exhibit 2 -- whistleblower transcript (redacted)

TSG Reporting - Worldwide 877-702-9580

1

2 UNITED STATES DISTRICT COURT3 SOUTHERN DISTRICT OF NEW YORK4

-----------------------------) 5 SYNCORA GUARANTEE, INC.,

formerly known as XL CAPITAL 6 ASSURANCE, INC, 7 Plaintiff, No. 09 Civ. 3106

(PAC)8 vs. 9 EMC MORTGAGE CORPORATION,

10 Defendant. -----------------------------)

11 SUPREME COURT OF THE STATE OF NEW YORK 12 COUNTY OF NEW YORK

-----------------------------)13 AMBAC ASSURANCE CORPORATION,

PLAINTIFF,14 Index No. 65041/20111

-against- 15 EMC MORTGAGE LLC (formerly known as EMC

MORTGAGE CORPORATION), J.P. MORGAN SECURITIES16 LLC (formerly known as BEAR, STEARNS & CO.

INC.) and JPMORGAN CHASE BANK, N.A.,17 DEFENDANTS.18 -----------------------------)19

20 VIDEOTAPED DEPOSITION OF 21 New York, Ne22 Saturday, January 21, 2012 23

Reported by:24

KRISTIN KOCH, RPR, RMR, CRR, CLR25


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2 A. Yes.

3 Q. You worked on their loans?

4 A. Yes.

5 Q. For Watterson or Clayton?

6 A. That was with Watterson.

7 Q. Flag Star?

8 A. That was with Watterson.

9 Q. You worked on their loans?

10 A. Yes.

11 Q. Sun Trust?

12 A. No.

13 Q. First Horizon?

14 A. Not familiar with them.

15 Q. Watterfield?

16 A. Not familiar.

17 Q. Maribella?

18 A. Never heard of them.

19 Q. Impac?

20 A. No.

21 Q. I want to focus a little bit on your

22 jobs -- your job as an underwriter at both

23 Watterson and Clayton.

24 What is your understanding of what

25 the role of an underwriter was at Watterson and


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2 Clayton?

3 A. My understanding at the time was to

4 re-underwrite the loans to specific guidelines

5 to see if they were met and to give them a risk

6 assessment that ranges from a 1, 2 or 3, so,

7 therefore, the investor can assess whether to

8 buy that group of loans or that particular loan

9 that I underwrote.

10 Q. And the investor that you mentioned,

11 you are talking about clients of Watterson and

12 Clayton?

13 A. Yes.

14 Q. And let me just turn to paragraph 15

15 of your declaration, which is on page 5 here.

16 It says here: "Importantly, in reviewing each

17 loan, the due diligence underwriter also had to

18 assess whether the loan met the criteria set

19 out in the underwriting guidelines. For

20 example, the underwriting guidelines for stated

21 income loans required, among other things, that

22 the borrower's income listed on the loan

23 application must be reasonable."

24 A. That is correct.

25 Q. Did the underwriting guidelines also


4

1

2 require the underwriter to look for red flags

3 of fraud?

4 A. Yes.

5 Q. And what do the underwriting

6 guidelines say about red flags for fraud?

7 A. They were -- they were not

8 particular -- in other words, they were not

9 particularly good loans and possibly these

10 loans shouldn't have been approved.

11 Q. How did the underwriters receive the

12 guidelines and directions regarding the

13 guidelines?

14 MR. EDLIN: Objection.

15 A. It varied. It varied from project

16 to project. Sometimes some project leads would

17 give you the parameters and write things on a

18 flip pad or also on a dry board eraser, dry

19 board, or sometimes they may have them up there

20 near them, and sometimes we may be on the job

21 and not have any guidelines at all.

22 Q. So let me just clarify. It was the

23 project leads or the team leads who provided

24 you these guidelines or other instructions

25 relating to guidelines?


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1


3 Q. To the best of your knowledge, where

4 did the project leads and the team leads get

5 these guidelines from?

6 A. To the best of my knowledge,

7 probably the investors or their originators.

8 Q. You mentioned that -- well, I am

9 going to come back to that a little bit later.

10 Did you find that the guidelines

11 that you were provided by these project leads

12 and team leads of both Watterson and Clayton,

13 did they always apply to the loans that you

14 were reviewing?


16 A. No, they did not. Some guidelines

17 didn't meet any of the parameters of these

18 loans.

19 Q. Okay. And what do you mean when you

20 say the guidelines did not meet the parameters

21 of the loans?

22 A. Meaning the loans when they were

23 approved were outside the box of what was given

24 to us, if we had guidelines at all.

25 MR. EDLIN: Objection. Move to


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2 strike as non-responsive.

3 Q. When you say outside of the box, you

4 are talking about a time period?

5 A. Yes. The loans may have been

6 written to one set of guidelines compared to

7 what you was given.


9 strike.

10 Q. So as I understand it, I want to

11 make sure that the record is clear on this,

12 that Watterson Prime and Clayton underwriters

13 like yourself were not often provided with the

14 guidelines which were applicable to the loans

15 at the time they were originated?


17 MR. EDLIN: Objection. Lack of

18 foundation and leading.

19 A. That is -- that is correct. The

20 guidelines, the majority of the time you would

21 have them, did not line up or was parallel with

22 the loan approval at that time. These were the

23 guidelines we were going to go by.

24 THE COURT REPORTER: I'm sorry?

25 A. These were the guidelines we are


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2 going to use for this particular project at

3 that time and most of the time they were not

4 parallel or lined up with the approval of how

5 this underwriter came up with that decision.



