ubs paine webber, inc. nr - stanford...

Case 3:02-cv-02213-K Document 1 Filed 10/10/02 of 45 PageID 1

The JS -44 and the information containe in neither replace nor supplement the filing and service adings or other papers as required by law, except as provide(tP totc les of court. This form, approved by e Judicial Conference of the United States in September 1974, is required for the use of the Clerk of Court for the

Pu (ikX,ihting the civil docket sheet (SEE INSTRUCTIONS ON THE REVERSE OF THE FORM.)

AI TIFFS DEFENDANTS

rix Capital Markets, LLC UBS Warburg Real Estate Securities'Inc. UBS Warburg, Inc. UBS Paine Webber, Inc. nr

(b) COUNTY OF RESIDENCE OF FIRST LISTED COUNTY OF RESIDENCE OF FIRST LISTED

PLAINTIFF Dallas County, TX DEFENDANT v"

(EXCEPT IN U.S. PLAINTIFF CASES) (IN U.S. PLAINTIFF CASES 0NLX). NOTE IN LAND CONDEMNATION CASES, USE THE

LOCATION OF THE TRACT OF LAND

(c) ATTORNEYS (FIRM NAME, ADDRESS, AND TELEPHONE NUMBER)

R. Laurence Macon Akin Gump Strauss Hauer & Feld LLP 1700 Pacific Avenue, Suite 4100 Dallas, TX 75201 (214) 969-2800

11. BASIS OF JURISDICTION (PLACE AN "X" IN ONE BOX ONLY)

ATTORNEYS (IF KNOWN)

I

III. CITIZENSHIP OF PRINCIPAL PARTIES (PLACE AN "X" IN ONE (For Diversity Cases Only) BOX FOR PLAINTIFF AND

ONE BOX FOR DEFENDANT) PTF DEF PTF DEF

0 1 U.S. Government

Plaintiff

0 2 U.S. Government

Defendant

IV. NATURE OF

3 Federal Question

(U.S. Government Not a Party)

0 4 Diversity

(Indicate Citizenship of Parties in Item III)

IN ONE BOX

Citizenship of This State 0 1 0 1

Citizen of Another State 0 2 0 2

Citizen or Subject ofa 0 3 0 3 Foreign Country

Incorporated or Principal Place of Business In This State 0 4

Incorporated and Principal 0 5

Place of Business In Another State Foreign Nation 9 6

04

05

06

o ut Insurance o 120 Marine o 130 Miller Act o 140 Negotiable Instrument o 150 Recovery of Overpayment

& Enforcement of Judgment o 151 Medicare Act o 152 Recovery of Defaulted

Student Loans (Excl Veterans)

o 153 Recovery of Overpayment Of Veterans Benefits

o 160 Stockholders' Suits o 190 Other Contract o 195 Contract Product Liability

REAL PROPERTY

o 210 Land Condemnation D 220 Foreclosaure D 230 Rent Lease & Ejectment G 240 Torts to Land o 245 Tort Product Liability o 290 All Other Real Property

PERSONAL INJURY

o 310 Airplane o 315 Airplane Product

Liability o 320 Assault, Libel &

Slander o 330 Federal Employ

ers' Liability D 340 Marine o 345 Marine Product

Liability El 350 Motor Vehicle o 355 Motor Vehicle

Product Liability o 360 Other Personal Injury

CIVIL RIGHTS

o 441 Voting o 442 Employment o 443 I-lousing!

Accommodations o 444 Welfare o 440 Other Civil Rights

PERSONAL INJURY o 362 Persona! Injury-

Med Malpractice o 365 Personal Injury-

Product Liability o 368 Asbestos Personal

Injury Product Liability

PERSONAL PROPERTY o 370 Other Fraud o 371 Truth in Lending o 380 Other Personal

Property Damage o 385 Property Damage

Product Liability

PRISONER PETITIONS

o 510 Motions to Vacate Sentence Habeus Corpus

Cl 530 General o 535 Death Penalty o 540 Mandamus & Other o 550 Civil Rights o 555 Prison Condition

o 610 Agriculture

o 620 Other Food & Drug o 625 Drug Related Seizure

ofProperty2l U5C 881 o 630 Liquor Laws o 640RR &Trnck o 650 Airline Regs El 660 Occupational

Safely/Health o 690 Other

LABOR

o 710 Fair Labor Standards Act

D 720 Lahor/Mgmt Relations

o 730 Labor/Mgmt Reporting & Disclo-sure Act

o 740 Railway Labor Act o 790 Other Labor

Litigation o 791 EmpI Ret Inc

Security Act

o 422 Appeal 28 USC 158

o 423 Withdrawal 28 USC 157

PROPERTY RIGHTS

o 820 Copyrights o 830 Patent o 840 Trademark

SOCIAL SECURITY

o 861 HIA(l395ft) o 862 Black Lung (923) o 863 DIWC/DIWW (405(g)) D 864 SSID Title XVI o 865 RSI (405(g))

FEDERAL TAX SUITS

o 870 Taxes (US Plaintiff or Defendant)

o 871 IRS . Third Party 26 USC 7609

o 400 State Reapportionment o 410 Antitrust o 430 Banks and Banking o 450 Commerce/ICC Rates/etc o 460 Deportation o 470 Racketeer Influenced and

Corrupt Organizations o 810 Selective Service

850 Securities/Commodities/ Exchange

o 875 Customer Challenge 12 USC 3410

o 891 Agricultural Acts o 892 Economic Stabilization Act o 893 Environmental Matters o 894 Energy Allocation Act o 895 Freedom of

Information Ad o 900 Appeal of Fee

Determination Under Equal Access to Justice

o 950 Constitutionality of State Statutes

o 890 Other Statutory Actions

V. ORIGIN

(PLACE AN "X" IN ONE BOX ONLY) Appeal to Transferred from District Judge

I Original

02 Removed from 0 3 Remanded from 0 4 Reinstated or 0 5 another district 0 6 Mullidiatrict 0 7 from Magistrate Judge Proceeding

Stale Court Appellate Court Reopened (specify) Litigation

VI. CAUSE OF ACTION

(Cite the U S Civil Statute under which you are filing and write brief statement of cause Do not cute jurisdictional Statutes unless diversity

Violation of securities laws, including 15 U.S.C. § 78j; 17 C.F.R. § 240.10b-5; 15 U.S.C. § 78t; 15 U.S.C. § 771; 15 U.S.C. § 77o

VII. REQUESTED IN CHECK IF THIS IS A CLASS ACTION DEMAND $549,923,000 CHECK YES only if demanded in complaint COMPLAINT: UNDER FR C P 23 JURY DEMAND: 0 YES 0 NO

VIII. RELATED CASE(S)

(See instructions) IF ANY -

DATE

SIGNATURE OF ATTORNEY OF RECORD

FOR OFFICE USE ONLY RECEIPT #____________ AMOUNT APPLYING IFP JUDGE MAG JUDGE

Filed 10/10/02 of 45 PageID 2 Case 3:02-cv-02213-K Document 1

\ UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TE

DALLAS DIVISION

§ ORIX CAPITAL MARKETS, LLC, §

§ Plaintiff

§ §

V. §

Civil Action No.:

§ UBS WARBURG REAL ESTATE

§

SECURITIES INC., UBS WARBURG, INC

§ AND UBS PAINE WEBBER, INC., §

§ Defendants. §

U.S. STRICT CUU ki

NC USTRICTOFTEXAS

OCT L __

cLi:c U,3.DSTR1 1CT COURT

By Deputy

PLAINTIFF'S COMPLAINT - CLASS ACTION

TO THE HONORABLE JUDGE OF THIS COURT:

ORIX Capital Markets, LLC brings this action against Defendants UBS Warburg Real

Estate Securities Inc. (f/k/a Paine Webber Real Estate Securities, Inc.), UBS Warburg, Inc., and

UBS Paine Webber, Inc. (f/k/a PaineWebber, Inc.) and pleads as follows:

SUMMARY OF THE ACTION

1. This case concerns Defendants' securities fraud made in connection with a transaction

transferring commercial mortgage loans to a trust administered by Wells Fargo Bank

Minnesota, N.A. ("Wells Fargo" and "Trustee") (f/k/a Norwest Bank Minnesota, N.A.)

for Certificateholders of Merrill Lynch Mortgage Investors, Inc. Mortgage Pass-Through

Certificates Series 1999-Cl (the "Trust"). The Trust is a Delaware trust evidenced by a

November 1, 1999 Pooling and Servicing Agreement. The holders of the Trust

certificates are referred to as the Certificateholders. Plaintiff brings this case as a

Certificateholder, in its representative capacity as Special Servicer of the Trust, and also

PLAINTIFF'S COMPLAINT - page 1


p

as a class action under Federal Rule of Civil Procedure 23. Plaintiff seeks rescission of

trust certificates and other relief under the securities laws.

