5), at S-19 (Feb. 1, 2007);
Prospectus Supplement for HEMT 2005-5 (Form 424B5), at S-18 (Dec. 29, 2005); Registration
Statement (333-131465) filed by ABS Corp. (Form S-3/A, Am. 1), at 26 (Mar. 15, 2006);
Registration Statement (333-135481) filed by CSFB Mortgage (Form S-3/A, Am. 2), at 11 (Aug.
10, 2006); Registration Statement (333-130884) filed by CSFB Mortgage (Form S-3/A, Am. 3),
at 9 (Mar. 31, 2006).
(c) The sponsor selected the mortgage loans for sale to the depositor from among its portfolio of mortgage loans based on a variety of considerations, including type of mortgage loan, geographic concentration, range of mortgage interest rates, principal balance, credit scores
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and other characteristics. In making this selection, the sponsor took into account investor preferences and the sponsor’s objective of obtaining the most favorable combination of ratings on the certificates.
The above misstatement was contained in the following Offering Documents: Prospectus
Supplement for CSAB 2006-3 (Form 424B5), at S-21 (Oct. 30, 2006); Prospectus Supplement
for HEAT 2006-5 (Form 424B5), at S-19 (July 6, 2006); Prospectus Supplement for HEAT
2006-6 (Form 424B5), at S-19 (Aug. 1, 2006); Prospectus Supplement for HEAT 2006-7 (Form
424B5), at S-19 (Oct. 3, 2006); Prospectus Supplement for HEAT 2006-8 (Form 424B5), at S-19
(Dec. 4, 2006); Prospectus Supplement for HEAT 2007-1 (Form 424B5), at S-19 (Feb. 1, 2007).
(d) Each mortgage loan will be selected by the depositor or its affiliates for inclusion in a mortgage pool from among those purchased by the depositor, either directly or through its affiliates, from unaffiliated sellers or affiliated sellers. As to each series of securities, the mortgage loans will be selected for inclusion in the mortgage pool based on rating agency criteria, compliance with representations and warranties, and conformity to criteria relating to the characterization of securities for tax, ERISA, SMMEA, Form S-3 eligibility and other legal purposes.
The above misstatement, in identical or substantially similar language, was contained in the
following Offering Documents: Prospectus Supplement for CSAB 2006-3 (Form 424B5), at 27
(Oct. 30, 2006); Prospectus Supplement for HEAT 2007-1 (Form 424B5), at 140 (Feb. 1, 2007);
Registration Statement (333-135481) filed by CSFB Mortgage (Form S-3/A, Am. 2), at 36 (Aug.
10, 2006); Registration Statement (333-130884) filed by CSFB Mortgage (Form S-3/A, Am. 3),
at 222 (Mar. 31, 2006).
(e) The mortgage loans to be included in the mortgage pool were acquired by the seller in the normal course of its business and in accordance with the underwriting criteria specified in this prospectus supplement.
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The above misstatement was contained in the following Offering Document: Prospectus
Supplement for HEMT 2005-5 (Form 424B5), at S-18 (Dec. 29, 2005).
262. These representations were false when made because Defendants knew that the
information set forth in the Prospectus Supplements did not adequately describe the
characteristics of the mortgage pools, and that at the time of sale material pool characteristics
differed by 5% or more from the descriptions given, due to factors such as appraisals that did not
comply with USPAP standards and inflated LTV values. In addition, Defendants did not select
the loans to be included in mortgage pools based on investor preferences or preset standards, but
rather, on the basis of which loans would be most profitable to securitize and least likely to incur
loss to Defendants.
263. In light of the numerous departures from underwriting guidelines and appraisal
standards by CSFC, DLJ and the third-party originators described above, the Offering
Documents (Registration Statements and Prospectus Supplements) disseminated by Defendants
in the course of selling the Certificates contained numerous misstatements and omissions, as set
forth below.
A. DEFENDANTS MADE FALSE AND MISLEADING STATEMENTS REGARDING UNDERWRITING STANDARDS AND PRACTICES
264. The Prospectus Supplements disseminated by Defendants in the course of selling
the Certificates, and therefore the Registration Statements of which those Prospectus
Supplements formed a part, contained the following misleading statements, among others, in
identical or substantially similar language, regarding the underwriting standards and practices
that the originators applied in originating the mortgage loans underlying the Certificates.
(a) The originator’s underwriting standards are primarily intended to assess the value of the mortgaged property and to evaluate the adequacy of that property as collateral for the mortgage loan and the applicant’s
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credit standing and ability to repay. Each originator provides loans primarily to borrowers who do not qualify for loans conforming to Fannie Mae and Freddie Mac guidelines but who generally have equity in their property. While the primary consideration in underwriting a mortgage loan is the value and adequacy of the mortgaged property as collateral, the originators also consider, among other things, a mortgagor’s credit history, repayment ability and debt service-to-income ratio, as well as the type and use of the mortgaged property.
The above misstatements were contained in the following Offering Documents: Prospectus
Supplement for ABSC 2006-HE6 (Form 424B5), at S-16 (Dec. 1, 2006); Prospectus Supplement
for ABSC 2006-HE7 (Form 424B5), at S-16 (Dec. 1, 2006); Prospectus Supplement for ABSC
2007-HE1 (Form 424B5), at S-16 (Feb. 6, 2007); Prospectus Supplement for ABSC 2007-HE2
(Form 424B5, at S-17 (June 4, 2007); Registration Statement (333-131465) filed by ABS Corp.
(Form S-3/A, Am.1), at 18 (Mar. 15, 2006).
(b) The depositor expects that the originator of each of the loans will have applied, consistent with applicable federal and state laws and regulations, underwriting procedures intended to evaluate the borrower’s credit standing and repayment ability and/or the value and adequacy of the related property as collateral.
Prospectus Supplement for CSAB 2006-3 (Form 424B5), at 30 (Oct. 30, 2006); Prospectus
Supplement for HEAT 2006-5 (Form 424B5), at 30 (July 6, 2006); Prospectus Supplement for
HEAT 2006-6 (Form 424B5), at 30 (Aug. 1, 2006); Prospectus Supplement for HEAT 2006-7
(Form 424B5, at 30 (Oct. 3, 2006); Prospectus Supplement for HEAT 2006-8 (Form 424B5), at
30 (Dec. 4, 2006); Prospectus Supplement for HEAT 2007-1 (Form 424B5), at 39 (Feb. 1, 2007);
Prospectus Supplement for HEMT 2005-5 (Form 424B5), at 28 (Dec. 29, 2005); Registration
Statement (333-130884) filed by CSFB Mortgage (Form S-3/A, Am.3), at 225 (Mar. 31, 2006);
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Registration Statement (333-127872) filed by CSFB Mortgage (Form S-3/A, Am.1), at 225 (Dec.
7, 2005).