8 Q. What direction, if any, did you

9 receive from the clients of Watterson Prime and

10 Clayton regarding how to conduct a

11 re-underwriting review?

12 A. Usually it was channeled through the

13 team lead or the project manager certain

14 problems maybe after the first day we would run

15 through and usually they would say, "hey, the

16 client is -- they are going to ignore that" or

17 "that's not a big concern and they will take

18 care of that."

19 Q. So as I understand it, through the

20 team leads you received directions that the

21 clients wanted the underwriters to ignore

22 certain defects in loans?



25 MR. EDLIN: Objection. Leading.


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2 Lack of foundation.

3 Q. Turn to paragraph 17 of your

4 affidavit, which is on page 5.

5 It says here in the first line:

6 "Clayton supervisors would often inform the due

7 diligence underwriters that the purchasers

8 wanted the underwriters to approve loans that

9 often did not satisfy the underwriting

10 guidelines."


12 Q. Is the same statement true for

13 Watterson Prime?

14 A. Yes.

15 Q. Was this a practice which was

16 pervasive at Watterson and Clayton?

17 A. Yes.

18 Q. Across all clients?

19 A. Yes.

20 Q. What type of deviations from

21 underwriting guidelines are you referring to in

22 this sentence?

23 A. You have -- you have things for

24 appraisals where the value wasn't there. They

25 ignore it. You would have as far as income


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2 that didn't -- that wasn't jailed, in other

3 words, the income wasn't there.

4 THE COURT REPORTER: "That

5 wasn't" --

6 A. Jailed, or, in other words, that

7 income wasn't there for these borrowers and

8 they will say find exceptions to compensate or

9 for that loan is not -- that's not lining up

10 correctly, don't worry about it, let's get it

11 done, get the information in there and

12 compensate it out, we will compensate it.

13 Q. We are going to come back to the

14 issue of compensating factors a little bit

15 later.

16 You said just now that you found

17 that the income wasn't there. What do you mean

18 by that?

19 A. You would look at -- you would look

20 at underwriters that are front-end underwriters

21 that approve the loan at one income and it's

22 true enough they may have -- if they had the

23 documents -- if you had all the documents in

24 the loan the income may have been that, but

25 based on what you have in front of you the


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2 income didn't line up, and then sometimes when

3 you look at some of the income even if you had

4 all the documents and recalculated it, it

5 wasn't -- the income wasn't there. In other

6 words, the loan lacked substance of being

7 approved.


9 strike.

10 Q. Did you work on stated income loans

11 at Watterson and Clayton?

12 A. Yes, I did.

13 Q. When you say that the income wasn't

14 there, could that be related to stated income

15 loans?


17 A. That is correct. You had some

18 stated income loans that was out of the box and

19 unreasonable.



22 Q. Your testimony is that on stated

23 income loans you found many times that the

24 income listed on these loan applications was

25 not reasonable?


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2 A. Yes, there was.

3 Q. What instructions --

4 MR. EDLIN: Just one second. Do we

5 have -- just to keep the flow going and

6 lack of -- just save a little time, we have

7 a standing objection, I take it, that any

8 objections are reserved if not made?

9 MR. FARIDI: I don't know what the

10 usual stips are here.

11 MR. EDLIN: Do we have -- what are

12 the usual stips on this dep?

13 THE COURT REPORTER: Do you want to

14 go off the record?

15 MR. EDLIN: Yes, we can go off the

16 record.

17 THE VIDEOGRAPHER: The time is

18 10:12. We are going off the record.

19 (Discussion off the record.)


21 10:13. We are back on the record.

22 BY MR. FARIDI:

23 Q. Let me go back to paragraph 17 of

24 your declaration. Let me read the second line

25 here. It states that: "I recall specifically


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2 one occasion when representatives of Bear

3 Stearns (the purchaser) told my supervisors

4 that because Bear Stearns was willing to

5 purchase loans that did not meet the

6 underwriting guidelines, we should try to find

7 a compensating factor for every single loan

8 that did not meet the underwriting guidelines."

9 A. That is true.

10 Q. Do you recall any other instances --

11 MR. EDLIN: Move to strike as not

12 responsive. Is there a question?

13 Q. Is that a true statement?

14 A. That is a true statement.

15 Q. Do you recall any other instances?

16 A. That's pretty much on all jobs.

17 Q. So you don't recall any of the

18 specific instances?

19 A. No. Like I said, that -- those

20 loans -- you are talking about a whole year

21 doing --


23 A. You are talking about a whole year

24 doing multiple loans and different jobs.

25 That's pretty much the standard through all --


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2 throughout my clear at Clayton.

3 MR. EDLIN: Move to strike as

4 non-responsive.

5 Q. So it's fair to say that even though

6 you don't remember any other specific occasions

7 when you received similar instructions, that

8 you did receive these types of instructions on

9 a regular basis?

10 MR. EDLIN: Leading.

11 A. I would say yes, I did.

12 Q. To your knowledge, was it a

13 pervasive practice at Watterson and Clayton for

14 underwriters to fail to follow the underwriting

15 guidelines?

16 MR. EDLIN: Leading.

17 A. Ask the question again.

18 Q. To your knowledge, was it a

19 pervasive practice at Watterson and Clayton for

20 underwriters re-underwriting the loans to not

21 follow the underwriting guidelines?

22 MR. EDLIN: Leading and lack of

23 foundation.