THE PARTIES

2. Plaintiff ORIX Capital Markets, LLC ("ORIX") (f/k/a ORIX Real Estate Capital

Markets, LLC) is a Delaware limited liability company with its principal place of

business at 1717 Main Street, 9th Floor, Dallas, Texas 75201.

3. Defendants UBS Warburg Real Estate Securities Inc. (f/k/a Paine Webber Real Estate

Securities, Inc. ("Paine Webber")), UBS Warburg, Inc., and UBS Paine Webber, Inc. (on

information and belief f/k/a PaineWebber, Inc.) (collectively the "UBS Entities") are

Delaware corporations with their principal place of business at 1285 Avenue of the

Americas, New York, New York 10019. The UBS Entities may be served with process

by serving their registered agent Corporation Service Company (d/b/a CSC Lawyers

Incorporating Service Co.), 800 Brazos, Austin, Texas 78701. On information and belief,

among their business lines, the UBS Entities, and, at the time of the transactions detailed

in this Complaint, Paine Webber and PaineWebber, Inc., originate(d) loans and

securitize(d) them. On or about November 3, 2000, the ultimate parent of PaineWebber,

Inc. and Paine Webber merged with UBS AG. On information and belief, through one or

more subsequent transfers, some portion of the liability of Paine Webber and

PaineWebber, Inc. was retained by UBS Warburg, Inc., a subsidiary of UBS AG.

VENUE AND JURISDICTION

4. The Court has subject matter jurisdiction of this action pursuant to 28 U.S.C. § 1331

because this is a civil action arising under the laws of the United States.



4 .

5. Personal jurisdiction over the Defendants exists in this Court because Defendants do

significant business in this state, including but not limited to their activities related to the

transaction that forms the basis of this Complaint.

6. Venue is appropriate in this Court because a substantial part of the events giving rise to

the claims asserted in this Complaint occurred in Dallas County, Texas. Specifically,

Plaintiff ORIX purchased shares in the Trust in Dallas County, Texas, and has serviced

the loan pool from Dallas County, Texas.

BASIS FOR REPRESENTATIVE ACTION

7. The Pooling and Servicing Agreement provides that ORIX as Master Servicer or Special

Servicer may in its discretion undertake any such action which it may deem necessary or

desirable with respect to the enforcement and/or protection of the interests of the

Certificateholders under the Pooling and Servicing Agreement. See PSA § 6.03.

Similarly, Paine Webber's Mortgage Loan Purchase Agreement acknowledges that the

representations, warranties and agreements made by Paine Webber are made for the

benefit of, and may be enforced by or on behalf of, the Trustee and the Certificateholders

to the same extent that the Purchaser has rights against Paine Webber under the Mortgage

Loan Purchase Agreement. See MLPA § 5.3.

Class Action Allegations

8. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil Procedure

23(a) and (b)(3) on behalf of a Class, which consists of all persons who purchased or

otherwise acquired certificates and received the Prospectus and Prospectus Supplement

described herein. Excluded from the Class are: the defendants, members of the

immediate family of the defendants, individual defendants, former officers and directors



of Defendants and any entity in which any defendant has or had a controlling interest, and

the legal representatives, heirs, successors, or assigns of any defendant. The Class Period

includes the initial offering of the Certificates.

9. Plaintiff does not know the full size of the Class, but on information and belief, the

members of the Class are so numerous that joinder of all members is impracticable.

Class members are located nationwide.

10. Plaintiff's claims are typical of the claims of the members of the Class in that the Plaintiff

and each Class member purchased or otherwise obtained certificates during the Class

Period pursuant to, and/or in reliance upon, a prospectus and prospectus supplement

issued as part of an integrated offering and containing common misrepresentations by the

Defendants. No corrective statements have been issued by any of the Defendants.

11. Plaintiff will fairly and adequately protect the interests of the members of the Class and

has retained counsel competent and experienced in class action and securities litigation.

12. A class action is superior to other available methods for the fair and efficient adjudication

of this controversy as joinder of all class members is impracticable. Furthermore, as the

damages suffered by individual Class members may be relatively small, the expense and

burden of individual litigation makes it impossible for the Class members to seek redress

individually for the wrongs done to them. There will be no difficulty in the management

of this action as a class action.

13. Common questions of law and fact exist as to all members of the Class and predominate

over any questions affecting solely individual members of the Class. Among the

questions of law and fact common to the Class are:

a. whether federal securities laws were violated by the Defendants' acts and/or omissions;



im

b. whether statements made by the Defendants to the investing public during the Class Period omitted and/or misrepresented material facts;

C. whether the Defendants participated in and pursued a fraudulent scheme and the common course of conduct complained of herein;

d. whether the Defendants acted willfully or recklessly in omitting to state and/or misrepresenting material facts;

C. whether Defendants' statements during the Class Period were recklessly made about the business, operations, finances, value, stock, and prospects of the Borrowers in the Loan Pool;

f. whether the price of the certificates during the Class Period was artificially inflated due to non-disclosures and/or misrepresentations complained of herein; and

g. whether the plaintiff and other members of the Class were damaged and, if so, the proper measures thereof.

THE TRANSACTIONS

The Private Placement Memorandum, Prospectus, and Prospectus Supplement

14. In 1999, Merrill Lynch Mortgage Investors, Inc. took steps to establish the Trust. The

Trust would be established through a Pooling and Servicing Agreement, which would

create a pool of loans for securitization. The loans for the pool would be purchased under

Mortgage Loan Purchase Agreements with Paine Webber, Merrill Lynch Mortgage

Capital Inc., and ORIX Real Estate Capital Markets, LLC. The Mortgage Loan Purchase

Agreement with Paine Webber makes it abundantly clear that Paine Webber originated

the loans it supplied to the loan pool for the express purpose of securitization. Interests in

the pool of loans were to be offered simultaneously to public and private investors, all of

whom would be provided with a prospectus and prospectus supplement.

15. As part of this integrated offering, Merrill Lynch & Co. and PaineWebber Inc. prepared

and, by instrumentalities of interstate commerce, sent to the Certificateholders during



October 1999 a Prospectus (the "Prospectus") and a Prospectus Supplement to Prospectus

Dated October 15, 1999 ("Prospectus Supplement")

16. In October 1999, as part of this integrated offering, Merrill Lynch & Co. and

PaineWebber Inc., by instrumentalities of interstate commerce, sent to Plaintiff ORIX an

October 15, 1999 Private Placement Memorandum ("PPM"), along with the Prospectus

and Prospectus Supplement.

17. The PPM offered ORIX the opportunity to purchase Privately Offered Certificates, which

evidenced beneficial ownership in the Trust consisting primarily of a pool of 106

conventional, fixed-rate mortgage loans secured by 115 commercial and multifamily

properties. The Prospectus offered the Certificateholders the opportunity to purchase

publicly traded certificates evidencing beneficial ownership in the same Trust.

18. On information and belief, on November 1, 1999, pursuant to the PPM, Prospectus, and

Prospectus Supplement, the Certificateholders paid over $549,923,000 for various classes

of Mortgage Pass-Through Certificates, Series 1999-Cl, with Plaintiff ORIX purchasing

the classes of Mortgage Pass-Through Certificates, Series 1999-Cl set forth in the

Certification of Named Plaintiff attached to this Complaint.

The Representations

19. In the PPM, Prospectus, and Prospectus Supplement, Paine Webber, PaineWebber, Inc.,

and Merrill Lynch & Co. represented that:

a. "All of the Mortgage Loans are generally non-recourse obligations of the respective

borrowers." Pro. Supp. at S-42.

b. "Each Mortgaged Property was inspected by a member of the applicable Mortgage

Loan Seller's professional staff or by a direct agent of such Mortgage Loan Seller.