(c) As of the Cut-off Date, DLJMC acquired approximately 49.23% of the mortgage loans (by Cut-off Date Principal Balance) through its whole-loan flow acquisition channel from originators that DLJMC has determined met its qualified correspondent requirements. Such standards require that the following conditions be satisfied: (i) the related mortgage loans were originated … in accordance with underwriting guidelines designated by DLJMC (“Designated Guidelines”) or guidelines that do not vary materially from such Designated Guidelines; (ii) such mortgage loans were in fact underwritten as described in clause (i) above and were acquired by DLJMC within 270 days after the related origination dates … (iv) DLJMC employed, at the time such mortgage loans were acquired by DLJMC, certain quality assurance procedures designed to ensure that the applicable qualified correspondent from which it purchased the related mortgage loans properly applied the underwriting criteria designated by DLJMC.
The above misstatements were contained in the following Offering Document: Prospectus
Supplement for CSAB 2006-3 (Form 424B5), at S-30 (Oct. 30, 2006).
265. The statements quoted above were false because they represented that the
originators applied underwriting guidelines and quality control measures to assess the value of
the mortgaged properties, evaluate the adequacy of such properties as collateral for the mortgage
loans, and assess the applicants’ abilities to repay their mortgage loans, when in fact the
originators had actually abandoned these standards so that they could increase the volume of loan
origination and the resulting fees that they earned.
B. DEFENDANTS MADE FALSE AND MISLEADING STATEMENTS REGARDING UNDERWRITING EXCEPTIONS
266. The Prospectus Supplements disseminated by Defendants in the course of selling
the Certificates, and therefore the Registration Statements of which those Prospectus
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Supplements formed a part, contained the following misleading statements, among others, using
identical or substantially similar language, regarding the circumstances under which the
originators granted underwriting exceptions for loans underlying the Certificates:
(a) In addition, certain exceptions to the underwriting standards described herein may be made in the event that compensating factors are demonstrated by a prospective mortgagor.
The above misstatement, in identical or substantially similar language, was contained in the
following Offering Documents: Prospectus Supplement for CSAB 2006-3 (Form 424B5), at 19
(Oct. 30, 2006); Prospectus Supplement for HEAT 2006-5 (Form 424B5), at S-36 (July 6, 2006);
Prospectus Supplement for HEAT 2006-6 (Form 424B5), at S-36 (Aug. 1, 2006); Prospectus
Supplement for HEAT 2006-7 (Form 424B5), at S-36 (Oct. 3, 2006); Prospectus Supplement for
HEAT 2006-8 (Form 424B5), at S-36 (Dec. 4, 2006); Prospectus Supplement for HEAT 2007-1
(Form 424B5), at 39 (Feb. 1, 2007); Prospectus Supplement for HEMT 2005-5 (Form 424B5), at
29 (Dec. 29, 2005); Registration Statement (333-135481) filed by CSFB Mortgage (Form S-3/A,
Am. 2) (Aug. 10, 2006); Registration Statement (333-130884) filed by CSFB Mortgage (Form S-
3/A, Am. 3) (Mar. 31, 2006); Registration Statement (333-127872) filed by CSFB Mortgage
(Form S-3/A, Am. 1) (Dec. 7, 2005).
(b) On a case-by-case basis, the applicable Originator may determine that, based upon compensating factors, a loan applicant, not strictly qualifying under one of the Risk Categories described below, warrants an exception to the requirements set forth in the Underwriting Guidelines. Compensating factors may include, but are not limited to, loan-to-value ratio, debt-to-income ratio, good credit history, stable employment history, length at current employment and time in residence at the applicant’s current address.
The above misstatement, in identical or substantially similar language, was contained in the
following Offering Documents: Prospectus Supplement for ABSC 2006-HE7 (Form 424B5), at
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49 (Dec. 1, 2006); Prospectus Supplement for ABSC 2006-HE6 (Form 424B5), at 70-72 (Dec. 1,
2006); Prospectus Supplement for ABSC 2007-HE1 (Form 424B5), at 37 (Feb. 6, 2007);
Prospectus Supplement for ABSC 2007-HE2 (Form 424B5), at 34 (June 4, 2007); Registration
Statement (333-131465) filed by ABS Corp. (Form S-3/A, Am. 1) (Mar. 15, 2006).
267. The above statements of material facts were untrue when made because they
failed to disclose that, in order to generate increased loan volume for securitizations, and in
contravention of Defendants’ and the third party originators’ underwriting guidelines,
Defendants and the third party originators allowed non-qualifying borrowers to be approved for
loans under “exceptions” to their underwriting standards, even though there were no
“compensating factors” that could possibly justify such an exception.
C. DEFENDANTS MADE UNTRUE STATEMENTS AND OMISSIONS REGARDING LOAN-TO-VALUE RATIOS AND APPRAISALS
268. The Prospectus Supplements disseminated by Defendants in the course of selling
the Certificates, and therefore the Registration Statements of which those Prospectus
Supplements formed a part, contained the following misleading statements, among others,
regarding loan-to-value ratios and appraisals of the properties securing the mortgage loans
underlying the Certificates:
(a) No Mortgage Loan had an LTV at origination in excess of 100.00%.
The above misstatement, in identical or substantially similar language, was contained in the
following Offering Documents: Prospectus Supplement for ABSC 2006-HE6 (Form 424B5), at
26 (Dec. 1, 2006); Prospectus Supplement for ABSC 2006-HE7 (Form 424B5), at 25 (Dec. 1,
2006); Prospectus Supplement for ABSC 2007-HE1 (Form 424B5), at 28 (Feb. 6, 2007);
Prospectus Supplement for ABSC 2007-HE2 (Form 424B5), at 29 (June 4, 2007); Prospectus
Supplement for CSAB 2006-3 (Form 424B5), at 20 (Oct. 30, 2006); Prospectus Supplement for
102
HEAT 2006-5 (Form 424B5), at S-29 (July 6, 2006); Prospectus Supplement for HEAT 2006-6
(Form 424B5), at S-29 (Aug. 1, 2006); Prospectus Supplement for HEAT 2006-7 (Form 424B5),
at S-29 (Oct. 3, 2006); Prospectus Supplement for HEAT 2006-8 (Form 424B5), at S-29 (Dec. 4,
2006); Prospectus Supplement for HEAT 2007-1 (Form 424B5), at 31 (Feb. 1, 2007); Prospectus
Supplement for HEMT 2005-5 (Form 424B5), at S-20 (Dec. 29, 2005); Registration Statement
(333-131465) filed by ABS Corp. (Form S-3/A, Am. 1), at 28 (Mar. 15, 2006).
(b) The adequacy of the mortgaged property as security for repayment of the related mortgage loan will generally have been determined by an appraisal in accordance with pre established appraisal procedure guidelines for appraisals established by or acceptable to the originator. All appraisals conform to the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal Foundation and must be on forms acceptable to Fannie Mae and/or Freddie Mac. Appraisers may be staff appraisers employed by the originator or independent appraisers selected in accordance with pre established appraisal procedure guidelines established by the originator. The appraisal procedure guidelines generally will have required the appraiser or an agent on its behalf to personally inspect the property and to verify whether the property was in good condition and that construction, if new, had been substantially completed. The appraisal generally will have been based upon a market data analysis of recent sales of comparable properties and, when deemed applicable, an analysis based on income generated from the property or a replacement cost analysis based on the current cost of constructing or purchasing a similar property. Under some reduced documentation programs, the originator may rely on the original appraised value of the mortgaged property in connection with a refinance by an existing mortgagor.