24 A. Yes.

25 Q. In paragraph 17 you also state:


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2 "When I could not find a compensating factor

3 for certain defective loans even after a

4 thorough review of the loan files, I was told

5 to return to my desk and search again. Due

6 diligence underwriters like myself were forced

7 to find compensating factors for defective

8 loans where none existed."

9 A. Yes.


11 A. That is true.

12 Q. Did the same practice take place at

13 Watterson Prime?

14 A. Yes.

15 Q. How common was it for Clayton and

16 Watterson Prime underwriters to provide as

17 compensating factors those that were not

18 sufficient or were contrived?

19 A. It was very common.

20 MR. EDLIN: Leading and lack of

21 foundation.

22 A. It was very common for that type of

23 practice for both Watterson and Clayton.

24 Q. Now, this paragraph in particular,

25 paragraph 17, refers to a particular Bear


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2 Stearns job; correct?

3 A. Yes.


5 Q. Is it your testimony that on this

6 particular job you found compensating factors

7 that were contrived?

8 A. Yes.


10 Q. Take a look at paragraph 18. It

11 says: "For example, on one occasion the loan

12 application for a stated income loan that I

13 processed stated that the borrower made $8,500

14 per month working as an assistant manager at

15 McDonalds restaurant. I told my supervisor

16 that the borrower's stated income was

17 unreasonable. I was told to find a

18 compensating factor and approve the loan. The

19 compensating factor that I found did not

20 sufficiently compensate for the defect."


22 Q. That's a true statement?

23 A. Yes, that is.

24 Q. Do you recall any other specific

25 instances?


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2 A. There were several instances that I

3 can't recall, but that stood out particularly,

4 because I remember it was a California loan and

5 they tried -- and the team lead tried to

6 basically say this is California, of course

7 they are going to pay higher, and at that time

8 I believe 8,500 for someone that's around about

9 19 or 20 coming out of high school was not

10 reasonable at a hundred thousand and you are

11 not even the owner of a McDonalds.

12 MR. EDLIN: Move to strike.

13 Q. Even though you may not be able to

14 recall, as you testified, other specific

15 examples, do you believe that you found loans

16 like this where the stated income was not

17 reasonable on other occasions?

18 A. Yes.

19 Q. On Bear Stearns jobs?

20 A. Yes.


22 Q. And you graded those loans as 1s, 2s

23 or 3s?

24 A. Most of the time it was graded as a

25 2. It was graded as a 2 and later on down the


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2 line it was changed to a 1.

3 Q. Okay. We are going to come back to

4 that a little bit later.


6 strike.

7 Q. At Watterson and Clayton,

8 logistically speaking, how did the underwriters

9 record the results of the review of loans?

10 A. Once we entered all the information,

11 we hit "save" and it saves your initials or

12 your user ID name in there.

13 Q. When you say you enter information

14 and you hit "save," where are you entering

15 information into and what are you hitting

16 "save" on?

17 A. We were provided their laptops,

18 Watterson and Clayton, and at the very end when

19 you hit "save" to move to the next loan -- hit

20 "save" or either at the very -- at the end of

21 the script on each system that takes you out of

22 that loan and, therefore, your name was -- your

23 name or user ID was dropped in as the person

24 that completed that loan.

25 Q. Was there a particular software


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2 installed on each of these computers where you

3 entered information into?

4 A. I think the CLAS system was based on

5 a DOS system, old DOS system, which is called

6 CLAS, and StratQ, I'm not -- I can't remember

7 what their -- what their system was based on.

8 Q. You talked about a CLAS system.

9 Which company utilized the CLAS system?

10 A. Clayton used -- utilized CLAS. That

11 was the name of their system, CLAS. StratQ was

12 the software that was created by Bruce

13 Watterson for Watterson Prime.

14 Q. So as I understand it, underwriters

15 enter information into the CLAS and the StratQ

16 systems; correct?


18 Q. Relating to each individual loans?

19 A. Yes.

20 Q. And I think you testified about a

21 grading scheme; correct?

22 A. Yes.

23 Q. And what was that grading scheme?

24 A. Both grading schemes were similar.

25 1s were loans that were pretty much no defects


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2 and, you know, in other words, they was good

3 loans to buy. 2s were loans that they were

4 borderline, meaning that there was some type of

5 deficiency, but you had compensating factors

6 that could overcome that deficiency. And 3s

7 were loans which you graded that were high risk

8 to be defaults or loans that shouldn't have

9 been approved on the front end.

10 Q. Did both Watterson and Clayton

11 utilize the same grading system?

12 A. Yes.

13 Q. StratQ and CLAS?

14 A. Yes.

15 Q. And I think you talked about

16 initials and user names of underwriters. I

17 want to make sure we have covered that and the

18 record is clear.

19 A. Okay.

20 Q. How did Clayton and Watterson track

21 which underwriter reviewed each loan?

22 A. Each underwriter always had a unique

23 user name that you use throughout your

24 employment or your contract employment with

25 them.


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2 Q. And did you -- do you remember your

3 user name at Clayton for CLAS?

4 A. My user name at Clayton was .

5 Q. Okay. Do you remember your user

6 name at Watterson for StratQ?

7 A. I had several user ID names at that

8 time, because the system had upgraded several

9 times. was one. A combination of my

10 last name and last four of my social,

11 and, I think, may have -- was

12 approximately one of my user ID names.

13 Q. So for StratQ ?

14 A. Correct.

15 Q. D


17 Q. And you said there was a third one

18 that you don't remember?

19 A. Yeah, it might have been .

20 It was always a combination of your name or

21 some type of particular number that you -- that

22 was assigned to you and pretty much stayed up.