[ ... ] No inspection revealed any patent structural deficiency or any deferred

maintenance considered material and adverse to the interests of the holders of the

Offered Certificates and for which adequate reserves have not been established." Pro.

Supp. at S-44.

c. "The related borrowers generally deposited with the Lender or its designee at the

origination of the related Mortgage Loans an amount equal to approximately 125% of

the licensed engineer's or architect's estimated cost of any material recommended

repairs, corrections or replacements not completed by closing, to assure their

completion." Pro. Supp. at S-45.

d. "The borrower and, in the case of any Mortgage Loan secured by an indemnity deed

of trust on a Mortgaged Property, the guarantor, under each of these Mortgage Loans

is a single purpose entity." Pro. Supp. at S-45.

e. "As of April 1999, the appraisal value [of the Lee Hall Apartments] was $12,855,000.

As of May 1999, the [Lee Hall Apartments] property had a 91% occupancy rate.

As of April 1999, the appraisal value [of Colonial Court] was $1,530,000. As of May

1999, the [Colonial Court] property had a 94% occupancy rate. ... As of April 1999,

the appraisal value [of the River Drive Apartments] was $5,650,000. As of June

1999, the [River Drive Apartments] property had a 95% occupancy rate. ... As of

April 1999, the appraisal value [of the Norport Apartments] was $5,150,000. As of

April 1999, the [Norport Apartments] property had an 89% occupancy rate." Pro.

Supp. at S-47.

f. "The Mortgage Loans originated by PWREI [PW Real Estate Investments Inc.] and

such third-party originators and sold by PWRES [Paine Webber Real Estate

PLAINTIFF'S COMPLAINT page 7


Securities Inc.] to the Depositor were generally underwritten to PWRES guidelines as

set forth below. In some instances, one or more provisions of the underwriting

guidelines were waived or modified where it was determined by PWRES not to

adversely affect such Mortgage Loans in any material respect." Pro. Supp. at S-60.

g. "PWRBS evaluates the borrower and its principals with respect to financial capacity

to meet obligations, credit history and prior experience as an owner and operator of

commercial real estate properties." Pro. Supp. at S-60.

h. "The evaluation generally includes obtaining and reviewing a credit report or other

reliable indication of the borrower's and principals' financial capacity; obtaining and

verifying credit references and/or business and trade references; and obtaining and

reviewing certifications provided by the principals as to prior real estate experience."

Pro. Supp. at S-60.

i. "In addition, in general, each borrower for mortgage loans is required to be organized

as a single-purpose, bankruptcy-remote entity, and PWRES reviews the

organizational documents of the borrower to verify compliance with this

requirement." Pro. Supp. at S-60.

20. Paine Webber Inc. and Merrill Lynch & Co. also represented that "In each Mortgage

Loan Purchase Agreement, the Mortgage Loan Sellers will" make representations and

warranties "with respect to each related Mortgage Loan (subject to certain exceptions

specified in the related Mortgage Loan Purchase Agreement).... " Pro. Supp. at S-65.

21. Indeed, Merrill Lynch & Co. emphasized its and the future Certificateholders' reliance on

the representations and warranties of each Mortgage Loan Seller, including Paine

Webber: "The Depositor has not reunderwritten the Mortgage Loans. Instead, the



Depositor has relied on the representations and warranties made by each Mortgage Loan

Seller, and each Mortgage Loan Seller's obligation to repurchase a Mortgage Loan in the

event that a representation or warranty was not true when made. These representations

and warranties do not cover all of the matters that the Depositor would review in

underwriting a Mortgage Loan and you should not view them as a substitute for

reunderwriting the Mortgage Loans. If the Depositor had reunderwritten the Mortgage

Loans, it is possible that the reunderwriting process may have revealed problems with a

Mortgage Loan not covered by a representation and warranty." Pro. Supp. at S-36.

The Mortgage Loan Purchase Agreement and its Representations

22. Paine Webber transferred loans to Merrill Lynch Mortgage Investors, Inc. (which

transferred the loans to the Trust) under a November 1, 1999 Mortgage Loan Purchase

Agreement.

23. Under the Mortgage Loan Purchase Agreement, Paine Webber made representations and

warranties about the characteristics of the loans transferred. Paine Weber agreed that

these representations and warranties were for the Certificateholders' benefit, and that

ORIX, as Master Servicer and as Special Servicer, could enforce the representations and

warranties on the Certificateholders' behalf.

24. Specifically, Paine Webber represented and warranted that:

a. "[N] material default, breach, violation or event of acceleration" exists under the

Loan as of the closing date, November 4, 1999. See MLPA schedule I (vii);

b. Paine Webber had "no knowledge that the material representations and warranties

made by the Mortgagor in each Mortgage Loan are not true in any material

respect." See MLPA schedule I (ii);



C. To Paine Webber's best knowledge the Mortgagor did not commit "any

fraudulent acts during the origination process of any Mortgage Loan." MLPA

schedule I (iii);

d. "To the best of [Paine Webber's] knowledge, (1) the origination of each Mortgage

Loan purchased by the Mortgage Loan Seller and (2) the servicing and collection

of each Mortgage Loan is in all material respects legal, proper and prudent in

accordance with customary industry standards utilized by prudent institutional

and commercial mortgage lenders or loan servicers." MLPA schedule I (iv)(B);

e. "To the knowledge of [Paine Webber], as of the Closing Date, there is no pending

action, suit or proceeding, arbitration or governmental investigation against a

Mortgagor or Mortgaged Property, an adverse outcome of which would materially

and adversely affect such Mortgagor's ability to perform under the related

Mortgage Loan." MLPA schedule 1(x);

f. "With respect to each Mortgage Loan originated by a correspondent of [Paine

Webber] and purchased or 'table funded' by [Paine Webber] in connection with a

correspondent relationship with such originator such Mortgage Loan was

underwritten substantially in accordance with standards established by [Paine

Webber] (which standards are in all material respects the same as the

underwriting standards for Mortgage Loans originated by [Paine Webber])."

MLPA schedule I (lvii)(a); and

g. "Each Mortgage Loan purchased by [Paine Webber] from a third-party originator

was underwritten consistent in all material respects with prudent commercial

mortgage conduit lending standards." MLPA schedule I (lviii).



THE REALITY: A DOOMED LOAN; DEFENDANT'S MISREPRESENTATIONS, OMISSIONS, AND SUBSEQUENT COVER-UP

25. Defendants made material misrepresentations and omissions regarding the loans that

Paine Webber sold to the Trust as a Mortgage Loan Seller.

26. Compared to all loans in the Loan Pool, the Paine Webber loans have disproportionately

gone into default or required special attention, and have later been found not to meet the

standards represented in the PPM, Prospectus Supplement, and the Mortgage Loan

Purchase Agreement.

27. These problems, and the subsequent investigation by ORIX as the Trust's Master

Servicer and Special Servicer, demonstrate that Paine Webber:

a. Did not perform underwriting conforming to the representations made in the

PPM, Prospectus Supplement, and the Mortgage Loan Purchase Agreement;

b. Waived or modified underwriting guidelines that adversely affected loans in the

Loan Pool in a material respect; and

C. Failed to evaluate Borrowers and Borrowers' principals with respect to their

financial capacity to meet obligations, credit history, and prior experience as

owners and operators of commercial property.

28. Paine Webber failed to disclose that its practices in making the loans to be placed by it in

the Trust and to be underwritten and offered to investors by its affiliate, PaineWebber

Inc., did not conform to industry standards and, in fact, affirmatively misrepresented the

quality of the loans that it deposited in the Trust. These affirmative misrepresentations:

(1) were made by Paine Webber in the MLPA for the purpose of inducing the Trust to

accept the loans and issue the Certificates and with the intent to induce Certificateholders

to purchase the Certificates; (2) were incorporated by Paine Webber's affiliate,



PaineWebber Inc. in the Prospectus, Prospectus Supplements, and PPM without

modification or correction for the purpose of inducing investors to purchase Certificates,

and (3) have not been corrected by the Defendants.