The above misstatement, in identical or substantially similar language, was contained in the
following Offering Documents: Prospectus Supplement for CSAB 2006-3 (Form 424B5), at 32
(Oct. 30, 2006); Prospectus Supplement for HEAT 2007-1 (Form 424B5), at 41 (Feb. 1, 2007);
Prospectus Supplement for ABSC 2006-HE6 (Form 424B5), at 72 (Dec. 1, 2006); Prospectus
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Supplement for ABSC 2006-HE7 (Form 424B5), at 49-50 (Dec. 1, 2006); Prospectus
Supplement for ABSC 2007-HE1 (Form 424B5), at 162 (Feb. 6, 2007); Prospectus Supplement
for ABSC 2007-HE2 (Form 424B5), at 151 (June 4, 2007); Prospectus Supplement for HEAT
2006-5 (Form 424B5), at S-37 (July 6, 2006); Prospectus Supplement for HEAT 2006-6 (Form
424B5), at S-37 (Aug. 1, 2006); Prospectus Supplement for HEAT 2006-7 (Form 424B5), at S-
37 (Oct. 3, 2006); Prospectus Supplement for HEAT 2006-8 (Form 424B5), at S-37 (Dec. 4,
2006); Prospectus Supplement for HEAT 2007-1 (Form 424B5), at 41 (Feb. 1, 2007); Prospectus
Supplement for HEMT 2005-5 (Form 424B5), at 30 (Dec. 29, 2005); Registration Statement
(333-127872) filed by CSFB Mortgage (Form S-3/A, Am. 1), at 226 (Dec. 7, 2005); Registration
Statement (333-135481) filed by CSFB Mortgage (Form S-3/A, Am. 2), at 41 (Aug. 10, 2006);
Registration Statement (333-130884) filed by CSFB Mortgage (Form S-3/A, Am. 3), at 226
(Mar. 31, 2006).
269. The above representations were materially false and misleading in that they
omitted to state that: (i) Defendants and the originators violated their stated appraisal standards
and in many instances materially inflated the values of the underlying mortgaged properties used
to collateralize the Certificates; (ii) the appraisers were not independent, and Defendants and the
originators in fact exerted pressure on appraisers to come back with pre-determined, inflated and
false appraisal values; (iii) the inflated appraisals obtained by Defendants and the originators did
not conform to USPAP, Fannie Mae or Freddie Mac standards and were not based on market
data analyses of comparable homes in the area or analyses of the cost of construction of a
comparable home; and (iv) the forms of credit enhancement applicable to certain tranches of the
Certificates were affected by the total value of the underlying properties, and thus were
inaccurate as stated. Defendants omitted to disclose that they and the originators subordinated
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proper appraisals to the goal of originating and securitizing as many mortgage loans as they
could.
270. All of the representations regarding LTV ratios, described above, were materially
false and misleading because the underlying appraisals used to determine the LTVs were
improperly performed. The actual LTV ratios for numerous mortgage loans underlying the
Certificates would have exceeded 100% if the underlying properties had been appraised by an
independent appraiser according to USPAP standards as represented in the Offering Documents.
D. DEFENDANTS MATERIALLY MISREPRESENTED THE ACCURACY OF THE CREDIT RATINGS ASSIGNED TO THE CERTIFICATES
271. The Prospectus Supplements disseminated by Defendants in the course of selling
the Certificates, and therefore the Registration Statements of which those Prospectus
Supplements formed a part, contained the following misleading statements using identical or
substantially similar language, among others, touting the credit ratings assigned to the
Certificates.
It is a condition to the issuance of the certificates of each series offered hereby that at the time of issuance they shall have been rated in one of the four highest rating categories by the nationally recognized statistical rating agency or agencies specified in the related prospectus supplement.
The above misstatements were contained in the following Offering Documents: Prospectus
Supplement for CSAB 2006-3 (Form 424B5), at 136 (Oct. 30, 2006); Prospectus Supplement for
ABSC 2006-HE6 (Form 424B5), at S-185 (Dec. 1, 2006); Prospectus Supplement for ABSC
2006-HE7 (Form 424B5), at S-151 (Dec. 1, 2006); Prospectus Supplement for ABSC 2007-HE1
(Form 424B5), at S-105 (Feb. 6, 2007); Prospectus Supplement for ABSC 2007-HE2 (Form
424B5), at S-103 (June 4, 2007); Prospectus Supplement for HEAT 2006-5 (Form 424B5), at
136 (July 6, 2006); Prospectus Supplement for HEAT 2006-6 (Form 424B5), at 136 (Aug. 1,
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2006); Prospectus Supplement for HEAT 2006-7 (Form 424B5), at 136 (Oct. 3, 2006);
Prospectus Supplement for HEAT 2006-8 (Form 424B5), at 136 (Dec. 4, 2006); Prospectus
Supplement for HEAT 2007-1 (Form 424B5), at 147 (Feb. 1, 2007); Prospectus Supplement for
HEMT 2005-5 (Form 424B5), at 127 (Dec. 29, 2005); Registration Statement (333-130884) filed
by CSFB Mortgage (Form S-3/A, Am. 3), at 340 (Mar. 31, 2006); Registration Statement (333-
135481) filed by CSFB Mortgage (Form S-3/A, Am.2), at 148 (Aug. 10, 2006); Registration
Statement (333-127872) filed by CSFB Mortgage (Form S-3/A, Am.1), at 326 (Dec. 7, 2005).
272. By touting the ratings of the Certificates, and in making the above statements in
the Offering Documents, Defendants represented that they believed that the information provided
to the rating agencies to support these ratings accurately reflected the guidelines and practices of
Defendants CSFC and DLJ, as well as those of the third party originators, and the specific
qualities of the underlying loans. These representations were false because Defendants did not
disclose to the rating agencies the extent of their and the third party originator’s improper
underwriting and appraisals and that Defendants otherwise gamed the rating agencies to ensure
that they obtained the highest ratings even when those ratings were not warranted. The falsity of
these representations is further evidenced by the rapid downgrades of all of the Certificates
within a few years of issuance.
E. DEFENDANTS MADE UNTRUE STATEMENTS REGARDING THE CREDIT ENHANCEMENTS APPLICABLE TO THE CERTIFICATES
273. The Prospectus Supplements disseminated by Defendants in the course of
selling the Certificates, and therefore the Registration Statements of which those Prospectus
Supplements formed a part, contained the following misleading statements, among others, in
identical or substantially similar language, regarding credit enhancements.