23 Q. What about , does that sound

24 familiar?

25 A. It doesn't sound familiar, but that


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2 would be my -- would be one of my user IDs,

3 because I was the only at the company,

4 so there was no confusion that that was me.

5 Q. So we can tell what loans you

6 reviewed at both Clayton and Watterson and what

7 deals you worked on by checking whether your

8 employee user ID number is listed on the

9 reports for these loans and deals?


11 Q. Paragraph 20 of your declaration

12 states that: "Due diligence underwriters like

13 myself often faced significant pressure from

14 supervisors to review loan files quickly as

15 possible and to avoid finding defects." Is

16 that a correct statement?

17 A. I would say that is true.

18 Q. Okay. And this statement applies

19 equally to Watterson Prime?

20 A. Yes, that is true as well.

21 Q. What pressure, if any, did you

22 receive as an underwriter to underwrite a large

23 volume of loans and to avoid finding defects?

24 A. Basically the pressure I received

25 was basically get the loan information into the


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2 system as quickly as possible. These loans

3 already closed.

4 Q. The statement also says that the

5 pressure was there to avoid finding defects.

6 Do you see that?

7 A. Yes.

8 Q. That's a correct statement?


10 Q. Do you remember any specific

11 recollections of times when you were told to

12 avoid finding defects?

13 A. Most of the time it was on a lot of

14 Countrywide deals and also Bear Stearns and

15 Lehman Brother deals.

16 Q. And do you recall any statements

17 that were made to you by team leads?

18 A. One particular that stands out like

19 say it was always any time we did a Bear

20 Stearns job it was pretty much we just entering

21 data into the system like Bear don't care. You

22 know, that was like the little slogan that they

23 used to just basically throw around. So we

24 just pretty much put the information in there.



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2 non-responsive.

3 Q. So the slogan Bear don't care, was

4 that a slogan which was also used by team

5 leads?

6 A. Pretty much. I have heard one team

7 leader say that.

8 Q. Do you recall the name of the team

9 lead?

10 A. I want to say Steve Shockley, but I

11 don't want to put it on that particular team

12 lead, but he pretty much -- you know, he had

13 the attitude like that, but I can't recall if

14 that was the team lead that actually said that

15 at one time.

16 MR. EDLIN: Move to strike the

17 hearsay.

18 Q. Now, you said that there was a

19 significant amount of pressure here in the

20 statement to review loans quickly. How many

21 loans were underwriters reviewing per day at

22 both Watterson and Clayton?

23 A. It depends. Each underwriter was

24 required to complete one loan per hour, so,

25 therefore, if we were there for a ten-hour day,


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2 you was required at least to complete ten, and

3 some underwriters may have twelve to fifteen

4 and it varies, and if you had too many days

5 where you had less loans than the hours you

6 worked, you would pretty particularly -- you

7 probably were not going to get staffed again.

8 Q. How many loans were you reviewing?

9 A. I was in the middle of the pack. I

10 was always like one or two loans more than the

11 hours that we worked, but I wasn't at the very

12 top.

13 Q. So if you worked a twelve-hour day,

14 you would have reviewed at least twelve loans,

15 if not two or three more?

16 A. Correct, I would have no less than

17 that twelve loans in that twelve-hour period.

18 Probably I'd be around 14 or 15.

19 Q. Now what happens to underwriters

20 were not doing twelve hours -- twelve loans per

21 day in a twelve-hour day?

22 A. You in particular might not get

23 staffed again, because you are not producing

24 quantity and it was basically driven by

25 quantity, not quality, because you may have


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2 2,500 loans and you calculated per

3 underwriter -- it was calculated per

4 underwriter how many we had to get out of each

5 underwriter in order to finish that pool in

6 that particular time.


8 non-responsive.

9 Q. So Clayton and Watterson traded

10 quality for quantity?

11 A. Yes.


13 Q. And how did the quality of the loans

14 or the quality of the loan underwriting,

15 rather, and the review of those loans suffer

16 due to the pressure to increase the volume of

17 loans reviewed?

18 MR. EDLIN: Objection. Leading and

19 lack of foundation.

20 A. You would ignore -- you would ignore

21 some things that if you was to take your time

22 writing that -- underwriting that loan that you

23 would have caught -- that you would have

24 caught -- caught mistakes or things that you

25 could have looked at and, say, you know, this


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2 is not right.


4 Q. Who put pressure on you to review

5 that large number of loans per day?

6 A. Your team leads, they set the goals.

7 Q. What is 1003 or 1008 underwriting?

8 A. Basically that is -- like in the

9 writing world that's basically copying what's

10 already written, plagiarizing.


12 strike.

13 Q. Copying what from what?

14 A. You are basically copying what's

15 already written and you are not even bothering

16 to calculate, you are just entering --

17 basically you are just straight data entering,

18 entering information directly from the loan

19 application into the system. You are not even

20 looking at the documents.

21 Q. Well, let me just turn to paragraph

22 20 of your declaration on page 6 that states,

23 the second sentence: "These pressures" -- and

24 these pressures are to review loans quickly and

25 not to find defects -- "led many due diligence


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2 underwriters to simply enter into the CLAS

3 database information found on the loan

4 application rather than entering information

5 from the verification documents in the loan

6 file, as required by the protocol." Do you see

7 that?

8 A. Yes.

9 Q. And is that the practice of 1008,

10 1003 underwriting?

11 A. That is.

12 Q. And then you continue to write here:

13 "CLAS was therefore "re-calculating" the same

14 information which already often appeared on the

15 spreadsheet provided by the seller."