29. Defendants concealed their fraud by failing to provide ORI[X with relevant documents,

even those documents ORIX needed to perform its duties as servicer under the Pooling

and Servicing Agreement. Defendants failed to produce documents related to the

underwriting of loan files as required by the Pooling and Servicing Agreement, which

required Trustee Wells Fargo Bank Minnesota, N.A. to file suit on March 27, 2002

against UBS Warburg Real Estate Securities to obtain such documents.

30. Indeed, it was only through discovery initiated in actions brought on loans in default that

ORIX discovered documents demonstrating Paine Webber's fraud. Through subsequent

litigation against other borrowers in default, both related to this loan pool and another

Paine Webber loan pool in a trust called PaineWebber Mortgage Acceptance Corporation

V Commercial Mortgage Pass-Through Certificates Series 1999-Cl, ORIX has

discovered a pattern of Defendants making material misrepresentations and omissions

concerning the loan pool. Plaintiff did not know, and in the exercise of reasonable

diligence could not have known before October 15, 2000, of Defendants' pattern and

practice of failing to follow proper underwriting procedures and of misrepresenting the

quality of the loans placed by Paine Webber in the Trust and of the falsity of the

representations made by Paine Webber and PaineWebber, Inc. in connection with the

offer and sale of the securities.

31. By way of example, and not by limitation, Defendants made material misrepresentations

and omissions regarding a loan made to Lee Hall, L.L.C. that Paine Webber "table

PLAINTIFF'S COMPLAINT —page 12


funded" and sold to the Trust. By "table funding" the Loan, Paine Webber had the Loan

made in another party's name, but Paine Webber involved itself in the Loan's

underwriting, provided the loan funds at the closing table and, on the funding date of the

Loan, purchased the Loan. Similarly, Defendants also made material misrepresentations

as to a loan Paine Webber made to the Cyrus II Partnership.

THE LEE HALL LOAN

The Loan Underwriting

32. Lee Hall, L.L.C. ("Lee Hall" or the "Borrower") is a Delaware limited liability company

with its registered office in Norfolk, Virginia.

33. HSAlWexford BancGroup, L.L.C. now known as Wexford BancGroup, L.L.C.

("Wexford") is a limited liability company with a principal office in Chicago, Illinois.

Among its business lines, Wexford originates and securitizes commercial loans.

34. On or about July 21, 1999, Wexford made Lee Hall a $17,400,000 loan (the "Loan")

evidenced by an Amended and Restated Deed of Trust Note dated July 21, 1999 (the

"Note")

35. A lien on real and personal property that comprise four apartment projects located in the

State of Virginia (the "Property") secured the Loan, as evidenced by the July 21, 1999

Amended and Restated Deed of Trust (the "Deed of Trust")

36. Lee Hall obtained the Loan to refinance an existing loan made one (1) year earlier (the

"Original Loan") and to fund reserves. Wexford obtained an assignment of the note and

deed of trust evidencing the prior loan, and the Note and the Deed of Trust are

amendments and restatements of the earlier note and deed of trust.



C

37. Borrower obtained the Original Loan from ContiTrade Services L.L.C. ("Conti"). Based

on the payoff information that Conti provided, the Original Loan was in default. The

payoff information demonstrated 76 days of accrued interest plus an unpaid balance times

98.333%.

Transfer of the Loan to the Trust

38. On or about January 29, 1999, Paine Webber agreed to purchase certain loans Wexford

originated that conformed to certain criteria specified in the Wexford/Paine Webber

Mortgage Loan Purchase Agreement (the "Wexford MLPA")

39. Effective as of November 1, 1999, Paine Webber transferred the Loan to Merrill Lynch

Mortgage Investors, Inc. pursuant to the Mortgage Loan Purchase Agreement.

40. The same day and pursuant to the Pooling and Servicing Agreement, Merrill Lynch

Mortgage Investors, Inc., as Depositor, transferred the Loan to Norwest (now known as

Wells Fargo) as Trustee for the certificateholders of the Trust.

The Failed Loan

The Borrower's Owners Battle Over Ownership, Embezzlement, and Mismanagement

41. On July 21, 1999, Borrower Lee Hall was 49.5 percent owned by entities owned and

controlled by Ran Nizan ("Nizan"), 49.5 percent owned by entities owned and controlled

by Avran Cimmering ("Cimmering"), and one percent (1%) owned by Elitot Corp.

("Elitot")

42. Elitot was Lee Hall's sole managing member. Elitot was owned 50% by Cimmering's

wife and 50% by Nizan, with Cimmering listed as Elitot's President.



43. Borrower adopted this "49.5-49.5-1" percent ownership structure at Paine Webber's

insistence and submitted the "49.5-49.5-1" ownership structure for Paine Webber's

approval.

44. On July 21 or 22, 1999, the day of or the day after the closing of the Loan, Nizan and

Cimmering executed an agreement to separate their business dealings.'

45. The Transfer Agreement conveys all of Nizan's interest in Lee Hall to Cimmering. See

Transfer Agreement § 2(a). Cimmering assumed responsibility for the debt evidenced by

the Loan.

46. The Deed of Trust provides that the Borrower will not, without the lender's prior written

consent, sell or transfer the Property. See Deed of Trust ¶ 9(a); see also id. ¶ 20 (noting

that violation of 9(a) is an "Event of Default" under the Deed of Trust). The Deed of

Trust further defines a "sale" to include "the change, removal, resignation or addition of a

general partner, managing partner, limited partner, joint venturer or member.... " See

Deed of Trust ¶ 9(b).

47. The Deed of Trust also provides that "[Lee Hall] acknowledges that Beneficiary has

examined and relied on the credit worthiness and experience of [Lee Hall] in owning and

operating properties such as the Trust Property in agreeing to make the Loan secured

hereby, and Beneficiary will continue to rely on [Lee Hall's] ownership of the ... property

as a means of maintaining the value of the ... Property as security for repayment of the

[Loan]." See Deed of Trust ¶ 9(a).

'The Agreement is dated July 22, 1999. However, in a suit filed by Nizan against Cimmering, Nizan asserts that the effective date of the agreement was July 21, 1999, the same date as the date of the loan.



48. The July 21 or 22, 1999 transfer was a material default under and/or breach of the Deed

of Trust in that it constituted a transfer of the Property without Paine Webber' s prior

written consent.

49. The transfer also constituted a material default under and/or breach of the Deed of Trust

because the parties agreed that such a transfer triggered full recourse liability under the

Loan. See Deed of Trust ¶ 55(b).

50. On November 2, 1999, Cimmering transferred his interest in the Property to Wee Talk

L.L.C., a limited liability company that, on information and belief, Nizan controls.

51. These events ran contrary to Defendants' representations and/or constituted omissions of

material facts necessary in order to make the statements made, in light of the

circumstances in which they were made, not misleading. Specifically:

a. As of October 15, 1999, the Loan was not a nonrecourse obligation of the

borrower, as Nizan had no interest in Lee Hall yet still guaranteed the Loan.

b. As of November 2, 1999, the Loan was not a nonrecourse obligation of the

borrower, because Wee Talk, L.L.C. took over Lee Hall, but Nizan remained the

guarantor on the Loan.

C. As of October 15, 1999, Paine Webber in effect waived the transfer of Lee Hall to

Cimmering, which adversely affected the Loan in a material respect, as it resulted

in a default on the Deed of Trust, a payment default, litigation, accusations of

embezzlement, Cimmering's arrest, and mismanagement of the Property.

d. As of November 2, 1999, Paine Webber's waiver of the transfer of Lee Hall to

Nizan also adversely affected the Loan in a material respect in light of Nizan's

prior failed effort to manage the Property.



52. Paine Webber not only failed to disclose these material facts, but sought to cover them up

through making the unqualified representation and warranty in the Mortgage Loan

Purchase Agreement that "no material default, breach, violation or event of acceleration"

exists under the Loan as of the closing date, November 4, 1999. See MLPA schedule I

(vii).

53. The facts Paine Webber misrepresented and/or omitted in the MLPA and that were

adopted by PaineWebber Inc. in the Prospectus, Prospectus Supplement, and PPM were

material in that: (1) they demonstrated the Borrower's financial instability and eventual

inability to make payments on the Loan and otherwise comply with the terms of the Deed

of Trust; (2) as a result the Deed of Trust went unpaid and was subject to numerous liens

and encumbrances; and (3) the Property securing the Deed of Trust was jeopardized and

devalued.