106
Subordination The rights of the holders of the Subordinate Certificates to receive
distributions will be subordinated, to the extent described in this prospectus supplement, to the rights of the holders of the Class A Certificates. In addition, the rights of the holders of the Mezzanine Certificates with a lower payment priority will be subordinated to the rights of holders of the Mezzanine Certificates with a higher payment priority, in each case, to the extent described in this prospectus supplement. Subordination is intended to enhance the likelihood of regular distributions of interest and principal on the more senior certificates and to afford those certificates protection against realized losses on the mortgage loans.
* * *
Overcollateralization As of the closing date, the aggregate principal balance of the
mortgage loans as of the cut-off date will exceed the aggregate principal balance of the LIBOR Certificates and the Class P Certificates in an amount equal to approximately 2.00% of the aggregate principal balance of the mortgage loans as of the cut-off date. This feature is referred to as overcollateralization. The mortgage loans owned by the trust bear interest each month in an amount that in the aggregate is expected to exceed the amount needed to pay monthly interest on the LIBOR Certificates and to pay the fees and expenses of the trust. This excess interest will be applied, if necessary, to pay principal on the LIBOR Certificates in order to maintain the required level of overcollateralization. The required level of overcollateralization may decrease over time.
* * *
Excess Interest The mortgage loans owned by the trust bear interest each month in
an amount that in the aggregate is expected to exceed the amount needed to pay monthly interest on the LIBOR Certificates and to pay the fees and expenses of the trust. The excess interest from the mortgage loans each month will be available to maintain overcollateralization at required levels and to absorb realized losses on the mortgage loans as described in the pooling and servicing agreement.
* * * Allocation of Losses If on any distribution date there is not sufficient excess interest or
overcollateralization to absorb realized losses on the mortgage
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loans as described under "Description of the Certificates—Overcollateralization Provisions" in this prospectus supplement, then realized losses on the mortgage loans will be allocated to the Mezzanine Certificates. If realized losses on the mortgage loans are allocated to the Mezzanine Certificates, they will be allocated first to the class of Mezzanine Certificates with the highest numerical designation until the certificate principal balance thereof has been reduced to zero and then to the class of Mezzanine Certificates with the next highest numerical designation. The pooling and servicing agreement does not permit the allocation of realized losses on the mortgage loans to the Class A Certificates or Class P Certificates; however, investors in Class A Certificates should realize that under certain loss scenarios there will not be enough principal and interest on the mortgage loans on a distribution date to pay the Class A Certificates all interest and principal amounts to which those certificates are then entitled. Any realized losses allocated to a class of Mezzanine Certificates will generally cause a permanent reduction to its certificate principal balance. However, the amount of any realized losses allocated to any or all of the Mezzanine Certificates may be reimbursed to the holders of these certificates according to the priorities set forth under "Description of the Certificates--Overcollateralization Provisions" and "--the Swap Agreement" in this prospectus supplement.
* * *
Swap Agreement In certain circumstances, payments made to the supplemental
interest trust under the swap agreement may be available to cover certain realized losses on the mortgage loans.
The above misstatements, in identical or substantially similar language, were contained in the
following Offering Documents: Prospectus Supplement for ABSC 2006-HE6 (Form 424B5), at
12-13 (Dec. 1, 2006); Prospectus Supplement for ABSC 2006-HE7 (Form 424B5), at 12-13
(Dec. 1, 2006); Prospectus Supplement for ABSC 2007-HE1 (Form 424B5), at 14-15 (Feb. 6,
2007); Prospectus Supplement for ABSC 2007-HE2 (Form 424B5), at 15-16 (June 4, 2007);
Prospectus Supplement for CSAB 2006-3 (Form 424B5), at 51 (Oct. 30, 2006); Prospectus
Supplement for HEAT 2006-5 (Form 424B5), at S-11 – S-12 (July 6, 2006); Prospectus
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Supplement for HEAT 2006-6 (Form 424B5), at S-11 – S-12 (Aug. 1, 2006); Prospectus
Supplement for HEAT 2006-7 (Form 424B5), at S-11 – S-12 (Oct. 3, 2006); Prospectus
Supplement for HEAT 2006-8 (Form 424B5), at S-11 – S-12 (Dec. 4, 2006); Prospectus
Supplement for HEAT 2007-1 (Form 424B5), at S-11 – S-12 (Feb. 1, 2007); Prospectus
Supplement for HEMT 2005-5 (Form 424B5), at S-6 – S-7 (Dec. 29, 2005).
274. The above statements were materially false and misleading when made because
they failed to disclose that because the loan originators systematically ignored their underwriting
standards and abandoned their property appraisal standards, borrowers would not be able to
repay their loans, foreclosure sales would not recoup the full value of the loans, and the
aggregate expected principal payments would not, nor could they be expected to, exceed the
aggregate class principal of the Certificates. As such, the Certificates were not protected with
the level of credit enhancement and overcollateralization represented to investors in the
Prospectus Supplements.
F. DEFENDANTS MADE UNTRUE STATEMENTS REGARDING OWNER-OCCUPANCY STATISTICS
275. Each of the Prospectus Supplements disseminated by Defendants in the course of
selling the Certificates, and therefore the Registration Statements of which those Prospectus
Supplements formed a part, contained tables substantially similar to that below, purporting to
provide data on the owner-occupancy rates of mortgage loans underlying the Certificates. The
figures contained in these tables were materially false and misleading, however, because
Defendants systematically overstated the owner-occupancy rates.
276. For example, the following table appears in the Prospectus Supplement for HEMT
2005-5 (Form 424B5), at S-22 (Dec. 29, 2005), which was purchased in the offering by ABP:
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277. But an analysis by Allstate of this same Certificate found that the true non-owner-
occupancy rate for the loans included in this particular mortgage pool was 12.84%, not 10.02%
as represented above. See Section VI, supra.
278. FHFA also analyzed the owner-occupancy statistics for several Certificates that it
purchased and presented its results in tabular form (excerpted below).
Transaction Supporting Loan Group
Reported Percentage of Non-Owner Occupied Properties
Percentage of Properties
Reported as Owner-Occupied
With Strong Indications of Non-Owner-occupancy
Actual Percentage of Non-Owner Occupied Properties
Prospectus Understatement of Non-Owner
Occupied Properties
ABSC 2006-HE6 Group 1 17.58 10.97 26.62 9.04 ABSC 2006-HE7 Group 1 13.62 11.52 23.57 9.95 ABSC 2007-HE1 Group 1 6.26 9.72 15.38 9.12 ABSC 2007-HE2 Group 1 3.77 10.90 14.25 10.49
HEAT 2006-5 Group 1 13.81 9.28 21.80 8.00 HEAT 2006-6 Group 1 6.61 11.41 17.26 10.65 HEAT 2006-7 Group 1 5.88 13.85 18.92 13.04 HEAT 2006-8 Group 1 5.25 10.98 15.65 10.40 HEAT 2007-1 Group 1 5.99 13.54 18.72 12.73
The above misstatements were contained in the following Offering Documents: Prospectus
Supplement for ABSC 2006-HE6 (Form 424B5), at 37 (Dec. 1, 2006); Prospectus Supplement
110
for ABSC 2006-HE7 (Form 424B5), at 35 (Dec. 1, 2006); Prospectus Supplement for ABSC
2007-HE1 (Form 424B5), at 110 (Feb. 6, 2007); Prospectus Supplement for ABSC 2007-HE2
(Form 424B5), at 106 (June 4, 2007); Prospectus Supplement for HEAT 2006-5 (Form 424B5),
at S-24 (July 6, 2006); Prospectus Supplement for HEAT 2006-6 (Form 424B5), at S-24 (Aug. 1,
2006); Prospectus Supplement for HEAT 2006-7 (Form 424B5), at S-24 (Oct. 3, 2006);
Prospectus Supplement for HEAT 2006-8 (Form 424B5), at S-24 (Dec. 4, 2006); Prospectus
Supplement for HEAT 2007-1 (Form 424B5), at 25 (Feb. 1, 2007).