17 Q. So that practice is referred to as

18 1003 or 1008 underwriting?


20 Q. Did this practice take place at

21 Watterson?

22 A. Yes.

23 Q. And Clayton?

24 A. Yes.

25 Q. How prevalent was 1008 and 1003


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2 underwriting at Watterson and Clayton?


4 A. It was very common. It goes back to

5 some of the same people who had no experience

6 at underwriting, so, therefore, they were

7 copying straight from those documents.

8 Q. Did this practice take place on jobs

9 for Bear Stearns?

10 A. Yes.

11 Q. Did this practice take place on jobs

12 for Credit Suisse?

13 A. Yes.

14 Q. Countrywide jobs?

15 A. Yes.

16 Q. Deutsche Bank jobs?

17 A. Yes.

18 Q. Do you recall any particular

19 underwriters who engaged in this practice?

20 A. Jason Westmore.

21 Q. Any others?

22 A. Some of the ones that were related

23 to Barry Barmore.

24 Q. Jason Westmoreland, which company

25 did he work for?


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2 A. Watterson Prime.

3 Q. And Gary Barmore, which company did

4 he work for?

5 A. Clayton.

6 Q. You said that some of these

7 individuals engaged in this practice were

8 related to Gary Barmore?

9 A. Jason was not related to Gary

10 Barmore. He is just a particular individual

11 that stood out that was notorious for doing it

12 at Watterson Prime.


14 A. So, therefore, that was a reason why

15 he couldn't pass an underwriter test, because

16 he was used to just entering information from

17 the 1008 when you had to actually calculate

18 this stuff from verified documents.


20 strike the speculation. Move to strike the

21 non-responsiveness.

22 Q. And earlier you stated that you know

23 that relatives of Gary Barmore were also

24 engaged in 1008, 1003 underwriting?

25 A. Yes.


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2 Q. And Gary Barmore, you testified

3 earlier, was a team lead at Clayton?

4 A. Yes, he was.

5 Q. What, if anything, was done with

6 these 1008, 1003 underwriters who were related

7 to Gary Barmore? Were they reprimanded?

8 A. No.

9 Q. Were they continued to be employed

10 by Clayton?

11 A. They got staffed at every job

12 because they put out numbers doing that type of

13 underwriting.



16 Q. What, if any -- strike that.

17 Do you remember reviewing stated

18 income loans at Watterson and Clayton?

19 A. Yes.

20 Q. Okay. What, if any, instructions

21 did you get from Watterson and Clayton team

22 leads on how you should review stated income

23 loan products?

24 A. Basically don't look at them as

25 harsh as -- you know, the loans are already


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2 closed and these people are already in their

3 homes, just go ahead and enter information what

4 they got down there, what they have stated on

5 the application.


7 hearsay.

8 Q. Were you given any instructions on

9 whether you should find and mark as defective

10 those loans where the stated incomes were not

11 reasonable?


13 A. Yes. Some -- there is a

14 particular -- one particular team lead, Steve

15 Shockley, he would have an exception written on

16 a board or written down on a piece of paper,

17 "hey, if you come into this type of problem,

18 put this in your comment section for that

19 stated income."


21 hearsay.

22 Q. And what was that particular

23 instruction?


25 A. You may have it worded -- he would


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2 have it worded up so it looks uniformly for

3 everyone to use that same exception.

4 MR. EDLIN: Move to strike. Move to

5 strike the hearsay.

6 Q. Did this particular instruction say

7 that you should grade the loans as defective or

8 as non-defective?


10 A. Basically you would grade them as

11 2s, instead of being non-defective as 2s and

12 they would clean them up on the back end.


14 hearsay. More to strike as non-responsive.

15 Q. We are going to come back to

16 cleaning them up on the back end a little bit

17 later.

18 Basically what I want to make sure

19 that the record is crystal clear on is whether

20 or not you graded those loans where the income

21 was not reasonable as 3s or 1s or 2s.

22 A. Majority, 2s.


24 Q. And I think you already testified

25 earlier about loans that you graded as 2s;


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2 correct?

3 A. Yes.

4 Q. You said that 2s are loans which

5 have a defect but there is a comp factor;

6 correct?


8 A. Yes.

9 Q. And you testified earlier that the

10 comp factors that you found at the direction of

11 the team leads were either contrived or not

12 sufficient to overcome the defects?



15 Q. This practice on stated income loans

16 and comp factors, did that apply to all deals

17 that you worked on?

18 A. Yes.


20 Q. At Watterson and Clayton?

21 A. Yes.


23 A. For both.

24 Q. Bear Stearns job --

25 MR. EDLIN: Just -- let's just for


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2 the purposes of the court reporter being

3 able to take a record, at the end of the

4 question if it's clear I am objecting, just

5 wait for me to finish, then answer. At

6 least that way the court reporter can get

7 everything down.

8 THE WITNESS: Okay.

9 MR. FARIDI: So just make sure that

10 after I ask my question he doesn't have an

11 objection, and if he lodges an objection or

12 if he doesn't lodge an objection, then can

13 continue to answer.

14 THE WITNESS: Okay.

15 Q. This practice on stated income loans

16 that we were talking about as well as comp

17 factors, did this practice take place on jobs

18 for Bear Stearns?


20 A. Yes, this practice did take place on

21 Bear Stearns jobs.

22 Q. Were there times at Clayton and

23 Watterson when loans with unreasonable stated

24 incomes were simply graded as 1s?



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2 foundation.

3 A. Yes. There were times they were

4 graded as 1s.