Nizan's and Cimmering's Battle Over Lee Hall

54. Sometime between July and October 6, 1999, Nizan accused Cimmering of mismanaging

the Property, wrongfully transferring funds from Lee Hall's bank accounts, and using

those funds for Cimmering's personal benefit. Nizan alleged that between July and

October 1999: a) Cimmering diverted rents and other Lee Hall funds to himself, his wife,

and his business; b) Lee Hall defaulted on obligations, including the Loan and trade

payables to third party vendors; and c) Lee Hall had numerous checks returned for

insufficient funds, including payroll checks.

55. On September 23, 1999, Paine Webber's agent sent a letter to Nizan noting that the Loan

"was in default." The letter added that Paine Webber's agent had "begun the process of

instituting default proceedings[.]"



56. On October 6, 1999, Nizan initiated litigation against Cimmering.

57. On October 11, 1999, the Commonwealth of Virginia issued the following arrest warrants

for Cimmering: Case No. C99 008370 Break and enter in the nighttime, or break and

enter in the daytime, 209 73rd street, with the intent to commit larceny, assault and

battery, or a felony other than murder, rape or robbery (Class U Felony); Case No. C99

008371 Steal a check or checks valued at $200 or more (Class 1 Felony); Case No. C99

008372 Steal a check valued at $200 or more (Class U Felony); Case No. C99 008373

Destroy, deface, or damage, a kitchen window belonging to Terrell Renee Collins, with

the value of, or damage to such property being less than $1000.00 (Class 1

Misdemeanor); Case No. C99 008374 Assault and batter Sonny 0. Walker (Class 1

Misdemeanor).

58. Nizan's and Cimmering's battle, as well as any embezzlement or mismanagement that

occurred, caused or set into motion a series of events that greatly damaged the Property

and its operation, including but not limited to (a) a lawsuit between parties to the joint

venture that owned the Property, (b) conveyance of the Property to a new entity owned

by Nizan, (c) elimination of Cimmering as a viable guarantor of the Loan and/or adequate

manager of the Property, (d) a shortage of funds Borrower needed to maintain and

operate the Property, (e) a failure to maintain or manage the Property, and (f) a failure to

retain the Property's value.

59. By letter dated August 21, 2000, S. Michael Lucash, Paine Webber's agent, claimed that

on November 2, 1999, Borrower advised Paine Webber's agent "that there was serious

criminal activity that had been allegedly committed by the managing member." See

August 21, 2000 Wexford letter to ORIX Capital Markets, LLC. Paine Webber's agent



also received "documentation that the FBI had become involved" and was "informed

that" Cimmering "had fled the country." Id.

60. In the August 21, 2000 letter, S. Michael Lucash dated Paine Webber's claimed

knowledge of events one day after the PSA's Effective Date of November 1, 1999.

61. However, Defendant's agent in fact had knowledge of these events at least on October 8,

1999, when a memorandum from Mike Lucash to Richard Merel of Garfield and Merel

attached to Nizan's complaint against Cimmering says "I am wondering if we have an

obligation to notify our investor of this mess? Do you have any thoughts concerning

this? Please note in the complaint it references that three buildings at Norport

Apartments were condemned. What do you think that I should do?" See October 8, 1999

Memorandum from Lucash to Merel.

62. These events ran contrary to the representations made by Paine Webber in the MLPA and

adopted by PaineWebber Inc. in the Prospectus, Prospectus Supplement and PPM and/or

constituted omissions of material facts necessary in order to make the statements made, in

light of the circumstances in which they were made, not misleading. Specifically:

a. Defendants represented that each portion of the Property had a certain occupancy

rate and appraised value, both of which were negatively impacted by Nizan and

Cimmering's battle and the resulting mismanagement.

b. Defendants represented that the waiver or modification of underwriting guidelines

did not adversely affect the Loan in a material respect, when Nizan's and

Cimmering's battle did adversely affect the Loan in a material respect.



C. Defendants represented that it evaluated the Borrower with respect to financial

capacity to meet obligations, when Nizan's and Cimmering's battle negatively

impacted the Borrower's financial capacity to meet obligations.

d. Defendants represented that it required Borrower to be a single-purpose,

bankruptcy-remote entity, and that Defendants reviewed Borrower's

organizational documents to ensure compliance with this requirement, when the

Borrower was not a single-purpose, bankruptcy-remote entity and Borrower's

organizational documents demonstrated Borrower's break-up and the ensuing

battle.


through making representations and warranties in the Mortgage Loan Purchase

Agreement that:




made by the Mortgagor in each Mortgage Loan are not true in any material respect."

See MLPA schedule I (ii);

c. To Paine Webber's best knowledge the Mortgagor did not commit "any fraudulent

acts during the origination process of any Mortgage Loan." MLPA schedule I (iii);


Loan purchased by the Mortgage Loan Seller and (2) the servicing and collection of

each Mortgage Loan is in all material respects legal, proper and prudent in



accordance with customary industry standards utilized by prudent institutional and

commercial mortgage lenders or loan servicers." MLPA schedule I (iv)(B);

e. "To the knowledge of [Paine Webber], as of the Closing Date, there is no pending



and adversely affect such Mortgagor's ability to perform under the related Mortgage

Loan." MLPA schedule I (x);

f. "With respect to each Mortgage Loan originated by a correspondent of [Paine




Webber] (which standards are in all material respects the same as the underwriting

standards for Mortgage Loans originated by [Paine Webber])." MLPA schedule I

(lvii)(a); and

g. "Each Mortgage Loan purchased by [Paine Webber] from a third-party originator was

underwritten consistent in all material respects with prudent commercial mortgage

conduit lending standards." MLPA schedule I (lviii).

64. The facts that Defendants misrepresented and/or omitted were material in that: (1) they

demonstrated the Borrower's financial instability and eventual inability to make

payments on the Loan and otherwise comply with the terms of the Deed of Trust; (2) as a

result the Deed of Trust went unpaid and was subject to numerous liens and

encumbrances; and (3) the Property securing the Deed of Trust was jeopardized and

devalued.



The Property's Deteriorating Condition

65. Aspects and indicators of the Property's degeneration included: (a) governmental

authorities condemning portions of the Property, (b) leasing of apartments at the Property

to tenants who damaged the Property, (c) a precipitous drop in occupancy in the

apartments at the Property, (d) failure to perform adequate maintenance on the Property,

(e) failure to keep the Property in livable condition, (f) a rent strike by tenants leasing

apartments on the Property, (g) collapse of an exterior wall of a building on the Property,

(h) explosive gas levels and lethal carbon monoxide levels in several apartment units on

the Property, and (i) media reports on the Property's degenerating condition.




a. Defendants represented that the Property was inspected by a member of Paine

Webber's staff or by a direct agent of Paine Webber, but did not disclose defects

in the Property or, to the extent the Property was inspected without discovering

such defects, that the inspection was not competently or thoroughly performed.

b. Defendants represented that any inspection revealed that the Property did not have

patent structural deficiencies or deferred maintenance considered material and

adverse to the interests of the Certificateholders, and that the reserves Paine

Webber established were adequate, but did not disclose that the Property had

patent structural deficiencies or deferred maintenance considered material and

adverse to the Certificateholders' interests and that the reserves were inadequate.

To the extent the inspection did not reveal such patent structural deficiencies or



S

deferred maintenance material and adverse to the Certificateholders' interest, such

inspection was not competently performed.

C. Defendants represented that each portion of the Property had a certain occupancy

rate and appraised value, both of which were negatively impacted by the

Property's continuing disintegration.

d. Defendants represented that the reserves Paine Webber established were adequate,

but the Borrower did not deposit sufficient funds at closing to assure the

completion of any material recommended repairs, corrections, or replacements

not completed by closing.


through making the representation and warranty in the Mortgage Loan Purchase

Agreement that: "To [Paine Webber's] knowledge, based upon a site inspection

conducted in connection with the origination of the Mortgage Loan and a review of the

related engineering report, each related Mortgage Property is free and clear of any

material damage that would affect materially and adversely the use or operation or value

of such Mortgaged Property as security for the Mortgage Loan...." MLPA schedule I

(xxxix).

