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Downey Financial Complaint 041709 073

Downey Financial Complaint 041709 073

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Published by wilbur113
Investors suing DSL
Investors suing DSL

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Published by: wilbur113 on Dec 15, 2011
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07/21/2013

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Case 2:08-cv-03261-JFW-RZ Document 73 Filed 04/17/2009 Page 1 of 194
 
TABLE OF CONTENTSPage
- i -12345678910111213141516171819202122232425262728I.
 
INTRODUCTION AND OVERVIEW...........................................................1
 
II.
 
JURISDICTION AND VENUE....................................................................13
 
III.
 
THE PARTIES..............................................................................................14
 
IV.
 
SOURCES OF ALLEGATIONS..................................................................16
 
V.
 
DEFENDANTS’ FRAUDULENT SCHEME..............................................27
 
A.
 
False and Misleading Statements Regarding Downey’s LendingPractices, Loan Quality, Underwriting Standards and CreditRisk Controls.......................................................................................27
 
B.
 
Reasons Why Defendants’ Statements Regarding Downey’sLending Practices, Loan Quality, Underwriting Standards andCredit Risk Controls Were Knowingly Materially False andMisleading When Issued.....................................................................30
 
1.
 
Downey Turns to Option ARMs to Inflate Its Revenueand Earnings, a Practice the OTS Found Unsafe andUnsound....................................................................................31
 
2.
 
Defendants Deliberately Misled Downey’s InvestorsAbout the Quality of the Loans on Downey’s Books..............34
 
a.
 
Percipient Witnesses Aver that DefendantsParticipated in Setting Downey’s UnsoundUnderwriting Guidelines................................................37
 
b.
 
Multiple Sources Detail that Defendants’ TrackedDowney’s Lending Practices..........................................38
 
c.
 
Downey’s $11-15 Billion Loan Portfolio WasPremised on Unsound Underwriting..............................43
 
d.
 
Percipient Witnesses Aver that DefendantsDeliberately Misled Borrowers to Originate MoreLoans..............................................................................56
 
e.
 
Witnesses Confirm that Defendants RoutinelyGranted Exceptions to Downey’s Already Looseand Unsafe Underwriting Guidelines.............................59
 
f.
 
Victims of Downey’s Toxic Lending PracticesCorroborate Defendants’ Unsafe and PredatoryLending Practices in Pleadings and Complaints............64
 
g.
 
Multiple Sources Detail the Vast Incentives Givenby Defendants that Drove the Volume of Toxicand Predatory Option ARMs on Downey’s Books........73
 
Case 2:08-cv-03261-JFW-RZ Document 73 Filed 04/17/2009 Page 2 of 194
 
 - ii -12345678910111213141516171819202122232425262728C.
 
Defendants’ False and Misleading Statements ConcerningSubprime Lending...............................................................................78
 
D.
 
Reasons Why Defendants’ Statements Regarding Downey’sSubprime Lending Were Knowingly Materially False andMisleading When Issued.....................................................................79
 
E.
 
False and Misleading Statements Concerning Downey’sFinancial Results, Allowances for Loan and Credit Losses,Non-Performing Assets, Negative Amortization and CapitalPosition................................................................................................83
 
1.
 
False Statements: Downey’s Financial Results (3Q06-FY07), GAAP Compliance and Internal Controls...................83
 
2.
 
False Statements Concerning Credit and Loan LossAllowances and Risk Controls.................................................84
 
3.
 
False Statements Concerning Downey’s Capital Position.......88
 
F.
 
Reasons Why Defendants’ Financial Results and StatementsConcerning Allowances for Loan and Credit Losses, Non-Performing Assets, Negative Amortization, Credit Risk Exposure and Capital Position Were False and Misleading...............91
 
1.
 
Rosenthal and Côté Directly Participated in Downey’sInternal Asset Review Committee and Issued Reports toDowney’s Audit Committee that Reflected InadequateReserves....................................................................................92
 
2.
 
GAAP Provisions Violated by Defendants in Accountingfor Credit and Loan Loss Reserves..........................................93
 
3.
 
SEC Rules Violated by Defendants in Accounting forLoan Loss Reserves..................................................................95
 
4.
 
OTS Provisions Violated by Defendants..................................96
 
5.
 
Defendants Violated GAAP, SEC Rules and OTSRegulations by Intentionally Manipulating theCompany’s Reserves and Provision for Loan Losses toConceal Loan Impairment and by Willfully DisregardingKnown Adverse Facts and Red Flags.......................................97
 
6.
 
Defendants Intentionally Reduced Downey’s Loan LossProvision to Fraudulently Inflate Earnings and ConcealDowney’s Rapidly Increasing Risk and Impairment of Loans.......................................................................................115
 
7.
 
Defendants’ Overstatement of Assets RenderedDefendants’ Statements Regarding Downey’s CapitalPosition Knowingly False.......................................................120
 
Case 2:08-cv-03261-JFW-RZ Document 73 Filed 04/17/2009 Page 3 of 194

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