279. Although ABP purchased Group 2 securities, it is likely that those securities had
owner-occupancy discrepancies as well.
280. The other Offering Document represented similar information regarding owner-
occupancy statistics. See Prospectus Supplement for CSAB 2006-3 (Form 424B5), at 16 (Oct.
30, 2006).
281. The results of these loan-level reviews establish that, contrary to Defendants’
representations, a far lower percentage of borrowers did, in fact, occupy the mortgaged
properties than was represented to investors such as Plaintiff ABP in the Offering Documents.
G. DEFENDANTS MADE UNTRUE STATEMENTS REGARDING THE TRANSFER OF TITLE TO THE ISSUING TRUSTS
282. Defendants stated in each of the Offering Documents, using identical or
substantially similar language, that:
On the Closing Date, the Depositor will transfer to the Trust all of its right, title and interest in and to each Mortgage Loan, the related mortgage note, mortgage, assignment of mortgage in recordable form to the Trustee and other related documents (collectively, the “Mortgage Loan Documents”), including all scheduled payments with respect to each such Mortgage Loan due after the Cut-off Date.
111
The above misstatements were contained in the following Offering Documents: Prospectus
Supplement for ABSC 2006-HE6 (Form 424B5), at 113 (Dec. 1, 2006); Prospectus Supplement
for ABSC 2006-HE7 (Form 424B5), at 85 (Dec. 1, 2006); Prospectus Supplement for ABS
2007-HE1 (Form 424B5), at 70 (Feb. 6, 2007); Prospectus Supplement for ABSC 2007-HE2
(Form 424B5), at 68 (June 4, 2007); Prospectus Supplement for CSAB 2006-3 (Form 424B5), at
44 (Oct. 30, 2006); Prospectus Supplement for HEAT 2006-5 (Form 424B5), at S-34 (July 6,
2006); Prospectus Supplement for HEAT 2006-6 (Form 424B5), at S-34 (Aug. 1, 2006);
Prospectus Supplement for HEAT 2006-7 (Form 424B5), at S-34 (Oct. 3, 2006); Prospectus
Supplement for HEAT 2006-8 (Form 424B5), at S-34 (Dec. 4, 2006); Prospectus Supplement for
HEAT 2007-1 (Form 424B5), at 39 (Feb. 1, 2007); Prospectus Supplement for HEMT 2005-5
(Form 424B5), at S-25 (Dec. 29, 2005); Registration Statement (333-130884) filed by CSFB
Mortgage (Form S-3/A, Am.3), at 246 (Mar. 31, 2006); Registration Statement (333-135481)
filed by CSFB Mortgage (Form S-3/A, Am.2), at 60 (Aug. 10, 2006); Registration Statement
(333-127872) filed by CSFB Mortgage (Form S-3/A, Am.1), at 242 (Dec. 7, 2005).
283. These representations were false because Defendants routinely failed to
physically deliver the original promissory notes and security instruments for the mortgage loans
to the Issuing Trusts, as required by applicable state laws and the PSAs. These representations
were also false because Defendants routinely failed to execute valid endorsements of the
documents at the time of the purported transfer, as is also required by applicable state laws and
the PSAs. The Issuing Trusts therefore did not possess good title to many of the mortgage loans
and lacked legal authority to enforce many of the mortgage loans against the borrowers in the
event of default.
112
XII. DEFENDANTS KNEW THAT THE OFFERING DOCUMENTS CONTAINED MATERIAL MISSTATEMENTS AND OMISSIONS
284. The allegations below are made in support of Plaintiff’s common-law fraud,
fraudulent inducement and aiding and abetting claims, and not in support of its negligent
misrepresentation claim, which is based solely on negligence.
285. As set forth above, at all relevant times, Defendants knew or were reckless in not
knowing that the Offering Documents contained material misstatements and omissions.
Defendants’ knowledge or recklessness is evidenced by, among other things, the following:
• Some of the defective loans underlying the Certificates purchased by Plaintiff were originated by the Credit Suisse entities CSFC and DLJ specifically for the purpose of securitization as part of Credit Suisse’s vertically integrated RMBS operation. See ¶¶ 82-91, supra.
• The limited due diligence that Defendants did perform on the mortgage loans being pooled for securitization demonstrated that there were significant and extensive defects in the mortgage loans. Defendants commissioned due diligence reports from various external parties which showed that a significant proportion of the sampled loans analyzed had defects, including breaches of the Originators’ underwriting guidelines and improper appraisals. Despite this knowledge, Defendants waived the breaches and allowed large numbers of these defective mortgages to be included in the mortgage pools used to collateralize the Certificates sold to Plaintiff. See ¶¶ 100-101, supra.
• Defendants required third-party originators to compensate them for defective or defaulting loans without remitting their recoveries to the Issuing Trusts or providing notice to the RMBS investors who owned the loans. See ¶¶ 105-110, supra.
• Defendants’ vertically integrated securitization operations included servicing activities that kept them apprised of the true state of the securitized mortgages, including default rates and property values. Defendants did not provide accurate information regarding these matters to investors. See ¶¶ 111-117, supra.
• Multiple independent reviews of the loans underlying Defendants’ RMBS offerings have revealed that Defendants consistently made material misstatements of owner-occupancy rates and LTV ratios in their offering documents. See ¶¶ 209-212, 225-228, supra.
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• Defendants knew that the mortgages they were acquiring from the various originators as quickly as possible and packaging into the Certificates sold to investors such as Plaintiff were not worthy of their high credit ratings. The ratings of the Certificates, which were all rated Aaa at the time Plaintiff purchased them, have declined substantially to their current non-investment grade and/or junk ratings. See ¶¶ 296-307, supra.
• A report prepared by Credit Suisse’s own analysts, including members of its Mortgage-Backed Securities Team, revealed that Defendants were aware of the widespread collapse of lending and underwriting standards by originators of the loans that were pooled into securitizations like those purchased by ABP. See ¶¶ 119-124, supra.
• Defendants knew that the mortgages underlying the Certificates were likely to default, as evidenced by the high percentage of loans that are currently in foreclosure as well as the percentage of the loans underlying the Certificates that are currently delinquent by more than 90 days. See ¶ 308, infra.