68. To the extent Paine Webber failed to inspect the Property, Paine Webber breached its

warranty that Paine Webber "has inspected or caused to be inspected each related

Mortgaged Property within the past twelve months." MLPA schedule I (xliv).

69. The facts Defendants misrepresented and/or omitted were material in that: (1) they







devalued.

Liens and Condemnation

70. Borrower represented and warranted in the Deed of Trust that Borrower owned the

Property "free and clear of all liens, encumbrances, and charges whatsoever[.]" See Deed

of Trust ¶ 2; see also Deed of Trust ¶ 20 (Borrower's failure to cure "promptly" any

violations of laws or ordinances affecting the Property constitutes an Event of Default.).

71. On July 29,1999, the City of Portsmouth recorded a $50,000 water lien against the

Property.

72. On October 6, 1999, on information and belief, the City of Portsmouth condemned four

buildings within the Property.

73. These liens and condemnations breached the Deed of Trust warranty that Borrower

owned the Property free and clear of all liens, encumbrances, and charges whatsoever,

and constituted an Event of Default under the Deed of Trust. See Deed of Trust ¶ 20(h, i,

j).

74. Paine Webber did not disclose the liens or condemnations.

75. As of the closing date, the water lien primed the lien of the Deed of Trust.

76. Paine Webber had actual, or at least constructive knowledge of the liens and

condemnations.

77. An adverse outcome in the liens or condemnations would have materially and adversely

affected Borrower's ability to perform under the Loan by forcing a breach of the Deed of

Trust and reducing Borrower's ability to make payments on the Loan.






a. That each portion of the Property had a certain occupancy rate and appraised value,

both of which were negatively impacted by the condemnations.

b. Defendants represented that any underwriting guidelines were waived or modified

where Paine Webber determined that the waiver or modification did not adversely

affect the Loan in any material respect, but did not disclose that liens and

condemnations existed on the Property.



Agreement that:

a. "The Mortgage is a valid and enforceable first lien on the related Mortgage Property

subject only to ... the lien of current real property taxes, ground rents, water charges,

sewer rents and assessments not yet due and payable . . .." MLPA schedule I (xxv).


made by the Mortgagor in each Mortgage Loan are not true in any material respect."

MLPA schedule I (ii);

c. "To the knowledge of [Paine Webber], as of the Closing Date, there is no pending



and adversely affect such Mortgagor's ability to perform under the related Mortgage

Loan." MLPA schedule 1(x); and



d. Paine Webber had "received no actual notice of any proceedings pending for the total

or partial condemnation of such Mortgaged Property." MLPA schedule I (xxxix).




result the Deed of Trust was subject to liens and encumbrances; and (3) the Property

securing the Deed of Trust was jeopardized and devalued.

Delinquent Loan Payments

81. On September 30, 1999, Borrower admitted in a Board Resolution that the Loan was in

default.

82. By letters dated September 23, 1999, Wexford notified Cimmering and Nizan that the

Loan was in default.

83. The Loan is a renewal and extension, and not a novation, of an existing loan with respect

to which delinquencies existed.

84. The first payment due under the Loan was not paid in full when due, triggering full

recourse of the Loan.

85. On information and belief Wexford advanced funds on account of payments due under

the Loan.

86. These events constituted omissions of material facts necessary in order to make the

statements made, in light of the circumstances in which they were made, not misleading.

Specifically, Defendants represented that any underwriting guidelines were waived or

modified where Paine Webber determined that the waiver or modification did not



adversely affect the Loan in any material respect, yet did not disclose that actual defaults

had occurred on the Loan.



Agreement that:

a. No monthly payment of principal or interest has been more than thirty (30) days

delinquent since origination. See MLPA schedule I (vi).

b. No material default existed under the Loan. See MLPA schedule I (vii).

C. No third party has advanced any funds on account of payments due on the

Mortgage Loan. See MLPA schedule I (xviii).

88. The facts Defendants misrepresented and/or omitted were material in that they


payments on the Loan and otherwise comply with the terms of the Deed of Trust.

The Loan Origination

89. Wexford and Paine Webber underwrote the Loan on the following basis:

a. Lee Hall is owned 85% by Nizan and 15% by Cimmering.

b. Ennis Management Company, a company owned and controlled by Nizan, managed

the Property securing the Loan.

90. In reality, Lee Hall was on the July 21, 1999 Loan closing date, owned 49.5% by a

company controlled by Nizan, 49.5% by a company controlled by Cimmering and 1% by

a corporation owned 50% by Nizan and 50% by Cimmering's wife.


Case 3:02-cv-02213-K Document 1 Filed 10/10/02

0 of 45 PageID 29

91. Indeed, on June 18, 1999, Defendant Paine Webber and Wexford required Lee Hall to

add the corporation with the one percent ownership as a managing member, and therefore

was fully aware of Lee Hall's ownership structure.

92. In setting up this ownership structure, Wexford and Defendant Paine Webber insisted that

the one percent owner have an independent director. On information and belief,

however, the managing member, Joseph Heller, was not independent.

93. Moreover, Cimmering, not Nizan, managed the Property, and Wexford lists Avram

Cimmering and Ran Nizan as Borrower's "key principals".

94. Furthermore, the portfolio bore Cimmering's name and Cimmering served as Wexford's

primary contact during the refinancing.

95. By contrast, the underwriting emphasizes Nizan's substantial assets and "clean and solid"

credit record, but does not cover Cimmering's assets, experience or credit.

96. The original underwriting information shows that the loan underwriter did not rely on any

of the assets, credit or experience of Mr. Cimmering, despite the fact that Wexford and

Defendant obtained Cimmering's signature on a document listing Cimmering as a

guarantor of the Loan.

97. Any underwriter that looked into Cimmering's background would have discovered that

Cimmering did not meet minimum credit standards. Indeed, on information and belief,

Cimmering did not meet the minimum credit standards of Wexford, Defendant's agent

that made the Loan.

98. On November 24, 1999, the Circuit Court of Henrico County, Virginia, issued

garnishment summonses to enforce a December 9, 1998 judgment for $302,245.85

against Cimmering and two of his companies.



99. Furthermore, the Loan was a refinance of an existing loan that was made only one year

earlier. On information and belief, the existing loan was in default at the time of the

closing of the Loan.

100. The underwriting gave the Property an appraised value of $25,000,000 when the Property

had been purchased only a year earlier for $15,600,000.

101. The underwriting did not require adequate reserves to ensure repairs necessary to

maintain the Property's value.

102. The Borrower took cash from the proceeds at the Closing, at a time when the property

was in disrepair. This included a "broker's back fee" of $110,000, which was a broker

payment for an unrelated transaction. On information and belief, either the Borrower or

its principals and/or affiliates also received a substantial amount of cash from the first

financing, which amounts were not used to improve or maintain the Property.

103. Paine Webber approved the Loan's underwriting and conducted its own underwriting of

the Loan prior to funding.




a. The Borrower was not a single purpose entity, because it used funds from the

Loan to close other unrelated transactions.

b. The underwriting did not conform to the guidelines set forth in the PPM,

Prospectus, and Prospectus Supplement.

C. Paine Webber's waiver or modification of underwriting guidelines adversely

affected the Loan in a material respect.



d. Paine Webber did not evaluate the Borrower and its principals with respect to

financial capacity to meet obligations, credit history, and prior experience as an

owner and operator of commercial real estate properties.

e. Paine Webber did not obtain a credit report or other reliable indication of

Borrower's and principals' financial capacity.

f. Paine Webber did not obtain and verify credit references and/or business and

trade references for the Borrower and its principals.



Agreement that:

a. "[T]o the best of [Paine Webber's] knowledge the origination of such Mortgage

Loan purchased by the Mortgage Loan Seller is in all material respects legal,

proper and prudent in accordance with customary industry standards utilized by

prudent institutional and commercial lenders." MLPA schedule I (iv); and

b. Each loan was underwritten "consistent in all material respects with prudent

commercial mortgage conduit lending standards." MLPA schedule I (lvii).






devalued.



THE CYRUS II PARTNERSHIP LOAN

The Loan Underwriting

107. Cyrus II Partnership ("Cyrus") is a Louisiana Partnership in commendam (the equivalent

of a limited partnership). Cyrus' general partner is Bahar Development, Inc., a Texas

corporation located at 806 Main Street, Suite 1230, Houston, Texas 77002.