5 Q. The majority of the times --


7 Q. -- or minority of the times?

8 A. It would be the majority.

9 Q. Do you recall during your employment

10 at Watterson and Clayton, in

11 coming across -- strike that.

12 Do you recall during your employment

13 at Watterson and Clayton coming across

14 documents in loan files that appeared to be

15 fraudulent?


17 foundation.

18 A. Yes, I have during that time.

19 Q. What instructions, if any, did you

20 receive from Watterson Prime and Clayton

21 supervisors and team leads on what you should

22 do with these documents?

23 MR. EDLIN: Objection. Foundation

24 and compound.

25 A. Usually the instructions were just


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2 go ahead and keep it moving, enter the

3 information, we will take care of that with the

4 investor, the seller, or we will get the

5 document -- the correct documents later.

6 Q. Were you ever told to overlook these

7 documents?

8 A. Yes.

9 Q. Were you told ever to grade loans

10 where you found these types of documents as 1s,

11 2s or 3s?

12 A. What's the question again?

13 Q. Let me rephrase that.

14 How were you told you should grade

15 these loans which had these types of documents?


17 A. Once we found a bunch of -- like say

18 a lot of these documents were missing --


20 A. Once we -- once a lot of the

21 documents were missing or it was prevalent that

22 we don't have these documents, we were told to

23 ignore, ignore that and grade them as normal,

24 ignore that document that was needed.



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2 strike and move to strike the hearsay.

3 Q. I want to make sure we are talking

4 about the same thing. I was talking about

5 loans where the documents appear to be

6 fraudulent and I think you were talking about

7 loans where there were missing documents.

8 A. Okay. Okay.

9 Q. So let me just ask the question.

10 When -- if -- strike that.

11 During your employment at Watterson

12 and Clayton if you came across a document or

13 when you came across a document which was --

14 which appeared to be fraudulent, how did you

15 grade such loans?


17 foundation. Leading.

18 A. It depends on the team lead. They

19 pretty much sometimes would just ignore it,

20 don't worry about that, that document, we will

21 take care of it later, go ahead and grade it as

22 normal, ignore that document.



25 Q. And normal, by "normal" you mean as


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2 a 1?

3 A. If the loan would have been a 1

4 without that document, go ahead and grade it a

5 1 or accordingly.


7 hearsay.

8 Q. Was this practice prevalent at both

9 Watterson and Clayton?


11 A. Yes, it was.

12 Q. Did you ever notice in reviewing

13 stated income loan products at Watterson and

14 Clayton W-2s and other tax documents that were

15 left in the loan file?


17 A. Yes. There had been plenty of times

18 that W-2s, pay stubs, other documents that were

19 in the file.

20 Q. On stated income loan products?

21 A. Yes.

22 Q. Did at times any of these documents,

23 W-2s or the tax documents, contradict or call

24 into question the income listed by the borrower

25 on the loan application?


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3 A. Yes.

4 Q. What instructions, if any, did you

5 receive on what you should do with these loans?


7 A. Usually it would depend on the job,

8 either they pull the documents -- they pull

9 those documents out or we were told to turn

10 them over and put them at the very back of the

11 documents.


13 non-responsive and move to strike the

14 hearsay.

15 Q. When you say "pull those documents

16 out," what do you mean by that?

17 A. Pull them out of their folder,

18 meaning that they don't exist.


20 Q. And do what with them?


22 non-responsive.

23 A. We would put them in a pile --

24 sometimes we would put them in a pile and

25 whatever they did with them, either they


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2 shredded them or they got -- in other words,

3 they disappeared, they disappeared, and

4 sometimes the explanation would have been,

5 well, this borrower was going for a full doc

6 but they went stated.


8 A. Sometimes they would tell us, well,

9 you know, this borrower was going a full doc

10 loan but they went stated.


12 non-responsive and move to strike the

13 hearsay.

14 Q. So a lot of times these documents

15 were pulled out of the loan file and just

16 destroyed?


18 A. Yes, they were destroyed, but it was

19 not by the underwriter. They was hidden.


21 non-responsive.

22 Q. Let me refer to page 6 of your

23 declaration, paragraph 19. It states that:

24 "Supervisors and project managers repeatedly

25 told due diligence underwriters that the loans


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2 that we were reviewing had already closed and

3 that the borrowers had already moved into their

4 new houses, and as such, the due diligence

5 underwriters should not be too strict in their

6 review." Is that a true statement?

7 A. Yes.

8 Q. Did the similar practices take place

9 at Watterson?

10 A. Yes.

11 MR. EDLIN: Muhammad, when you are

12 at a time for a quick break. Do you have

13 much longer to go?

14 MR. FARIDI: Let's take a quick

15 break. I have got another fifteen minutes

16 maybe.

17 MR. EDLIN: Let's take a quick

18 break.

19 MR. FARIDI: Okay. Let's go off the

20 record.


22 10:41. We are going off the record.

23 (Recess was taken from 10:41 to

24 10:50.)



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2 10:50. We are back on the record.

3 BY MR. FARIDI:

4 Q. Turn to paragraph 19 of your

5 affidavit, which is on page 6. It states here

6 basically that you were instructed that because

7 the loans had already closed your review of

8 those loans should not be too strict.


10 Q. That's true also?

11 A. Yes.

12 Q. Okay. And paragraph 21, the first

13 line here reads: "There was a general attitude

14 at Clayton that underwriters should not be

15 searching for discrepancies." Is that a true

16 statement?