XIII. PLAINTIFF JUSTIFIABLY RELIED ON DEFENDANTS’ MISREPRESENTATIONS TO ITS DETERIMENT
286. Plaintiff, through its agents, purchased senior classes of mortgage-backed
securities (i.e., those rated AAA/Aaa by the rating agencies S&P and Moody’s). The Certificates
were purchased to generate income and total return through safe investments. The securities
were purchased with the expectation that the investments could be – and indeed some were –
purchased and sold on the secondary market.
287. In making the investments, Plaintiff and/or its agents relied upon Defendants’
representations and assurances regarding the quality of the mortgage collateral underlying the
Certificates, including the quality of the underwriting processes related to the underlying
mortgage loans. Plaintiff and/or its agents received, reviewed, and relied upon the Offering
Documents, which purported to describe in detail the mortgage loans underlying each offering.
Offering Documents containing the representations outlined above (nearly identical, or
materially similar counterparts thereto) were obtained, reviewed, and relied upon before any
purchase was made.
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288. In purchasing the Certificates, Plaintiff and/or its agents justifiably relied on
Defendants’ false representations and omissions of material fact detailed above, including the
misstatements and omissions in the Offering Documents. These representations materially
altered the total mix of information upon which Plaintiff and/or its agents made their purchasing
decisions.
289. But for the misrepresentations and omissions in the Offering Documents, Plaintiff
and its agents would not have purchased or acquired the Certificates as they ultimately did,
because those representations and omissions were material to their decisions to acquire the
Certificates, as described above.
290. As discussed supra, Plaintiff is a conservative institutional investor that relied on
Defendants’ representations in the Offering Documents that the Certificates purchased by
Plaintiff were safe, Aaa-rated securities. Because Plaintiff did not have access to the loan files,
appraisals, or other supporting documentation for the loans underlying the Certificates, Plaintiff
had no reasonable means or ability to conduct its own due diligence regarding the quality of the
mortgage pools. As such, Plaintiff and its agents were forced to and did rely on the
representations made by Defendants in the Offering Documents, and it was because of those
representations that Plaintiff purchased the Certificates at issue in this Complaint.
291. In its capacity as underwriter of these offerings, Credit Suisse Securities had an
obligation to conduct due diligence regarding the accuracy and completeness of the Offering
Documents prior to their dissemination to investors and prior to consummation of the offerings.
In connection with that due diligence process, Credit Suisse Securities had access to numerous
internal and external sources of information that should have alerted it to the systematic and
widespread abandonment of the underwriting guidelines and stated appraisal methods of CSFC,
115
DLJ, and the third-party originators who sold loans that were included in Credit Suisse
securitizations.
292. Credit Suisse Securities was thus supposed to play a “gatekeeper” role for public
investors such as Plaintiff, who did not have access to non-public information through which to
test the assertions in the Offering Documents. However, as set forth above, Credit Suisse
Securities failed to discharge its obligations. As concluded in a March 2008 Policy Statement on
Financial Market Developments by the President’s Working Group on Financial Markets,
“[a]lthough market participants had economic incentives to conduct due diligence … the steps
they took were insufficient.”
293. As discussed in ¶¶ 100-101, supra, Credit Suisse’s due diligence vendor Clayton
informed Credit Suisse that a substantial number of the loans in its securitization pools did not
meet underwriting guidelines, and did not possess compensating factors to justify granting
exceptions to the guidelines. Credit Suisse largely ignored these findings, waived a third of these
troubled pools back into the securitization pools and sold them to investors such as Plaintiff
ABP. In breach of its obligations, the Underwriter Defendant omitted to disclose this
information and proceeded to market the Certificates to investors such as Plaintiff.
XIV. PLAINTIFF HAS SUFFERED LOSSES AS A RESULT OF ITS PURCHASES OF THE CERTIFICATES
294. The false and misleading statements of material fact and omissions of material
facts in the Offering Documents directly caused Plaintiff damage, because the Certificates were
in fact far riskier than Defendants had described them to be. As set forth below, the loans
underlying the Certificates experienced default and delinquency at very high rates due to
Defendants’ abandonment of their purported underwriting guidelines. The resulting downgrades
to the Certificates’ ratings have made them unmarketable at anywhere near the prices Plaintiff
116
paid, thus confirming that Plaintiff paid far more for the Certificates than the value they actually
received.
295. As set forth below, Plaintiff has incurred substantial losses in market value due to
the poor quality of the collateral underlying the Certificates. The income and principal payments
Plaintiff received have been lower than Plaintiff expected. Because of the declining collateral
base, it is increasingly likely that Plaintiff will not obtain the full payments expected under the
“waterfall” provisions of the securitizations. This is reflected in the far diminished market value
for these securities, which, again, is a strong indicator that the true value of the Certificates was
far less than what Plaintiff paid.
296. Plaintiff purchased Certificates issued by Home Equity Mortgage Trust 2005-5 on
December 29, 2005, in the offering, when they were rated as Aaa by Moody’s, but the
Certificates have since been downgraded twice and are currently rated Caa1. At the time of
filing of this complaint, the Certificates were trading at just approximately 33% of par.
297. Plaintiff purchased Certificates issued by HEAT 2006-5 on July 5, 2006, in the
offering, when they were rated as Aaa by Moody’s, but the Certificates have since been
downgraded once and are currently rated Aa3. At the time of filing of this complaint, the
Certificates were trading at just approximately 97% of par.
298. Plaintiff purchased Certificates issued by HEAT 2006-6 on August 1, 2006, in the
offering, when they were rated as Aaa by Moody’s, but the Certificates have since been
downgraded twice and are currently rated Baa3. At the time of filing of this complaint, the
Certificates were trading at just approximately 88% of par.
299. Plaintiff purchased Certificates issued by HEAT 2006-7 on October 3, 2006, in
the offering, when they were rated as Aaa by Moody’s, but the Certificates have since been
117
downgraded four times and are currently rated B1. At the time of filing of this complaint, the
Certificates were trading at just approximately 80% of par.
300. Plaintiff purchased Certificates issued by CSAB 2006-3, on October 31, 2006, in
the offering, when they were rated as Aaa by Moody’s, but the Certificates have since been
downgraded four times and are currently rated Ca. At the time of filing of this complaint, the
Certificates were trading at just approximately 37% of par.
301. Plaintiff purchased Certificates issued by ABSC 2006-HE6 on November 30,
2006, in the offering, when they were rated as Aaa by Moody’s, but the Certificates have since
been downgraded and are currently rated Ba1. At the time of filing of this complaint, the
Certificates were trading at just approximately 97% of par.
302. Plaintiff purchased Certificates issued by ABSC 2006-HE7 on November 30,
2006, when they were rated as Aaa by Moody’s, but the Certificates have since been
downgraded twice and are currently rated Caa2. At the time of filing of this complaint, the
Certificates were trading at just approximately 58% of par.