108. Love Funding Corporation ("Love Funding") is a Virginia Corporation with its principal

place of business in Washington, D.C. Among its business lines, Love Funding

originates and securitizes commercial loans.

109. On or about July 6, 1999, Love Funding and Cyrus executed a $6,400,000 Mortgage Note

("the Note") in connection with Cyrus' refinancing of the Arlington Apartments

("Arlington" or "the Property'). Arlington is located in Harvey, Louisiana, near New

Orleans, The Note is secured by a "Mortgage, Security Agreement, and Assignment of

Leases and Rents" ("the Mortgage"), as well as by the personal guaranty of Mondona

Rafizadeh, who, in her individual capacity, signed a Guaranty of Borrower's Recourse

Obligations ("the Guaranty")

110. Also on July 6, 1999, Love Funding assigned the above loan documents to Paine Webber

through an Assignment of Mortgage, Security Agreement and Assignment of Leases and

Rents.

Transfer of the Loan to the Trust

111. Effective as of November 1, 1999, Paine Webber transferred the Loan to Merrill Lynch

Mortgage Investors, Inc. pursuant to the Mortgage Loan Purchase Agreement.


Case 3:02-cv-02213-K

Document 1 Filed 10/10/02 of 45 PageID 33

112. The same day and pursuant to the Pooling and Servicing Agreement, Merrill Lynch

Mortgage Investors, Inc., as Depositor, transferred the Loan to Norwest (now known as

Wells Fargo) as Trustee for the certificateholders of the Trust.

The Failed Loan

The Fraudulent Origination

113. During the origination process, Cyrus provided Paine Webber and Love Funding an

inaccurate June 30, 1999 rent roll overstating Arlington Apartments' occupancy levels.

Cyrus also buried the existence of two commercial master leases that were not term

leases, and instead manufactured and placed in the Arlington Apartments files fraudulent

leases designed to give the impression that these apartments were occupied by individual

tenants.

114. Prior to the Loan's closing, Cyrus permitted Love Funding, Paine Webber, the real estate

appraiser and the inspector each designated by Love Funding, and others hired by or

performing services on behalf of Love Funding and Paine Webber, full access to the

Arlington Apartments property for the purposes of assessing its condition. Cyrus also

gave Love Funding and Paine Webber full and complete access to all of its books and

records of account and of operation of the Arlington Apartments. At the time that the

Loan closed, Love Funding and Paine Webber should have been able to determine both

the physical condition of this property, and its actual operating experience, and to

discover the discrepancy between the rent roll income and actual cash collections.

115. Moreover, the falsified lease files did not contain the accompanying documents that were

required from prospective tenants as part of the lease application process, including

copies of their credit and criminal histories, a copy of their driver's licenses, a written



application, and other associated documents that were required of all prospective tenants

at the Arlington Apartments. It is inconceivable that Paine Webber or Love Funding

would not have noticed the discrepancy between the ordinary lease files, which contained

all of these documents as a mater of course, and the non bona fide leases, which lacked

all of the associated supporting documentation. At no time did Love Funding or Paine

Webber raise any questions concerning the deficiency of documentation for the files.

116. Furthermore, Bahar Development provided Love Funding and Paine Webber with

accurate information regarding the number of residential leases and occupied units at

Arlington Apartments, which was not consistent with the June 30, 1999 rent roll, and

disclosed the existence of the master leases. Despite the availability of this information,

the loan proceeded based on the falsified rent roll and undisclosed master leases.



circumstances in which they were made, not misleading. Specifically, Defendants

represented that it evaluated the Borrower with respect to financial capacity to meet

obligations, yet it did not disclosed that this capacity was based upon falsified rent rolls

and leases.



Agreement that:

a. "[N]o material default, breach, violation or event of acceleration" exists under the


PLAINTIFF'S COMPLAINT -- page 33







schedule I (iii);






e. "With respect to each Mortgage Loan originated by a correspondent of [Paine







f. "Each Mortgage Loan purchased by [Paine Webber] from a third-party originator







payments on the Loan and otherwise comply with the terms of the Note; (2) as a result

the Note went unpaid and was subject to numerous liens and encumbrances; and (3) the

Property securing the Note was jeopardized and devalued.

The Incomplete Required Repairs

120. One condition of the loan was that Cyrus complete rehabilitation and refurbishment

repairs on apartment buildings 33, 35, and 36 (the "Repairs") under the

Completion/Repair and Security Agreement. At the time that the Arlington Apartments

refinancing Loan closed, however, the Repairs had not been completed. Paine Webber

and Love Funding were fully aware that the contemplated rehabilitation work was not, in

fact, complete at the time of the Loan closing. Cyrus did not request an extension from

Love Funding, Paine Webber, or anyone else for additional time beyond 45 days to

complete those repairs, nor did Love Funding, Paine Webber, or anyone else acting on

their behalf waive these requirements.




a. Defendants represented that adequate reserves existed to assure completion of

repairs, when, in fact, reserves were not adequate to ensure completion of repairs,

nor was the issue of completing repairs addressed with the Borrower.

b. Defendants represented that Paine Webber had no knowledge that the Borrower's

representations and warranties were not true in any material respect, when, in fact,

the Borrower did not complete repairs required by the Completion/Repair and

Security Agreement.



C. Defendants represented that Paine Webber waived underwriting guidelines when

it was determined by Paine Webber not to adversely affect the Mortgage Loan in

any material respect, but, in, fact, Paine Webber made no such determination in

this instance.



Agreement that:








schedule I (iii);






e. "With respect to each Mortgage Loan originated by a correspondent of [Paine









f. "Each Mortgage Loan purchased by [Paine Webber] from a third-party originator





payments on the Loan and otherwise comply with the terms of the Note; (2) as a result

the Note went unpaid and was subject to numerous liens and encumbrances; and (3) the

Property securing the Note was jeopardized and devalued.

The Subsequent Cover-Up

124. In obtaining the loan, Cyrus provided Love Funding and Paine Webber financial

documentation including copies of the Arlington Apartments' bank statements for the

twelve months prior to June 30, 1999. However, the documents produced by Love

Funding in connection with the litigation involving this loan demonstrate that those bank

statements had been removed from Love Funding's files. Furthermore, Love Funding

had also removed all contemporaneous notes, records, and documents generated during

Love Funding's three physical inspections of the property, along with Love Funding's

audit of the lease files at the Arlington Apartments offices prior to the closing.



PLAINTIFF'S CAUSES OF ACTION

FIRST CAUSE OF ACTION Exchange Act § 10(b) (15 U.S.C. § 78j) and Rule 10b-5 (17 C.F.R. § 240.10b-5)

125. Plaintiff incorporates by reference the Complaint's preceding paragraphs.

126. Defendants used an instrumentality of interstate commerce in connection with the

securities transaction in this case, including interstate wire transfers of funds, United

States Mail and other delivery of the PPM, Prospectus and Prospectus Supplement, and

correspondence and/or telephone calls to interested purchasers, Merrill Lynch, and

ORIX.

127. Paine Webber in the MLPA and PaineWebber Inc. in the PPM, Prospectus, and

Prospectus Supplement made misrepresentations of material fact or failed to state

material facts that were necessary to prevent their other statements from being misleading

("omissions"). Specifically, the Prospectus and the Prospectus Supplement

misrepresented those items set forth in this Complaint under the heading "The

Representations". The specific loan transactions detailed in this Complaint provide

specific examples of the falsity of those representations and the materiality of the facts

misrepresented or omitted. Furthermore, Defendants failed to state that Paine Webber's

representations and warranties were knowingly false, that Paine Webber was providing a

loan pool containing loans that it knew did not meet the representations and warranties,

or that Paine Webber had a pattern and practice of failing to follow the very underwriting

guidelines that it warranted it had followed as to individual loans.

128. Defendants made the misrepresentations and omissions knowingly, or with reckless

disregard for their truth or falsity. Specifically, Defendants knew that the loans detailed



above did not meet the representations and warranties, and yet provided them to the Trust

under the representations detailed above.