17 A. Yes.

18 Q. The same practice took place at

19 Watterson?

20 A. Yes.

21 Q. Turn to paragraph 30. It states

22 here in the last line on page 10: "With

23 respect to one particular job for Bear Stearns,

24 I recall a Watterson supervisor stating, "I

25 don't care how bad the loans are, I only want


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2 to see them graded as 1s and 2s"." Do you see

3 that?

4 A. Yes.

5 MR. EDLIN: Objection to the

6 hearsay.

7 A. Yes.


9 A. Yes, it is.


11 hearsay.

12 Q. Do you recall the name of the team

13 lead here?

14 A. Steve Shockley.

15 Q. You testified earlier that you

16 believe that these instructions were coming

17 from the clients. Do you recall that?

18 A. Yes, I did.

19 Q. What basis do you have to say that

20 these instructions to not focus on finding

21 defects and to grade loans as 1s and 2s were

22 coming from the clients?

23 A. Usually at the beginning of every

24 project the team lead or project manager would

25 state "here is what the client wants and give


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1

2 your parameters as met," and usually either

3 somewhere in between that day or the next day

4 after that either that project manager would

5 get on the phone or go in a private meeting,

6 they would come back and say, "well, the client

7 is not accepting this," that usually come out

8 of the project managers, "the client is not

9 accepting this."

10 Q. So you --

11 MR. EDLIN: Objection. Objection.

12 Move to strike and move to strike the

13 hearsay.

14 Q. So you heard it from the mouths of

15 your team leads --

16 A. Yes.

17 Q. -- that the clients did not want you

18 to find these types of defects?


20 A. Yes. It came out of project

21 manager's mouth that here -- the client accept

22 this.


24 hearsay.

25 Q. And do you recall whether -- strike


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1

2 that.

3 Do you recall the names of any

4 particular clients which come to mind?


6 A. Bear Stearns were one of them.

7 Q. Do you recall --


9 Q. Do you recall the name of the

10 particular Bear Stearns representative which

11 the team leads referenced?

12 A. No.

13 Q. Does the name John Mongoluzza sound

14 familiar?


16 A. Yes.

17 Q. Okay. Do you recall instances where

18 the team leads relayed instructions to you from

19 Mr. Mongoluzza?

20 A. Yes.


22 Move to strike the hearsay.

23 Q. Did these instructions -- what were

24 these instructions?

25 A. Pretty much similar to what we just


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2 stated before, go ahead -- they gave us

3 instructions to ignore this, go ahead, the

4 client will accept that. That's usually when

5 you have seen the project manager either

6 talking to the side with Mr. Mongoluzza or on

7 the phone with him.


9 non-responsive. More to strike the

10 hearsay.

11 Q. I want to go back to paragraph 21 of

12 your declaration on page 6. It states here,

13 the third line: "It was an understood rule at

14 Clayton that if a due diligence underwriter

15 graded a significant number of loans as EV-3s,

16 that underwriter would not be hired for the

17 next due diligence job."

18 First off, EV-3s are the same things

19 as 3s that we have been talking about?

20 A. Yes.

21 MR. EDLIN: Objection. Objection to

22 the question. Lack of foundation.

23 A. Yeah. EV-3s, basically that's just

24 Clayton's version of just a -- it's a 3 what

25 Watterson Prime grades it as.


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3 Q. And you state here that basically if

4 underwriters were grading too many loans or a

5 significant number of loans, that's what it

6 says here, as EV-3s, those underwriters were

7 not hired by Clayton for future jobs.

8 A. That is correct. You usually

9 wouldn't see that underwriter for a while

10 unless we had a huge job and they needed every

11 pretty much body on a project and get a bunch

12 of loans out.


14 non-responsive.

15 Q. So basically the only time

16 underwriters who graded too many loans as 3s

17 were called back for future jobs were when they

18 needed -- when they didn't have enough people

19 to cover a particular job?


21 Lack of foundation.

22 A. That is -- that is correct. And it

23 was prevalent with Watterson Prime, because it

24 was small base and you pretty much knew

25 every -- you pretty much knew underwriter.


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3 non-responsive.

4 Q. Was it also prevalent at Clayton?

5 A. Yes, but the thing is it wasn't as

6 easy to spot, because Clayton had pretty much

7 500 underwriters.



10 Q. Do you recall the -- any specific

11 instances where underwriters were not called

12 back for future jobs because they were grading

13 too many loans as defective?


15 A. Yes.

16 Q. Any particular names which come to

17 mind?

18 A. Not at this time.

19 Q. I am going to turn to paragraph 25

20 of your affidavit, which is on page 8. It

21 states that -- here that: "When due diligence

22 underwriters determined that a particular loan

23 had a defect that was not sufficiently overcome

24 by compensating factors -- resulting in a grade

25 of 3 -- supervisors would frequently change the


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2 grades for those loans to a 1 or a 2. I

3 remember multiple occasions where I looked back

4 at a loan that I had graded as a 3 and found

5 that the grade had been changed to a 1 or a 2

6 without justification." Is that a true

7 statement?

8 A. Yes.

9 Q. Do you believe that the changes

10 which were made to these loans, changes from 3s

11 to 1s and 2s, were justified?


13 A. No, I don't believe they were

14 justified at all, because there were

15 particularly notes I put in there why they were

16 3s.

17 Q. Could you give us examples of loans

18 that you had graded as 3s where the grade of

19 those loans was changed to a 1 or 2 for

20 unjustified reasons?

21 A. I have been on multiple loans, but I

22 couldn't just give any single example, but it

23 did happen. It happened like say I recorded

24 these loans every night on my scratch-off pad,

25 would have the calculations of everything with


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2 the loan number and usually I put a circle on

3 that and go back and look at it again with --

4 hoping that, well, let me see if I can see it

5 with a fresh mind and fresh start and usually I

6 will go back and they were changed.



9 Q. Okay. So basically as I understand

10 it, you kept a notebook which indicated loan

11 numbers and how you graded those loans?

12 A. Yes. Because any time -- any time

13 they had any discrepancy on how many number of

14 loans you have done, I could always refer back

15 to here is the loans I worked on.

16 Q. Okay. And on the next day after you

17 had done the review for a particular day, you

18 went back and you checked to see whether grades

19 that you had marked as defective on the

20 previous day remained as defective in the

21 Watterson and Clayton computer systems?


23 A. Yes.

24 Q. And you found, as I understand your

25 testimony, that on many of these times when you


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2 checked the following day you noticed that the

3 loans that you had marked as defective the day

4 before were marked now as non-defective?

5 A. Yes.

6 Q. Was this practice prevalent at

7 Watterson and Clayton?


9 A. Yes.

10 Q. And these changes in grades you

11 believe took place for unjustified reasons?


13 A. Yes. Correct.

14 Q. Turn to paragraph 29. Strike that.

15 Let's just stay on paragraph 25 for

16 a second. The next line reads: "When such

17 changes occurred, Watterson's computer system

18 deleted any evidence of the earlier grade."

19 A. Yes.


21 A. That is true.

22 Q. I want to turn to paragraph 29 now.

23 I want to read just a couple of lines at the

24 top. "Mr. Weeks pressured due diligence

25 underwriters to complete a review of loans


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2 quickly, even if that meant sacrificing quality

3 of loans." Do you see that?

4 A. Yes.


6 Q. That's a true statement; correct?

7 A. Yes.


9 Q. And who is Mr. Weeks?

10 A. Mr. Weeks was a project office

11 manager in the Atlanta office for Watterson

12 Prime.

13 Q. Okay. Next line reads: "He told us

14 that we should "clear" (approve) the loans

15 quickly and that Watterson would "clean it up

16 on the back end"." Do you see that?

17 A. Yes.


19 A. Yes.

20 Q. "During this "clean up" process

21 Mr. Weeks instructed Watterson personnel to

22 change data on Watterson's due diligence

23 reports to ensure that it matched the

24 information on the spreadsheet or "loan tape"."

25 Is that a true statement?


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2 A. Yes.

3 Q. Now, how do you know -- strike that.

4 Did Mr. Weeks instruct you to change

5 data on Watterson's due diligence reports to

6 ensure that it matched the data provided on the

7 loan tape?


9 A. No, he did not instruct me.

10 Q. And how do you -- did he instruct

11 others?

12 A. Yes.

13 Q. And how do you know that he

14 instructed others?

15 A. He made several occasions "don't

16 worry about it, we will have the QCers and

17 analysts take care of that on the back end" and

18 they changed this information.

19 MR. EDLIN: Hold on. Let me just

20 read that.

21 Move to strike the hearsay.

22 Q. Were you present when he provided

23 those instructions?

24 A. Yes, I was. There was many times

25 when he may be talking openly on the floor to


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2 personnel and I am sitting right by at my desk.



5 Q. You also provide here a statement

6 where it says: "This changing of the data was

7 done without any review of the documents in the

8 loan file." Do you see that?

9 A. Yes.


11 A. Yes, it is.

12 Q. And then I think you go on to

13 provide an example here in paragraph 29.

14 Strike that. Let me just go back and wrap that

15 up.

16 Was this practice prevalent at

17 Watterson?


19 A. Yes, it was.

20 Q. What about at Clayton?


22 A. It wasn't as blatantly done that

23 way. It was -- like say usually they --

24 Clayton did it when we went home for the night,

25 the QCers and the project managers stayed back


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2 maybe about an hour or two later and did that.


4 Non-responsive.

5 Q. 'For example" -- and I am reading

6 here from paragraph 29 -- "on numerous

7 occasions, based upon a review of the "HUD-1"

8 forms, the due diligence underwriters found

9 loans defective because they were considered

10 "high cost" loans under state law. For these

11 loans, Mr. Weeks would routinely delete

12 evidence of many closing charges from

13 Watterson's computer systems despite the fact

14 that these charges were clearly shown on the

15 HUD-1 forms. Deleting evidence of closing

16 charges from Watterson's computer systems did

17 not change the fact that the HUD-1 forms

18 clearly showed that the borrowers paid those

19 fees. Mr. Weeks was considered the master of

20 engineering apparent compliance with state law

21 and manipulating the numbers." Is that a true

22 statement?


24 A. That is a true statement.



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2 strike.

3 Q. Was this practice prevalent on jobs

4 where Mr. Weeks was the manager?


6 A. Yes, it was.

7 Q. In summary, just to wrap it up, is

8 it your view that the due diligence

9 underwriting practices at Watterson and Clayton

10 did not accurately or properly determine

11 whether loans complied with the underwriting

12 guidelines?


14 A. Yes, it was.

15 Q. Is it your view that Bear Stearns

16 improperly directed Watterson and Clayton to

17 deviate from underwriting guidelines and

18 improperly changed loans ranked defective to

19 loans ranked approved?


21 A. Yes. Bear Stearns was neglect and

22 negligent on their part as well as Watterson

23 Prime and Clayton.



exhibit 2 -- whistleblower transcript (redacted)

Documents