303. Plaintiff purchased Certificates issued by HEAT 2006-8 on December 1, 2006, in
the offering, when they were rated as Aaa by Moody’s, but the Certificates have since been
downgraded four times and are currently rated B2. At the time of filing of this complaint, the
Certificates were trading at just approximately 77% of par.
304. Plaintiff purchased Certificates issued by HEAT 2007-1 on February 1, 2007, in
the offering, when they were rated as Aaa by Moody’s, but the Certificates have since been
downgraded three times and are currently rated A3. At the time of filing of this complaint, the
Certificates were trading at just approximately 96% of par.
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305. Plaintiff purchased Certificates issued by ABSC 2007-HE1 on February 6, 2007,
in the offering, when they were rated as Aaa by Moody’s, but the Certificates have since been
downgraded twice and are currently rated Caa3. At the time of filing of this complaint, the
Certificates were trading at just approximately 76% of par.
306. Plaintiff purchased Certificates issued by ABSC 2007-HE2 on May 31, 2007, in
the offering, when they were rated as Aaa by Moody’s, but the Certificates have since been
downgraded twice and are currently rated B3. At the time of filing of this complaint, the
Certificates were trading at just approximately 69% of par.
307. The chart below shows the complete downgrade histories for all of the
Certificates purchased by Plaintiff.
Issuing Trust S&P Rating / Effective Date
Moody’s Rating / Effective Date
AAA 12/4/06 Aaa 11/30/06 BBB 7/18/11 Ba3 3/13/09 ABSC 2006-HE6 A3
Ba1 7/12/10 AAA 12/4/06 Aaa 11/30/06
A 3/2/10 Ba3 3/13/09 ABSC 2006-HE7 A3 CCC 8/11/11 Caa2 7/12/10 AAA 3/2/07 Aaa 2/6/07 AA 3/26/10 B3 3/13/09 ABSC 2007-HE1 A3
CCC 7/18/11 Caa3 7/12/10 AAA 6/4/07 Aaa 6/8/07 A+ 8/4/09 Ba3 3/13/09 A- 3/2/10 B3 7/12/10
ABSC 2007-HE2 A2
CCC 8/11/11 AAA 11/2/06 Aaa 10/30/06 CCC 8/14/09 Aa3 9/22/08
Baa2 2/11/09 B3 8/12/09
CSAB 2006-3 A1B2
Ca 11/19/10
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Issuing Trust S&P Rating / Effective Date
Moody’s Rating / Effective Date
AAA 7/17/06 Aaa 7/5/06 HEAT 2006-5 2A2
Aa3 3/19/09 AAA 9/6/06 Aaa 8/1/06 AA 9/25/09 Aa1 4/21/08 A+ 3/2/10 Baa3 3/19/09
HEAT 2006-6 2A2
BB+ 10/21/11 AAA 10/9/06 Aaa 10/13/06
A 9/2/08 Aa2 4/21/08 B+ 10/21/11 A1 10/28/08
Baa3 3/19/09 HEAT 2006-7 2A2
B1 5/5/10
AAA 12/12/06 Aaa 12/19/06 AA 12/19/08 Aa3 4/21/08
BBB 10/6/09 Baa1 10/28/08 CCC 7/18/11 Ba1 3/19/09
HEAT 2006-8 2A2
B2 5/5/10 AAA 2/23/07 Aaa 2/1/07 BB+ 7/18/11 AA2 4/21/08
A1 3/19/09 HEAT 2007-1 2A1
A3 5/5/10
AAA 12/30/05 Aaa 12/29/05
Baa2 10/20/08 HEMT 2005-5 A1A
Caa1 3/2/09
308. As a result of the multiple and material misrepresentations contained in the
Offering Documents, Plaintiff has suffered losses on its purchases of the Certificates. As of the
filing of this Complaint, the mortgage loans in the pools held by the Issuing Trusts and
underlying Plaintiff’s Certificates have suffered escalating default rates and mounting
foreclosures.
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Certificates Purchased by ABP
Percentage of Loans
Underlying the
Certificates Delinquent
by More Than 90 Days
Percentage of Loans
Underlying the
Certificates in
Foreclosure
ABSC 2006-HE6 A3 27.96% 12.74% ABSC 2006-HE7 A3 30.70% 16.48% ABSC 2007-HE1 A3 25.09% 11.91% ABSC 2007-HE2 A2 30.53% 14.86% CSAB 2006-3 A1B2 42.14% 28.49% HEAT 2006-5 2A2 39.83% 22.06% HEAT 2006-6 2A2 41.00% 20.39% HEAT 2006-7 2A2 39.03% 20.80% HEAT 2006-8 2A2 42.82% 24.15% HEAT 2007-1 2A1 41.55% 21.18% HEMT 2005-5 A1A 7.65% .63%
CAUSES OF ACTION
FIRST CAUSE OF ACTION Common Law Fraud
(Against the Corporate Defendants)
309. Plaintiff realleges each and every allegation contained above as if fully set forth
herein.
310. This claim is brought against the Corporate Defendants.
311. The Corporate Defendants promoted and sold the Certificates purchased by
Plaintiff pursuant to the defective Offering Documents. The Offering Documents contained
untrue statements of material facts, omitted to state other facts necessary to make the statements
made not misleading, and concealed and failed to disclose material facts.
312. Each of the Corporate Defendants knew their representations and omissions were
false and/or misleading at the time they were made. Each of the Corporate Defendants made the
misleading statements with an intent to defraud ABP.
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313. Each of the Corporate Defendants knew that their representations and omissions
were false and/or misleading at the time they were made or at the very least, recklessly made
such representations and omissions without knowledge of their truth or falsity.
314. Each of the Corporate Defendants made the misleading statements and omissions
with an intent to defraud Plaintiff and to induce Plaintiff into purchasing the Certificates.
Furthermore, these statements related to these Defendants’ own acts and omissions.
315. The Corporate Defendants knew or recklessly disregarded that investors such as
Plaintiff ABP were relying on their expertise, and they encouraged such reliance through the
Offering Documents and their public representations. These Defendants knew or recklessly
disregarded that investors such as ABP would rely upon their representations in connection their
decision to purchase the Certificates. These Defendants were in a position of unique and
superior knowledge regarding the true facts concerning the foregoing material misrepresentations
and omissions.
316. ABP reasonably, justifiably and foreseeably relied on the Corporate Defendants’
false representations and misleading omissions.
317. It was only by making such representations that the Corporate Defendants were
able to induce ABP to buy the Certificates. ABP would not have purchased or otherwise
acquired the Certificates but for these Defendants’ fraudulent representations and omissions
about the quality of the Certificates.
318. Had ABP known the true facts regarding the loans underlying the Certificates,
including the Corporate Defendants’ and the Originators’ abandonment of their underwriting
practices, the Corporate Defendants’ and Originators’ improper appraisal methods, the
inaccuracy of the ratings assigned by the rating agencies, and the failure to convey to the Issuing
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Trusts legal title to the underlying mortgages, Plaintiff would not have purchased the
Certificates.