129. Plaintiff and the Certificateholders justifiably relied on Defendants' misrepresentations

and omissions. Indeed, the only tool available for evaluating the loan pool is the

representations and warranties and the other information set forth in the Prospectus and

Prospectus Supplement. Plaintiff and the Certificateholders would not have purchased

their certificates had they known that Defendants lied about the quality of the loans in the

pool, and placed loans in the pool that Defendants knew did not meet the representations

and warranties and failed to disclose their pattern and practice of failing to follow proper

underwriting guidelines.

130. The pricing of the Certificates depended upon the representations by the depositor of the

loans that they were of a particular quality. To the extent that the PPM, Prospectus, and

Prospectus Supplement misrepresented the quality of a material loan or loans, such

misrepresentation affected the overall pool of loans and the attendant pricing of the

Certificates. Thus, all purchasers of Certificates during the initial offering suffered a

similar injury through their purchase of Certificates at artificially inflated prices, and a

presumption of reliance applies.

131. As a direct and proximate result of such wrongful conduct, the Plaintiff and other

members of the Class were damaged in connection with their purchase of certificates

during the Class Period.

132. By reason of the foregoing, the Defendants violated Exchange Act § 10(b), 15 U.S.C. §

78j (b) and SEC Rule lOb-5 promulgated pursuant thereto, and are accordingly liable.



I

SECOND CAUSE OF ACTION Violation of Exchange Act § 20(a) (15 U.S.C. § 78t)

133. Plaintiff incorporates by reference the Complaint's the preceding paragraphs.

134. Upon information and belief, PaineWebber, Inc. created Paine Webber for the specific

purpose of carrying out this and similar transactions, had full ownership of Paine

Webber, and shared information and employees with Paine Webber. PaineWebber, Inc.

received and publicized through the PPM, Prospectus, and Prospectus Supplement,

information it knew or should have known to be false, specifically: the representations

and warranties, information regarding Paine Webber's loan origination, underwriting, and

servicing, and information regarding the Paine Webber-originated, underwritten, and

serviced loan pool. PaineWebber, Inc., by virtue of its position, participated in and

exercised control over Paine Webber and had the power and ability to control and direct

the acts and conduct complained of in this Complaint and was aware of the omissions and

misrepresentations in the PPM, Prospectus, and Prospectus Supplement. At all relevant

times, the PaineWebber, Inc. had the power and influence to control Paine Webber. By

failing to take this action to correct the conduct and misstatements of Paine Webber,

PaineWebber, Inc. assisted and participated in the fraud complained of herein.

135. PaineWebber, Inc., as a control person pursuant to Section 20(a) of the 1934 Act, further

is jointly and severally liable with Paine Webber to the Plaintiff and other members of the

Class for violation of the 1934 Act to the full extent.

136. As a result, Plaintiff and other members of the Class are entitled to recover from said

Defendant the full amount for all damages to be established at trial.



THIRD CAUSE OF ACTION Violation of Securities Act § 12(a)(2) (15 U.S.C. § 77))

137. Plaintiff incorporates by reference the Complaint's the preceding paragraphs.

138. PaineWebber, Inc. offered or sold the certificates by using interstate delivery services and

United States mail, by means of the Prospectus and Prospectus Supplement.

139. The Prospectus and Prospectus Supplement included untrue statements of material fact,

or omitted to state facts necessary in order to make the statements, in light of the

circumstances under which they were made, not misleading. Specifically, the Prospectus

and the Prospectus Supplement misrepresented those items set forth in this Complaint

under the heading "The Representations". The specific loan transactions detailed in this

Complaint provide specific examples of the falsity of those representations and their

materiality.

140. Although Plaintiff and other class members received the PPM in connection with its

purchase of the certificates, the Prospectus and Prospectus Supplement accompanied the

PPM, and the PPM "strongly urged" investors to read the Prospectus and Prospectus

Supplement in their entirety. See PPM at iv. The PPM also incorporates the information

contained in the Prospectus and Prospectus Supplement. See PPM at 1. Thus,

Defendants marketed and sold to prospective investors the certificates as part of a

coordinated integrated "public" offering of securities for purposes of Section 12 of the

Securities Act.

141. As a direct and proximate result of Defendant's wrongful conduct, the Plaintiff and other

members of the Class were damaged in connection with their purchase of certificates

during the Class Period.

PLAINTIFF'S COMPLAINT page 41


142. By reason of the foregoing, PaineWebber, Inc. violated Securities Act § 12(a)(2), 15

U.S.C. § 771, and is accordingly liable to Plaintiff and all Class members who purchased

Certificates from Paine Webber, Inc.

FOURTH CAUSE OF ACTION Securities Act § 15 (15 U.S.C. § 77o)

143. Plaintiff incorporates by reference the Complaint's preceding paragraphs.

144. By virtue of providing information for the PPM, Prospectus, and Prospectus Supplement

that was uniquely in their control, Defendants controlled the conduct of Merrill Lynch &

Co. Specifically, Defendants provided Merrill Lynch & Co. the following information,

which is set forth with specificity above: the representations and warranties, information

regarding Paine Webber' s loan origination, underwriting, and servicing, and information

regarding the Paine Webber-originated, underwritten, and serviced loan pool.

Defendants by virtue of their positions, participated in and exercised control over Merrill

Lynch & Co. and had the power and ability to control and direct the acts and conduct

complained of in this Complaint and were aware of the omissions and misrepresentations

in the PPM, Prospectus, and Prospectus Supplement. At all relevant times, the

Defendants had the power and influence to control Merrill Lynch & Co. By failing to

take this action to correct the conduct and misstatements of Merrill Lynch & Co., the

Defendants assisted and participated in the fraud complained of in this Complaint.

145. Similarly, by virtue of providing information for the PPM, Prospectus, and Prospectus

Supplement that was uniquely in their control, Paine Webber influenced and controlled

the conduct of PaineWebber, Inc. and Merrill Lynch & Co. Specifically, Paine Webber

provided PaineWebber, Inc. and Merrill Lynch & Co. the following information, which is

set forth with specificity above: the representations and warranties, information regarding



Paine Webber's loan origination, underwriting, and servicing, and information regarding

the Paine Webber-originated, underwritten, and serviced loan pool. Paine Webber by

virtue of its position, participated in and exercised control over PaineWebber, Inc. and

Merrill Lynch & Co. and had the power and ability to control and direct the acts and

conduct complained of in this Complaint and was aware of the omissions and

misrepresentations in the PPM, Prospectus, and Prospectus Supplement. At all relevant

times, Paine Webber had the power and influence to control PaineWebber, Inc. and

Merrill Lynch & Co. By failing to take this action to correct the conduct and

misstatements of PaineWebber, Inc. and Merrill Lynch & Co., Paine Webber assisted and

participated in the fraud complained of in this Complaint.

146. Defendants, as control persons pursuant to Section 15 of the 1933 Act, further are jointly

and severally liable to the Plaintiff and other members of the Class for violation of the

1933 Act to the full extent.

147. As a result, Plaintiff and other members of the Class are entitled to recover from said

Defendants the full amount for all damages to be established at trial.

REQUEST FOR RELIEF

Wherefore, Plaintiff prays that Defendants be cited to appear and answer, and that

Plaintiff, upon hearing, have judgment against Defendants as follows:

1. For rescission of Plaintiffs investment in the Certificates, or, alternatively, for actual

damages at least in the amount of $549,923,000.

2. For Plaintiff's reasonable attorneys' fees and costs from this action.

3. For all interest as determined by applicable law.

4. For all costs of Court and suit.



5. For any other relief to which Plaintiff is entitled.

PLAINTIFF DEMANDS A TRIAL BY JURY.

Dated: October 10, 2002.

Respectfully submitted,

AKIN GUMP STRAUSS HAUER & FELD, LLP

By:

26 ~ I ~~ 4" R. iâurkce Macon Texas State Bar No. 12787500 Mary L. O'Connor Texas State Bar No. 15186900 Edward S. Koppman Texas State Bar No. 11681000 Talcott J. Franklin Texas State Bar No. 24010629 1700 Pacific Avenue, Suite 4100 Dallas, Texas 75201 Telephone (214) 969-2800 Facsimile (214) 969-4343

Attorneys for the Plaintiff:

ORIX Capital Markets, LLC 611368


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