319. As a result of the Corporate Defendants’ false and misleading statements and
omissions, Plaintiff suffered damages in connection with its purchase of the Certificates.
320. Because the Corporate Defendants committed these acts and omissions
maliciously, wantonly and oppressively, and because the consequences of these acts knowingly
affected the general public, including but not limited to all persons with interests in the RMBS,
ABP is entitled to recover punitive damages.
321. In the alternative, ABP hereby demands rescission and makes any necessary
tender of Certificates.
SECOND CAUSE OF ACTION Fraudulent Inducement
(Against the Corporate Defendants)
322. Plaintiff realleges each and every allegation contained above as if fully set forth
herein.
323. This is a claim for fraudulent inducement against the Corporate Defendants.
324. As alleged above, in the Offering Documents and in their public statements, the
Corporate Defendants made fraudulent and false statements of material fact, and omitted
material facts necessary in order to make their statements, in light of the circumstances under
which the statements were made, not misleading.
325. The Issuing and Underwriter Defendants knew at the time they sold and marketed
each of the Certificates that the foregoing statements were false, or, at the very least, made
recklessly, without any belief in the truth of the statements.
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326. The Corporate Defendants made these materially misleading statements and
omissions for the purpose of inducing Plaintiff to purchase the Certificates. Furthermore, these
statements related to these Defendants’ own acts and omissions.
327. The Corporate Defendants knew or recklessly disregarded that investors such as
ABP were relying on their expertise, and they encouraged such reliance through the Offering
Documents and their public representations. These Defendants knew or recklessly disregarded
that investors such as ABP would rely upon their representations in connection with their
decision to purchase the Certificates. These Defendants were in a position of unique and
superior knowledge regarding the true facts concerning the foregoing material misrepresentations
and omissions.
328. It was only by making such representations that the Corporate Defendants were
able to induce Plaintiff to buy the Certificates. Plaintiff would not have purchased or otherwise
acquired the Certificates but for the Corporate Defendants’ fraudulent representations and
omissions about the quality of the Certificates.
329. Plaintiff justifiably, reasonably and foreseeably relied on the Corporate
Defendants’ representations and false statements regarding the quality of the Certificates.
330. By virtue of the Corporate and Underwriter Defendants’ false and misleading
statements and omissions, as alleged herein, Plaintiff has suffered substantial damages and is
also entitled to rescission or rescissory damages.
THIRD CAUSE OF ACTION Aiding and Abetting Fraud
(Against All Defendants)
331. ABP repeats and realleges each and every allegation contained above as if fully
set forth herein.
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332. This is a claim against the above-named aiding and abetting Defendants (the
“Aiding and Abetting Defendants”) for aiding and abetting the fraudulent and reckless
misrepresentations by all Defendants. Each of these Defendants aided and abetted the fraud
committed by all of the other Defendants
333. As alleged in detail above, the Corporate Defendants knowingly promoted and
sold Certificates to ABP pursuant to materially misleading Offering Documents, thereby
damaging ABP. The Aiding and Abetting Defendants knew of the fraud perpetrated on ABP by
the Corporate Defendants; each Corporate Defendant aiding and abetting all other Corporate
Defendants. The Aiding and Abetting Defendants directed, supervised and otherwise knew of
the abandonment of underwriting practices and the utilization of improper appraisal methods; the
inaccuracy of the ratings assigned by the rating agencies; and the failure to convey to the Issuing
Trusts legal title to the underlying mortgages.
334. The Aiding and Abetting Defendants provided the Corporate Defendants with
substantial assistance in perpetrating the fraud. The Aiding and Abetting Defendants
participated in the violation of mortgage loan underwriting and appraisal standards; made false
public statements about mortgage loan underwriting and appraisal standards; provided false
information about the mortgage loans underlying the Certificates to the rating agencies; provided
false information for use in the Offering Documents; and/or participated in the failure to properly
endorse and deliver the mortgage notes and security documents to the Issuing Trusts.
335. It was foreseeable to the Aiding and Abetting Defendants at the time they actively
assisted in the commission of the fraud that ABP would be harmed as a result of their assistance.
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336. As a direct and natural result of the fraud committed by the Corporate Defendants,
and the knowing and active participation by the Aiding and Abetting Defendants, Plaintiff has
suffered substantial damages.
FOURTH CAUSE OF ACTION Negligent Misrepresentation
(Against All Defendants)
337. Plaintiff repeats and realleges each and every allegation contained above as if
fully set forth herein, except any allegations that the Defendants made any untrue statements and
omissions intentionally or recklessly. For the purposes of this Count, ABP expressly disclaims
any claim of fraud or intentional misconduct.
338. Defendants originated or acquired all of the underlying mortgage loans and
underwrote and sponsored the securitizations at issue. Based on due diligence they conducted on
the loan pools and the Originators, they had unique and special knowledge about underwriting
defects in the loans in the offerings. Defendants were uniquely situated to evaluate the
economics of each securitization.
339. As the sponsors, underwriters and depositors of the Certificates, Defendants were
uniquely situated to explain the details, attributes, and conditions of each security. Defendants
made the misrepresentations described above to induce ABP to purchase the Certificates.
340. ABP did not possess the loan files for the mortgage loans underlying its
Certificates and thus it could not conduct a loan-level analysis of the underwriting quality or
servicing practices for the mortgage loans.
341. Defendants were aware that Plaintiff relied on Defendants’ unique and special
knowledge and experience and depended upon Defendants for accurate and truthful information
regarding the quality of the underlying mortgage loans and their underwriting when determining
whether to invest in the Certificates at issue in this action. Defendants also knew that the facts
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regarding whether or not the Originators of the underlying loans complied with their stated
underwriting standards and appraisal methods were exclusively within Defendants’ knowledge
and control.
342. Over the course of almost two years, when making millions of dollars in
investments, ABP relied on the Defendants’ unique and special knowledge regarding the quality
of the underlying mortgage loans and their underwriting when determining whether to invest in
the Certificates. This longstanding relationship, coupled with the Defendants’ unique and special
knowledge about the underlying loans, created a special relationship of trust, confidence, and
dependence between the Defendants and ABP.
343. At the time it made these misrepresentations, Defendants knew, or at a minimum
were negligent in not knowing, that these statements were false, misleading, and incorrect. Such
information was known to Defendants but not known to ABP, and Defendants knew that ABP
was acting in reliance on mistaken information.
344. Based on their expertise, superior knowledge, and relationship with ABP,
Defendants had a duty to provide ABP with complete, accurate, and timely information
regarding the underwriting standards and appraisal methods used. Defendants breached their
duty to provide such information to ABP.
345. ABP reasonably relied on the information Defendants did provide which
Defendants undertook no attempt to correct. Without these material misrepresentations, ABP
would not have bought the Certificates.
346. ABP has suffered substantial damages as a result of Defendants’
misrepresentations.
PRAYER FOR RELIEF
WHEREFORE, ABP prays for relief and judgment, as follows: