JPMorgan, BofA sued over mortgage debt losses

By Jonathan Stempel Fri Sep 30, 2011 4:34pm EDT (Reuters) - JPMorgan Chase & Co and Bank of America Corp were hit with new lawsuits by investors claiming losses on $4.5 billion of soured mortgage debt, adding to litigation targeting the two largest U.S. banks. The plaintiff Sealink Funding Ltd said it lost money after buying nearly $2.4 billion of residential mortgage-backed securities (RMBS) from JPMorgan and $1.6 billion from Bank of America from 2005 to 2007, relying on offering materials that were misleading about the quality of the underlying loans. According to court papers, Sealink is an Irish entity that oversees risky RMBS that contributed to the near collapse of Germany's Landesbank Sachsen AG. Another plaintiff, Germany's Landesbank Baden-Wurttemberg, raised similar claims in a separate lawsuit against JPMorgan over $500 million of RMBS that it said it bought. The lawsuits accuse the banks of packaging large amounts of high-risk mortgages by such issuers as Countrywide Financial now owned by Bank of America, and Bear Stearns and Washington Mutual, now owned by JPMorgan, in pursuit of higher profit. "This misconduct has resulted in astounding rates of default on the loans underlying the defendants' RMBS and massive downgrades of the (investors') certificates, the vast majority of which are now considered 'junk,'" the lawsuits said. The investors are seeking compensatory and punitive damages in the lawsuits, all filed Thursday in the New York State Supreme Court in Manhattan.

Bank of America spokesman Lawrence Grayson said the bank will defend against its lawsuit by Sealink, which "appears to be another sophisticated investor looking for someone to blame" for losses caused by a downturn in the economy. JPMorgan spokeswoman Jennifer Zuccarelli declined to comment. Bernstein Litowitz Bernstein & Grossmann, which represents Sealink and Landesbank Baden-Wurttemberg, did not respond to a request for comment. In a separate lawsuit filed on Thursday in the same court, Britain's Barclays Plc was sued by Germany's HSH Nordbank AG, which said it lost $40 million after being misled into buying risky RMBS. Barclays spokeswoman Kristin Friel declined to comment. Banks face many lawsuits by mortgage securities investors seeking to hold them responsible for losses on debt that once seemed safe but turned toxic once the housing and credit crises began more than four years ago. Bank of America is seeking court approval of an $8.5 billion global settlement covering investors in mortgage pools with $174 billion of unpaid Countrywide principal balances. That bank and JPMorgan are also among lenders negotiating with regulators including all 50 state attorneys general on a multibillion-dollar accord addressing foreclosure abuses.

FOLLOWING ARE ALL THE COMPLAINTS:

FILED: NEW YORK COUNTY CLERK 09/29/2011
NYSCEF DOC. NO. 1

INDEX NO. 652681/2011 RECEIVED NYSCEF: 09/29/2011

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

SEALINK FUNDING LIMITED, Plaintiffs, v. BEAR STEARNS & CO. INC., BEAR STEARNS ASSET BACKED SECURITIES I LLC, EMC MORTGAGE LLC (f/k/a EMC MORTGAGE CORPORATION), STRUCTURED ASSET MORTGAGE INVESTMENTS II INC., J.P. MORGAN ACCEPTANCE CORPORATION I, J.P. MORGAN ACQUISITION CORPORATION., J.P. MORGAN SECURITIES LLC (f/k/a/ JPMORGAN SECURITIES INC.), WAMU ASSET ACCEPTANCE CORP., WAMU CAPITAL CORP., JPMORGAN CHASE & CO., and JPMORGAN CHASE BANK, N.A. Defendants. SUMMONS Index No.

TO THE ABOVE-NAMED DEFENDANTS: J.P. Morgan Chase & Co. 4001 Governor Printz Boulevard Wilmington, Delaware 19802 J.P. Morgan Securities LLC (f/k/a/ JP Morgan Securities Inc.) 227 Park Avenue New York, New York 10017 J.P. Morgan Acceptance Corp. I 270 Park Avenue New York, New York 10017 Bear Stearns Asset Backed Securities I LLC 383 Madison Avenue New York, New York 1017

JP Morgan Chase Bank, N.A. 1111 Polaris Parkway Columbus, Ohio 43240 J.P. Morgan Acquisition Corp. 270 Park Avenue New York, New York 10017

Bear Stearns & Co. Inc. 383 Madison Avenue New York, New York 10179 EMC Mortgage LLC (f/k/a/ EMC Mortgage Corp.) 2780 Lake Vista Drive Lewisville, Texas 75067

Structured Asset Mortgage Investments II Inc., 383 Madison Avenue New York., New York 10179 WaMu Asset Acceptance Corp. 1301 Second Avenue, WMC 3501A Seattle, Washington 98101

WaMu Capital Corp. 1301 Second Avenue, WMC 3501A Seattle, Washington 98101

You are hereby summoned to answer the complaint in this action and to serve a copy of your answer, or if the complaint is not served with this summons, to serve notice of appearance, on the plaintiff’s attorneys within twenty (20) days after the service of this summons, exclusive of the day of service (or within thirty (30) days after service is complete if this summons is not personally delivered to you within the State of New York); and in case of your failure to appear or answer, judgment will be taken against you by default for relief demanded herein. Venue is proper in this Court because several of the Defendants maintain their principal places of business in New York County.

Dated: New York, New York September 29, 2011

Respectfully submitted, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP /s/ Gerald H Silk Gerald H. Silk Avi Josefson Michael D. Blatchley Ross Shikowitz 1285 Avenue of the Americas, 38th Floor New York, NY 10019 Tel: (212) 554-1400 Fax: (212) 554-1444 jerry@blbglaw.com avi@blbglaw.com michaelb@blbglaw.com ross@blbglaw.com Counsel for Plaintiff 2

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

SEALINK FUNDING LIMITED, Plaintiff, v. BEAR STEARNS & CO. INC., BEAR STEARNS ASSET BACKED SECURITIES I LLC, EMC MORTGAGE LLC (f/k/a EMC MORTGAGE CORPORATION), STRUCTURED ASSET MORTGAGE INVESTMENTS II INC., J.P. MORGAN ACCEPTANCE CORPORATION I, J.P. MORGAN ACQUISITION CORPORATION., J.P. MORGAN SECURITIES LLC (f/k/a/ JPMORGAN SECURITIES INC.), WAMU ASSET ACCEPTANCE CORP., WAMU CAPITAL CORP., JPMORGAN CHASE & CO., and JPMORGAN CHASE BANK, N.A., Defendants. COMPLAINT Index No.

JURY TRIAL DEMANDED

Plaintiff Sealink Funding Limited, as defined below (“Sealink”), by its attorneys Bernstein Litowitz Berger & Grossmann LLP, for its Complaint herein against Bear Stearns & Co. Inc., Bear Stearns Asset Backed Securities I LLC, EMC Mortgage LLC (f/k/a EMC Mortgage Corporation), Structured Asset Mortgage Investments II Inc., J.P. Morgan Acceptance Corporation I, J.P. Morgan Acquisition Corp., JP Morgan Securities LLC (f/k/a JP Morgan Securities Inc.), WaMu Asset Acceptance Corp., WaMu Capital Corp., JPMorgan Chase & Co., and JPMorgan Chase Bank, N.A. (collectively, “Defendants”), alleges as follows: I. SUMMARY OF THE ACTION 1. This action arises from a fraud perpetrated by Defendants against Sealink, which

invested in residential mortgage-backed securities (“RMBS”) that contained loans purchased, financed, and securitized by Defendants. Sealink invested in highly-rated RMBS, bearing AAA ratings, in reliance on Defendants’ representations that those mortgages were originated according to specific underwriting guidelines and collateralized by accurately appraised properties. Those representations and the AAA ratings the RMBS carried led Sealink to believe that the Defendants’ RMBS it purchased were safe investments. 2. Sealink purchased almost $2.4 billion worth of Defendants’ RMBS in 37

offerings between 2005 and 2007 (the “Certificates”) in reliance on registration statements, prospectuses, draft prospectus supplements, prospectus supplements and term sheets (the “Offering Materials”) prepared by and provided to them, directly or indirectly, by Defendants. The Offering Materials contained numerous representations about the purportedly conservative mortgage underwriting standards applied by the mortgage originators, the appraisals of the mortgaged properties, and other facts regarding the collateral underlying the RMBS that were material to Sealink’s investment decisions.

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3.

In truth, and as Sealink and the world would only later discover, the originators

whose loans collateralized the Defendants’ RMBS purchased by Sealink were among the worst of the worst culprits in the subprime lending industry. These infamous lenders included

subsidiaries of Bear Stearns such as EMC Mortgage Company (“EMC”), as well as other notorious originators such as Countrywide Home Loans (“Countrywide”), American Home Mortgage Investment Corporation (“American Home”), and Fremont Investment & Loan (“Fremont”). These originators have since folded up their operations, filed for bankruptcy or been shut down by regulators, and are the subject of numerous governmental investigations and private lawsuits alleging misconduct arising out of pervasive illegal and improper mortgage lending practices and other violations of law. 4. Defendants knew or recklessly disregarded that those lenders were issuing high-

risk loans that did not conform to their respective underwriting standards. Defendants did, in fact, conduct extensive due diligence on the loans it purchased for securitization, as represented in the Offering Materials. In the course of that extensive due diligence process, which, in many instances, included an extensive re-underwriting review of the loans it purchased by an independent third-party due diligence provider, Clayton Holdings, Inc. (“Clayton”), Defendants learned that the originators routinely and flagrantly disregarded their own underwriting guidelines, originated loans based on wildly inflated appraisal values, and manipulated the underwriting process in order to issue loans to borrowers who had no plausible means to repay them. Indeed, documents released by the Federal Crisis Inquiry Commission (“FCIC”) and Clayton reveal the extensive deficiencies identified through Defendants’ due diligence. Specifically, 27% of the loans JPMorgan and Washington Mutual (“WaMu”) evaluated for purchase and securitization at the height of the mortgage boom (from 2006 through mid-2007),

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and over 16% of such loans evaluated by Bear Stearns (together with EMC), failed to meet the originators’ own underwriting guidelines. 5. In fact, between January 2006 and June 2007, JPMorgan, WaMu and Bear

Stearns (together with EMC) purchased and securitized 51%, 29% and 42% respectively, of the sampled loans that Clayton determined failed to meet the originator’s underwriting guidelines, meaning that Defendants knew the loan pools it securitized were riddled with defective loans that were underwritten in a systematically deficient manner that flatly contradicted the representations in Defendants’ Offering Materials. 6. Defendants not only concealed from Sealink the truth about the poor quality of

the securitized loans, Defendants also knowingly provided false information to the credit rating agencies in order to secure a triple-A blessing for its RMBS. As a result of these practices, Defendants knew that the ratings assigned to its securitizations did not reflect the true credit quality of the Certificates Sealink purchased. 7. This misconduct has resulted in astounding rates of default on the loans

underlying the Defendants’ RMBS and massive downgrades of the Certificates, the vast majority of which are now considered “junk.” Accordingly, the Certificates are no longer marketable or salable at or near the prices Sealink paid for them, and Sealink has suffered significant losses as a result of the fraud perpetrated by Defendants. 8. Sealink seeks compensatory and/or rescissory damages against Defendants for

fraud, fraud in the inducement, aiding and abetting fraud, and negligent misrepresentation. II. JURISDICTION AND VENUE 9. This Court has jurisdiction over each of the Defendants because each of them

transacts business within the State of New York within the meaning of CPLR § 302(a)(1) and each of them committed a tortious act inside the State of New York or outside the State of New
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York causing injury within the State of New York within the meaning of CPLR §§ 302(a)(2) and 302(a)(3). The amount in controversy exceeds $150,000. 10. Venue is proper in this Court because several of the Defendants maintain their

principal places of business in New York County. III. THE PARTIES A. 11. Plaintiff Plaintiff Sealink Funding Limited is a company incorporated under the laws of

Ireland that was established to receive, hold and manage RMBS purchased by certain special purpose vehicles formerly sponsored by SachsenLB (the “SPVs”), and the claims asserted herein arise from the purchase of those RMBS by the SPVs. Sealink Funding Limited and the SPVs are hereinafter collectively referred to as “Sealink.” B. 12. Defendants Defendant JPMorgan Chase & Co. is a financial holding company incorporated

under Delaware law. JPMorgan Chase & Co. is one of the largest banking institutions in the United States and is the ultimate owner of Defendants JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC (f/k/a J.P. Morgan Securities Inc.), J.P. Morgan Acceptance Corporation, I, and J.P. Morgan Acquisition Corp. JPMorgan Chase & Co. is also the

successor-in-interest to non-party The Bear Stearns Companies, Inc. 13. Defendant JPMorgan Chase Bank, N.A. is a national banking association, a

subsidiary of JPMorgan Chase & Co., and the sole owner of J.P. Morgan Acquisition Corp. Its main office is located in Columbus, Ohio. JPMorgan Chase Bank, N.A. is also the successorin-interest to Washington Mutual Bank. 14. Defendant J.P. Morgan Securities LLC (f/k/a J.P. Morgan Securities Inc.) is a

Delaware corporation with its principal place of business at 277 Park Avenue, New York, New

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York 10017. J.P Morgan Securities LLC is a SEC-registered broker-dealer that engages in investment banking activities in the U.S., and served as the underwriter for four of the securitizations at issue here. 15. Defendant J.P. Morgan Acquisition Corporation is a Delaware corporation with

its principal place of business at 270 Park Avenue, New York, New York 10017. J.P. Morgan Acquisition Corporation is a direct, wholly-owned subsidiary of JPMorgan Chase Bank, N.A, and served as the sponsor for three of the securitizations at issue here. 16. Defendant J.P. Morgan Acceptance Corporation I, is a Delaware corporation

with its principal executive offices at 270 Park Avenue, New York, New York 10017. J.P. Morgan Acceptance Corporation I is a direct, wholly-owned subsidiary of J.P. Morgan Securities Holdings LLC which, in turn, is a direct, wholly-owned subsidiary of JPMorgan Chase & Co. J.P. Morgan Acceptance Corporation I served as the depositor for three of the securitizations at issue here. 17. Defendants JPMorgan Chase & Co., JPMorgan Chase Bank, N.A., J.P. Morgan

Securities LLC, J.P. Morgan Acquisition Corporation, and J.P. Morgan Acceptance Corporation I are collectively hereinafter referred to as “JPMorgan.” 18. Non-party The Bear Stearns Companies, Inc. was, at all relevant times, a holding

company that provided investment banking, securities, and derivative trading services to its clients through its subsidiaries. The Bear Stearns Companies Inc. was the sole owner, at the time of the securitizations, of Bear Stearns & Co. Inc., Bear Stearns Asset Backed Securities I LLC, EMC Mortgage LLC (f/k/a EMC Mortgage Corporation), and Structured Asset Mortgage Investments II Inc. On March 16, 2008, The Bear Sterns Companies, Inc. entered into an agreement and plan of merger (the “Merger”) with JPMorgan Chase & Co., making The Bear Sterns Companies, Inc. a wholly-owned subsidiary of JPMorgan Chase & Co.
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19.

Defendant Bear Stearns & Co. Inc. was, at all relevant times, an SEC-registered

broker-dealer with its principal place of business at 383 Madison Avenue, New York, New York 10179. Bear Stearns & Co. Inc. was a wholly-owned subsidiary of The Bear Stearns Companies, Inc., and served as the underwriter for 31 of the securitizations at issue here. Bear Stearns & Co. Inc. directed the activities of its affiliates EMC Mortgage LLC, Structured Asset Mortgage Investments II Inc. and Bear Stearns Asset Backed Securities I LLC. On or about October 1, 2008, following the merger effective May 30, 2008, Bear Stearns & Co. Inc. merged with J.P. Morgan Securities LLC (a subsidiary of JPMorgan Chase & Co.), and is now doing business as J.P. Morgan Securities LLC. All allegations against Bear Stearns & Co. Inc. are thus made against its successor-in-interest, J.P. Morgan Securities LLC as well. 20. Defendant EMC Mortgage LLC (f/k/a EMC Mortgage Corporation) is

incorporated in Delaware and was, at all relevant times, a wholly-owned subsidiary of The Bear Stearns Companies, Inc. EMC Mortgage LLC served as sponsor for 19 of the securitizations at issue here. As a result of the merger between The Bear Stearns Companies, Inc. and JPMorgan Chase & Co., EMC Mortgage LLC became a wholly-owned subsidiary of JPMorgan Chase & Co. 21. Defendant Structured Asset Mortgage Investments II Inc. was, at all relevant

times, a Delaware corporation with its principal place of business at 383 Madison Avenue, New York., New York 10179. Structured Asset Mortgage Investments II Inc. was a wholly-owned subsidiary of The Bear Stearns Companies, Inc., and served as depositor for 18 of the securitizations at issue here. As a result of the merger between The Bear Stearns Companies, Inc. and JPMorgan Chase & Co., Structured Asset Mortgage Investments II Inc. became a wholly-owned subsidiary of JPMorgan Chase & Co.

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22.

Defendant Bear Stearns Asset Backed Securities I LLC was, at all relevant times,

a Delaware limited liability company and a limited purpose finance subsidiary of The Bear Stearns Companies, Inc., and an affiliate of Bear Stearns & Co., Inc. Bear Stearns Asset Backed Securities I LLC served as the depositor for three of the securitizations at issue here. As a result of the merger between The Bear Stearns Companies, Inc. and JPMorgan Chase & Co., Bear Stearns Asset Backed Securities I LLC became a wholly-owned subsidiary of JPMorgan Chase & Co. 23. Defendants Bear Stearns & Co. Inc., EMC Mortgage LLC, Structured Asset

Mortgage Investments II Inc., Bear Stearns Asset Backed Securities I LLC, J.P. Morgan Securities LLC (as successor-in-interest to Bear Stearns & Co., Inc.), and JPMorgan Chase & Co. (as successor-in-interest to The Bear Stearns Companies, Inc.), are collectively hereinafter referred to as “Bear Stearns.” 24. At all relevant times, Washington Mutual Bank was a federal savings association At the time of the

that provided financial services to consumer and commercial clients.

securitizations, Washington Mutual Bank was the sole owner of Defendants WaMu Asset Acceptance Corporation and WaMu Capital Corporation. Washington Mutual Bank was also the sponsor of two of the securitizations at issue here. On September 25, 2008, JPMorgan Chase Bank, N.A. entered into a purchase and assumption agreement (the “PAA”) with the FDIC, under which JPMorgan Chase Bank, N.A. agreed to assume substantially all of Washington Mutual Bank’s liabilities and purchase substantially all of Washington Mutual Bank’s assets including WaMu Asset Acceptance Corporation and WaMu Capital Corporation. As such, this action is brought against JPMorgan Chase Bank, N.A. as the successor to Washington Mutual Bank.

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25.

Defendant WaMu Capital Corporation was, at all relevant times, an SEC-

registered broker-dealer principally located at 1301 Second Avenue, WMC 3501A, Seattle, Washington 98101. WaMu Capital Corporation was a wholly-owned subsidiary of Washington Mutual Bank, and served as the underwriter for two of the securitizations at issue here. WaMu Capital Corporation is not currently affiliated with Washington Mutual Bank and is now a wholly-owned subsidiary of JPMorgan Chase Bank, N.A. 26. Defendant WaMu Asset Acceptance Corporation was, at all relevant times, a

wholly-owned subsidiary of Washington Mutual Bank and was principally located at 1301 Second Avenue, WMC 3501A, Seattle, Washington 98101. WaMu Asset Acceptance

Corporation served as the depositor for two of the securitizations at issue here. WaMu Asset Acceptance Corporation is not currently affiliated with Washington Mutual Bank and is now a wholly-owned subsidiary of JPMorgan Chase Bank, N.A, successor-in-interest to Washington Mutual Bank. 27. Defendants WaMu Capital Corporation, WaMu Asset Acceptance Corporation,

and JPMorgan Chase Bank, N.A. (as successor-in-interest to Washington Mutual Bank) are collectively hereinafter referred to as “WaMu.” IV. FACTUAL BACKGROUND UNDERLYING SEALINK’S CLAIMS A. 28. The Defendants’ RMBS Purchased By Sealink RMBS, such as the Defendants’ RMBS purchased by Sealink, provide the

RMBS investor with an interest in income generated by a pool of mortgages. The actual securities themselves represent a participating interest in an “issuing trust” that holds the mortgage loan pool. Although the structure and underlying collateral of the mortgages varies among the 37 offerings (and 43 tranches) of RMBS that Sealink purchased, they all function in a similar manner: The cash flows from the borrowers who make interest and principal payments

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on the individual mortgages comprising the mortgage pool are “passed through” to the certificate holders, like Sealink. Accordingly, failure by those borrowers to make their

mortgage payments directly impacts the returns Sealink earns on its investment. Moreover, a default resulting in foreclosure may cause the trust to sell the subject property at a loss – a risk that increases when the appraisals utilized in underwriting the loans overstated the value of the property that serves as collateral for the mortgage. For these reasons, the proper underwriting of the mortgages underlying the RMBS – including verifying the credit quality of the borrower and the value of the real estate – is essential to ensuring that the RMBS perform according to the representations made to investors like Sealink. 29. The first step in creating an RMBS is the acquisition by a “depositor” of an

inventory of loans from a “sponsor” or “seller,” which either originates the loans or acquires the loans from other mortgage originators, in exchange for cash. The type of loans in the inventory varies, and can include conventional, fixed-rate or adjustable-rate mortgage loans, secured by first liens, junior liens, or a combination of first and junior liens, with various lifetimes to maturity. The depositor then transfers, or deposits, the acquired pool of loans to an “issuing trust.” Although there can be more than one “sponsor” or “depositor” in a given securitization, in most of the Defendants’ RMBS purchased by Sealink, affiliates and/or subsidiaries of the Defendants acted as the “depositor” and “sponsor” of the securitization. 30. The depositor then securitizes the pool of loans in the issuing trust so that the

rights to the cash flows from the pool can be sold to investors. The securitization transactions are structured such that the risk of loss is divided among different levels of investment, or “tranches,” with each having a different level of risk and reward. Typically, losses on the underlying loans—whether due to default, delinquency, or otherwise—are generally applied in reverse order of seniority. As such, the most senior tranches of pass-through securities are rated
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by credit rating agencies as the best quality, or “AAA/Aaa.” Junior tranches, which usually obtained lower ratings, ranging from “AA/Aa” to “BB/Ba,” are less insulated from risk, but offer greater potential returns in the form of higher rates of interest. All of the Defendants’ RMBS purchased by Sealink were among the most senior, risk-averse tranches of the relevant offerings and were all rated “AAA/Aaa” by at least one credit rating agency at issuance and when purchased by Sealink. 31. Once the tranches are established, the issuing trust passes the securities back to

the depositor, which becomes the issuer of the RMBS. The depositor then passes the RMBS to the underwriter, which offers and sells the securities to Sealink and other investors in exchange for cash that is passed back to the depositor, less any fees collected by the underwriter. Typically, underwriters collect between 0.2% to 1.5% in discounts, concessions or commissions in serving as an underwriter of an RMBS securitization. By serving as a sponsor and depositor of the securitizations, the Defendants earned even more. 32. Defendants were involved in almost every step of the process of selling the

RMBS to Sealink. Sponsors such as EMC Mortgage Corporation, J.P. Morgan Mortgage Acquisition Corp. and Washington Mutual Bank provided warehouse financing to the originators that issued the mortgage loans, acquired the mortgage loans from the originators, and initiated the securitization of the mortgage loans into RMBS by transferring the loans to the relevant depositor, such as Structured Asset Mortgage Investments II Inc. The relevant

depositor, controlled by Defendants in most of the RMBS purchased by Sealink, obtained the mortgage loans from the relevant sponsor to place into the issuing trust for sale in privately negotiated transactions to investors like Sealink. Importantly, Defendants provided the

information that Sealink used to decide whether to purchase the securities.

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33.

Because the cash flow from the loans in the collateral pool of a securitization is

the source of funds to pay the holders of the RMBS issued by the trust, the credit quality of those securities depends upon the credit quality of the loans in the collateral pool. The most important information about the credit quality of the loans is contained in the “loan files” that the mortgage originator develops while making the loans. For residential mortgage loans, each loan file normally contains documents including: the borrower’s application for the loan; verification of the borrower’s income, assets, and employment; references; credit reports on the borrower; an appraisal of the property that will secure the loan and provide the basis for important measures of credit quality, such as loan-to-value ratios. 34. The collateral pool of loans for each securitization usually includes thousands of

loans. Instead of each potential investor reviewing thousands of loan files, Defendants, in their roles as a sponsor and underwriter of the securitization, is responsible for gathering, verifying and presenting to potential investors accurate and complete information about the credit quality and characteristics of the loans that are deposited into the trust. Indeed, the single most important factors for Sealink—and, for any investor—in purchasing Defendants’ RMBS were: (1) the ability of the underlying borrowers to repay their mortgages; (2) the ability for the trust to recover its losses in case of default by ensuring the properties were appropriate collateral for the loans and were accurately valued; and (3) the rate of interest received on the RMBS. The loan files themselves are not provided or available to RMBS investors like Sealink, who must instead rely upon Defendants’ representations about the mortgages underlying the RMBS and the process used to select and review those loans. 35. As noted, all of the Defendants’ RMBS purchased by Sealink were rated triple-A

at issuance, as set forth below:

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1  2  3  4  5 

Offering &  Tranche  AABST  2005‐5 1A3  AHM  2005‐4 3A1  AHM  2006‐3 11A2  BALTA  2005‐9 11A1  BALTA  2006‐1 11A1 

Original  Top Three Expenditure  Originators  $51,315,000 Aegis Mortgage Corporation   $75,000,000 American Home Mortgage       Investment Corp.   $50,000,000 American Home Mortgage       Investment Corp.  $80,000,000 EMC Mortgage Company   Countrywide Home Loans  $44,690,000 EMC Mortgage Corporation    GMAC Mortgage Corporation    Bear Stearns Residential        Mortgage Corporation   $57,500,000 EMC Mortgage Company   $75,000,000 EMC Mortgage Company   Countrywide Home Loans  $80,000,000 EMC Mortgage Company   Countrywide Home Loans  $50,000,000 EMC Mortgage Company   Mid America Bank fsb  $80,000,000 Bear Stearns Residential Mortgage   EMC Mortgage Company  $23,000,000 Bear Stearns Residential Mortgage   EMC Mortgage Company  $69,986,328 EMC Mortgage Company   Bear Stearns Residential Mortgage  $50,416,151 EMC Mortgage Company   Bear Stearns Residential Mortgage  $30,209,357 Encore Credit Corporation   $60,000,000 Encore Credit Corporation   Opteum Financial Services LLC  $93,977,000 Impac Funding Corporation   $152,000,00 EMC Mortgage Company   0  Bear Stearns Residential Mortgage   $51,418,000 EMC Mortgage Company   Bear Stearns Residential Mortgage   $57,293,000 Bear Stearns Residential Mortgage   EMC Mortgage Company   $29,888,000 EMC Mortgage Company   Bear Stearns Residential Mortgage   $12,718,000 Bear Stearns Residential Mortgage   EMC Mortgage Company  

Initial 
Moody's Fitch  S&P 

Current
Moody's  Fitch  S&P 

Aaa  AAA  AAA  Baa3  Aaa  Aaa  Aaa  Aaa              AAA  Caa3  AAA  C 

B             

AA+/ *‐ B  CC  CCC  CCC 

AAA  Caa3  AAA  Caa2 

BALTA  2006‐3 1A1  7  BALTA  2006‐4 11A1  8  BALTA  2006‐5 1A1  9  BALTA  2006‐8 1A2  10  BALTA  2007‐2 1A1  11  BALTA  2007‐2 1A2  12  BALTA  2007‐3 1A1  13  BALTA  2007‐3 1A2  14  BMAT  2006‐1A A2  15  BSABS  2006‐HE3 A2  16  BSABS  2006‐IM1 A1  17  BSMF  2006‐AR2  1A2G  18  BSMF  2006‐AR3  1A2G  19  BSMF  2006‐AR3  2A2G  20  BSMF  2006‐AR5  1A3  21  BSMF  2007‐AR1  1A3 

Aaa  Aaa  Aaa  Aaa  Aaa  Aaa  Aaa  Aaa  Aaa  Aaa  Aaa  Aaa 

                                   

AAA  AAA  AAA  AAA  AAA  AAA  AAA  AAA 

Ca  Ca  Ca  C  Ca  C  Ca  C 

                                   

CCC  CC  D  D  CC  D  CC  D  BBB  BB+  D  CC 

AAA  Aa3  AAA  Ba2  AAA  AAA  Ca  C 

Aaa 

  

AAA 

  

CCC 

Aaa 

  

AAA 

  

CCC 

Aaa 

  

AAA 

  

Aaa 

  

AAA 

  

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Offering &  Tranche  22  BSMF  2007‐AR4  G1A3  23  BSMF  2007‐AR4  G2AB  24  BSMF  2007‐AR5  1A1G  25  BSMF  2007‐AR5  1A2G  26  CARR  2006‐OPT1  A3  27  CWL  2005‐AB4  2A3  28  GPMF  2005‐AR5  3A1  29  IMSA  2006‐5 1A1C  30  IMSA  2007‐2 1A1B  31  IMSA  2007‐3 A1B  32  JPALT  2007‐A1 1A4  33  JPALT  2007‐A2  12A1 

Original  Top Three Expenditure  Originators  $45,936,000 Bear Stearns Residential Mortgage   EMC Mortgage Company   $50,000,000 Bear Stearns Residential Mortgage   EMC Mortgage Company   $50,000,000 Bear Stearns Residential Mortgage   EMC Mortgage Company   Quicken Loans, Inc  $50,000,000 Bear Stearns Residential Mortgage   EMC Mortgage Company   Quicken Loans, Inc  $42,000,000 Option One Mortgage Corporation  

Initial 
Moody's Fitch  S&P 

Current
Moody's  Fitch  S&P 

Aaa 

  

AAA 

  

CC 

Aaa 

  

AAA 

  

CCC 

Aaa 

  

AAA  Caa2 

  

B+ 

Aaa 

  

AAA 

  

CCC 

Aaa  AAA  AAA  Ba3  CCC 

AA 

$45,000,000 Countrywide Home Loans  

Aaa 

  

AAA  Caa3 

  

CCC 

$57,715,000 GreenPoint Mortgage Funding, Inc.  

Aaa 

  

AAA 

Ca 

  

CCC 

$50,000,000 Impac Funding Corporation   American Home  Mortgage  $55,000,000 Impac Funding Corporation  $40,500,000 Impac Funding Corporation   $42,736,000 Chase Originators    Greenpoint Mortgage Funding    Countrywide Home Loans Inc.   $50,000,000 Chase    American Home Mortgage Corp.    Greenpoint Mortgage Funding       $40,000,000 Fremont Investment & Loan  

Aaa  Aaa  Aaa  Aaa 

           

CC 

Caa3 

           

CC  CC  CCC  D 

AAA  Caa2  AAA  Caa3  AAA  C 

Aaa  AAA  AAA 

Ca 

CCC 

34 

JPMAC  2006‐FRE2  A3  35  LUM  $60,000,000 EMC Mortgage Corp.    2005‐1 A1  Countrywide Home Loans        Servicing LP    PHH Mortgage Corp   36  LUM  $24,425,000 American Home Mortgage Corp.   2006‐7 2A3  IndyMac Bank, FSB  37  NHELI  $20,000,000 First National Bank of Nevada   2007‐1 1A4  38  SAMI  $156,058,00 Countrywide Home Loans   2006‐AR8  0  SouthStar Funding LLC   A4CG  39  SAMI  $50,000,000 Countrywide Home Loans   2007‐AR3  G14B 

Aaa  AAA  AAA  Ba3  CCC 

B‐ 

Aaa 

  

AAA  Caa3 

  

CCC 

Aaa  Aaa  Aaa 

        

AAA  AAA  AAA 

C  Ca  C 

        

D  CCC  CCC 

Ba1 

  

AAA 

  

CCC 

13

40 

41 

42 

43 

Offering &  Tranche  SAMI  2007‐AR3  G23B  SGMS  2006‐FRE2  A2D  WMHE  2007‐HE1  2A4  WMHE  2007‐HE4  2A3 

Original  Top Three Expenditure  Originators  $53,323,000 Aegis Mortgage Corporation   Opteum Financial Services LLC   $65,000,000 Fremont Investment & Loan  

Initial 
Moody's Fitch  S&P 

Current
Moody's  Fitch  S&P 

Aaa 

  

AAA 

  

CC 

Aaa  AAA  AAA 

Ca 

CCC 

$37,625,000 Long Beach Mortgage Company  

Aaa 

  

AAA 

Ca 

  

CCC 

$20,000,000 Washington Mutual Bank  

Aaa 

  

AAA 

Ca 

  

CCC 

B. 37.

Defendants’ Activities In The Subprime Mortgage Arena Defendants’ activities as a buyer, financer and securitizer of residential mortgage

loans have been the focus of numerous government investigations and prosecutions as well as private investor lawsuits. 38. Defendants’ activities were integral to the growth and proliferation of high-risk Mortgage originators generated profits

mortgages that contributed to the financial crisis.

primarily through the sale of their loans to investment banks like Defendants, and the originators were therefore driven to originate and sell as many loans as possible. Increased demand for mortgages by banks like Defendants, which, as noted above, were competing to sell mortgage-backed products, led to increased volume in mortgage originations. That increased volume, in turn, led to a decrease in the gain-on-sale margins that mortgage originators received from selling pools of loans. As a result, originators began to borrow money from the same large banks that were buying their mortgages in order to fund the origination of even more mortgages. 39. One of the principal ways originators obtained such capital was by establishing a

warehouse line of credit with an investment bank. The line of credit, in turn, would be secured by the very mortgage loans that the investment bank would purchase for securitization.

14

Investment banks, such as Defendants, earned fees and interest income on those warehouse lines of credit. C. 40. Defendants’ Role Was To Ensure The Quality Of The Loans Backing The RMBS Defendants and the mortgage originators utilized two methods to securitize

mortgages into RMBS for sale to investors. Specifically, the originators aggregated the loans into pools and would either (1) deposit them into a trust that would issue RMBS backed by the loans (referred to herein as an “originator securitization”), or (2) sell the loan pools to an investment bank, and the investment bank would then deposit the securities into a trust that would issue securities backed by the loans (“principal securitization”). Under the first

approach, Defendants profited by the fees they received by serving as an underwriter of the securities issued by the originator. Under the second approach, referred to herein as a “principal securitization” because the investment bank is securitizing the loans on its own behalf, Defendants profited off of the difference in the price it paid for the loan pools it purchased from the originator and that which it received from the sale of those loans as RMBS. 41. Most of the RMBS purchased by Sealink at issue in this action were securitized

through principal securitization, whereby Defendants would first purchase loan pools originated by third-party originators and/or loan sellers and then sell those loans into the RMBS trust as the sponsor of a mortgage securitization. Some investors prefer principal securitizations to

originator securitizations because the involvement of a sophisticated investment bank throughout the securitization process indicates a higher degree of oversight and due diligence on the mortgages being selected for inclusion in the RMBS.

15

42.

Indeed, Defendants routinely used an outside third-party due diligence provider,

Clayton Holdings, Inc. (“Clayton”), to perform due diligence on the pools of mortgages that Defendants would securitize. 43. Specifically, before purchasing loans from an originator in a principal

securitization, Defendants would perform due diligence on the mortgage loan pools by examining three areas—credit, compliance and valuation. First, credit diligence examined a sampling of the individual loans in a given loan pool to assess their quality and compliance with the underwriting guidelines of the originator. An originator’s underwriting guidelines are a critical tool for investors to evaluate the risk of default on the loans that serve as collateral for RMBS. Prudent lending standards—as articulated in an originator’s underwriting guidelines— are addressed in numerous federal guidance statements requiring that federally-regulated institutions adopt well-defined underwriting parameters such as acceptable loan-to-value ratios, debt-to-income ratios, and minimum acceptable credit scores.1 Those federal standards have been adopted by the subprime industry as a whole through substantially similar guidance published by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators. These standards are intended not only to protect borrowers to ensure that they can repay their loans, but also to ensure the safety and soundness of individual lending institutions and the financial system as a whole. Second, compliance diligence focused on whether the loans were originated in compliance with state, federal and local laws, including predatory lending and truth-in-lending statutes. Third, valuation diligence checked the accuracy of the originator’s reported property valuations of the collateral backing the loans.
1

In a

See, e.g., 12 C.F.R. Part 34, subpart D (Office of the Comptroller of Currency standards); 12 C.F.R. Part 208, subpart C (Board of Governors of the Federal Reserve standards); 12 C.F.R. Part 365 (Federal Deposit Insurance Corporation standards); 12 C.F.R. 560.100 and 12 C.F.R. 560.101 (Office of Thrift Supervision standards); and 12 CFR 701.21 (National Credit Union Administration standards).
16

principal securitization, this due diligence provides comfort to investors that Defendants has ensured that only mortgages that conform to the requirements of the RMBS at issue are being securitized. 44. In truth, Defendants routinely ignored the pervasive defects that their due

diligence identified in the loans they had purchased for securitization. Defendants deliberately concealed these defects from Sealink and other investors in order to increase their own profits, preserve their ongoing business relationships with the RMBS originators, and move risk from their own balance sheet onto investors. Instead, as discussed in further detail below, Defendants used their asymmetrical informational advantage to reap illicit profits. D. 45. Factors Impacting The Quality Of The Defendants’ RMBS Federal regulators have long recognized the importance of sound lending and

have for years issued guidance on subprime mortgage products to ensure that borrowers are able to repay their loans. For example, the 1993 Interagency Guidelines for Real Estate Lending, issued jointly by the Board of Governors of the Federal Reserve System (Defendants’ primary federal regulator), the Office of the Comptroller of the Treasury, the Federal Depository Insurance Commission, the Office of Thrift Supervision, and the National Credit Union Administration, provided that prudently underwritten real estate loans (subprime or otherwise) “should reflect all relevant credit factors, including . . . the capacity of the borrower, or income from the underlying property, to adequately service the debt.” Federal regulators responded to the growth of newer subprime products with enhanced guidance in 1999, warning that if risks associated with subprime lending were “not properly controlled, the agencies consider subprime lending a high-risk activity that is unsafe and unsound.”

17

46.

The 1999 guidance recognized the critical role that banks such as Defendants,

which comprised the primary market for the sale of subprime loans, played in dictating and enforcing underwriting standards for subprime mortgage lending: Institutions should not accept loans from originators that do not meet their underwriting criteria, and should regularly review loans offered to ensure that loans purchased continue to meet those criteria. Deterioration in the quality of purchased loans or in the portfolio’s actual performance versus expectations requires a thorough reevaluation of the lenders or dealers who originated or sold the loans, as well as a reevaluation of the institution’s criteria for underwriting loans and selecting dealers and lenders. Any such deterioration may also highlight the need to modify or terminate the correspondent relationship or make adjustments to underwriting and dealer/lender selection criteria. 47. The guidance also required that “institutions . . . perform an ongoing analysis of

subprime loans,” “have information systems in place to segment and stratify their portfolio (e.g., by originator, loan-to-value, debt-to-income ratios, credit scores) and produce reports for management to evaluate the performance of subprime loans,” determine “whether performance meets expectations,” and “consider the source and characteristics of loans that do not meet expectations and make changes in their underwriting policies and loan administration procedures to restore performance to acceptable levels.” 48. Indeed, the fundamental basis upon which RMBS are valued is the ability of the

borrowers to repay the principal and interest on the underlying loans and the adequacy of the collateral. Thus, proper loan underwriting is critical to assessing the borrowers’ ability to repay the loans, and a necessary consideration when purchasing and pooling loans. If the loans pooled in the RMBS suffer defaults and delinquencies in excess of the assumptions built into the certificate payment structure, RMBS investors suffer losses because of the diminished cash flow into the RMBS.

18

49.

Likewise, independent and accurate appraisals of the collateralized real estate are

essential to ensure that the mortgage or home equity loan can be satisfied in the event of a default and foreclosure on a particular property. An accurate appraisal is necessary to determine the likely price at which the foreclosed property can be sold and, thus, the amount of money available to pass through to certificate holders. 50. An accurate appraisal is also critical to calculating the loan-to-value (“LTV”)

ratio, which is a financial metric commonly used to evaluate the price and risk of RMBS. The LTV ratio expresses the amount of mortgage or loan as a percentage of the appraised value of the collateral property. For example, if a borrower seeks to borrow $90,000 to purchase a home worth $100,000, the LTV ratio is equal to $90,000 divided by $100,000, or 90%. If, however, the appraised value of the house has been artificially inflated to $100,000 from $90,000, the real LTV ratio would be 100% ($90,000 divided by $90,000). The term combined loan-to-value ratio (“CLTV”) applies to the situation in which more than one loan is secured by a particular property. For example, a property valued at $100,000 with a single mortgage of $50,000 has an LTV of 50%. A similar property with a value of $100,000 with a first mortgage of $50,000 and a second lien mortgage of $25,000 has an aggregate mortgage balance of $75,000, and a CLTV of 75%. 51. From an investor’s perspective, a high LTV or CLTV ratio represents a greater

risk of default on the loan. First, borrowers with a small equity position in the underlying property have “less to lose” in the event of a default. Second, even a slight drop in housing prices might cause a loan with a high LTV ratio to exceed the value of the underlying collateral, which might cause the borrower to default and would prevent the issuing trust from recouping its expected return in the case of foreclosure and subsequent sale of the property.

19

52.

Consequently, the LTV ratios of the loans underlying the RMBS are important to

investors’ assessment of the value of such RMBS. Prospectuses typically provide information regarding the LTV ratios, and even guarantee certain LTV ratio limits for the loans that will support the RMBS. Each of the prospectus supplements expressly stated, in sum or substance, that none of the mortgage loans have loan-to-value ratios at origination, or with respect to second-lien mortgages, combined loan-to-value ratios at origination, in excess of 100%. As discussed below, this representation was false because a substantial portion of the loans purchased and securitized by Defendants had LTVs and CLTVs that exceeded 100% as calculated under independent property valuations obtained by Defendants. 53. Another important metric when considering a borrower’s ability to repay a loan is

a borrower’s debt-to-income ratio, or DTI, which reflects the increased risk that borrowers whose debt is relatively high compared to their income will default on their loans. While a borrower’s current DTI is good measure of his or her capacity to repay a fixed rate mortgage, other loan products, such as adjustable rate mortgages (“ARMs”), have initial “teaser” rates that reset at much higher index rates after a certain period. A “fully indexed rate” accounts for this interest rate reset, and represents the interest rate over the life of the loan, calculated by adding the index rate at origination and the margin that a lender adds to the index rate after the initial “teaser” period. For example, if the current index rate is 2.5%, and if the margin on a particular loan is 3%, the fully indexed rate on that loan is 5.5%. Because the fully indexed rate accounts for the current value of the interest rate index used by an ARM, it is a better measure of a borrower’s ability to repay the loan. 54. In 2006, the interagency regulators, responding to the explosive growth of non-

traditional mortgage products, provided revised guidance explicitly addressing how institutions should calculate a borrower’s DTI. Specifically, the underwriting guidelines state that “[w]hen
20

an institution offers nontraditional mortgage loan products, underwriting standards should address the effect of a substantial payment increase on the borrower’s capacity to repay when loan amortization begins.” Moreover, according to the guidance: For all nontraditional mortgage loan products, an institution’s analysis of a borrower’s repayment capacity should include an evaluation of their ability to repay the debt by final maturity at the fully indexed rate, assuming a fully amortizing repayment schedule. In addition, for products that permit negative amortization, the repayment analysis should be based upon the initial loan amount plus any balance increase that may accrue from the negative amortization provision.2 55. The federal guidance thus served to provide assurance to investors that

investments in instruments backed by subprime mortgages could be safe and conservative products so long as the underlying loans were properly underwritten and scrutinized. Indeed, the federal guidance made clear that heightened attention to and rigorous compliance with strict underwriting standards was critical for institutions engaged in subprime lending due to the unique risks posed by that borrower population. As regulators made clear, in the context of RMBS such as those purchased by Sealink here, representations concerning underwriting guidelines, appraisals, LTVs and DTIs were paramount. V. THE OFFERING MATERIALS MISREPRESENTED THE UNDERWRITING AND QUALITY OF THE LOANS BACKING THE DEFENDANTS’ RMBS 56. Contrary to the statements in the Offering Materials and other communications by

Defendants used to solicit Sealink’s investment in the RMBS, the originators whose loans served as collateral for Sealink’s investments routinely and egregiously violated their stated underwriting guidelines. As a result, the mortgages they originated and sold to Defendants for securitization presented a materially higher risk to investors than represented by Defendants in the Offering Materials.
2

All emphasis added unless otherwise indicated.
21

57.

For example, the BALTA 2005-9 prospectus supplement described EMC

Mortgage Corporation’s underwriting standards, in relevant part, as follows: The EMC mortgage loans have either been originated or purchased by an originator and were generally underwritten in accordance with the standards described herein. Exceptions to the underwriting guidelines are permitted when the seller’s performance supports such action and the variance request is approved by credit management. Such underwriting standards are applied to evaluate the prospective borrower’s credit standing and repayment ability and the value and adequacy of the mortgaged property as collateral. These standards are applied in accordance with the applicable federal and state laws and regulations. Exceptions to the underwriting standards are permitted where compensating factors are present and are managed through a formal exception process. 58. Further, like the other originators whose loans backed the Defendants’ RMBS

purchased by Sealink, the Offering Materials described the documentation that EMC purportedly required prospective borrowers to produce in order to properly obtain a mortgage loan. For example, the BALTA 2005-9 prospectus supplement stated, in relevant part, as follows: Generally, each mortgagor will have been required to complete an application designed to provide to the lender pertinent credit information concerning the mortgagor. The mortgagor will have given information with respect to its assets, liabilities, income (except as described below), credit history, employment history and personal information, and will have furnished the lender with authorization to obtain a credit report which summarizes the mortgagor’s credit history. 59. The Offering Materials also provided information regarding the appraisal For example, the BALTA 2006-1

standards and practices employed by the Defendants.

prospectus supplement described EMC Mortgage Corporation’s appraisal practices as follows: Each mortgaged property relating to an EMC mortgage loan has been appraised by a qualified independent appraiser who is approved by each lender. All appraisals are required to conform to the Uniform Standards of Professional Appraisal Practice
22

adopted by the Appraisal Standard Board of the Appraisal Foundation. Each appraisal must meet the requirements of Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac require, among other things, that the appraiser, or its agent on its behalf, personally inspect the property inside and out, verify whether the property was in good condition and verify that construction, if new, had been substantially completed. The appraisal generally will have been based on prices obtained on recent sales of comparable properties, determined in accordance with Fannie Mae and Freddie Mac guidelines. In certain cases an analysis based on income generated from the property or a replacement cost analysis based on the current cost of constructing or purchasing a similar property may be used. 60. These statements of material fact, and materially similar statements appearing in

all of the Defendants’ RMBS Offering Materials, were false and misleading when made because the originators discussed below failed to adhere to their established underwriting standards. Indeed, the reckless practices of the mortgage originators whose loans backed the Defendants’ RMBS rendered numerous statements concerning the originator’s guidelines, the LTV ratios, property appraisal values, and the credit ratings assigned to the RMBS materially false and misleading. As such, the riskiness of the loans underlying the RMBS purchased by Sealink, and thus the true risk profile of the RMBS was materially misrepresented. Through Defendants’ intimate knowledge of the originators’ underwriting practices gleaned through its warehouse lending relationships with some of the most prominent originators that provided the loans backing the RMBS, Defendants knew of these violations, and concealed them from Sealink. A. 61. EMC Violated Its Underwriting Guidelines EMC was one of the primary mortgage originators of the loans backing Sealink’s

Bear Stearns-related RMBS investments. The Offering Materials relied upon by Sealink in purchasing the RMBS backed by loans originated by EMC contained false and misleading statements of material fact regarding its underwriting practices and guidelines. For example,

23

the BALTA 2007-2 prospectus supplement described EMC’s underwriting guidelines, in relevant part, as follows: The EMC mortgage loans have either been originated or purchased by an originator and were generally underwritten in accordance with the standards described herein. Exceptions to the underwriting guidelines are permitted when the seller’s performance supports such action and the variance request is approved by credit management. Such underwriting standards are applied to evaluate the prospective borrower’s credit standing and repayment ability and the value and adequacy of the mortgaged property as collateral. These standards are applied in accordance with the applicable federal and state laws and regulations. Exceptions to the underwriting standards are permitted where compensating factors are present and are managed through a formal exception process. 62. The Offering Materials relied upon by Sealink also contained misstatements of

material fact concerning the documentation that EMC’s prospective borrowers were purportedly required to submit in order to properly obtain a mortgage loan. For example, the BALTA 20072 prospectus supplement represented, in relevant part, as follows: Generally, each mortgagor will have been required to complete an application designed to provide to the lender pertinent credit information concerning the mortgagor. The mortgagor will have given information with respect to its assets, liabilities, income (except as described below), credit history, employment history and personal information, and will have furnished the lender with authorization to obtain a credit report which summarizes the mortgagor’s credit history. 63. These statements were false and misleading when made. In fact, EMC

systematically disregarded a borrower’s ability to pay when originating or acquiring loans, without regard to any “compensating factors.” 64. The Offering Materials for the BALTA 2007-2 used to solicit Sealink’s purchase

of Bear Stearns RMBS backed by EMC-originated loans also represented that EMC ensured

24

proper appraisals when issuing loans to borrowers. prospectus supplement explained that:

For example, the BALTA 2007-2

Each mortgaged property relating to an EMC mortgage loan has been appraised by a qualified independent appraiser who is approved by each lender. All appraisals are required to conform to the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standard Board of the Appraisal Foundation. Each appraisal must meet the requirements of Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac require, among other things, that the appraiser, or its agent on its behalf, personally inspect the property inside and out, verify whether the property was in good condition and verify that construction, if new, had been substantially completed. The appraisal generally will have been based on prices obtained on recent sales of comparable properties, determined in accordance with Fannie Mae and Freddie Mac guidelines. In certain cases an analysis based on income generated from the property or a replacement cost analysis based on the current cost of constructing or purchasing a similar property may be used. 65. These statements were false and misleading when made. In order to increase

loan origination volume, EMC routinely originated or acquired mortgages that were issued utilizing biased appraisers and used inflated appraisals as a matter of course to issue loans to borrowers who would not otherwise qualify for the mortgage. B. 66. Countrywide Violated Its Underwriting Guidelines Countrywide originated a substantial percentage of the loans in several of the

Defendants’ RMBS purchased by Sealink. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding Countrywide’s underwriting standards and practices. For example, the prospectus supplement for the BALTA 2006-4 RMBS

represented Countrywide’s underwriting guidelines, in relevant part, as follows: As part of its evaluation of potential borrowers, Countrywide Home Loans generally requires a description of income. If required by its underwriting guidelines, Countrywide Home Loans obtains employment verification providing current and historical income information and/or a telephonic employment

25

confirmation. Such employment verification may be obtained, either through analysis of the prospective borrower’s recent pay stub and/or W-2 forms for the most recent two years, relevant portions of the most recent two years’ tax returns, or from the prospective borrower’s employer, wherein the employer reports the length of employment and current salary with that organization. Self-employed prospective borrowers generally are required to submit relevant portions of their federal tax returns for the past two years. * * *

Countrywide Home Loans’ underwriting standards are applied by or on behalf of Countrywide Home Loans to evaluate the prospective borrower’s credit standing and repayment ability and the value and adequacy of the mortgaged property as collateral. Under those standards, a prospective borrower must generally demonstrate that the ratio of the borrower’s monthly housing expenses (including principal and interest on the proposed mortgage loan and, as applicable, the related monthly portion of property taxes, hazard insurance and mortgage insurance) to the borrower’s monthly gross income and the ratio of total monthly debt to the monthly gross income (the “debt-to-income” ratios) are within acceptable limits. . . . Exceptions to Countrywide Home Loans’ underwriting guidelines may be made if compensating factors are demonstrated by a prospective borrower. * * *

The nature of the information that a borrower is required to disclose and whether the information is verified depends, in part, on the documentation program used in the origination process. In general under the Full Documentation Loan Program (the “Full Documentation Program”), each prospective borrower is required to complete an application which includes information with respect to the applicant’s assets, liabilities, income, credit history, employment history and other personal information. Self-employed individuals are generally required to submit their two most recent federal income tax returns. Under the Full Documentation Program, the underwriter verifies the information contained in the application relating to employment, income, assets and mortgages. * * *

Except with respect to the mortgage loans originated pursuant to its Streamlined Documentation Program, whose values were confirmed with a Fannie Mae proprietary automated valuation
26

model, Countrywide Home Loans obtains appraisals from independent appraisers or appraisal services for properties that are to secure mortgage loans. The appraisers inspect and appraise the proposed mortgaged property and verify that the property is in acceptable condition. Following each appraisal, the appraiser prepares a report which includes a market data analysis based on recent sales of comparable homes in the area and, when deemed appropriate, a replacement cost analysis based on the current cost of constructing a similar home. All appraisals are required to conform to Fannie Mae or Freddie Mac appraisal standards then in effect. 67. These statements were false and misleading when made in that they

misrepresented that Countrywide: (i) systematically failed to follow its stated underwriting standards; (ii) allowed pervasive exceptions to its stated underwriting standards in the absence of compensating factors; (iii) disregarded credit quality in favor of generating increased loan volume; and (iv) violated its stated appraisal standards and in many instances materially inflated the values of the underlying mortgage properties in the loan origination and underwriting process. C. 68. American Home Violated Its Underwriting Guidelines American Home originated a substantial percentage of the loans for several of the

RMBS purchased by Sealink. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding American Home’s underwriting standards and practices. For example, the prospectus supplement for the AHM 2005-4 RMBS described American Home’s underwriting guidelines, in relevant part, as follows: American Home’s underwriting philosophy is to weigh all risk factors inherent in the loan file, giving consideration to the individual transaction, borrower profile, the level of documentation provided and the property used to collateralize the debt. Because each loan is different, American Home expects and encourages underwriters to use professional judgment based on their experience in making a lending decision.

27

American Home underwrites a borrower’s creditworthiness based solely on information that American Home believes is indicative of the applicant’s willingness and ability to pay the debt they would be incurring. * * *

In addition to reviewing the borrower’s credit history and credit score, American Home underwriters closely review the borrower’s housing payment history. In general, for non-conforming loans the borrower should not have made any mortgage payments over thirty days after the due date for the most recent twelve months. In general, for Alt-A loans the borrower may have no more than one payment that was made over thirty days after the due date for the most recent twelve months. * * *

Every American Home mortgage loan is secured by a property that has been appraised by a licensed appraiser in accordance with the Uniform Standards of Professional Appraisal Practice of the Appraisal Foundation. The appraisers perform on site inspections of the property and report on the neighborhood and property condition in factual and specific terms. Each appraisal contains an opinion of value that represents the appraiser’s professional conclusion based on market data of sales of comparable properties, a logical analysis with adjustments for differences between the comparable sales and the subject property and the appraiser’s judgment. In addition, each appraisal is reviewed for accuracy and consistency by an American Home underwriter or a mortgage insurance company contract underwriter. * * *

American Home realizes that there may be some acceptable quality loans that fall outside published guidelines and encourages “common sense” underwriting. Because a multitude of factors are involved in a loan transaction, no set of guidelines can contemplate every potential situation. Therefore, each case is weighed individually on its own merits and exceptions to American Home’s underwriting guidelines are allowed if sufficient compensating factors exist to offset any additional risk due to the exception. 69. The above statements of material fact were false and misleading when they were

made because they misrepresented that American Home: (i) systematically failed to follow its
28

own underwriting guidelines; (ii) allowed pervasive exceptions to its underwriting standards in the absence of qualifying compensating factors; (iii) disregarded credit quality to meet the demand for loans to securitize into RMBS; and (iv) violated its stated appraisal standards, and, in many instances, materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. D. 70. Fremont Violated Its Underwriting Guidelines Fremont originated a substantial percentage of the loans for several of the RMBS

purchased by Sealink. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding Fremont’s underwriting standards and practices. For

example, the prospectus supplement for the JPMAC 2006-FRE2 RMBS described Fremont’s underwriting guidelines, in relevant part, as follows: Mortgage loans are underwritten in accordance with Fremont’s current underwriting programs, referred to as the Scored Programs (“Scored Programs”), subject to various exceptions as described in this section. Fremont began originating mortgage loans pursuant to Scored Programs in 2001. Fremont’s underwriting guidelines are primarily intended to assess the ability and willingness of the borrower to repay the debt and to evaluate the adequacy of the mortgaged property as collateral for the mortgage loan. * * *

All of the mortgage loans were underwritten by Fremont’s underwriters having the appropriate approval authority. Each underwriter is granted a level of authority commensurate with their proven judgment, experience and credit skills. On a case by case basis, Fremont may determine that, based upon compensating factors, a prospective mortgagor not strictly qualifying under the underwriting risk category guidelines described below is nonetheless qualified to receive a loan, i.e., an underwriting exception. Compensating factors may include, but are not limited to, low loan-to -value ratio, low debt to income ratio, substantial liquid assets, good credit history, stable employment and time in residence at the applicant’s current address. It is expected that a substantial portion of the mortgage loans may represent such underwriting exceptions.

29

*

*

*

Fremont’s underwriting guidelines are applied in accordance with a procedure which complies with applicable federal and state laws and regulations and require an appraisal of the mortgaged property, and if appropriate, a review appraisal. Generally, initial appraisals are provided by qualified independent appraisers licensed in their respective states. Review appraisals may only be provided by appraisers approved by Fremont. In some cases, Fremont relies on a statistical appraisal methodology provided by a third-party. Qualified independent appraisers must meet minimum standards of licensing and provide errors and omissions insurance in states where it is required to become approved to do business with Fremont. Each uniform residential appraisal report includes a market data analysis based on recent sales of comparable homes in the area and, where deemed appropriate, replacement cost analysis based on the current cost of constructing a similar home. The review appraisal may be a desk review, field review or an automated valuation report that confirms or supports the original appraiser’s value of the mortgaged premises. * * *

Fremont conducts a number of quality control procedures, including a post-funding review as well as a full reunderwriting of a random selection of loans to assure asset quality. Under the funding review, all loans are reviewed to verify credit grading, documentation compliance and data accuracy. Under the asset quality procedure, a random selection of each month’s originations is reviewed. The loan review confirms the existence and accuracy of legal documents, credit documentation, appraisal analysis and underwriting decision. A report detailing review findings and level of error is sent monthly to each loan production office for response. The review findings and branch responses are then reviewed by Fremont’s senior management. Adverse findings are tracked monthly. This review procedure allows Fremont to assess programs for potential guideline changes, program enhancements, appraisal policies, areas of risk to be reduced or eliminated and the need for additional staff training. 71. The above statements of material fact were false and misleading when made

because, in truth, Fremont: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions

30

to its underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. E. 72. Washington Mutual Bank Violated Its Underwriting Guidelines Washington Mutual Bank (“WaMu Bank”) originated or acquired a substantial

percentage of the loans for several of the RMBS purchased by Sealink. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding WaMu Bank’s underwriting standards and practices. For example, the prospectus supplement for the WMHE 2007-HE1 RMBS described WaMu Bank’s underwriting guidelines, in relevant part, as follows: All of the mortgage loans owned by the trust have been, or will be, originated by the sponsor through wholesale brokers or reunderwritten upon acquisition from correspondents by the sponsor generally in accordance with the WMB sub-prime underwriting standards described in this section. The WMB sub-prime underwriting standards are primarily intended to evaluate the prospective borrower’s credit standing and repayment ability as well as the value and adequacy of the mortgaged property as collateral. * * *

Prospective borrowers are required to complete a standard loan application in which they provide financial information regarding the amount of income and related sources, liabilities and related monthly payments, credit history and employment history, as well as certain other personal information. During the underwriting or re-underwriting process, the sponsor reviews and verifies the prospective borrower’s sources of income (only under the full documentation residential loan program), calculates the amount of income from all such sources indicated on the loan application, reviews the credit history and credit score(s) of the prospective borrower and calculates the debt-to-income ratio to
31

determine the prospective borrower’s ability to repay the loan, and determines whether the mortgaged property complies with the WMB sub-prime underwriting standards. * * *

The adequacy of the mortgaged property as collateral is generally determined by an appraisal of the mortgaged property that generally conforms to Fannie Mae and Freddie Mac appraisal standards and a review of that appraisal. The mortgaged properties are appraised by licensed independent appraisers who have satisfied the servicer’s appraiser screening process. In most cases, properties in below average condition, including properties requiring major deferred maintenance, are not acceptable under the WMB sub-prime underwriting programs. Each appraisal includes a market data analysis based on recent sales of comparable homes in the area and, where deemed appropriate, replacement cost analysis based on the current cost of constructing a similar home. * Underwriting Exceptions On a case-by-case basis and only with the approval of an employee with appropriate risk level authority, the sponsor may determine that, based upon compensating factors, a prospective borrower not strictly qualifying under the WMB sub-prime underwriting risk category guidelines warrants an underwriting exception. Compensating factors may include, but are not limited to, low loan-to-value ratio, low debt-to-income ratio, good credit history, stable employment and time in residence at the prospective borrower’s current address. It is expected that some of the mortgage loans owned by the trust will be underwriting exceptions. Documentation Programs The mortgage loans have been, or will be, originated or reunderwritten upon acquisition, generally in accordance with the WMB sub-prime underwriting standards under the WMB subprime full documentation, limited documentation or stated income documentation residential loan programs. * Quality Control Review As part of its quality control system, the sponsor re-verifies information that has been provided by the mortgage brokerage
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*

*

*

*

company prior to funding a loan and the sponsor conducts a post-funding audit of every origination file. In addition, Washington Mutual Bank periodically audits files based on a statistical sample of closed loans. In the course of its pre-funding review, the sponsor re-verifies the income of each prospective borrower or, for a self-employed prospective borrower, reviews the income documentation obtained under the full documentation and limited documentation residential loan programs. The sponsor generally requires evidence of funds to close on the mortgage loan. 73. The above statements of material fact were false and misleading when made

because in truth, WaMu Bank: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. F. 74. Aegis Mortgage Corporation Violated Its Underwriting Guidelines Aegis Mortgage Corporation (“Aegis”) originated a substantial percentage of the

loans for several of the RMBS purchased by Sealink. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding Aegis’ underwriting standards and practices. For example, the prospectus supplement for the SAMI 2007-AR3 RMBS described Aegis’ underwriting guidelines, in relevant part, as follows: AEGIS mortgage loans have either been originated or purchased by an originator and were generally underwritten in accordance with the standards described herein. Exceptions to the underwriting guidelines are permitted when the seller’s performance supports such action and the variance request is approved by credit management.

33

Such underwriting standards are applied to evaluate the prospective borrower’s credit standing and repayment ability and the value and adequacy of the mortgaged property as collateral. These standards are applied in accordance with the applicable federal and state laws and regulations. Exceptions to the underwriting standards are permitted where compensating factors are present and are managed through a formal exception process. Generally, each mortgagor will have been required to complete an application designed to provide to the lender pertinent credit information concerning the mortgagor. The mortgagor will have given information with respect to its assets, liabilities, income (except as described below), credit history, employment history and personal information, and will have furnished the lender with authorization to obtain a credit report which summarizes the mortgagor’s credit history. In the case of investment properties and two- to four-unit dwellings, income derived from the mortgaged property may have been considered for underwriting purposes, in addition to the income of the mortgagor from other sources. With respect to second homes or vacation properties, no income derived from the property will have been considered for underwriting purposes. * * *

Each mortgaged property relating to an AEGIS mortgage loan has been appraised by a qualified independent appraiser who is approved by each lender. All appraisals are required to conform to the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standard Board of the Appraisal Foundation. Each appraisal must meet the requirements of Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac require, among other things, that the appraiser, or its agent on its behalf, personally inspect the property inside and out, verify whether the property was in good condition and verify that construction, if new, had been substantially completed. The appraisal generally will have been based on prices obtained on recent sales of comparable properties, determined in accordance with Fannie Mae and Freddie Mac guidelines. In certain cases an analysis based on income generated from the property or a replacement cost analysis based on the current cost of constructing or purchasing a similar property may be used. 75. The above statements of material fact were false and misleading when made

because in truth, Aegis: (i) abandoned its underwriting guidelines, verification procedures and

34

quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. G. 76. Impac Funding Corporation Violated Its Underwriting Guidelines Impac Funding Corporation (“Impac”) originated a substantial percentage of the

loans for several of the RMBS purchased by Sealink. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding Impac’s underwriting standards and practices. For example, the prospectus supplement for the BSABS 2006-IM1 RMBS described Impac’s underwriting guidelines, in relevant part, as follows: Approximately 90.90% of the mortgage loans were underwritten pursuant to, or in accordance with, the standards of the Originator’s Progressive Series Program. * The Progressive Series Program General. The underwriting guidelines utilized in the Progressive Series Program, as developed by the Originator, are intended to assess the borrower’s ability and willingness to repay the mortgage loan obligation and to assess the adequacy of the mortgaged property as collateral for the mortgage loan. The Progressive Series Program is designed to meet the needs of borrowers with excellent credit, as well as those whose credit has been adversely affected. . . . The philosophy of the Progressive Series Program is that no single borrower characteristic should automatically determine whether an application for a mortgage loan should be approved or disapproved. Lending decisions are based on a risk analysis assessment after the review of the entire mortgage loan file. Each mortgage loan is individually underwritten with emphasis placed on the overall quality of the mortgage loan.
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*

*

*

*

*

Each prospective borrower completes a mortgage loan application which includes information with respect to the applicant’s liabilities, income, credit history, employment history and personal information. The Originator requires a credit report on each applicant from a credit reporting company. The report typically contains information relating to credit history with local and national merchants and lenders, installment debt payments and any record of defaults, bankruptcies, repossessions or judgments. * * *

Appraisals. The Originator does not publish an approved appraiser list for the conduit seller. Each conduit seller maintains its own list of appraisers, provided that each appraiser must: • be a state licensed or certified appraiser; • meet the independent appraiser requirements for staff appraisers, or, if appropriate, be on a list of appraisers specified by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the FDIC and the Office of Thrift Supervision under their respective real estate appraisal regulations adopted in accordance with Title XI of the Financial Institutions Reform Recovery and Enforcement Act of 1989, regardless of whether the seller is subject to those regulations; • be experienced in the appraisal of properties similar to the type being appraised; • be actively engaged in appraisal work; and • subscribe to a code of ethics that is at least as strict as the code of the American Institute of Real Estate Appraisers or the Society of Real Estate Appraisers. * * * Variations. The Originator uses the following parameters as guidelines only. On a case-by-case basis, the Originator may determine that the prospective mortgagor warrants an exception outside the standard program guidelines. An exception may be allowed if the loan application reflects certain compensating factors, including instances where the prospective mortgagor:

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• has demonstrated an ability to save and devote a greater portion of income to basic housing needs; • may have a potential for increased earnings and advancement because of education or special job training, even if the prospective mortgagor has just entered the job market; • has demonstrated an ability to maintain a debt free position; • may have short term income that is verifiable but could not be counted as stable income because it does not meet the remaining term requirements; and • has net worth substantial enough to suggest that repayment of the loan is within the prospective mortgagor’s ability.

77.

The above statements of material fact were false and misleading when made

because in truth, Impac: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. H. 78. GreenPoint Mortgage Funding, Inc. Violated Its Underwriting Guidelines GreenPoint Mortgage Funding, Inc. (“GreenPoint”) originated a substantial

percentage of the loans for several of the RMBS purchased by Sealink. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding GreenPoint’s underwriting standards and practices. For example, the prospectus supplement for

37

the JPALT 2007-A1 RMBS described GreenPoint’s underwriting guidelines, in relevant part, as follows: Generally, the GreenPoint underwriting guidelines are applied to evaluate the prospective borrower’s credit standing and repayment ability and the value and adequacy of the mortgaged property as collateral. Exceptions to the guidelines are permitted where compensating factors are present. The GreenPoint underwriting guidelines are generally not as strict as Fannie Mae or Freddie Mac guidelines. GreenPoint’s underwriting guidelines are applied in accordance with applicable federal and state laws and regulations. * * *

In determining whether a prospective borrower has sufficient monthly income available to meet the borrower’s monthly obligation on the proposed mortgage loan and monthly housing expenses and other financial obligations, GreenPoint generally considers the ratio of those amounts to the proposed borrower’s monthly gross income. These ratios vary depending on a number of underwriting criteria, including loan-to-value ratios (“LTV”), and are determined on a loan-by-loan basis. The ratios generally are limited to 40% but may be extended to 50% with adequate compensating factors, such as disposable income, reserves, higher FICO credit score, or lower LTV’s. * * *

As part of its evaluation of potential borrowers, GreenPoint generally requires a description of the borrower’s income. If required by its underwriting guidelines, GreenPoint obtains employment verification providing current and historical income information and/or a telephonic employment confirmation. Employment verification may be obtained through analysis of the prospective borrower’s recent pay stubs and/or W-2 forms for the most recent two years or relevant portions of the borrower’s most recent two years’ tax returns, or from the prospective borrower’s employer, wherein the employer reports the borrower’s length of employment and current salary with that organization. Selfemployed prospective borrowers generally are required to submit relevant portions of their federal tax returns for the past two years. * * *

In determining the adequacy of the property as collateral, an independent appraisal is generally made of each property
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considered for financing. All appraisals are required to conform the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standard Board of the Appraisal Foundation. Each appraisal must meet the requirements of Fannie Mae and Freddie Mac. The requirements of Fannie Mae and Freddie Mac require, among other things, that the appraiser, or its agent on its behalf, personally inspect the property inside and out, verify whether the property is in a good condition and verify that construction, if new, has been substantially completed. The appraisal generally will have been based on prices obtained on recent sales of comparable properties determined in accordance with Fannie Mae and Freddie Mac guidelines. 79. The above statements of material fact were false and misleading when made

because in truth, GreenPoint: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. I. 80. Encore Credit Corporation Violated Its Underwriting Guidelines Encore Credit Corporation (“Encore”) originated a substantial percentage of the

loans for several of the RMBS purchased by Sealink. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding Encore’s underwriting standards and practices. For example, the prospectus supplement for the BSABS 2006-HE3 RMBS described Encore’s underwriting guidelines, in relevant part, as follows: Encore has developed internal underwriting processes and criteria that they believe generate quality loans and give it the ability to approve and fund loans quickly. Encore’s internal underwriting guidelines are designed to help it evaluate a borrower’s credit

39

history, capacity, willingness and ability to repay the loan, and the value and adequacy of the collateral. * * *

If an individual loan application does not meet Encore’s formal written underwriting guidelines, but the underwriter is confident both that the borrower has the ability and willingness to pay and that the property provides adequate collateral for the borrower’s obligations, Encore’s underwriters can make underwriting exceptions up to certain limits within their formal exception policies and approval authorities. All of Encore’s loan programs have tiered exception levels whereby approval of certain exceptions, such as LTV ratio exceptions, loan amount exceptions, and debt-to-income exceptions, are escalated to higher loan approval authority levels. * * *

In the event that an underwriting exception is required for approval, only specifically designated personnel, dictated by the exception needed, are authorized to make such exceptions. * * *

The underwriting of a mortgage loan to be originated or purchased by Encore generally includes a review of the completed loan package, which includes the loan application, a current appraisal, a preliminary title report and a credit report. All loan applications and all closed loans offered to Encore for purchase must be approved by Encore in accordance with its underwriting criteria. * * *

Verification of Borrower’s Income. Encore’s mortgage programs include several levels of documentation used to verify the borrower’s income. . . . A verification of employment and position is done for each stated income loan. Appraisal Review. An assessment of the adequacy of the real property as collateral for the loan is primarily based upon an appraisal of the property and a calculation of the LTV ratio of the loan applied for and the combined LTV to the appraised value of the property at the time of origination. Appraisers determine a property’s value by reference to the sales prices of comparable properties recently sold, adjusted to reflect the condition of the property as determined through inspection.

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*

*

*

Quality Control. Encore’s quality control program is intended to monitor loan production with the overall goal of improving the quality of loan production generated by Encore’s retail loan operation and independent mortgage broker channel. 81. The above statements of material fact were false and misleading when made

because in truth, Encore: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. J. 82. Opteum Financial Services, LLC Violated Its Underwriting Guidelines Opteum Financial Services, LLC (“Opteum”) originated a substantial percentage

of the loans for several of the RMBS purchased by Sealink. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding Opteum’s underwriting standards and practices. For example, the prospectus supplement for the SAMI 2007-AR3 RMBS described Opteum’s underwriting guidelines, in relevant part, as follows: General. Loans originated under OFS’s Five Star Series™ program, the Five Star Plus™ program as described within the guidelines originated through OFS’s retail platform is designed for borrowers who have demonstrated an excellent credit history. OFS generally – includes in its origination process by performing a pre-funding audit on each mortgage loan originated by OFS’s retail and wholesale origination platforms including a review for compliance with the related program parameters and accuracy of the legal documents. OFS generally performs verbal audits of the borrowers’ income or employment and a verification of social security numbers of each borrower, and reviews the property
41

ownership history that is provided by outside services prior to the disbursement of the loan. For closed loans purchased under OFS’s conduit flow programs, generally, an eligibility review is performed on each loan to insure compliance to the related program parameters and to review the accuracy of the legal documentation used at the closing of the loan transaction. The conduit-seller makes certain representations and warranties, in its respective agreement with OFS, for each of the mortgage loans purchased by the conduit. OFS also includes in its origination process a post-closing quality control review, which covers a minimum of 10% of the mortgage loans originated. This review generally includes a complete re-verification of income, liquid assets and employment that the borrower used to qualify for the mortgage loan, as well as procedures to detect evidence of fraudulent documentation and/or imprudent behavior or activity during the processing and funding of the mortgage loan. Exceptions. The following program parameters that are used by OFS are guidelines only. OFS, on a case-by-case basis, may determine that the prospective mortgagor warrants an exception outside the standard program guidelines. Exceptions may be granted if the loan application reflects certain compensating factors, including instances where the prospective mortgagor has demonstrated an ability to save and devote a greater portion of income to basic housing needs. Other compensating factors may include a low loan-to-value; an excellent mortgage pay history; the primary borrower possesses a higher credit score than required; a substantial net worth to suggest that the repayment of the loan is within the prospective mortgagor’s ability and/or the borrower has demonstrated an ability to maintain a debt-free position and the value of the mortgaged property as collateral for the loan is adequate. * * *

Appraisals. Neither OFS nor OFS’s conduit division publishes an approved appraiser list. Each appraisal is completed on the applicable Fannie Mae Uniform Residential Appraisal Report along with applicable schedules and addendums if required. Each appraiser must be a state licensed or certified appraiser and meet the independent appraiser requirements for staff appraisers, or, if appropriate, be on a list of appraisers specified by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the FDIC and the Office of Thrift Supervision under their respective real estate appraisal regulations adopted in accordance with Title XI of the Financial Institutions Reform Recovery and Enforcement Act of l989, regardless of

42

whether OFS is subject to those regulations. In addition, each appraiser must be actively engaged in appraisal work, must be experienced, and must subscribe to a code of ethics that is at least as strict as the code of the American Institute of Real Estate Appraisers or the Society of Real Estate Appraisers. All appraisals must be in writing and preformed [sic] in strict accordance with all applicable local, state and federal laws, regulations and orders. In addition, all appraisals conform to the current Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal Foundation. Generally, each appraisal is reviewed in detail for completeness, accuracy and appraising logic in accordance with Fannie Mae guidelines. 83. The above statements of material fact were false and misleading when made

because in truth, Opteum: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. K. 84. The Chase Originators Violated Their Underwriting Guidelines Chase Home Finance LLC and JPMorgan Chase Bank, N.A. (collectively, the

“Chase Originators”) originated a substantial percentage of the loans for several of the RMBS purchased by Sealink. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding Chase’s underwriting standards and practices. For

example, the prospectus supplement for the JPALT 2007-A2 RMBS described Chase’s underwriting guidelines, in relevant part, as follows: The depositor believes that such Mortgage Loans subject to the exception in the previous sentence were originated generally in

43

accordance with the underwriting guidelines set forth under the heading “The Originators—General Underwriting Guidelines” in this prospectus supplement. * * *

General Underwriting Guidelines Underwriting standards are applied by or on behalf of a lender to evaluate a borrower’s credit standing and repayment ability, and the value and adequacy of the related Mortgaged Property as collateral. In general, a prospective borrower applying for a loan is required to fill out a detailed application designed to provide to the underwriting officer pertinent credit information. As part of the description of the borrower’s financial condition, the borrower generally is required to provide a current list of assets and liabilities and a statement of income and expenses, as well as an authorization to apply for a credit report which summarizes the borrower’s credit history with local merchants and lenders and any record of bankruptcy. In most cases, an employment verification is obtained from an independent source (typically the borrower’s employer), which verification reports, among other things, the length of employment with that organization, the current salary, and whether it is expected that the borrower will continue such employment in the future. * * *

Based on the data provided in the application and certain verification (if required), a determination is made by the original lender that the mortgagor’s monthly income (if required to be stated) will be sufficient to enable the mortgagor to meet its monthly obligations on the mortgage loan and other expenses related to the property such as property taxes, utility costs, standard hazard insurance and other fixed obligations other than housing expenses. * * *

The adequacy of the mortgaged property as security for repayment of the related mortgage loan will generally have been determined by an appraisal in accordance with pre-established appraisal procedure guidelines for appraisals established by or acceptable to the originator. All appraisals conform to the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal Foundation and must be on forms acceptable to Fannie Mae and/or Freddie Mac. * *
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*

From time to time, exceptions to a lender’s underwriting policies may be made. Such exceptions may be made on a loan by loan basis at the discretion of the lender’s underwriter. Exceptions may be made after careful consideration of certain mitigating factors such as borrower liquidity, employment and residential stability and local economic conditions. 85. The above statements of material fact were false and misleading when made

because in truth, the Chase Originators: (i) abandoned their underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to their underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded their stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. L. 86. Quicken Loans Inc. Violated Its Underwriting Guidelines Quicken Loans Inc. (“Quicken”) originated a substantial percentage of the loans The Offering Materials for such RMBS

for several of the RMBS purchased by Sealink.

contained false and misleading statements of material fact regarding Quicken’s underwriting standards and practices. For example, the prospectus supplement for the BSMF 2007-AR5 RMBS described Quicken’s underwriting guidelines, in relevant part, as follows: The program requirements for the Quicken Loans’ 5-Year and 7Year Secure Option ARM Programs follow generally accepted mortgage industry underwriting guidelines for loans of this type and are intended to evaluate the borrower’s credit standing, repayment ability, and the value and adequacy of the proposed mortgaged property as collateral. * * *

In addition to the above program requirements, in order to qualify for the 5-Year or 7-Year Secure Option ARM program, borrowers generally have to meet the following requirements:
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• A debt-to-income ratio of 45% or less; • A minimum asset reserve equal to two months worth of principal, interest, taxes and insurance payments (six months reserve requirement on second home and investment properties); • A maximum mortgage late frequency of 1 times 30 days delinquent in the past 12 months; • A minimum of 2 years since the date of the borrower’s last bankruptcy discharge or dismissal; • A minimum of 3 years since the date the borrower’s last foreclosure was reported, or from the date of the borrower’s most recent “120+ days” mortgage payment delinquency. Although borrowers are assessed against the program requirements, prudent exceptions may be made on a case by case basis. Exceptions may be allowed if the application reflects strong compensating factors, such as, a lower debt-to-income ratio, higher credit scores, low loan-to-value ratio, significant asset reserves, stable employment or ownership at current residence. * * *

In determining the adequacy of the home proposed as collateral, an independent mortgage loan appraisal is obtained for each property considered for financing. All appraisals obtained are required to conform to the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal Foundation and are required to be on forms generally acceptable to Fannie Mae or Freddie Mac. The appraiser is required to inspect the property, and verify that it is in acceptable condition and that any recent construction is complete. The appraisal is based on the appraiser’s opinion of values, giving appropriate weight to both the market value of comparable homes and the cost of replacing the improvements to the proposed property. The value and type of the property indicated in the appraisal obtained by Quicken Loans must support the initial loan amount in accordance with the program’s loan-to-value requirements at the time the loan is originated. No assurance can be given that the value of any property will remain at the level indicated on the appraisal or other assessment tool.

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87.

The above statements of material fact were false and misleading when made

because in truth Quicken: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. M. 88. IndyMac Bank, FSB Violated Its Underwriting Guidelines IndyMac Bank, FSB (“IndyMac”) originated a substantial percentage of the loans

for at least one of the RMBS purchased by Sealink. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding IndyMac’s underwriting standards and practices. For example, the prospectus supplement for the LUM 2006-7 RMBS described IndyMac’s underwriting guidelines, in relevant part, as follows: IndyMac Bank has two principal underwriting methods designed to be responsive to the needs of its mortgage loan customers: traditional underwriting and e-MITS (Electronic Mortgage Information and Transaction System) underwriting. E-MITS is an automated, internet-based underwriting and risk-based pricing system. IndyMac Bank believes that e-MITS generally enables it to estimate expected credit loss, interest rate risk and prepayment risk more objectively than traditional underwriting and also provides consistent underwriting decisions. IndyMac Bank has procedures to override an e-MITS decision to allow for compensating factors. * * *

IndyMac Bank’s underwriting criteria for traditionally underwritten mortgage loans includes an analysis of the borrower’s credit history, ability to repay the mortgage loan and the adequacy of the mortgaged property as collateral. Traditional underwriting decisions are made by individuals authorized to
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consider compensating factors that would allow mortgage loans not otherwise meeting IndyMac Bank’s guidelines. * * * In addition to the FICO credit score, other information regarding a borrower’s credit quality is considered in the loan approval process, such as the number and degree of any late mortgage or rent payments within the preceding 12-month period, the age of any foreclosure action against any property owned by the borrower, the age of any bankruptcy action, the number of seasoned tradelines reflected on the credit report and any outstanding judgments, liens, charge-offs or collections. * * *

IndyMac Bank originates and purchases loans that have been originated under one of seven documentation programs: Full/Alternate, FastForward, Bank Statement, Stated Income, No Income/No Asset, No Ratio and No Doc. Under the Full/Alternate Documentation Program, the prospective borrower’s employment, income and assets are verified through written or telephonic communications. All loans may be submitted under the Full/Alternate Documentation Program. The Full/Alternate Documentation Program also provides for alternative methods of employment verification generally using W-2 forms or pay stubs. Borrowers applying under the Full/Alternate Documentation Program may, based on certain credit and loan characteristics, qualify for IndyMac Bank’s FastForward program and be entitled to income and asset documentation relief. Borrowers who qualify for FastForward must state their income, provide a signed Internal Revenue Service Form 4506 (authorizing IndyMac Bank to obtain copies of their tax returns), and state their assets; IndyMac Bank does not require any verification of income or assets under this program. * * *

To determine the adequacy of the property to be used as collateral, an appraisal is generally made of the subject property in accordance with the Uniform Standards of Profession Appraisal Practice. The appraiser generally inspects the property, analyzes data including the sales prices of comparable properties and issues an opinion of value using a Fannie Mae/Freddie Mac appraisal report form, or other acceptable form. In some cases, an automated valuation model (AVM) may be used in lieu of an appraisal. AVMs are computer programs that use real estate information, such as demographics, property characteristics, sales
48

prices, and price trends to calculate a value for the specific property. The value of the property, as indicated by the appraisal or AVM, must support the loan amount. 89. The above statements of material fact were false and misleading when made

because in truth IndyMac: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. N. 90. Option One Mortgage Corporation Violated Its Underwriting Guidelines Option One Mortgage Corporation (“Option One”) originated a substantial

percentage of the loans for at least one of the RMBS purchased by Sealink. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding Option One’s underwriting standards and practices. For example, the prospectus supplement for the CARR 2006-OPT1 RMBS described Option One’s underwriting guidelines, in relevant part, as follows: The Mortgage Loans will have been originated generally in accordance with Option One’s Guidelines (the "Option One Underwriting Guidelines"). The Option One Underwriting Guidelines are primarily intended to assess the value of the mortgaged property, to evaluate the adequacy of such property as collateral for the mortgage loan and to assess the applicant’s ability to repay the mortgage loan. The Mortgage Loans were also generally underwritten with a view toward resale in the secondary market. The Mortgage Loans generally bear higher rates of interest than mortgage loans that are originated in accordance with customary Fannie Mae and Freddie Mac standards.

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On a case-by-case basis, exceptions to the Option One Underwriting Guidelines are made where compensating factors exist. * * *

Each mortgage loan applicant completes an application that includes information with respect to the applicant’s liabilities, income, credit history, employment history and personal information. * * *

Mortgaged properties that are to secure mortgage loans generally are appraised by qualified independent appraisers. Such appraisers inspect and appraise the subject property and verify that such property is in acceptable condition. Following each appraisal, the appraiser prepares a report which includes a market value analysis based on recent sales of comparable homes in the area and, when deemed appropriate, replacement cost analysis based on the current cost of constructing a similar home. All appraisals are required to conform to the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal Foundation and are generally on forms acceptable to Fannie Mae and Freddie Mac. * * *

Option One Underwriting Guidelines require a reasonable determination of an applicant’s ability to repay the loan. Such determination is based on a review of the applicant’s source of income, calculation of a debt service-to-income ratio based on the amount of income from sources indicated on the loan application or similar documentation, a review of the applicant’s credit history and the type and intended use of the property being financed. Except with respect to the No Documentation program that is described below, the Option One Underwriting Guidelines require verification or evaluation of the income of each applicant and, for purchase transactions, verification of the seasoning or source of funds (in excess of $2,500) required to be deposited by the applicant into escrow. 91. The above statements of material fact were false and misleading when made

because in truth Option One: (i) abandoned its underwriting guidelines, verification procedures

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and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. O. 92. PHH Mortgage Corporation Violated Its Underwriting Guidelines PHH Mortgage Corporation (“PHH”) originated a substantial percentage of the

loans for at least one of the RMBS purchased by Sealink. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding PHH’s underwriting standards and practices. For example, the prospectus supplement for the LUM 2005-1 RMBS described PHH’s underwriting guidelines, in relevant part, as follows: The application of the underwriting standards represent a balancing of several factors that may affect the ultimate recovery of the loan amount, including but not limited to, the applicant’s credit standing and ability to repay the loan, as well as the value and adequacy of the mortgaged property as collateral. PHH may adapt its underwriting guidelines based upon the nature of a specific private-label relationship. General Underwriting Procedure. . . . From time to time, exceptions to PHH’s underwriting policies may be made. Such exceptions are made on a loan-by-loan basis only at the discretion of PHH’s underwriters and may be made only after careful consideration of certain compensating factors such as borrower capacity, liquidity, employment and residential stability. References to mortgage loans in this section only refer to those mortgage loans originated or acquired by PHH. PHH’s underwriting guidelines are applied to evaluate an applicant’s credit standing, financial condition, and repayment ability, as well as the value and adequacy of the mortgaged property as collateral for any loan made. As part of the loan application process, the applicant is required to provide

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information concerning his or her assets, liabilities, income and expenses (except as described below), along with an authorization to obtain any necessary third party verifications, including a credit report summarizing the applicant’s credit history. * * *

In evaluating the applicant’s ability and willingness to repay the proposed loan, PHH reviews the applicant’s credit history and outstanding debts, as reported on the credit report. If an existing mortgage or other significant debt listed on the loan application is not adequately reported on the credit report, PHH may request a written or oral verification of the balance and payment history of such debt from the servicer of such debt. PHH verifies the applicant’s liquid assets to ensure that the applicant has adequate liquid assets to apply toward any required down payment, closing costs, prepaid interest, and a specified amount of cash reserves after the closing of the related mortgage. Additional liquid assets may not be verified. Except as described below, PHH also evaluates the applicant’s income to determine its stability, probability of continuation, and adequacy to service the proposed PHH debt payment. * * *

In determining the adequacy of the property as collateral for a first lien mortgage loan, a Fannie Mae/Freddie Mac conforming appraisal of the property is performed by an independent appraiser selected by PHH, except as noted below. The appraiser is required to inspect the property and verify that it is in good condition and that construction or renovation, if new, has been completed. The appraisal report indicates a value for the property and provides information concerning marketability, the neighborhood, the property site, interior and exterior improvements, and the condition of the property. In lieu of an appraisal, alternative collateral assessment products which comply with Fannie Mae/Freddie Mac criteria may be used. 93. The above statements of material fact were false and misleading when made

because in truth PHH: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii)

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consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. P. 94. First National Bank of Nevada Violated Its Underwriting Guidelines First National Bank of Nevada (“FNBN”) originated a substantial percentage of

the loans for at least one of the RMBS purchased by Sealink. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding FNBN’s underwriting standards and practices. For example, the prospectus supplement for the NHELI 2007-1 RMBS described FNBN’s underwriting guidelines, in relevant part, as follows: FNBN’s underwriting guidelines are primarily intended to evaluate the prospective borrower’s credit standing and ability to repay the loan, as well as the value and adequacy of the proposed Mortgaged Property as collateral. A prospective borrower applying for a mortgage loan is required to complete an application, which elicits pertinent information about the prospective borrower including, depending upon the loan program, the prospective borrower’s financial condition (assets, liabilities, income and expenses), the property being financed and the type of loan desired. * * *

Based on the data provided in the application and certain verifications (if required), a determination will have been made that the borrower’s monthly income (if required to be stated or verified) should be sufficient to enable the borrower to meet its monthly obligations on the mortgage loan and other expenses related to the Mortgaged Property (such as property taxes, standard hazard insurance and other fixed obligations other than housing expenses). * * *

The adequacy of the Mortgaged Property as security for repayment of the related mortgage loan will generally have been determined by an appraisal in accordance with preestablished appraisal
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procedure guidelines for appraisals established by or acceptable to the originator. All appraisals conform to the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal Foundation and must be on forms acceptable to Fannie Mae and/or Freddie Mac. Appraisers may be staff appraisers employed by the originator or independent appraisers selected in accordance with pre-established appraisal procedure guidelines established by or acceptable to the originator. * * *

FNBN’s underwriting guidelines are applied in a standard procedure that is intended to comply with applicable federal and state laws and regulations. However, the application of FNBN’s underwriting guidelines does not imply that each specific criterion was satisfied individually. FNBN will have considered a mortgage loan to be originated in accordance with a given set of underwriting guidelines if, based on an overall qualitative evaluation, in FNBN’s discretion such mortgage loan is in substantial compliance with such underwriting guidelines or if the borrower can document compensating factors. A mortgage loan may be considered to comply with a set of underwriting guidelines, even if one or more specific criteria included in such underwriting guidelines were not satisfied, if other factors compensated for the criteria that were not satisfied or the mortgage loan is considered to be in substantial compliance with the underwriting guidelines. In addition to the “full/alternate” underwriting guidelines, FNBN also originates or purchases loans that have been originated under certain limited documentation programs designed to streamline the loan underwriting process. These “stated income,” “no ratio,” “no income/no assets,” “stated income/stated assets,” “no documentation with assets,” “no documentation” and “lite documentation” programs may not require income, employment or asset verifications. Generally, in order to be eligible for a limited or no documentation program, the Mortgaged Property must have a loan-to-value ratio that supports the amount of the mortgage loan and the prospective borrower must have a credit history that demonstrates an established ability to repay indebtedness in a timely fashion. 95. The above statements of material fact were false and misleading when made

because in truth FNBN: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions

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to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. VI. DEFENDANTS KNEW THE TRUTH ABOUT THE ORIGINATORS’ LENDING PRACTICES 96. Defendants scrutinized the loans they purchased and identified the rampant

underwriting deficiencies at the mortgage originators discussed above. Notwithstanding their knowledge about the real risks of default those loans presented, they securitized them into the RMBS sold to Sealink. A. 97. Defendants’ Due Diligence Identified Defects In The Loan Pools Defendants Purchased For Securitization Defendants learned, through their due diligence process, that a substantial

portion of the loans they securitized woefully failed to meet the stated underwriting standards of those originators, had other deficiencies, violated state and federal law, and/or were based on inflated property valuations. 98. As described in the FCIC, Defendants rejected Clayton’s credit due diligence

findings as a matter of course. During its review, Clayton would assign each loan a number—1, 2 or 3—to reflect Clayton’s evaluation of the soundness of the loan. The numbering referred to three different levels, “1” being the best—i.e., the loan met the originators’ underwriting guidelines—and a “3” being the worst. 99. As revealed by the FCIC and reports released by Clayton, approximately 27% of

the JPMorgan- and WaMu-securitized loans sampled by Clayton during the height of the mortgage boom (from 2006 to mid-2007), and 16% of such Bear Stearns loans (together with

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EMC loans), failed to meet the originator’s underwriting guidelines. The FCIC’s findings confirm that, over this same period, JPMorgan, WaMu and Bear Stearns (together with EMC) overruled Clayton’s findings and “waived” approximately 51%, 29%, and 42% respectively, of all such defective “exception” loans and securitized them into RMBS that were sold to investors like Sealink. 100. Extrapolating the results of Defendants’ “waive in” rate of the loans Clayton had

rejected for failing to meet originator’s guidelines to the entire loan pools backing their RMBS purchased by Sealink reveals the extent to which Defendants knew the loans they had securitized were destined to fail. As the FCIC Report concluded with regard to the Offering Materials for RMBS securitized by Defendants: [M]any prospectuses indicated that the loans in the pool either met guidelines outright or had compensating factors, even though Clayton’s records show that only a portion of the loans were sampled, and that of those that were sampled, a substantial percentage of Grade 3 loans were waived in….[O]ne could reasonably expect [the untested loans] to have many of the same deficiencies, at the same rate, as the sampled loans. Prospectuses for the ultimate investors in the mortgage-backed securities did not contain this information, or information on how few of the loans were reviewed, raising the question of whether the disclosures were materially misleading, in violation of the securities laws. FCIC Report at 167, 170. 101. Defendants’ astounding “waive in” rate, and the implications for the quality of

the RMBS underwritten by Defendants, rendered materially false and misleading numerous statements in the Offering Materials relied on by Sealink in purchasing the RMBS. The Defendants’ prospectus supplements represented, for example, that “[e]xceptions to Countrywide Home Loans’ underwriting guidelines may be made if compensating factors are demonstrated by a prospective borrower.” Defendants knew that these statements were

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materially false and misleading because, through their due diligence process, they had determined that a substantial number of the loans were exception loans that did not have compensating factors and, in fact, deliberately included many of those exception loans in the loan pools they securitized. Moreover, given that the loans actually reviewed by Clayton represented only a fraction of the loans Defendants actually purchased and securitized, Defendants either knew or recklessly disregarded that a highly material number of the loans underlying their RMBS purchased by Sealink were not underwritten in compliance with the originator’s guidelines. 102. Bear Stearns, WaMu and JPMorgan were also well aware of the true quality of

the loans originated or acquired by their own origination subsidiaries such as EMC, Washington Mutual Bank and the Chase Originators, as defined above. VII. DEFENDANTS KNEW THE CREDIT RATINGS ASSIGNED TO THE DEFENDANTS’ RMBS MATERIALLY MISREPRESENTED THE CREDIT RISK OF THE RMBS 103. To bring its RMBS to market, Defendants knew that they needed to obtain the

highest “investment grade” ratings possible from the credit rating agencies (“CRAs”)— Moody’s, S&P and Fitch—that rated Defendants’ securitizations. Indeed, Defendants featured the ratings prominently in the Offering Materials and discussed at length the ratings received by the different tranches of the RMBS, and the bases for the ratings. Yet, Defendants knew that the ratings were not reliable because those ratings were supported by false information that Defendants provided. 104. “Investment grade” products are understood in the marketplace to be stable,

secure and safe. Using S&P’s scale, “investment grade” ratings are AAA, AA, A and BBB, and represent, high credit quality (AAA), upper-medium credit quality (AA and A) and medium

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credit quality (BBB). Any instrument rated below BBB is considered below investment grade or “junk bond.” 105. The Offering Materials for the Defendants’ RMBS Sealink purchased state that

the issuance of each tranche of the RMBS was conditioned on the assignment of particular investment-grade ratings, and listed the ratings in a chart. All of the tranches of RMBS purchased by Sealink were rated triple-A. The triple-A rating denotes “high credit-quality,” and is the same rating as those typically assigned to bonds backed by the full faith and credit of the United States Government, such as Treasury Bills. For example, Bear Stearns represented in the BALTA 2006-5 prospectus supplement that: It is a condition to the issuance of each class of Offered Certificates that it receives at least the ratings set forth below from S&P and Moody’s. Offered Certificates Class I-A-1 Class I-A-2 Class I-M-1 Class I-M-2 Class I-B-1 Class I-B-2 Class II-A-1 Class II-A-2 Class II-A-3 Class II-X-1 Class II-X-2 Class II-X-3 Class II-B-1 Class II-B-2 Class II-B-3 S&P AAA AAA AA A BBB+ BBB AAA AAA AAA AAA AAA AAA AA A+ BBB Moody’s Aaa Aaa Aa2 A2 Baa2 Baa3 Aaa Aaa Aaa Aaa Aaa Aaa Aa2 A2 Baa2

The ratings assigned by S&P and Moody’s to mortgage passthrough certificates address the likelihood of the receipt of all distributions on the mortgage loans by the related certificateholders under the agreements pursuant to which such certificates were issued. S&P’s and Moody’s ratings take into consideration the credit quality of the related mortgage pool, structural and legal aspects associated with such certificates, and the extent to which the payment stream in the mortgage pool is adequate to make
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payments required under such certificates. S&P’s and Moody’s ratings on such certificates do not, however, constitute a statement regarding frequency of prepayments on the mortgages. 106. The above statements (and the substantially similar statements appearing in all of

the Defendants’ RMBS Offering Materials) regarding the ratings assigned to the Defendants’ RMBS, as well as the ratings themselves, were materially false and misleading because Defendants touted these ratings while knowing that those ratings were based on the misleading information Defendants provided to the CRAs. 107. The credit ratings of the RMBS were further compromised by misinformation

provided by Defendants regarding the abandonment of the originators’ underwriting standards, rampant use of aggressive exceptions, Defendants’ knowledge or reckless disregard of pervasive fraud in the stated income loan programs, and the inflated appraisals assigned to the underlying collateral, as described above. The Defendants knew that the AAA ratings assigned to the RMBS were false because the originators did not follow their own underwriting standards and, as such, no reliable estimate could be made concerning the level of enhancement necessary to ensure that the top tranches purchased by Sealink were of AAA quality. By including and endorsing these AAA ratings in the Offering Materials, Defendants made a false representation that it actually believed that the AAA ratings were an accurate reflection of the credit quality of the RMBS. 108. Subsequent downgrades confirm that the investment grade ratings reported in the

Offering Materials were unjustifiably high and misstated the true credit risk of the RMBS purchased by Sealink. The RMBS purchased by Sealink—all of which were each initially awarded a triple-A rating—have almost without exception been downgraded to junk. The en

masse downgrade of AAA-rated RMBS indicates that the ratings set forth in the Offering Materials were false, unreliable and inflated.
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VIII. DEFENDANTS’ FALSE AND MISLEADING MISSTATEMENTS AND OMISSIONS OF MATERIAL FACT IN THE OFFERING DOCUMENTS 109. The Offering Materials Sealink relied upon in purchasing the Defendants’ RMBS

contained numerous misrepresentations of material fact, or omitted to state material fact necessary to make the statements therein not misleading, regarding: (i) the originators’ underwriting practices and guidelines by which the loans were originated, including the prevalence and type of exceptions to those guidelines being applied to the underlying loans, and the rampant fraud in stated income loans; (ii) the value of the underlying property securing the loans, in terms of LTV and CLTV ratios and the appraisal standards by which such mortgaged properties were measured; (iii) the due diligence that Defendants conducted into the mortgage loans backing the RMBS, which identified pervasive defects in the loans underlying the securitizations; (iv) the credit ratings assigned to the RMBS; and (v) the true risks of the RMBS. Indeed, as the FCIC Report concluded with regard to the Offering Materials for the Defendants’ RMBS: [M]any prospectuses indicated that the loans in the pool either met guidelines outright or had compensating factors, even though Clayton’s records show that only a portion of the loans were sampled, and that of those that were sampled, a substantial percentage of Grade 3 loans were waived in….[O]ne could reasonably expect [the untested loans] to have many of the same deficiencies, at the same rate, as the sampled loans. Prospectuses for the ultimate investors in the mortgage-backed securities did not contain this information, or information on how few of the loans were reviewed, raising the question of whether the disclosures were materially misleading, in violation of the securities laws. A. 110. The Offering Materials Misrepresented The Originators’ Underwriting Guidelines. The originators discussed above originated the mortgage loans that backed the

RMBS purchased by Sealink. The Offering Materials for the RMBS all contained identical or materially similar statements of material fact regarding the originators’ underwriting guidelines
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and practices. For example, the prospectus supplement for the AHM 2005-4 RMBS described American Home’s underwriting guidelines, in relevant part, as follows: American Home’s underwriting philosophy is to weigh all risk factors inherent in the loan file, giving consideration to the individual transaction, borrower profile, the level of documentation provided and the property used to collateralize the debt. Because each loan is different, American Home expects and encourages underwriters to use professional judgment based on their experience in making a lending decision. American Home underwrites a borrower’s creditworthiness based solely on information that American Home believes is indicative of the applicant’s willingness and ability to pay the debt they would be incurring. * * *

In addition to reviewing the borrower’s credit history and credit score, American Home underwriters closely review the borrower’s housing payment history. In general, for non-conforming loans the borrower should not have made any mortgage payments over thirty days after the due date for the most recent twelve months. In general, for Alt-A loans the borrower may have no more than one payment that was made over thirty days after the due date for the most recent twelve months. * * *

American Home realizes that there may be some acceptable quality loans that fall outside published guidelines and encourages “common sense” underwriting. Because a multitude of factors are involved in a loan transaction, no set of guidelines can contemplate every potential situation. Therefore, each case is weighed individually on its own merits and exceptions to American Home’s underwriting guidelines are allowed if sufficient compensating factors exist to offset any additional risk due to the exception. 111. The above statements of material fact and similar statements regarding the

originators whose loans back the Defendants’ RMBS in which Sealink invested, were materially false and misleading when made because, as explained above, they misrepresented the true facts, known by Defendants, that the originators: (i) systematically and flagrantly failed to follow their

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stated underwriting guidelines; (ii) allowed pervasive exceptions to their underwriting standards regardless of existing compensating factors; (iii) disregarded credit quality to fuel loan originations to sell to loan purchasers such as Defendants; and (iv) routinely allowed fraudulent representations of an applicant’s stated income, failed to verify a prospective borrowers documentation or statements regarding income or assets, and, in many cases, knowingly falsified the borrower’s stated or documented income or assets. B. 112. The Offering Materials Misrepresented The Appraisals And LTV Ratios Of The Securitized Loans The adequacy of the mortgaged properties as security of the repayment of the The Offering Materials represented that

loans was purportedly determined by appraisals.

independent appraisals were prepared for each mortgaged property and that reports were prepared to substantiate these appraisals. For example, the BALTA 2006-1 prospectus

supplement described EMC Mortgage Corporation’s appraisal practices as follows: Each mortgaged property relating to an EMC mortgage loan has been appraised by a qualified independent appraiser who is approved by each lender. All appraisals are required to conform to the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standard Board of the Appraisal Foundation. Each appraisal must meet the requirements of Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac require, among other things, that the appraiser, or its agent on its behalf, personally inspect the property inside and out, verify whether the property was in good condition and verify that construction, if new, had been substantially completed. The appraisal generally will have been based on prices obtained on recent sales of comparable properties, determined in accordance with Fannie Mae and Freddie Mac guidelines. In certain cases an analysis based on income generated from the property or a replacement cost analysis based on the current cost of constructing or purchasing a similar property may be used. 113. As discussed above, the representations regarding appraisals and LTV ratios were

materially false and misleading in that they misrepresented that the appraisal process employed

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by the originators, including, among others things, the fact that: (i) the appraisers were not independent from the respective mortgage lenders, which pressured appraisers to value the mortgaged property at a pre-determined, preconceived, inflated, and false appraisal value; (ii) the actual LTV ratios for many of the mortgage loans underlying the RMBS would have exceeded 100% if the mortgaged properties had been appraised by an independent appraiser as represented in the Offering Documents; (iii) sales managers employed by the respective originators had and utilized the authority to override and inflate an appraiser’s final professional valuation of the mortgaged property; and, as such, (iv) the appraisals failed to conform to the standards set by Fannie Mae and Freddie Mac. C. 114. Defendants Materially Misrepresented The Accuracy Of The Credit Ratings Assigned To The Certificates Defendants represented in the Offering Materials that all of the RMBS purchased

by Sealink were worthy of being rated “AAA,” signifying that the risk of loss was virtually nonexistent. 115. By providing ratings, Defendants represented that they believed that the

information provided to the rating agencies to support these ratings accurately reflected the Defendants’ underwriting guidelines and practices, and the specific qualities of the underlying loans. Specifically, the Offering Materials prepared by Defendants represented, in sum or substance, that: It is a condition to the issuance of each class of Offered Certificates that it receives at least the ratings set forth below from S&P and Moody’s. Offered Certificates Class I-A-1 Class I-A-2 Class I-M-1 Class I-M-2 Class I-B-1 S&P AAA AAA AA A BBB+ Moody’s Aaa Aaa Aa2 A2 Baa2

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Class I-B-2 Class II-A-1 Class II-A-2 Class II-A-3 Class II-X-1 Class II-X-2 Class II-X-3 Class II-B-1 Class II-B-2 Class II-B-3

BBB AAA AAA AAA AAA AAA AAA AA A+ BBB

Baa3 Aaa Aaa Aaa Aaa Aaa Aaa Aa2 A2 Baa2

The ratings assigned by S&P and Moody’s to mortgage passthrough certificates address the likelihood of the receipt of all distributions on the mortgage loans by the related certificateholders under the agreements pursuant to which such certificates were issued. S&P’s and Moody’s ratings take into consideration the credit quality of the related mortgage pool, structural and legal aspects associated with such certificates, and the extent to which the payment stream in the mortgage pool is adequate to make payments required under such certificates. S&P’s and Moody’s ratings on such certificates do not, however, constitute a statement regarding frequency of prepayments on the mortgages. 116. These statements regarding the ratings assigned to the RMBS were false and

misleading because Defendants stated the assigned ratings while knowing that misleading information was provided to the rating agencies by Defendants to guarantee AAA ratings were assigned to the RMBS. IX. SEALINK’S INVESTMENT IN THE RMBS AND RELIANCE ON DEFENDANTS’ MISREPRESENTATIONS 117. The RMBS for all offerings were issued pursuant to the Offering Materials,

which contained the false and misleading statements set forth above. These documents also generally explained the structure and provided an overview of the RMBS. depositor prepared the Offering Materials. 118. The Offering Materials contained detailed descriptions of the mortgage pools The relevant

underlying the RMBS and provided the specific terms of the particular RMBS offering. The Offering Materials included tabular data concerning the loans underlying the RMBS, including

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(but not limited to) the type of loans; the number of loans; the mortgage rate and net mortgage rate (the mortgage rate net of the premium for any lender paid mortgage insurance less the sum of the master servicing fee and the trustee fee on the mortgage loan); the aggregate scheduled principal balance of the loans; the weighted average original combined LTV ratio; occupancy rates; credit enhancement; and the geographic concentration of the mortgaged properties. The Offering Materials also contained a summary of the originators’ underwriting and appraisal standards, guidelines and practices. 119. In deciding to purchase the RMBS, Sealink relied on the Defendants’ false

representations and omissions of material fact regarding their underwriting standards and the characteristics of the mortgage loans underlying the RMBS in the Offering Materials. But for the Defendants’ fraudulent representations and omissions, Sealink would not have purchased the RMBS. 120. Sealink reasonably relied upon the Defendants’ representations in the Offering

Materials regarding the underlying loan quality. Sealink did not know at the time it purchased the RMBS, and could not have known, that the originators were not following their underwriting guidelines, leading to a drastic increase in the origination of risky loans, nor did Sealink know that the property appraisals secured by the originators were not independent and resulted in false appraisal values. Sealink also did not know that the originators knowingly or recklessly accepted false information about material fact such as borrowers’ stated income, which caused the Defendants’ representations to be false. Sealink did not know that

Defendants’ due diligence had identified significant problems with the originators’ loans signifying that a substantial number of the loans underlying the RMBS would not be able to be repaid. If Sealink had known these and other material facts regarding Defendants’ fraudulent

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misrepresentations and omissions of material fact contained in the Offering Materials, Sealink would not have purchased the RMBS. 121. Defendants’ misrepresentations and omissions of material fact caused Sealink to

suffer losses on the RMBS, because the RMBS were far riskier—and their rate of default far higher—than the Offering Materials represented them to be. The mortgage loans underlying the RMBS experienced defaults and delinquencies at a much higher rate due to the originators’ abandonment of their loan-origination guidelines. 122. Sealink purchased each RMBS in reliance on the information contained in the

applicable Offering Materials. In connection with the offers and sales of the RMBS to Sealink, Defendants provided directly or indirectly to Sealink’s investment personnel or managers the Offering Materials. Similar information was sent to and analyzed by Sealink’s investment personnel and managers if the RMBS was sold to them in the secondary market. 123. Sealink reviewed and analyzed the Offering Materials provided directly or

indirectly by Defendants with respect to each offering of RMBS and performed various analyses of the RMBS-specific data for each offering before deciding to purchase RMBS in the offering. The analyses conducted by Sealink before deciding to purchase a RMBS included various credit analyses based on the information provided by Defendants with respect to both the credit characteristics of the mortgage loan pool (including, for example, geographic concentration; weighted average life; fixed- or floating-rate loans; full-, low-, or nodocumentation “stated income” loans; and owner-occupied, second home, or investment properties), and the structure of the securitization with respect to the seniority and risk characteristics of the particular tranche of RMBS (including, for example, position in the payment “waterfall”).

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124.

Thus, Sealink justifiably relied on the Offering Materials provided directly or

indirectly by Defendants for each offering of the RMBS. These documents contained numerous statements of material fact about the RMBS, including statements concerning: (i) the mortgage originators’ underwriting guidelines that were purportedly applied to evaluate the ability of the borrowers to repay the loans underlying the RMBS; (ii) the appraisal guidelines that were purportedly applied to evaluate the value and adequacy of the mortgaged properties as collateral; (iii) the LTV ratios and debt to income ratios; (iv) Defendants’ due diligence of the loans and the originators’ underwriting practices; and (v) the ratings assigned to the RMBS. 125. These statements of material fact were untrue because: (i) the originators

violated their stated underwriting guidelines and did not originate loans based on the borrowers’ ability to repay; and (ii) inflated appraisals caused the listed LTV ratios and levels of credit enhancement to be untrue. In addition, metrics such as debt-to-income ratios were untrue as a result of the other mortgage originators’ acceptance of untrue information from mortgage applicants. For example, Defendants and the mortgage originators allowed applicants for

“stated income” loans to provide untrue income information and did not verify the applicants’ purported income. In addition, the credit ratings on which Sealink relied were materially misleading, did not reflect the true credit quality of the RMBS and were the result of intentional manipulation. X. BECAUSE OF DEFENDANTS’ FRAUDULENT CONDUCT, SEALINK SUFFERED LOSSES ON ITS PURCHASES OF RMBS 126. The ratings on virtually all of the RMBS have since been downgraded and they

are no longer marketable or salable at the prices paid for them by Sealink. All of the RMBS in which Sealink purchased interests were rated “AAA” at issuance and the vast majority have since been downgraded to junk.

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127.

Further, the delinquency, bank ownership and foreclosure rates on the underlying

mortgages have soared since issuance. These current performance numbers do not reflect the number of loans which have been foreclosed since issuance and which are no longer included within the loan pools. A substantial number of the original loans contained in the loan pools have been removed from the pools, largely due to either foreclosure or early payout, negatively impacting the income payable to certificate-holders. FIRST CAUSE OF ACTION (Common Law Fraud Against Defendants) 128. Sealink repeats and realleges the allegations set forth in the preceding

paragraphs, as if fully set forth herein. 129. As alleged above, in the Offering Materials and in their public statements,

Defendants made fraudulent and false statements of material fact, and omitted material facts necessary in order to make their statements, in light of the circumstances under which the statements were made, not misleading. 130. As a corporate parent, JPMorgan Chase & Co. directed the activities of

JPMorgan Chase Bank, N.A. (which is the successor to Washington Mutual Bank), J.P. Morgan Securities LLC (which is the successor to Bear Stearns & Co. Inc.), J.P. Morgan Acquisition Corporation and J.P. Morgan Acceptance Corporation I. 131. Defendants knew at the time they sold and marketed each of the RMBS that the

foregoing statements were false or, at the very least, made recklessly, without any belief in the truth of the statements. 132. Defendants made these materially false and misleading statements and omissions

for the purpose of inducing Sealink to purchase the RMBS. Furthermore, these statements related to these Defendants’ own acts and omissions.
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133.

Defendants knew or recklessly disregarded that investors like Sealink were

relying on their expertise, and they encouraged such reliance through the Offering Materials and their public representations, as described herein. Defendants knew or recklessly disregarded that investors like Sealink would rely upon their representations in connection their decision to purchase the RMBS. Defendants were in a position of unique and superior knowledge

regarding the true facts concerning the foregoing material misrepresentations and omissions. 134. It was only by making such representations that Defendants were able to induce

Sealink to buy the RMBS. Sealink would not have purchased or otherwise acquired the RMBS but for Defendants’ fraudulent representations and omissions about the quality of the RMBS. 135. Sealink justifiably, reasonably and foreseeably relied upon Defendants’

representations and false statements regarding the quality of the RMBS. 136. As a result of the false and misleading statements and omissions, as alleged

herein, Sealink has suffered substantial damages. SECOND CAUSE OF ACTION (Fraudulent Inducement Against Defendants) 137. Sealink repeats and realleges the allegations set forth in the preceding

paragraphs, as if fully set forth herein. 138. As alleged above, in the Offering Materials and in other communications to

Sealink, Defendants made fraudulent and false statements of material fact, and omitted material facts necessary in order to make their statements, in light of the circumstances under which the statements were made, not misleading. 139. This is a claim for fraudulent inducement against Defendants. As a corporate

parent, JPMorgan Chase & Co. directed the activities of JPMorgan Chase Bank, N.A. (which is the successor to Washington Mutual Bank), J.P. Morgan Securities LLC (which is the successor
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to Bear Stearns & Co. Inc.), J.P. Morgan Acquisition Corporation and J.P. Morgan Acceptance Corporation I. 140. Defendants knew at the time they sold and marketed each of the RMBS that the

foregoing statements were false or, at the very least, made recklessly, without any belief in the truth of the statements. 141. Defendants made these materially misleading statements and omissions for the

purpose of inducing Sealink to purchase the RMBS. Furthermore, these statements related to these Defendants’ own acts and omissions. 142. Defendants knew or recklessly disregarded that investors like Sealink were

relying on their expertise, and they encouraged such reliance through the Offering Materials and their public representations, as described herein. Defendants knew or recklessly disregarded that investors like Sealink would rely upon their representations in connection with their decision to purchase the RMBS. Defendants were in a position of unique and superior

knowledge regarding the true facts concerning the foregoing material misrepresentations and omissions. 143. It was only by making such representations that Defendants were able to induce

Sealink to buy the RMBS. Sealink would not have purchased or otherwise acquired the RMBS but for Defendants’ fraudulent representations and omissions about the quality of the RMBS. 144. Sealink justifiably, reasonably and foreseeably relied upon Defendants’

representations and false statements regarding the quality of the RMBS. 145. By virtue of Defendants’ false and misleading statements and omissions, as

alleged herein, Sealink has suffered substantial damages and is also entitled to a rescission of the sale of the RMBS.

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THIRD CAUSE OF ACTION (Aiding And Abetting Fraud Against Defendants) 146. Sealink repeats and realleges the allegations set forth in the preceding

paragraphs, as if fully set forth herein. 147. This is a claim against the above-named Defendants for aiding and abetting the

fraud by Defendants. Each of these Defendants aided and abetted the fraud committed by and among all of the other Defendants. 148. As alleged above, each of the above-named Defendants knew that the RMBS

were not backed by high quality loans and were not underwritten according to the originators’ underwriting standards, conducted third-party due diligence on the loan pools securitized into the Defendants’ RMBS purchased by Sealink that identified the originators’ deviations from loan underwriting and appraisal standards, participated in those violations and had actual knowledge of their own acts, or participated in or had actual knowledge of Defendants’ reckless or intentional dissemination of false and misleading information to the credit rating agencies. 149. Furthermore, the above-named Defendants provided to each other substantial

assistance in advancing the commission of the fraud. As alleged above, each of the abovenamed Defendants participated in the violations of concealing the originators’ deviations from their stated mortgage loan underwriting and appraisal standards, made false statements about the originators’ mortgage loan underwriting and appraisal standards and Defendants’ own underwriting guidelines, provided false information about the mortgage loans underlying the certificates to the credit rating agencies, provided false information for use in the Offering Materials, or participated in the failure to properly endorse and deliver the mortgage notes and security documents to the issuing trusts.

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150.

It was foreseeable to the above-named Defendants at the time they actively

assisted in the commission of the fraud that Sealink would be harmed as a result of their assistance. 151. As a direct and natural result of the fraud committed by the Defendants, and the

above-named Defendants’ knowing and active participation therein, Sealink has suffered substantial damages. FOURTH CAUSE OF ACTION (Negligent Misrepresentation Against Defendants) 152. Sealink repeats and realleges each and every allegation set forth in the preceding

paragraphs above as if fully set forth herein, except any allegations that Defendants made any untrue statements and omissions intentionally or recklessly. For the purposes of this Count, Sealink expressly disclaims any claim of fraud or intentional misconduct. 153. 154. This is a claim for negligent misrepresentation against Defendants. As a corporate parent, JPMorgan Chase & Co. directed the activities of

JPMorgan Chase Bank, N.A. (which is the successor to Washington Mutual Bank), J.P. Morgan Securities LLC (which is the successor to Bear Stearns & Co. Inc.), J.P. Morgan Acquisition Corporation and J.P. Morgan Acceptance Corporation I. 155. Sealink made 43 separate investments in six offerings of RMBS that Defendants

securitized and sold. 156. It is commonly accepted industry practice for underwriters of RMBS to perform

due diligence on the loans backing the RMBS to ensure that the quality of the loans are as represented in the offering materials provided to investors. The understanding that RMBS underwriters generally perform such due diligence, caused Sealink to believe that it could reasonably rely upon the Offering Materials.
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Moreover, by virtue of the third-party due

diligence Defendants performed, and Defendants’ extensive role in originating, purchasing, securitizing and selling the RMBS that Sealink purchased, Defendants had unique and special knowledge and expertise regarding the loans backing those securities, including their quality, the nature of the underwriting, and the value of the collateral. 157. In particular, because Sealink neither had the same level of information

regarding the mortgage lenders for the loans purchased by Defendants nor had access to the loan files for the mortgage loans underlying the Defendants’ RMBS, and because Sealink could not examine the underwriting quality of the mortgage loans in the securitizations on a loan-by-loan basis, Sealink was heavily dependent on the Defendants’ unique and special knowledge regarding the underwriting standards of the relevant mortgage originators and the underlying loans when determining whether to invest in each RMBS. Sealink was entirely dependent on the Defendants to provide accurate information regarding the underwriting standards for the loans and the quality of those loans in engaging in their analysis. Accordingly, the Defendants were uniquely situated to evaluate the economics of each RMBS. 158. Because Sealink was without access to critical information regarding the

underwriting standards of the mortgage originators for the Defendants’ RMBS, coupled with the industry understanding that RMBS underwriters perform due diligence, Defendants had a duty to Sealink to verify the accuracy of the Offering Materials. 159. Over the course of almost two years, for 43 separate investments, Sealink relied

on Defendants’ unique and special knowledge regarding the quality of the underlying mortgage loans and their underwriting when determining whether to invest in the RMBS. This

longstanding relationship, coupled with Defendants’ unique and special knowledge about the underlying loans and the underwriting standards of the mortgage originators, created a special relationship of trust, confidence, and dependence between Defendants and Sealink.
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160.

Defendants were aware that Sealink relied on their unique and special expertise

and experience and depended upon them for accurate and truthful information. Defendants also knew that the facts regarding the originators’ compliance with their underwriting standards were exclusively within Defendants’ knowledge. 161. Based on their expertise, superior knowledge, and relationship with Sealink,

Defendants owed a duty to Sealink to provide complete, accurate, and timely information regarding the mortgage loans and the RMBS. Defendants breached their duty to provide such information to Sealink. 162. Defendants likewise made misrepresentations, which they were negligent in not

knowing at the time to be false, in order to induce Sealink’s investment in the RMBS. Defendants provided the Offering Materials to Sealink in connection with the RMBS for the purpose of informing Sealink of material facts necessary to make an informed judgment about whether to purchase the RMBS. In providing these documents, Defendants knew that the information contained and incorporated therein would be used for a serious purpose, and that Sealink, like other reasonably prudent investors, intended to rely on the information. 163. As alleged above, the Offering Materials contained materially false and

misleading information. 164. Defendants should have known that the information in the Offering Materials

was materially false and misleading. 165. Unaware that the Offering Materials contained materially false and misleading

statements, Sealink reasonably relied on those false and misleading statements when deciding to purchase the RMBS in the offerings. 166. Sealink purchased RMBS from J.P. Morgan Acceptance Corporation I, EMC

Mortgage LLC, Structured Asset Mortgage Investments II Inc., WaMu Asset Aceptance
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Corporation, and from J.P. Morgan Securities LLC, Bear Stearns & Co. Inc., and WaMu Capital Corporation in the RMBS offerings, and is therefore in privity with J.P. Morgan Acceptance Corporation I, EMC Mortgage LLC, Structured Asset Mortgage Investments II Inc., WaMu Asset Acceptance Corporation, J.P. Morgan Securities LLC, Bear Stearns & Co. Inc., and WaMu Capital Corporation. 167. Based on Defendants’ expertise and specialized knowledge, and in light of the

false and misleading representations in the Offering Materials, Defendants owed Sealink a duty to provide it with complete, accurate, and timely information regarding the quality of the RMBS, and breached their duty to provide such information to Sealink. 168. Sealink reasonably relied on the information provided by Defendants and have

suffered substantial damages as a result of their misrepresentations. FIFTH CAUSE OF ACTION (Successor and Vicarious Liability Against JPMorgan Chase & Co., JPMorgan Chase Bank, N.A., and J.P. Morgan Securities LLC) 169. Sealink repeats and realleges each and every allegation set forth in the preceding

paragraphs above as if fully set forth herein. 170. Defendant JPMorgan Chase & Co. is the successor to The Bear Stearns

Companies, Inc., pursuant to the Merger JP Morgan Chase & Co. is liable for The Bear Stearns Companies, Inc.’s wrongdoing, in its entirety, under common law, because The Bear Stearns Companies, Inc. merged and consolidated with JPMorgan Chase & Co., because JPMorgan Chase & Co. has expressly or impliedly assumed The Bear Stearns Companies, Inc.’s tort liabilities, and because JPMorgan Chase & Co. is a mere continuation of The Bear Stearns Companies, Inc. As such, this action is brought against JPMorgan Chase & Co. both in its own capacity and as successor-in-interest to The Bear Stearns Companies Inc.

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171.

Defendant J.P. Morgan Securities LLC is the successor to Bear Stearns & Co.

Inc., pursuant to the Merger. J.P. Morgan Securities LLC is liable for Bear Stearns & Co. Inc.’s wrongdoing, in its entirety, under common law, because Bear Stearns & Co. Inc. merged and consolidated with J.P. Morgan Securities LLC, because J.P. Morgan Securities LLC has expressly or impliedly assumed Bear Stearns & Co. Inc.’s tort liabilities, and because J.P. Morgan Securities LLC is a mere continuation of Bear Stearns & Co. Inc. This action is thus brought against J.P Morgan Securities LLC both in its own capacity and as successor-in-interest to Bear Stearns & Co. Inc. 172. Defendant JPMorgan Chase Bank, N.A. succeeded to Washington Mutual

Bank’s liabilities pursuant to the PAA. JPMorgan Chase Bank, N.A. is liable for Washington Mutual Bank’s wrongdoing, in its entirety, under common law, because Washington Mutual Bank merged and consolidated with JPMorgan Chase Bank, N.A., because JPMorgan Chase Bank, N.A. has expressly or impliedly assumed Washington Mutual Bank’s tort liabilities, and because JPMorgan Chase Bank, N.A. is a mere continuation of Washington Mutual Bank. This action is thus brought against JPMorgan Chase Bank, N.A. both in its own capacity and as a successor to Washington Mutual Bank. PRAYER FOR RELIEF WHEREFORE, Plaintiffs pray for relief and judgment, as follows: (a) Awarding compensatory and/or rescissory damages in favor of Plaintiff against

all Defendants, jointly and severally, for all damages sustained as a result of Defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon; (b) (c) Awarding punitive damages for Plaintiff’s common-law fraud claims; Awarding Plaintiff its reasonable costs and expenses incurred in this action,

including counsel fees and expert fees; and (d) Such other relief as the Court may deem just and proper.
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JURY DEMAND Plaintiffs demand a trial by jury on all claims so triable. Dated: September 29, 2011 New York, New York Respectfully Submitted, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP /s/ Gerald H. Silk Gerald H. Silk Avi Josefson Michael D. Blatchley Ross Shikowitz 1285 Avenue of the Americas, 38th Floor New York, NY 10019 Tel: (212) 554-1400 Fax: (212) 554-1444 jerry@blbglaw.com avi@blbglaw.com michaelb@blbglaw.com ross@blbglaw.com Counsel for Plaintiff

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FILED: NEW YORK COUNTY CLERK 09/29/2011
NYSCEF DOC. NO. 1

INDEX NO. 652679/2011 RECEIVED NYSCEF: 09/29/2011

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

SEALINK FUNDING LIMITED, Plaintiffs, v. COUNTRYWIDE FINANCIAL CORPORATION; COUNTRYWIDE HOME LOANS, INC.; CWALT, INC.; CWABS, INC.; CWHEQ, INC.; COUNTRYWIDE SECURITIES CORPORATION; ANGELO MOZILO; DAVID A. SAMBOL; BANK OF AMERICA CORP.; BAC HOME LOANS SERVICING, L.P., and; NB HOLDINGS CORPORATION, Defendants. SUMMONS Index No.

TO THE ABOVE-NAMED DEFENDANTS: Countrywide Financial Corporation 4500 Park Granada Calabasas, California 91302 Countrywide Securities Corporation 4500 Park Granada Calabasas, California 91302 CWABS, Inc. 4500 Park Granada Calabasas, California 91302 Angelo R. Mozilo 2816 Ladbrook Way Thousand Oak, California 91361 Bank of America Corp. 1 Bryant Park New York, New York 10036

Countrywide Home Loans, Inc. 4500 Park Granada Calabasas, California 91302 CWALT, Inc. 4500 Park Granada Calabasas, California 91302 CWHEQ, Inc. 4500 Park Granada Calabasas, California 91302 David A. Sambol 23807 Long Valley Road Hidden Hills, California 91302 BAC Home Loans Servicing, LP 1 Bryant Park New York, New York 10036

NB Holdings Corp., c/o The Corporation Trust Company Corporation Trust Center 1209 Orange Street, Delaware 19801

You are hereby summoned to answer the complaint in this action and to serve a copy of your answer, or if the complaint is not served with this summons, to serve notice of appearance, on the plaintiff’s attorneys within twenty (20) days after the service of this summons, exclusive of the day of service (or within thirty (30) days after service is complete if this summons is not personally delivered to you within the State of New York); and in case of your failure to appear or answer, judgment will be taken against you by default for relief demanded herein. Venue is proper in this Court pursuant to CPLR § 503(a) and Plaintiff has designated New York County as the place of trial.

Dated: New York, New York September 29, 2011

Respectfully submitted, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP /s/ Gerald H Silk Gerald H. Silk Avi Josefson Michael D. Blatchley Ross Shikowitz 1285 Avenue of the Americas, 38th Floor New York, NY 10019 Tel: (212) 554-1400 Fax: (212) 554-1444 jerry@blbglaw.com avi@blbglaw.com michaelb@blbglaw.com ross@blbglaw.com Counsel for Plaintiff

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SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK SEALINK FUNDING LIMITED, Plaintiff, v. COUNTRYWIDE FINANCIAL CORPORATION; COUNTRYWIDE HOME LOANS, INC.; CWALT, INC.; CWABS, INC.; CWHEQ, INC.; COUNTRYWIDE SECURITIES CORPORATION; ANGELO MOZILO; DAVID A. SAMBOL; BANK OF AMERICA CORP.; BAC HOME LOANS SERVICING, L.P., and; NB HOLDINGS CORPORATION, Defendants. COMPLAINT Index No.

JURY TRIAL DEMANDED

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Plaintiff Sealink Funding Limited (“Sealink” or “Plaintiff”), by its attorneys Bernstein Litowitz Berger & Grossmann LLP, for the Complaint herein against Countrywide Financial Corporation (“Countrywide Financial”), Countrywide Home Loans, Inc. (“Countrywide Home”), Countrywide Securities Corporation (“Countrywide Securities”), CWALT, Inc., CWABS, Inc., CWHEQ, Inc., Angelo Mozilo, David A. Sambol (collectively, “Countrywide” or the “Countrywide Defendants”), Bank of America Corp., BAC Home Loans Servicing, L.P., and NB Holdings Corp. (collectively, the “Bank of America Defendants,” and together with the Countrywide Defendants, “Defendants”) alleges the following: I. SUMMARY OF THE ACTION 1. This action concerns a massive fraud perpetrated by Defendant Countrywide

Financial and certain of its officers and affiliates against Plaintiff Sealink, and investor in residential mortgage-backed securities (“RMBS”) that contained loans purchased, financed, and securitized by Defendants. The Plaintiff invested in purportedly low-risk Countrywide RMBS (the “Certificates”), in reliance on Defendants’ representations that the Certificates were backed by mortgages originated pursuant to specific underwriting guidelines, collateralized by accurately appraised properties, and rated investment-grade (primarily AAA). In purchasing the Certificates, the Plaintiffs and their investment advisors relied on registration statements, prospectuses, draft prospectus supplements, prospectus supplements, term sheets, and other materials (the “Offering Materials”) prepared by and provided to them by the Defendants. These representations by Defendants were recklessly or knowingly false when made, and caused Sealink to believe that the Defendants’ RMBS it purchased were safe investments. In reality, Countrywide was an enterprise driven by only one purpose – to originate and securitize as many mortgage loans as possible into MBS to generate profits for the Countrywide

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Defendants, without regard to the investors that relied on the critical, false information provided to them with respect to the related Certificates. 2. Sealink purchased approximately $1.6 billion worth of Defendants’ RMBS in 30

offerings between 2005 and 2007 in reliance on the Offering Materials prepared and provided by Defendants. The Offering Materials contained numerous representations about the

purportedly conservative mortgage underwriting standards applied by the mortgage originators, the appraisals of the mortgaged properties, and other facts regarding the collateral underlying the RMBS that were material to Sealink’s investment decisions. 3. However, as Sealink would only later discover, the originators whose loans

collateralized the Defendants’ RMBS purchased by Sealink did not employ rigid underwriting processes and were among the worst culprits in the subprime lending industry. These infamous lenders included Countrywide’s own subprime mortgage originator, Countrywide Home, as well as other notorious mortgage originators American Home Mortgage Investment Corporation (“American Home”), Decision One Mortgage, Fremont Investment & Loan (“Fremont”), Impac Funding Corp., and AIG subsidiary Wilmington Finance, Inc. These originators have since

folded up their operations, filed for bankruptcy or been shut down by regulators, and are the subject of numerous governmental investigations and private lawsuits alleging misconduct arising out of pervasive illegal and improper mortgage lending practices and other violations of law. 4. Defendants knew or recklessly disregarded that those lenders were issuing high-

risk loans that did not conform to their respective underwriting standards. Countrywide knew that its own subprime mortgage originator subsidiary, Countrywide Home Loans, was issuing mortgages in flagrant disregard of its stated guidelines. Countrywide played a ubiquitous role in the mortgage origination and securitization process through Countrywide Home, which
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originated hundreds of millions of dollars of the loans backing the Countrywide RMBS that Sealink purchased. In the Offering Materials, Countrywide claimed that Countrywide Home— which acted as the sponsor of Sealink’s Countrywide RMBS—conducted a “re-underwriting” of a random selection of mortgage loans “to determine whether they were underwritten generally in accordance with the related Originator’s underwriting guidelines or reasonable exceptions thereto”. 5. Countrywide was driven to purchase and securitize defective loans despite its

knowledge that the originators abandoned their guidelines for a sole purpose: to securitize as many mortgage loans as possible into RMBS and generate profits for the Countrywide Defendants without regard to the investors that relied on the critical, but false information provided to them with respect to the related Certificates. 6. The scope of the Countrywide Defendants’ fraud is reflected by, among other

things: (i) a securities fraud action brought by the United States Securities and Exchange Commission (“SEC”) against three former senior executives of Countrywide Financial, in which the Court denied those Defendants’ motion for summary judgment and which then culminated in an historic settlement (the “SEC Action”); (ii) regulatory actions initiated by multiple state attorneys general which resulted in settlements worth over eight billion dollars; (iii) other fraud actions brought against the Countrywide Defendants by investors of mortgagebacked securities (“MBS”) and insurers related to the same wrongdoing alleged herein, along with federal securities fraud claims brought against Countrywide for its misstatements to the investing public regarding the company’s mortgage loan underwriting standards; and (iv) the enormous number of defaults and foreclosures in the underlying mortgages supporting the RMBS resulting in substantial damages to investors in Countrywide’s RMBS.

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7.

In addition to the misrepresentations in the Offering Materials about the quality

of the securitized loans, Defendants also knowingly provided false information to the credit rating agencies in order to secure an investment grade rating for its RMBS. As a result of these practices, Defendants knew that the ratings assigned to its securitizations did not reflect the true credit quality of the Certificates Sealink purchased. 8. This misconduct has resulted in astounding rates of default on the loans

underlying the Defendants RMBS and massive downgrades of the Certificates, the vast majority of which are now considered “junk.” The underlying loan performance and significant

foreclosures have caused Plaintiffs’ Certificates to have their credit ratings downgraded. Today, the Certificates are no longer marketable or salable at or near the prices Sealink paid for them, and Sealink has suffered significant losses as a result of the fraud perpetrated by Defendants. 9. Sealink seeks compensatory and/or rescissory damages against Defendants for

fraud, fraud in the inducement, aiding and abetting fraud, and negligent misrepresentation. II. JURISDICTION AND VENUE 10. This Court has jurisdiction over each of the non-domiciliary Defendants because

each of them transacts business within the State of New York within the meaning of CPLR § 302(a)(1) and each of them committed a tortious act inside the State of New York or outside the State of New York causing injury within the State of New York within the meaning of CPLR §§ 302(a)(2) and 302(a)(3). The amount in controversy exceeds $150,000. 11. Venue is proper in this Court pursuant to CPLR § 503(a) and Plaintiff has

designated New York County as the place of trial.

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III.

THE PARTIES A. 12. Plaintiffs Plaintiff Sealink Funding Limited is a company incorporated under the laws of

Ireland that was established to receive, hold and manage RMBS purchased by certain special purpose vehicles formerly sponsored by SachsenLB (the “SPVs”), and the claims asserted herein arise from the purchase of those RMBS by the SPVs. Sealink Funding Limited and the SPVs are hereinafter collectively referred to as “Sealink.” B. 13. Countrywide Defendants Defendant Countrywide Financial Corporation (“Countrywide Financial” or the

“Company”) was, at all relevant times, a Delaware corporation with its principal executive offices located at 4500 Park Granada, Calabasas, California. Countrywide Financial was a holding company which, through its subsidiaries, engaged in mortgage lending, mortgage banking, banking and mortgage warehouse lending, dealing in securities and insurance underwriting throughout the United States. As discussed below, Countrywide Financial merged with and became a wholly owned subsidiary of Bank of America in 2008. 14. Defendant Countrywide Home Loans, Inc. (“Countrywide Home”), a direct

wholly owned subsidiary of Countrywide Financial, is a New York corporation with its principal place of business in Calabasas, California. Countrywide Home originates and services residential home mortgage loans. Countrywide Home served as the “Seller” of the mortgage loans comprising the security for each of the Certificates purchased by Plaintiffs, meaning that it played a central role in providing the pools of mortgage loans upon which the Certificates were based to the issuing trusts. Countrywide Home was acquired by Bank of America on July 1, 2008, and is now doing business as Bank of America Home Loans, a division of Bank of America.

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15.

Defendant Countrywide Securities Corporation (“Countrywide Securities”), a

wholly owned subsidiary of Countrywide Financial, is a California corporation with its principal place of business in Calabasas, California. During times relevant to this Complaint, Countrywide Securities had an office in New York, New York. Countrywide Securities is a registered broker-dealer and was an underwriter of the offerings of MBS. Securities was acquired by Bank of America on July 1, 2008. 16. Defendant CWALT, Inc. was, at times relevant to this Complaint, a Delaware Countrywide

corporation and a limited-purpose subsidiary of Countrywide Financial. CWALT’s principal executive offices were located at 4500 Park Granada, Calabasas, California. CWALT served in the role of the “Depositor” and was an “Issuer” of the Certificates within the meaning of the Securities Act, 15 U.S.C. § 77b(a)(4) and 17 CFR §230.191. 17. Defendant CWABS, Inc. was, at times relevant to this Complaint, a Delaware

corporation and a limited-purpose subsidiary of Countrywide Financial. CWABS’s principal executive offices were located at 4500 Park Granada, Calabasas, California. CWABS served in the role of the “Depositor” and was an “Issuer” of the Certificates within the meaning of the Securities Act, 15 U.S.C. § 77b(a)(4) and 17 CFR §230.191. 18. Defendant CWHEQ, Inc. was, at times relevant to this Complaint, a Delaware

corporation and a limited-purpose subsidiary of Countrywide Financial. CWABS’s principal executive offices were located at 4500 Park Granada, Calabasas, California. CWABS served in the role of the “Depositor” and was an “Issuer” of the Certificates within the meaning of the Securities Act, 15 U.S.C. § 77b(a)(4) and 17 CFR §230.191. 19. Defendants CWALT, CWABS, and CWHEQ are collectively referred to herein The Depositor Defendants were controlled directly by

as the “Depositor Defendants.”

Countrywide Financial, including by the appointment of Countrywide Financial executives as
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directors and officers of these entities. Revenues flowing from the issuance and sale of MBS issued by CWALT, and CWABS, and CWHEQ, and the Issuing Trusts were passed through to Countrywide and consolidated into Countrywide Financial’s financial statements. Defendant Countrywide Financial, therefore, exercised actual day-to-day control over Defendants CWALT, CWABS, and CWHEQ. 20. Defendant Angelo R. Mozilo (“Mozilo”), Countrywide’s co-founder, was

Chairman of Countrywide’s Board of Directors starting in March 1999 and Chief Executive Officer (“CEO”) starting in February 1998. He was also President of Countrywide Financial from March 2000 through December 2003. Mozilo was a member of Countrywide Financial’s Board beginning in 1969, when the Company was founded, and served in other executive roles since then. He left Countrywide on July 1, 2008. In October 2010, Mozilo settled securities fraud claims brought against him by the SEC for $67.5 million in penalties and forfeiture of illgotten gains, the largest penalty ever paid by a senior corporate executive in an SEC settlement. At all relevant times, Mozilo directed, authorized, and participated in the Countrywide Defendants’ wrongdoing, as alleged herein. 21. Defendant David Sambol (“Sambol”) joined Countrywide Financial in 1985 and

was Countrywide Financial’s President and Chief Operating Officer (“COO”) from September 2006 until Countrywide Financial was acquired by Bank of America in 2008. Sambol was Countrywide Financial’s executive managing director for business segment operations and Chief Production Officer from April 2006 until September 2006, and executive managing director and chief of mortgage banking and capital markets from January 2004 until April 2006. Sambol was also Chairman, CEO and a member of the Board of Directors of Countrywide Home beginning in 2007. In October 2010, Sambol settled securities fraud claims brought

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against him by the SEC. At all relevant times, Sambol directed, authorized, and participated in the Countrywide Defendants’ wrongdoing, as alleged herein. 22. The Defendants identified in ¶¶13-21 are hereinafter collectively referred to as

the “Countrywide Defendants.” C. 23. Bank Of America Defendants Defendant Bank of America Corp. (“Bank of America”) is a successor to

Defendant Countrywide. On July 1, 2008, Countrywide Financial Corporation completed a merger with Red Oak Merger Corporation (“Red Oak”), a wholly owned subsidiary of Bank of America that was created for the sole purpose of facilitating the acquisition of Countrywide, pursuant to an Agreement and Plan of Merger, dated as of January 11, 2008, by and among Bank of America, Red Oak, and Countrywide Financial. The acquisition was an all-stock transaction. Bank of America has assumed Countrywide’s liabilities, having paid to resolve other litigation arising from misconduct such as predatory lending allegedly committed by Countrywide. At the time of Bank of America’s purchase of Countrywide, a Bank of America spokesperson publicly stated: “We bought the company and all of its assets and liabilities . . . . We are aware of the claims and potential claims against the company and have factored these into the purchase.” Bank of America is a successor-in-interest to the Countrywide Defendants and is thus vicariously liable for the conduct of the Countrywide Defendants alleged herein.1 24. Defendant BAC Home Loans Servicing, LP is a limited partnership and

subsidiary of Bank of America with its principal offices at 4500 Park Granada, Calabasas, CA.

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The federal court in the SEC Action against Mozilo and Sambol recently noted that “Countrywide’s remaining operations and employees have been transferred to Bank of America, and Bank of America ceased using its Countrywide name in April 2009.” Securities and Exchange Commission v. Mozilo, No. 09-CV-3994, 2010 WL 3656068, at *2 n.2 (C.D. Cal. Sept. 16, 2010).
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BAC Home Loans Servicing, LP is identified in mortgage contracts and other legal documents as “BAC Home Loans Servicing, LP FNA Countrywide Home Loans Servicing, LP,” meaning it was formerly known as Countrywide Home Loans Servicing, LP, the Countrywide subsidiary responsible for servicing Countrywide’s mortgage loans after they are originated. 25. Defendant NB Holdings Corporation is a Delaware corporation. NB Holdings

Corporation is one of the shell entities used to effectuate the Bank of America-Countrywide merger, and is a successor to Defendant Countrywide Home Loans. On July 3, 2008, Defendant Countrywide Home completed the sale of substantially all of its assets to NB Holdings Corporation, a wholly-owned subsidiary of Bank of America. 26. The Defendants identified in ¶¶23-25 are hereinafter collectively referred to as

the “Bank of America Defendants.” IV. FACTS RELEVANT TO SEALINKS’S CLAIMS A. 27. The Defendants’ RMBS Purchased By Sealink RMBS, such as the Defendants RMBS purchased by Sealink, provide the RMBS

investor with an interest in income generated by a pool of mortgages. The actual securities themselves represent a participating interest in an “issuing trust” that holds the mortgage loan pool. Although the structure and underlying collateral of the mortgages varies among the 37 offerings (and 43 tranches) of RMBS that Sealink purchased, they all function in a similar manner: The cash flows from the borrowers who make interest and principal payments on the individual mortgages comprising the mortgage pool are “passed through” to the certificate holders, like Sealink. Accordingly, failure by those borrowers to make their mortgage payments directly impacts the returns Sealink earns on its investment. Moreover, a default resulting in foreclosure may cause the trust to sell the subject property at a loss – a risk that increases when the appraisals utilized in underwriting the loans overstated the value of the property that serves

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as collateral for the mortgage. For these reasons, the proper underwriting of the mortgages underlying the RMBS – including verifying the credit quality of the borrower and the value of the real estate – is essential to ensuring that the RMBS perform according to the representations made to investors like Sealink. 28. The first step in creating an RMBS is the acquisition by a “depositor” of an

inventory of loans from a “sponsor” or “seller,” which either originates the loans or acquires the loans from other mortgage originators, in exchange for cash. The type of loans in the inventory varies, and can include conventional, fixed-rate or adjustable-rate mortgage loans, secured by first liens, junior liens, or a combination of first and junior liens, with various lifetimes to maturity. The depositor then transfers, or deposits, the acquired pool of loans to an “issuing trust.” Although there can be more than one “sponsor” or “depositor” in a given securitization, in most of the Defendants RMBS purchased by Sealink, affiliates and/or subsidiaries of the Defendants acted as the “depositor” and “sponsor” of the securitization. 29. The depositor then securitizes the pool of loans in the issuing trust so that the

rights to the cash flows from the pool can be sold to investors. The securitization transactions are structured such that the risk of loss is divided among different levels of investment, or “tranches,” with each having a different level of risk and reward. Typically, losses on the underlying loans—whether due to default, delinquency, or otherwise—are generally applied in reverse order of seniority. As such, the most senior tranches of pass-through securities are rated by credit rating agencies as the best quality, or “AAA/Aaa.” Junior tranches, which usually obtained lower ratings, ranging from “AA/Aa” to “BB/Ba,” are less insulated from risk, but offer greater potential returns in the form of higher rates of interest. All of the Defendants RMBS purchased by Sealink were among the most senior, risk-averse tranches of the relevant

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offerings and were all rated “AAA/Aaa” by at least one credit rating agency at issuance and when purchased by Sealink. 30. Once the tranches are established, the issuing trust passes the securities back to

the depositor, which becomes the issuer of the RMBS. The depositor then passes the RMBS to the underwriter, which offers and sells the securities to Sealink and other investors in exchange for cash that is passed back to the depositor, less any fees collected by the underwriter. Typically, underwriters collect between 0.2% to 1.5% in discounts, concessions or commissions in serving as an underwriter of an RMBS securitization. By serving as a sponsor and depositor of the securitizations, the Defendants earned even more. 31. Because the cash flow from the loans in the collateral pool of a securitization is

the source of funds to pay the holders of the RMBS issued by the trust, the credit quality of those securities depends upon the credit quality of the loans in the collateral pool. The most important information about the credit quality of the loans is contained in the “loan files” that the mortgage originator develops while making the loans. For residential mortgage loans, each loan file normally contains documents including: the borrower’s application for the loan; verification of the borrower’s income, assets, and employment; references; credit reports on the borrower; an appraisal of the property that will secure the loan and provide the basis for important measures of credit quality, such as loan-to-value ratios. 32. The collateral pool of loans for each securitization usually includes thousands of

loans. Instead of each potential investor reviewing thousands of loan files, Defendants, in their roles as a sponsor and underwriter of the securitization, is responsible for gathering, verifying and presenting to potential investors accurate and complete information about the credit quality and characteristics of the loans that are deposited into the trust. Indeed, the single most important factors for Sealink—and, for any investor—in purchasing Defendants RMBS were:
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(1) the ability of the underlying borrowers to repay their mortgages; (2) the ability for the trust to recover its losses in case of default by ensuring the properties were appropriate collateral for the loans and were accurately valued; and (3) the rate of interest received on the RMBS. The loan files themselves are not provided or available to RMBS investors like Sealink, who must instead rely upon Defendants’ representations about the mortgages underlying the RMBS and the process used to select and review those loans. 33. As noted, all of the Defendants RMBS purchased by Sealink were rated triple-A

at issuance, as set forth below:
Offering &  Original  Top Three  Tranche  Expenditure  Originators 1  AHMA  $45,000,000 American Home Mortgage   2007‐2 A2A      Investment Corp.  2  CWALT  $50,000,000 Countrywide Home Loans, Inc.    2006‐45T1 1A2  3  CWALT  $50,000,000 Countrywide Home Loans, Inc.    2006‐HY12 A6  4  CWALT  $95,000,000 Decision One Mortgage   2006‐OC2 1A  The Mortgage Store Financial, Inc.   American Home Mortgage Corp. 5  CWALT  $56,567,000 Decision One Mortgage   2006‐OC4  GreenPoint Mortgage Corporation   2A2A  Pinnacle Financial Corp.  6  CWALT  $80,000,000 Decision One Mortgage   2006‐OC6  Countrywide Home Loans   2A2A  Ohio Savings Bank 7  CWALT  $50,000,000 Countrywide Home Loans, Inc.    2007‐5CB 2A5  8  CWALT  $30,000,000 Countrywide Home Loans, Inc.  2007‐HY7C A3  9  CWALT  $50,000,000 Countrywide Home Loans  2007‐OA7 A2A  10  CWHEL  $80,000,000 Countrywide Bank, N.A.   2006‐D 2A  Countrywide Home Loans 11  CWL  $45,000,000 Countrywide Home Loans   2005‐AB4 2A3  12  CWL  $50,000,000 Countrywide Home Loans, Inc.   2006‐11 3AV2  13  CWL  $80,000,000 Countrywide Home Loans, Inc.   2006‐18 2A2  14  CWL  $60,000,000 Countrywide Home Loans, Inc.    2006‐3 2A2  # 
Initial 
Moody's Fitch  S&P  Moody's

Current
Fitch  S&P 

Aaa  Aaa  Aaa  Aaa 

  

AAA 

C  Ca  C  Ca 

   D       

CC  D  D  D 

AAA  AAA        AAA  AAA 

Aaa 

  

AAA  Caa2 

  

CCC 

Aaa 

  

AAA 

Ca 

  

Aaa  Aaa  Aaa  Aaa  Aaa  Aaa  Aaa  Aaa 

AAA  AAA                       AAA  AAA 

Ca  C  C 

D                      

D  CC  CCC  D  CCC  CCC  CCC  BBB+/ *‐

AAA  Ca/*‐  AAA  Caa3  AAA  Caa3  AAA  Caa2  AAA  B2 

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#  15  16  17  18  19  20  21  22  23 

$32,583,000 Wilmington Finance, Inc.   Quick Loan Funding Corp.   CIT Communications  24  CWL  $48,914,000 Decision One Mortgage   2007‐BC3 2A3  Wilmington Finance, Inc.   CIT Group/Consumer Finance, Inc. 25  GSCC  $73,877,000 American Home Mortgage Corp.   2006‐1 A1  Countrywide Home Loans   First National Bank of Nevada  26  IMM  $75,000,000 Impac Funding Corporation   2005‐7 A1  Decision One Mortgage 27  IMSA  $80,000,000 Impac Funding Corporation   2006‐3 A2  28  IMSA  $58,000,000 Impac Funding Corporation  2007‐1 A2  29  IMSA  $32,900,00 Impac Funding Corporation   2007‐1 AM  30  JPMAC  $32,900,000 Impac Funding Corporation   2006‐FRE2 A3  31  MSHEL  $50,000,000 Accredited Home Lenders   2007‐1 A4  Wilmington Finance, Inc.   Fremont Investment & Loan  

Offering &  Tranche  CWL  2006‐5 2A2  CWL  2006‐8 2A3  CWL  2006‐IM1 A2  CWL  2007‐1 2A4  CWL  2007‐2 2A4  CWL  2007‐3 2A3  CWL  2007‐6 2A3  CWL  2007‐7 2A3  CWL  2007‐BC1 2A4 

Original  Top Three  Expenditure  Originators $25,000,000 Countrywide Home Loans, Inc.   $55,000,000 Countrywide Home Loans, Inc.   $30,000,000 Impac Funding Corporation   $30,000,000 Countrywide Home Loans, Inc.    $25,800,000 Countrywide Home Loans, Inc.   $38,000,000 Countrywide Home Loans, Inc.    $60,000,000 Countrywide Home Loans, Inc.   $50,000,000 Countrywide Home Loans, Inc.   

Initial 
Moody's Fitch  S&P  Moody's

Current
Fitch  S&P 

Aaa  Aaa  Aaa  Aaa  Aaa  Aaa  Aaa  Aaa  Aaa 

                          

AAA 

B2 

                          

B‐  B‐/*‐ CCC  CCC  CCC  B‐/*‐ CCC  B‐/*‐ CCC 

AAA  Caa3  AAA  AAA  AAA  AAA  AAA  AAA  AAA  Ca  C  C  Ca  Ca  Ca  C 

Aaa 

  

AAA 

  

CCC 

Aaa 

AAA  AAA  Caa3 

CCC 

Aaa  Aaa  Aaa  Aaa  Aaa  Aaa 

                 

AAA  Caa2  AAA  Caa3  AAA  Caa3/ *  AAA  Caa3/ *  AAA  C  AAA  Ca 

                 

CC  D  CCC  CCC  D  CCC 

B. 34.

Defendants’ Activities In The Subprime Mortgage Arena Defendants’ activities as a buyer, financer and securitizer of residential mortgage

loans have been the focus of numerous government investigations and prosecutions as well as private investor lawsuits. At the height of the subprime bubble, Defendants’ executives became concerned about competition in the RMBS arena from their rivals. In response, Defendants

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aggressively pursued opportunities to profit from the booming subprime mortgage securitization industry. 35. Defendants’ activities were integral to the growth and proliferation of high-risk Mortgage originators generated profits

mortgages that contributed to the financial crisis.

primarily through the sale of their loans to investment banks like Defendants, and the originators were therefore driven to originate and sell as many loans as possible. Increased demand for mortgages by banks like Defendants, which, as noted above, were competing to sell mortgage-backed products, led to increased volume in mortgage originations. That increased volume, in turn, led to a decrease in the gain-on-sale margins that mortgage originators received from selling pools of loans. As a result, originators began to borrow money from the same large banks that were buying their mortgages in order to fund the origination of even more mortgages. 36. One of the principal ways originators obtained such capital was by establishing a

warehouse line of credit with an investment bank. The line of credit, in turn, would be secured by the very mortgage loans that the investment bank would purchase for securitization. Investment banks, such as Defendants, earned fees and interest income on those warehouse lines of credit. C. 37. Defendants’ Role Was To Ensure The Quality Of The Loans Backing The RMBS Defendants and the mortgage originators utilized two methods to securitize

mortgages into RMBS for sale to investors. Specifically, the originators aggregated the loans into pools and would either (1) deposit them into a trust that would issue RMBS backed by the loans (referred to herein as an “originator securitization”), or (2) sell the loan pools to an investment bank, and the investment bank would then deposit the securities into a trust that would issue securities backed by the loans (“principal securitization”). Under the first

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approach, Defendants profited by the fees they received by serving as an underwriter of the securities issued by the originator. Under the second approach, referred to herein as a “principal securitization” because the investment bank is securitizing the loans on its own behalf, Defendants profited off of the difference in the price it paid for the loan pools it purchased from the originator and that which it received from the sale of those loans as RMBS. 38. Most of the RMBS purchased by Sealink at issue in this action were securitized

through principal securitization, whereby Defendants would first purchase loan pools originated by third-party originators and/or loan sellers and then sell those loans into the RMBS trust as the sponsor of a mortgage securitization. Some investors prefer principal securitizations to

originator securitizations because the involvement of a sophisticated investment bank throughout the securitization process indicates a higher degree of oversight and due diligence on the mortgages being selected for inclusion in the RMBS. 39. Prior to purchasing loans from an originator in a principal securitization,

Defendants would perform due diligence on the mortgage loan pools by examining three areas—credit, compliance and valuation. First, credit diligence examined a sampling of the individual loans in a given loan pool to assess their quality and compliance with the underwriting guidelines of the originator. An originator’s underwriting guidelines are a critical tool for investors to evaluate the risk of default on the loans that serve as collateral for RMBS. Prudent lending standards—as articulated in an originator’s underwriting guidelines—are addressed in numerous federal guidance statements requiring that federally-regulated institutions adopt well-defined underwriting parameters such as acceptable loan-to-value ratios,

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debt-to-income ratios, and minimum acceptable credit scores.2 Those federal standards have been adopted by the subprime industry as a whole through substantially similar guidance published by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators. These standards are intended not only to protect borrowers to ensure that they can repay their loans, but also to ensure the safety and soundness of individual lending institutions and the financial system as a whole. Second, compliance diligence focused on whether the loans were originated in compliance with state, federal and local laws, including predatory lending and truth-in-lending statutes. Third, valuation diligence checked the accuracy of the originator’s reported property valuations of the collateral backing the loans. In a

principal securitization, this due diligence provides comfort to investors that Morgan Stanley has ensured that only mortgages that conform to the requirements of the RMBS at issue are being securitized. 40. In truth, Defendants routinely ignored the pervasive defects that their due

diligence identified in the loans they had purchased for securitization. Defendants deliberately concealed these defects from Sealink and other investors in order to increase their own profits, preserve their ongoing business relationships with the RMBS originators, and move risk from their own balance sheet onto investors. Instead, as discussed in further detail below, Defendants used their asymmetrical informational advantage to reap illicit profits.

2

See, e.g., 12 C.F.R. Part 34, subpart D (Office of the Comptroller of Currency standards); 12 C.F.R. Part 208, subpart C (Board of Governors of the Federal Reserve standards); 12 C.F.R. Part 365 (Federal Deposit Insurance Corporation standards); 12 C.F.R. 560.100 and 12 C.F.R. 560.101 (Office of Thrift Supervision standards); and 12 CFR 701.21 (National Credit Union Administration standards).
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D. 41.

Factors Impacting The Quality Of The Defendants RMBS Federal regulators have long recognized the importance of sound lending and

have for years issued guidance on subprime mortgage products to ensure that borrowers are able to repay their loans. For example, the 1993 Interagency Guidelines for Real Estate Lending, issued jointly by the Board of Governors of the Federal Reserve System (Morgan Stanley’s primary federal regulator), the Office of the Comptroller of the Treasury, the Federal Depository Insurance Commission, the Office of Thrift Supervision, and the National Credit Union Administration, provided that prudently underwritten real estate loans (subprime or otherwise) “should reflect all relevant credit factors, including . . . the capacity of the borrower, or income from the underlying property, to adequately service the debt.” Federal regulators responded to the growth of newer subprime products with enhanced guidance in 1999, warning that if risks associated with subprime lending were “not properly controlled, the agencies consider subprime lending a high-risk activity that is unsafe and unsound.” 42. The 1999 guidance recognized the critical role that banks such as Defendants,

which comprised the primary market for the sale of subprime loans, played in dictating and enforcing underwriting standards for subprime mortgage lending: Institutions should not accept loans from originators that do not meet their underwriting criteria, and should regularly review loans offered to ensure that loans purchased continue to meet those criteria. Deterioration in the quality of purchased loans or in the portfolio’s actual performance versus expectations requires a thorough reevaluation of the lenders or dealers who originated or sold the loans, as well as a reevaluation of the institution’s criteria for underwriting loans and selecting dealers and lenders. Any such deterioration may also highlight the need to modify or terminate the correspondent relationship or make adjustments to underwriting and dealer/lender selection criteria. 43. The guidance also required that “institutions . . . perform an ongoing analysis of

subprime loans,” “have information systems in place to segment and stratify their portfolio (e.g.,

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by originator, loan-to-value, debt-to-income ratios, credit scores) and produce reports for management to evaluate the performance of subprime loans,” determine “whether performance meets expectations,” and “consider the source and characteristics of loans that do not meet expectations and make changes in their underwriting policies and loan administration procedures to restore performance to acceptable levels.” 44. Indeed, the fundamental basis upon which RMBS are valued is the ability of the

borrowers to repay the principal and interest on the underlying loans and the adequacy of the collateral. Thus, proper loan underwriting is critical to assessing the borrowers’ ability to repay the loans, and a necessary consideration when purchasing and pooling loans. If the loans pooled in the RMBS suffer defaults and delinquencies in excess of the assumptions built into the certificate payment structure, RMBS investors suffer losses because of the diminished cash flow into the RMBS. 45. Likewise, independent and accurate appraisals of the collateralized real estate are

essential to ensure that the mortgage or home equity loan can be satisfied in the event of a default and foreclosure on a particular property. An accurate appraisal is necessary to determine the likely price at which the foreclosed property can be sold and, thus, the amount of money available to pass through to certificate holders. 46. An accurate appraisal is also critical to calculating the loan-to-value (“LTV”)

ratio, which is a financial metric commonly used to evaluate the price and risk of RMBS. The LTV ratio expresses the amount of mortgage or loan as a percentage of the appraised value of the collateral property. For example, if a borrower seeks to borrow $90,000 to purchase a home worth $100,000, the LTV ratio is equal to $90,000 divided by $100,000, or 90%. If, however, the appraised value of the house has been artificially inflated to $100,000 from $90,000, the real LTV ratio would be 100% ($90,000 divided by $90,000). The term combined loan-to-value
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ratio (“CLTV”) applies to the situation in which more than one loan is secured by a particular property. For example, a property valued at $100,000 with a single mortgage of $50,000 has an LTV of 50%. A similar property with a value of $100,000 with a first mortgage of $50,000 and a second lien mortgage of $25,000 has an aggregate mortgage balance of $75,000, and a CLTV of 75%. 47. From an investor’s perspective, a high LTV or CLTV ratio represents a greater

risk of default on the loan. First, borrowers with a small equity position in the underlying property have “less to lose” in the event of a default. Second, even a slight drop in housing prices might cause a loan with a high LTV ratio to exceed the value of the underlying collateral, which might cause the borrower to default and would prevent the issuing trust from recouping its expected return in the case of foreclosure and subsequent sale of the property. 48. Consequently, the LTV ratios of the loans underlying the RMBS are important to

investors’ assessment of the value of such RMBS. Prospectuses typically provide information regarding the LTV ratios, and even guarantee certain LTV ratio limits for the loans that will support the RMBS. Each of the prospectus supplements expressly stated, in sum or substance, that none of the mortgage loans have loan-to-value ratios at origination, or with respect to second-lien mortgages, combined loan-to-value ratios at origination, in excess of 100%. As discussed below, this representation was false because a substantial portion of the loans purchased and securitized by Defendants had LTVs and CLTVs that exceeded 100% as calculated under independent property valuations obtained by Defendants. 49. Another important metric when considering a borrower’s ability to repay a loan is

a borrower’s debt-to-income ratio, or DTI, which reflects the increased risk that borrowers whose debt is relatively high compared to their income will default on their loans. While a borrower’s current DTI is good measure of his or her capacity to repay a fixed rate mortgage,
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other loan products, such as adjustable rate mortgages (“ARMs”), have initial “teaser” rates that reset at much higher index rates after a certain period. A “fully indexed rate” accounts for this interest rate reset, and represents the interest rate over the life of the loan, calculated by adding the index rate at origination and the margin that a lender adds to the index rate after the initial “teaser” period. For example, if the current index rate is 2.5%, and if the margin on a particular loan is 3%, the fully indexed rate on that loan is 5.5%. Because the fully indexed rate accounts for the current value of the interest rate index used by an ARM, it is a better measure of a borrower’s ability to repay the loan. 50. In 2006, the interagency regulators, responding to the explosive growth of non-

traditional mortgage products, provided revised guidance explicitly addressing how institutions should calculate a borrower’s DTI. Specifically, the underwriting guidelines state that “[w]hen an institution offers nontraditional mortgage loan products, underwriting standards should address the effect of a substantial payment increase on the borrower’s capacity to repay when loan amortization begins.” Moreover, according to the guidance: For all nontraditional mortgage loan products, an institution’s analysis of a borrower’s repayment capacity should include an evaluation of their ability to repay the debt by final maturity at the fully indexed rate, assuming a fully amortizing repayment schedule. In addition, for products that permit negative amortization, the repayment analysis should be based upon the initial loan amount plus any balance increase that may accrue from the negative amortization provision.3 51. The federal guidance thus served to provide assurance to investors that

investments in instruments backed by subprime mortgages could be safe and conservative products so long as the underlying loans were properly underwritten and scrutinized. Indeed, the federal guidance made clear that heightened attention to and rigorous compliance with strict

3

All emphasis added unless otherwise indicated.
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underwriting standards was critical for institutions engaged in subprime lending due to the unique risks posed by that borrower population. As regulators made clear, in the context of RMBS such as those purchased by Sealink here, representations concerning underwriting guidelines, appraisals, LTVs and DTIs were paramount. V. THE OFFERING MATERIALS MISREPRESENTED THE UNDERWRITING AND QUALITY OF THE LOANS BACKING THE DEFENDANTS RMBS 52. Contrary to the statements in the Offering Materials and other communications by

Defendants used to solicit Sealink’s investment in the RMBS, the originators whose loans served as collateral for Sealink’s investments routinely and egregiously violated their stated underwriting guidelines. As a result, the mortgages they originated and sold to Defendants for securitization presented a materially higher risk to investors than represented by Defendants in the Offering Materials. 53. For example, the CWL 2006-18 prospectus supplement described Countrywide’s

Home Loans underwriting standards, in relevant part, as follows: Prior to the funding of any credit-blemished mortgage loan, Countrywide Home Loans underwrites the related mortgage loan in accordance with the underwriting standards established by Countrywide Home Loans. In general, the mortgage loans are underwritten centrally by a specialized group of underwriters who are familiar with the unique characteristics of credit-blemished mortgage loans. In general, Countrywide Home Loans does not purchase any credit-blemished mortgage loan that it has not itself underwritten. Countrywide Home Loans’ underwriting standards are primarily intended to evaluate the value and adequacy of the mortgaged property as collateral for the proposed mortgage loan and the borrower’s credit standing and repayment ability. On a case by case basis, Countrywide Home Loans may determine that, based upon compensating factors, a prospective borrower not strictly qualifying under the underwriting risk category guidelines described below warrants an underwriting exception.

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54.

Similarly, the CWALT 2006-OC6 prospectus supplement described Decision One

Mortgage Company LLC’s underwriting standards, in relevant part, as follows: The mortgage loans will have been originated in accordance with the Decision One Underwriting Guidelines. On a case by case basis, exceptions to the Decision One Underwriting Guidelines are made where compensating factors exist. 55. Further, like the other originators whose loans backed the RMBS purchased by

Sealink, the Offering Materials described the documentation that prospective borrowers purportedly produced or were required to produce in order to properly obtain a mortgage loan. For example, the CWALT 2006-OC6 prospectus supplement stated, in relevant part, as follows: In general, a prospective borrower applying for a loan is required to fill out a detailed application designed to provide to the underwriting officer pertinent credit information. As part of the description of the borrower’s financial condition, the borrower generally is required to provide a current list of assets and liabilities and a statement of income and expenses, as well as an authorization to apply for a credit report which summarizes the borrower’s credit history with local merchants and lenders and any record of bankruptcy. In most cases, an employment verification is obtained from an independent source (typically the borrower’s employer) which verification reports, among other things, the length of employment with that organization and the borrower’s current salary. If a prospective borrower is self-employed, the borrower may be required to submit copies of signed tax returns. The borrower may also be required to authorize verification of deposits at financial institutions where the borrower has demand or savings accounts. 56. The Offering Materials also provided information regarding the appraisal For example, the CWL 2007-BC1

standards and practices employed by the Defendants.

prospectus supplement described Wilmington Finance Inc.’s appraisal practices as follows: The property that is to secure a mortgage loan generally is appraised by a qualified independent appraiser. These appraisers inspect and appraise the subject property and verify that the property is in acceptable condition. Following each appraisal, the appraiser prepares a report which typically includes a market value analysis based on recent sales of comparable homes in the area

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and, when deemed appropriate, replacement cost analysis based on the current cost of constructing a similar home. Generally, all appraisals are required to conform to the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal Foundation and are generally on forms acceptable to Fannie Mae and Freddie Mac. The underwriting guidelines generally require a review of the appraisal by a qualified employee of the Originator or by an appraiser retained by the Originator. 57. Finally, the Offering Materials provided information regarding the re-

underwriting practices of mortgage loans employed by Countrywide Home Loans. For example, the CWL 2007-BC1 prospectus supplement. State in relevant part, as follows: Countrywide Home Loans reviewed the Mortgage Loans to determine whether they were underwritten generally in accordance with the related Originator’s underwriting guidelines or reasonable exceptions thereto. In the course of such review, Countrywide Home Loans assigned to each Mortgage Loan a credit grade category which the Countrywide Home Loans employs in its own underwriting guidelines for credit blemished mortgage loans to grade the likelihood that the mortgagor will satisfy the repayment conditions of the mortgage loans. In general, Countrywide Home Loans assigns a credit grade category by evaluating a borrower’s consumer credit history, mortgage history, time since bankruptcy, and time since foreclosure or notice of default. 58. These statements of material fact, and materially similar statements appearing in

all of the Defendants’ RMBS Offering Materials, were false and misleading when made because the originators discussed below failed to adhere to their established underwriting standards. Indeed, the reckless practices of the mortgage originators whose loans backed the Defendants RMBS rendered numerous statements concerning the originator’s guidelines, the LTV ratios, property appraisal values, and the credit ratings assigned to the RMBS materially false and misleading. As such, the riskiness of the loans underlying the RMBS purchased by Sealink, and thus the true risk profile of the RMBS was materially misrepresented. Through Defendants’ intimate knowledge of the originators’ underwriting practices gleaned through its own
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subsidiary, which provided a majority of the loans backing the RMBS, Defendants knew of these misrepresentations, and concealed them from Sealink. A. 59. Countrywide Home Violated Its Underwriting Guidelines Countrywide was steeped in every aspect of the securitization process, including

the origination of the mortgage loans underlying the RMBS through Defendant Countrywide Home. The fact that Countrywide itself controlled this entity provides compelling evidence that Countrywide knew that the loans backing the Countrywide RMBS failed to meet the established underwriting guidelines represented in the relevant Offering Materials set forth below. 60. Defendant Countrywide Home, a direct wholly-owned subsidiary of Countrywide

Financial, originated a substantial percentage of the loans in several of the Defendants RMBS purchased by Sealink. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding Countrywide’s underwriting standards and practices. For example, the prospectus supplement for the CWL 2006-3 RMBS represented Countrywide’s underwriting guidelines, in relevant part, as follows:

Countrywide Home Loans’ underwriting standards are primarily intended to evaluate the value and adequacy of the mortgaged property as collateral for the proposed mortgage loan and the borrower’s credit standing and repayment ability. On a case by case basis, Countrywide Home Loans may determine that, based upon compensating factors, a prospective borrower not strictly qualifying under the underwriting risk category guidelines described below warrants an underwriting exception. Compensating factors may include low loan-to-value ratio, low debt-to-income ratio, stable employment, time in the same residence or other factors. It is expected that a significant number of the Mortgage Loans will have been originated based on these types of underwriting exceptions. Each prospective borrower completes an application which includes information with respect to the applicant’s assets, liabilities, income and employment history, as well as certain other personal information. Countrywide Home Loans requires an

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independent credit bureau report on the credit history of each applicant in order to evaluate the applicant’s prior willingness and/or ability to repay. The report typically contains information relating to credit history with local and national merchants and lenders, installment debt payments and any record of defaults, bankruptcy, repossession, suits or judgments, among other matters. * * *

Countrywide Home Loans underwrites or originates creditblemished mortgage loans pursuant to alternative sets of underwriting criteria under its Full Documentation Loan Program (the “Full Doc Program”), and Stated Income Loan Program (the “Stated Income Program”). Under each of the underwriting programs, Countrywide Home Loans verifies the loan applicant’s sources and amounts of income (except under the Stated Income Program where the amount of income is not verified), calculates the amount of income from all sources indicated on the loan application, reviews the credit history of the applicant, calculates the debt-to-income ratio to determine the applicant’s ability to repay the loan, and reviews the appraisal of the mortgaged property for compliance with Countrywide Home Loans’ underwriting standards. 61. The Offering Materials also made false and misleading representations of material

fact concerning Countrywide Home’s appraisal practices for mortgage loans backing the Certificates. For example, the CWL 2006-3 prospectus supplement stated, in relevant part, that: Countrywide Home Loans’ underwriting standards are applied in accordance with applicable federal and state laws and regulations and require an independent appraisal of the mortgaged property prepared on a Uniform Residential Appraisal Report (Form 1004) or other appraisal form as applicable to the specific mortgaged property type. Each appraisal includes a market data analysis based on recent sales of comparable homes in the area and, where deemed appropriate, replacement cost analysis based on the current cost of constructing a similar home and generally is required to have been made not earlier than 180 days prior to the date of origination of the mortgage loan. Every independent appraisal is reviewed by a representative of Countrywide Home Loans before the loan is funded, and an additional review appraisal is generally performed in connection with appraisals not provided by Landsafe Appraisals, Inc., a wholly owned subsidiary of Countrywide Home Loans. In most cases, properties that are not at least in average condition (including properties requiring major

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deferred maintenance) are not acceptable as collateral for a creditblemished loan. 62. In addition, Countrywide represented in the prospectus supplements for the

RMBS that Countrywide Home performed a re-underwriting of the mortgage loans purchased by the originators to ensure conformity with prudent underwriting standards, including by performing a full re-underwriting of a random sampling of the loans it purchased for securitization in order to ensure the quality and soundness of those loans. 63. follows: Re-Underwriting of Mortgage Loans by Countrywide Home Loans[.] Countrywide Home Loans reviewed the Mortgage Loans to determine whether they were underwritten generally in accordance with the related Originator’s underwriting guidelines or reasonable exceptions thereto. In the course of such review, Countrywide Home Loans assigned to each Mortgage Loan a credit grade category which the Countrywide Home Loans employs in its own underwriting guidelines for credit blemished mortgage loans to grade the likelihood that the mortgagor will satisfy the repayment conditions of the mortgage loans. In general, Countrywide Home Loans assigns a credit grade category by evaluating a borrower’s consumer credit history, mortgage history, time since bankruptcy, and time since foreclosure or notice of default. 64. These statements were false and misleading when made in that they For example, the CWL 2007-BC1 prospectus supplement state, in relevant part, as

misrepresented that Countrywide: (i) systematically failed to follow its stated underwriting standards; (ii) allowed pervasive exceptions to its stated underwriting standards in the absence of compensating factors; (iii) disregarded credit quality in favor of generating increased loan volume; (iv) violated its stated appraisal standards and in many instances materially inflated the values of the underlying mortgage properties in the loan origination and underwriting process.

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B. 65.

American Home Violated Its Underwriting Guidelines American Home originated a substantial portion of the loans for the GSCC 2006-

1 and AHMA 2007-2 RMBS purchased by Sealink. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding American Home’s underwriting standards and practices. For example, the prospectus supplement for the AHMA 2007-2 RMBS described American Home’s underwriting guidelines, in relevant part, as follows:

The mortgage loans have been purchased or originated, underwritten and documented in accordance with the guidelines of Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), the US Department of Agriculture Guaranteed Rural Housing Program (GRH), Ginnie Mae, the underwriting guidelines of specific private investors, and the nonconforming or Alt-A underwriting guidelines established by the Originator. Conforming conventional loans must generally be approved by the Desktop Underwriter and Loan Prospector automated underwriting systems of Fannie Mae and Freddie Mac. FHA and VA loans are generally approved by these same automated underwriting systems. * * *

The Originator’s underwriting philosophy is to weigh all risk factors inherent in the loan file, giving consideration to the individual transaction, borrower profile, the level of documentation provided and the property used to collateralize the debt. Because each loan is different, the Originator expects and encourages underwriters to use professional judgment based on their experience in making a lending decision. The Originator underwrites a borrower’s creditworthiness based solely on information that the Originator believes is indicative of the applicant's willingness and ability to pay the debt they would be incurring. * * *

The Originator realizes that there may be some acceptable quality loans that fall outside published guidelines and encourages “common sense” underwriting. Because a multitude of factors are involved in a loan transaction, no set of guidelines can contemplate every potential situation. Therefore, each case is weighed
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individually on its own merits and exceptions to the Originator’s underwriting guidelines are allowed if sufficient compensating factors exist to offset any additional risk due to the exception. 66. The Offering Materials also made false and misleading representations of material

fact concerning American Home’s appraisal practices for mortgage loans backing the Certificates. For example, the same prospectus supplement stated, in relevant part, that: Every American Home mortgage loan is secured by a property that has been appraised by a licensed appraiser in accordance with the Uniform Standards of Professional Appraisal Practice of the Appraisal Foundation. The appraisers perform on site inspections of the property and report on the neighborhood and property condition in factual and specific terms. Each appraisal contains an opinion of value that represents the appraiser’s professional conclusion based on market data of sales of comparable properties, a logical analysis with adjustments for differences between the comparable sales and the subject property and the appraiser's judgment. In addition, each appraisal is reviewed for accuracy and consistency by an American Home underwriter or a mortgage insurance company contract underwriter. 67. The above statements of material fact were false and misleading when they were

made because they misrepresented that American Home: (i) systematically failed to follow its own underwriting guidelines; (ii) allowed pervasive exceptions to its underwriting standards in the absence of qualifying compensating factors; (iii) disregarded credit quality to meet the demand for loans to securitize into RMBS; and (iv) violated its stated appraisal standards, and, in many instances, materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. C. 68. Fremont Violated Its Underwriting Guidelines Fremont originated a substantial percentage of the loans for several of the RMBS

purchased by Sealink. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding Fremont’s underwriting standards and practices. For

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example, the prospectus supplement for the JPMAC 2006-FRE2 RMBS described Fremont’s underwriting guidelines, in relevant part, as follows: Mortgage loans are underwritten in accordance with Fremont’s current underwriting programs, referred to as the Scored Programs (“Scored Programs”), subject to various exceptions as described in this section. Fremont began originating mortgage loans pursuant to Scored Programs in 2001. Fremont’s underwriting guidelines are primarily intended to assess the ability and willingness of the borrower to repay the debt and to evaluate the adequacy of the mortgaged property as collateral for the mortgage loan. * * *

All of the mortgage loans were underwritten by Fremont’s underwriters having the appropriate approval authority. Each underwriter is granted a level of authority commensurate with their proven judgment, experience and credit skills. On a case by case basis, Fremont may determine that, based upon compensating factors, a prospective mortgagor not strictly qualifying under the underwriting risk category guidelines described below is nonetheless qualified to receive a loan, i.e., an underwriting exception. Compensating factors may include, but are not limited to, low loan-to -value ratio, low debt to income ratio, substantial liquid assets, good credit history, stable employment and time in residence at the applicant’s current address. It is expected that a substantial portion of the mortgage loans may represent such underwriting exceptions. * * *

Fremont’s underwriting guidelines are applied in accordance with a procedure which complies with applicable federal and state laws and regulations and require an appraisal of the mortgaged property, and if appropriate, a review appraisal. Generally, initial appraisals are provided by qualified independent appraisers licensed in their respective states. Review appraisals may only be provided by appraisers approved by Fremont. In some cases, Fremont relies on a statistical appraisal methodology provided by a third-party. Qualified independent appraisers must meet minimum standards of licensing and provide errors and omissions insurance in states where it is required to become approved to do business with Fremont. Each uniform residential appraisal report includes a market data analysis based on recent sales of comparable homes in the area and, where deemed appropriate, replacement cost analysis based on the current cost of constructing a similar home. The review appraisal may be a
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desk review, field review or an automated valuation report that confirms or supports the original appraiser’s value of the mortgaged premises. * * *

Fremont conducts a number of quality control procedures, including a post-funding review as well as a full reunderwriting of a random selection of loans to assure asset quality. Under the funding review, all loans are reviewed to verify credit grading, documentation compliance and data accuracy. Under the asset quality procedure, a random selection of each month’s originations is reviewed. The loan review confirms the existence and accuracy of legal documents, credit documentation, appraisal analysis and underwriting decision. A report detailing review findings and level of error is sent monthly to each loan production office for response. The review findings and branch responses are then reviewed by Fremont’s senior management. Adverse findings are tracked monthly. This review procedure allows Fremont to assess programs for potential guideline changes, program enhancements, appraisal policies, areas of risk to be reduced or eliminated and the need for additional staff training. 69. The above statements of material fact were false and misleading when made

because, in truth, Fremont: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to its underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. D. 70. Wilmington Finance, Inc. Abandoned Its Underwriting Guidelines Wilmington Finance, Inc. (“Wilmington”), is a wholly-owned subsidiary of

American International Group, Inc. Wilmington originated mortgage loans for the CWL 2007BC1, CWL 2007-BC3, and MSHEL 2007-1 RMBS purchased by Sealink. The Offering

Materials for such RMBS contained false and misleading statements of material fact regarding
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Fremont’s underwriting standards and practices. For example, the prospectus supplement for the CWL 2007-BC1 RMBS described Wilmington’s underwriting guidelines, in relevant part, as follows: Generally, under the underwriting guidelines, the Originator reviews the applicant’s source of income, calculates the amount of income from sources indicated on the loan application or similar documentation, reviews the credit history of the applicant, calculates the debt service-to-income ratio to determine the applicant’s ability to repay the loan, reviews the type and use of the property being financed and reviews the property. The underwriting guidelines generally require that mortgage loans be underwritten in a standardized procedure which complies with applicable federal and state laws and regulations and requires the Originator’s underwriters to be satisfied that the value of the property being financed, as indicated by an appraisal and a review of the appraisal currently supports the outstanding loan balance. The underwriting guidelines of the Originators are more flexible than the standards generally acceptable to Freddie Mac and Fannie Mae with regard to the borrower’s credit standing and repayment ability. While more flexible, the underwriting guidelines still place significant reliance on a borrower’s ability to repay; however the Originator generally may require lower loan-to-value ratios than for loans underwritten to Freddie Mac and Fannie Mae standards. Borrowers who qualify generally have payment histories and debt-to-income ratios which would not satisfy Freddie Mac and Fannie Mae underwriting guidelines and may have a record of major derogatory credit items such as outstanding judgments or prior bankruptcies. On a case-by-case basis, exceptions to the underwriting guidelines are made where compensating factors exist. Compensating factors usually include low loan-to-value ratio, low debt-to-income ratio, stable employment, length of time in the same residence, cash reserves and/or reduction in monthly debt service. It is expected that a significant portion of the Mortgage Loans in the mortgage pool will represent these exceptions. 71. The Offering Materials also made false and misleading representations of material

fact concerning Wilmington’s appraisal practices for mortgage loans backing the Certificates. For example, the same prospectus supplement stated, in relevant part, that:

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The property that is to secure a mortgage loan generally is appraised by a qualified independent appraiser. These appraisers inspect and appraise the subject property and verify that the property is in acceptable condition. Following each appraisal, the appraiser prepares a report which typically includes a market value analysis based on recent sales of comparable homes in the area and, when deemed appropriate, replacement cost analysis based on the current cost of constructing a similar home. Generally, all appraisals are required to conform to the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal Foundation and are generally on forms acceptable to Fannie Mae and Freddie Mac. The underwriting guidelines generally require a review of the appraisal by a qualified employee of the Originator or by an appraiser retained by the Originator. 72. The above statements of material fact were false and misleading when made

because, in truth, Wilmington: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to its underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. E. 73. Impac Funding Corp. Abandoned Its Underwriting Guidelines Impac Funding Corporation (“Impac”) originated a substantial percentage of the

loans for the CWL 2006-IM1, IMM 2005-7, IMSA 2006-3, and IMSA 2007-1 RMBS purchased by Sealink. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding Impac’s underwriting standards and practices. For example, the

prospectus supplement for the IMSA 2006-3 RMBS described Impac’s underwriting guidelines, in relevant part, as follows:

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Approximately 71.49% of the sample mortgage loans were underwritten pursuant to, or in accordance with, the standards of the Originators Progressive Series Program which is described below. * * *

The Progressive Series Program General. The underwriting guidelines utilized in the Progressive Series Program, as developed by the Originator, are intended to assess the borrower's ability and willingness to repay the mortgage loan obligation and to assess the adequacy of the mortgaged property as collateral for the mortgage loan. The Progressive Series Program is designed to meet the needs of borrowers with excellent credit, as well as those whose credit has been adversely affected. . . . The philosophy of the Progressive Series Program is that no single borrower characteristic should automatically determine whether an application for a mortgage loan should be approved or disapproved. Lending decisions are based on a risk analysis assessment after the review of the entire mortgage loan file. Each mortgage loan is individually underwritten with emphasis placed on the overall quality of the mortgage loan. * * *

Each prospective borrower completes a mortgage loan application which includes information with respect to the applicant's liabilities, income, credit history, employment history and personal information. The Originator requires a credit report on each applicant from a credit reporting company. The report typically contains information relating to credit history with local and national merchants and lenders, installment debt payments and any record of defaults, bankruptcies, repossessions or judgments. * * *

Variations. The Originator uses the following parameters as guidelines only. On a case-by-case basis, the Originator may determine that the prospective mortgagor warrants an exception outside the standard program guidelines. An exception may be allowed if the loan application reflects certain compensating factors, including instances where the prospective mortgagor: • has demonstrated an ability to save and devote a greater portion of income to basic housing needs;

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• may have a potential for increased earnings and advancement because of education or special job training, even if the prospective mortgagor has just entered the job market; • has demonstrated an ability to maintain a debt free position; • may have short term income that is verifiable but could not be counted as stable income because it does not meet the remaining term requirements; and • has net worth substantial enough to suggest that repayment of the loan is within the prospective mortgagor’s ability.

74.

The Offering Materials also made false and misleading representations of material

fact concerning Impac’s appraisal practices for mortgage loans backing the Certificates. For example, the same prospectus supplement stated, in relevant part, that: Appraisals. The Originator does not publish an approved appraiser list for the conduit seller. Each conduit seller maintains its own list of appraisers, provided that each appraiser must: • be a state licensed or certified appraiser; • meet the independent appraiser requirements for staff appraisers, or, if appropriate, be on a list of appraisers specified by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the FDIC and the Office of Thrift Supervision under their respective real estate appraisal regulations adopted in accordance with Title XI of the Financial Institutions Reform Recovery and Enforcement Act of 1989, regardless of whether the seller is subject to those regulations; • be experienced in the appraisal of properties similar to the type being appraised; • be actively engaged in appraisal work; and • subscribe to a code of ethics that is at least as strict as the code of the American Institute of Real Estate Appraisers or the Society of Real Estate Appraisers.

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75.

The above statements of material fact were false and misleading when made

because in truth, Impac: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. F. 76. Decision One Mortgage Abandoned Its Underwriting Guidelines Decision One Mortgage (“Decision One”), a wholly-owned subsidiary of HSBC

Group, emphasizes the origination of mortgage loans that are commonly referred to as Alt lending options, and non-conforming or sub-prime loans. Decision One originated a substantial percentage of the loans for the CWALT 2006-OC2, CWALT 2006-OC4, CWALT 2006-OC6, and CWL 2007-BC3 RMBS purchased by Sealink. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding Decision One’s underwriting standards and practices. For example, the prospectus supplement for the CWALT 2006-OC4 RMBS described Decision One’s underwriting guidelines, in relevant part, as follows: Mortgage loans originated or acquired by Decision One Mortgage, referred to in this section as the originator, were done so in accordance with the underwriting guidelines established by it (collectively, the “Decision One Underwriting Guidelines”). The following is a general summary of the Decision One Underwriting Guidelines believed to be generally applied, with some variation, by Decision One Mortgage. The Decision One Underwriting Guidelines are primarily intended to assess the borrower’s ability to repay the mortgage loan, to assess the value of the mortgaged property and to evaluate the adequacy of the property as collateral for the mortgage loan. All of the mortgage loans in the mortgage loan

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pool were also underwritten with a view toward the resale of the mortgage loans in the secondary mortgage market. While Decision One Mortgage’s primary consideration in underwriting a mortgage loan is the value of the mortgaged property, Decision One Mortgage also considers, among other things, a mortgagor’s credit history, repayment ability and debt service to income ratio, as well as the type and use of the mortgaged property. The mortgage loans will have been originated in accordance with the Decision One Underwriting Guidelines. On a case by case basis, exceptions to the Decision One Underwriting Guidelines are made where compensating factors exist. Each applicant completes an application which includes information with respect to the applicant’s liabilities, income, credit history, employment history and personal information. * * *

The Decision One Underwriting Guidelines require that mortgage loans be underwritten in a standardized procedure which complies with applicable federal and state laws and regulations and requires Decision One Mortgage’s underwriters to be satisfied that the value of the property being financed, as indicated by an appraisal and a review of the appraisal, currently supports the outstanding loan balance. 77. The Offering Materials also made false and misleading representations of material

fact concerning Decision One’s appraisal practices for mortgage loans backing the Certificates. For example, the same prospectus supplement stated, in relevant part, that: Mortgaged properties that are to secure mortgage loans are appraised by qualified independent appraisers. These appraisers inspect and appraise the subject property and verify that the property is in acceptable condition. Following each appraisal, the appraiser prepares a report which includes a market value analysis based on recent sales of comparable homes in the area, and when deemed appropriate, replacement cost analysis based on the current cost of constructing a similar home. All appraisals are required to conform to the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal Foundation and are generally on forms acceptable to Fannie Mae and Freddie Mac.

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78.

The above statements of material fact were false and misleading when made

because in truth, Decision One: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. G. 79. Accredited Home Lenders, Inc. Abandoned Its Underwriting Guidelines Accredited Home Lenders, Inc. (“Accredited”), originated a substantial

percentage of the MSHEL 2007-1 RMBS purchased by Sealink. According to the MSHEL 2007-1 prospectus supplement, “Accredited focuses on originating mortgage loans which do not conform to credit and other criteria established by Fannie Mae and Freddie Mac, commonly referred to as “nonconforming” and “subprime” mortgage loans. The Offering Materials for the RMBS contained false and misleading statements of material fact regarding Accredited’s underwriting standards and practices. For instance, the MSHEL 2007-1 prospectus supplements stated, in relevant part, as follows: Each mortgage loan originated or acquired by Accredited is underwritten prior to loan closing, or re-underwritten after loan closing but prior to purchase by Accredited, in accordance with Accredited’s underwriting guidelines. Accredited’s underwriting process is intended to assess a mortgage loan applicant’s credit standing and repayment ability and the value and adequacy of the real property security as collateral for the proposed mortgage loan. All underwriting and re-underwriting is performed by Accredited’s underwriting personnel, and Accredited does not delegate underwriting authority to any broker, correspondent or other mortgage loan provider. Accredited’s underwriting standards

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are applied in a standardized manner which complies with applicable federal and state laws and regulations. All of Accredited’s prospective mortgage brokers and correspondents are subjected to a pre-approval process, including verification that all required licenses are current, and are required to sign agreements pursuant to which they represent and warrant compliance with Accredited’s underwriting guidelines and all applicable laws and regulations. Accredited periodically reviews each of its mortgage broker’s and correspondent’s performance relative to issues disclosed by Accredited’s quality control review, and discontinues relationships with unacceptable performers. Each prospective mortgagor completes a mortgage loan application that includes information with respect to the applicant’s liabilities, income, credit history, employment history and personal information. At least one credit report on each applicant from an independent, nationally recognized credit reporting company is required. The credit report typically contains information relating to such matters as credit history with local and national merchants and lenders, installment debt payments and any record of defaults, bankruptcies, repossessions, or judgments. All derogatory credit items occurring within the preceding two years and all credit inquiries within the preceding 90 days must be addressed by the applicant to the satisfaction of Accredited. * * *

A critical function of Accredited’s underwriting process is to identify the level of credit risk associated with each applicant for a mortgage loan. Accredited has established five principal classifications, “A+” to “C,” with respect to the credit profile of potential borrowers, and a rating is assigned to each mortgage loan based upon these classifications. Accredited has a sixth, generally inactive credit classification, called “C-” which may be assigned to a borrower with a current or recent foreclosure or bankruptcy and can still be used on an exception basis with approval from executive management. Accredited assigns credit grades by analyzing mortgage payment history, consumer credit history, credit score, bankruptcy history, and debt-to-income ratio. Each month, Accredited’s internal audit and quality control department generally reviews and re-underwrites a sample of the mortgage loans originated by Accredited. The statistical sample of mortgage loans is chosen by random selection and based on the prior defect rates. In addition, targeted reviews are conducted,
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including but not limited to the following areas: regulatory compliance, targeted and discretionary reviews, or where misrepresentation is suspected. . . . All findings of the internal audit and quality control department are reported on a regular basis to members of senior management and the audit committee of the board of directors. The Chief Executive Officer and the Chief Operating Officer, along with the Director of Operations and others analyze the results of the monthly internal audit and quality control department audits as well as performance trends and servicing issues. Based upon this analysis, corrective actions are taken. Exceptions. Accredited may allow exceptions to its underwriting guidelines in accordance with Accredited’s established exception policy. Exceptions may be allowed based upon the presence of compensating factors such as a low LTV, demonstrated pride of ownership and stability of employment. 80. The Offering Materials also made false and misleading representations of material

fact concerning Accredited’s appraisal practices for mortgage loans backing the Certificates. For example, the same prospectus supplement stated, in relevant part, that: A full appraisal of the property proposed to be pledged as collateral is required in connection with the origination of each first priority mortgage loan and each second priority mortgage loan greater than $50,000. Appraisals are performed by licensed, third-party, fee-based appraisers and include, among other things, an inspection of the exterior and interior of the subject property. Appraisals are also required to address neighborhood conditions, site and zoning status and the condition and value of improvements. Following each appraisal, the appraiser prepares a report which includes a reproduction costs analysis (when appropriate) based on the current cost of constructing a similar home and market value analysis based on recent sales of comparable homes in the area. Appraisals generally conform to the Uniform Standards of Professional Appraisal Practice and must be on forms acceptable to Freddie Mac and Fannie Mae. Every appraisal is reviewed by a non-affiliated appraisal review firm or by Accredited’s Appraisal Review Department or a qualified underwriter before the mortgage loan is closed. The appraisal may not be more than 180 days old on the day the mortgage loan is funded. A second full appraisal is required for combined mortgage loan amounts greater than $1,000,000. For second priority mortgage loans of $50,000 or less, “drive-by” appraisals alone are acceptable.
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81.

The above statements of material fact were false and misleading when made

because in truth, Accredited: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. VI. DEFENDANTS KNEW THE TRUTH ABOUT THE ORIGINATORS’ LENDING PRACTICES 82. Countrywide had identified (but never disclosed to investors like Sealink) the

rampant underwriting deficiencies at the mortgage originators discussed above, which directly contradicted the representations in the Offering Materials accompanying the RMBS sold to Sealink. In particular, Countrywide was aware of the practices of its own mortgage originator Countrywide Home, as has been detailed in numerous private actions against those entities. Indeed, as alleged in a recently sustained claim brought on behalf of MBIA Insurance Corporation, Countrywide “developed a systematic pattern and practice of abandoning its own guidelines for loan origination and underwriting by knowingly lending to borrowers who could not afford to repay the loans, who committed fraud in loan applications, or who otherwise did not satisfy the basic risk criteria for prudent and responsible lending that Countrywide claimed to use.” 83. According to the Federal Crisis Inquiry Commission (“FCIC”) “as early as

September 2004 Countrywide executives recognized that many of the loans they were

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originating could result in “catastrophic consequences.” Less than a year later, they noted that certain high-risk loans they were making could result not only in foreclosures but also in “financial and reputational catastrophe” for the firm.” 84. Attorneys General from various states have investigated Countrywide’s lending

practices and charged that Countrywide systematically departed from the underwriting standards it professed to use for originating residential loans, including those loans originated by Countrywide Home. For example, in 2008, the Illinois Attorney General investigated

Countrywide’s loan practices and filed an action in the Chancery Division of the Circuit Court of Cook County, Illinois, entitled Illinois v. Countrywide Financial Corp., et al., No. 08CH22994 (the “Illinois AG Complaint”). The California Attorney General also investigated Countrywide’s lending activities and filed a complaint in the Northwest District of the Superior Court for Los Angeles County, entitled California v. Countrywide Financial Corp., et al., No. LC081846 (the “California AG Complaint”). Many of the allegations in the Illinois and

California AG Complaints were confirmed by investigations in other states such as Connecticut, Washington, West Virginia, Indiana and Florida. Significantly, on October 6, 2008,

Countrywide announced that it had settled the claims brought by 11 states, including California and Illinois, agreeing to implement an estimated $8.4 billion program to modify pre-2008 Countrywide-originated mortgages. 85. Lawsuits filed by insurers of some of Countrywide’s mortgage loans have

confirmed Countrywide’s deviation from its stated underwriting practices, and material deficiencies prevalent in the loans underwritten pursuant to these deviations. On September 30, 2008, MBIA filed a complaint against Countrywide in New York state court, entitled MBIA Insurance Corp. v. Countrywide, et al., No. 08/602825. The MBIA complaint alleges that Countrywide fraudulently induced MBIA to provide insurance for certain Certificates. Through
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an investigation of approximately 19,000 loan files, MBIA discovered that there was “an extraordinarily high incidence of material deviations from the underwriting guidelines Countrywide represented it would follow.” MBIA discovered that many of the loan

applications “lack[ed] key documentation, such as a verification of borrower assets or income; include[d] an invalid or incomplete appraisal; demonstrate[d] fraud by the borrower on the face of the application; or reflect[ed] that any of borrower income, FICO score, or debt, or DTI [debt-to-income] or CLTV, fail[ed] to meet stated Countrywide guidelines (without any permissible exception).” Significantly, “MBIA’s re-underwriting review . . . revealed that almost 90% of defaulted or delinquent loans in the Countrywide Securitizations show material discrepancies.” The court sustained MBIA’s common law fraud claims against Countrywide. See MBIA Insurance Corporation v. Countrywide Home Loans, Inc., 2009 WL 2135167 (N.Y. Sup. July 8, 2009). Other complaints filed by bond insurers Ambac Assurance Corporation (Ambac Assurance Corp. v. Countrywide Home Loans, Inc., Index No. 641612/2010 (filed in the Supreme Court of the State of New York on May 6, 2010), Syncora Guarantee Incorporated (Syncora Guarantee Inc. v. Countrywide Home Loans, Inc., Index No. 650042/09E (Amended Complaint filed in the Supreme Court of the State of New York on May 6, 2010 after the initial Complaint was largely sustained on March 31, 2010); and Mortgage Guaranty Insurance Corporation (arbitration) also reveal shocking fraud by Countrywide loan officers. 86. According to Countrywide’s own officers, level of exceptions for Countrywide For instance, at a June 28, 2005 Credit Risk

originated mortgage loans was staggering.

Committee meeting, senior executives including CFO Sieracki and McMurray received a presentation informing the attendees that nonconforming exceptions loans accounted for a staggering 40% of Countrywide’s loan originations. By June 2006, a Credit Risk Leadership package reported that Countrywide underwrote, on an exceptions basis, 44.3% of its Pay-Option
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ARMs, 37.3% of its subprime first liens, 25.3% of its subprime second liens, and 55.3% of its standalone home equity loans. Despite this high level of exceptions, Countrywide assured investors that the level of exceptions was low. According to Christopher Brendler, an analyst for Stifel Nicholas who covered Countrywide beginning in January 2006 and was deposed in the SEC Action, Countrywide repeatedly told investors during conference calls and at investor forums that the company’s policy was to “keep our exceptions low.” Brendler also testified that a low exception rate for the industry would have been 5% to 10% of total loans, and most certainly not upwards of 25% to 55%, such as Countrywide actually had. 87. A June 28, 2005 Corporate Credit Risk Committee presentation revealed to

senior executives that one-third of the loans rejected by Countrywide’s own underwriting guidelines and approved pursuant to exceptions missed “major” underwriting guidelines, and another one-third missed “minor” underwriting guidelines. The presentation also informed the committee that exceptions-based loans greater than $650,000 were performing 2.8 times worse than similar loans underwritten within guidelines. 88. Mozilo was acutely aware of the breakdown in Countrywide’s procedures and

the lack of compliance with Countrywide’s underwriting guidelines. For example, in early 2006, HSBC exercised its contractual rights and forced Countrywide to “buy-back” many of the subprime 80-20 loans that it had purchased from Countrywide. Many of the HSBC “kick-outs” of defaulted loans were due to the fact that many of the underlying loans had been originated outside of Countrywide’s underwriting guidelines. Following the HSBC incident, on April 13, 2006, Mozilo sent an e-mail to Sieracki and Sambol, stating that he had “personally observed a serious lack of compliance with our origination system as it relates to documentation and generally a deterioration in the quality of loans originated versus the pricing of those loan[s]. In

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my conversations with Sambol he calls the 100% subprime seconds as the ‘milk’ of the business. Frankly I consider that product line to be the poison of ours.” 89. At a March 12, 2007 Corporate Credit Risk Committee meeting, attended by

Sambol, Risk Management reported that 12% of the loans reviewed through Countrywide's internal quality control process were rated severely unsatisfactory or high risk, and that one of the principal causes for such a rating was that loans had debt-to-income, loan to value, or FICO scores outside Countrywide's underwriting guidelines. 90. On May 29, 2007, Sambol attended a Credit Risk Committee Meeting, during

which he was informed that even as Countrywide had been purportedly tightening guidelines, “loans continue[d] to be originated outside guidelines” primarily via the Secondary Structured Lending Desk without “formal guidance or governance surrounding Secondary SID approvals.” The presentation also included a recommendation from the credit management department that two divisions “cease to grant exceptions where no major competitor is offering the guideline.” 91. Countrywide’s admission of its secret, rampant, and unjustified use of the

exceptions process is further corroborated by the particularized allegations in a lawsuit by another financial guarantor—Financial Guaranty Insurance Company v. Countrywide Home Loans, Inc. The plaintiff in that lawsuit states that at two separate meetings between the parties at Countrywide’s headquarters on April 24, 2007 and December 13, 2007, Countrywide admitted “that it had, apparently since sometime in 2006, undertaken a deliberate practice to routinely make increased exceptions to and expansion of its underwriting guidelines . . .” According to Countrywide, “[t]he reason . . . for these undisclosed exceptions and expansion of the guidelines was to try to retain [its] existing share of the mortgage origination market.” Countrywide also informed Financial Guaranty Insurance Company that it had discovered borrower misrepresentation, speculation, and fraud at an increasing rate in 2006, which it
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admitted “had been a significant factor in the underperformance of the 2006 securitized HELOC portfolios.” 92. In other recent lawsuits, Countrywide employees have confirmed the prevalence

of these practices. One former Countrywide employee quoted in a class action complaint filed by Countrywide debt holders, Argent Classic Convertible Arbitrage Fund v. Countrywide Financial Corp., stated that Countrywide routinely approved loans through the Exception Processing System that violated its underwriting guidelines. And another former Countrywide employee, a former Assistant Vice President of Risk Management with Countrywide's Structured Loan Desk in Plano, Texas and an underwriter from 2004 until 2006 responsible for evaluating credit risk, stated that Countrywide’s management “encouraged more and more loans” to be processed through the Exception Processing System beginning in 2004. During 2006, Countrywide processed between 15,000 and 20,000 loans a month through the Exception Processing System. 93. The complaint in a shareholder class action, In re Countrywide Financial

Corporation Securities Litigation (C.D. Cal., Jan. 6, 2009), similarly alleges, based on statements from a loan underwriter in Countrywide’s Consumer Markets Division, that “loan applications that should never have been approved were constantly kicked further up the corporate ladder until they reached a level where they would be approved by those driven solely by corporate profits and greed.” 94. The United States District Court denied Countrywide’s motion to dismiss the

federal scienter-based claims in the shareholder class action, holding that the allegations “present the extraordinary case where a company’s essential operations were so at odds with the company’s public statements that many statements that would not be actionable in the vast majority of cases are rendered cognizable to the securities laws.” The court explained that
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descriptions like “‘high quality’ are generally not actionable; they are vague and subjective puffery not capable of being material as a matter of law.” But here, the complaint “adequately alleges that Countrywide so departed from its public statements that even ‘high quality’ became materially false or misleading.” $600 million. 95. On information and belief, and based in part on Countrywide’s knowledge of the Countrywide recently agreed to settle this lawsuit by paying

abandoned underwriting practices at Countrywide Home and its status as one of the leaders in subprime origination, Defendants’ knew that statements in the prospectus supplements concerning the originators underwriting guidelines were materially false and misleading. Defendants either knew or recklessly disregarded that a highly material number of the loans underlying their RMBS purchased by Sealink were not underwritten in compliance with the originator’s guidelines. VII. DEFENDANTS KNEW THE CREDIT RATINGS ASSIGNED TO THE DEFENDANTS’ RMBS MATERIALLY MISREPRESENTED THE CREDIT RISK OF THE RMBS 96. To bring its RMBS to market, Defendants knew that they needed to obtain the

highest “investment grade” ratings possible from the credit rating agencies (“CRAs”)— Moody’s, S&P and Fitch—that rated Defendants’ securitizations. Indeed, Defendants featured the ratings prominently in the Offering Materials and discussed at length the ratings received by the different tranches of the RMBS, and the bases for the ratings. The credit rating agencies received the information about the mortgage loan pools for each securitization and about the structure of the securitization from the sponsor, i.e., Countrywide Home. Countrywide worked closely with the rating agencies to structure the securitizations to ensure that each tranche of RMBS received the desired rating. Yet, Countrywide knew that the ratings were not reliable because those ratings were supported by false information that Defendants provided.

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97.

“Investment grade” products are understood in the marketplace to be stable,

secure and safe. Using S&P’s scale, “investment grade” ratings are AAA, AA, A and BBB, and represent, high credit quality (AAA), upper-medium credit quality (AA and A) and medium credit quality (BBB). Any instrument rated below BBB is considered below investment grade or “junk bond.” 98. The Offering Materials for the Defendants’ RMBS Sealink purchased state that

the issuance of each tranche of the RMBS was conditioned on the assignment of particular investment-grade ratings, and listed the ratings in a chart. All of the tranches of RMBS purchased by Sealink were rated triple-A. The triple-A rating denotes “high credit-quality,” and is the same rating as those typically assigned to bonds backed by the full faith and credit of the United States Government, such as Treasury Bills. For example, Bear Stearns represented in the CWL 2006-18 prospectus supplement that:

It is a condition of the issuance of the Offered Certificates that each class of Offered Certificates set forth below be assigned the ratings at least as high as those designated below by Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc. (“S&P”) and together with Moody’s, the “Rating Agencies”). Class 1-A 2-A-1 2-A-2 2-A-3 A-R M-1 M-2 M-3 M-4 M-5 M-6 M-7 M-8 Moody’s Rating Aaa Aaa Aaa Aaa Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2
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S&P Rating AAA AAA AAA AAA AAA AA+ AA AAA+ A ABBB+ BBB

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M-9 *

Baa3 * *

BBB-

The security ratings assigned to the Offered Certificates should be evaluated independently from similar ratings on other types of securities. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the Rating Agencies. The ratings on the Offered Certificates do not, however, constitute statements regarding the likelihood or frequency of prepayments on the Mortgage Loans, the payment of Net Rate Carryover or the anticipated yields in light of prepayments. 99. The above statements (and the substantially similar statements appearing in all of

the Defendants’ RMBS Offering Materials) regarding the ratings assigned to the Defendants’ RMBS, as well as the ratings themselves, were materially false and misleading because Defendants touted these ratings while knowing that those ratings were based on the misleading information Defendants provided to the CRAs. 100. The credit ratings of the RMBS were further compromised by misinformation

provided by Defendants regarding the abandonment of the originators’ underwriting standards, rampant use of aggressive exceptions, Defendants’ knowledge or reckless disregard of pervasive fraud in the stated income loan programs, and the inflated appraisals assigned to the underlying collateral, as described above. The Defendants knew that the AAA ratings assigned to the RMBS were false because the originators did not follow their own underwriting standards and, as such, no reliable estimate could be made concerning the level of enhancement necessary to ensure that the top tranches purchased by Sealink were of AAA quality. By including and endorsing these AAA ratings in the Offering Materials, Defendants made a false representation that it actually believed that the AAA ratings were an accurate reflection of the credit quality of the RMBS.

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101.

Subsequent downgrades confirm that the investment grade ratings reported in the

Offering Materials were unjustifiably high and misstated the true credit risk of the RMBS purchased by Sealink. The RMBS purchased by Sealink—all of which were each initially awarded a triple-A rating—have almost without exception been downgraded to junk. The en

masse downgrade of AAA-rated RMBS indicates that the ratings set forth in the Offering Materials were false, unreliable and inflated. VIII. DEFENDANTS’ FALSE AND MISLEADING MISSTATEMENTS AND OMISSIONS OF MATERIAL FACT IN THE OFFERING DOCUMENTS 102. The Offering Materials Sealink relied upon in purchasing the Defendants’ RMBS

contained numerous misrepresentations of material fact, or omitted to state material fact necessary to make the statements therein not misleading, regarding: (i) the originators’ underwriting practices and guidelines by which the loans were originated, including the prevalence and type of exceptions to those guidelines being applied to the underlying loans, and the rampant fraud in stated income loans; (ii) the value of the underlying property securing the loans, in terms of LTV and CLTV ratios and the appraisal standards by which such mortgaged properties were measured; (iii) the due diligence that Defendants conducted into the mortgage loans backing the RMBS, which identified pervasive defects in the loans underlying the securitizations; (iv) the credit ratings assigned to the RMBS; and (v) the true risks of the RMBS. A. 103. The Offering Materials Misrepresented The Originators’ Underwriting Guidelines. The originators discussed above originated the mortgage loans that backed the

RMBS purchased by Sealink. The Offering Materials for the RMBS all contained identical or materially similar statements of material fact regarding the originators’ underwriting guidelines and practices. For example, the prospectus supplement for the CWALT 2006-45T1 RMBS described Countrywide Home’s underwriting guidelines, in relevant part, as follows:

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All of the mortgage loans in the issuing entity will have been originated or acquired by Countrywide Home Loans in accordance with its credit, appraisal and underwriting process. Countrywide Home Loans has been originating mortgage loans since 1969. Countrywide Home Loans’ underwriting process are applied in accordance with applicable federal and state laws and regulations. Except as otherwise provided in this prospectus supplement, the underwriting procedures are consistent with those identified under “Loan Program — Underwriting Standards” in the prospectus. * * *

Countrywide Home Loans’ underwriting standards are applied by or on behalf of Countrywide Home Loans to evaluate the prospective borrower’s credit standing and repayment ability and the value and adequacy of the mortgaged property as collateral. Under those standards, a prospective borrower must generally demonstrate that the ratio of the borrower’s monthly housing expenses (including principal and interest on the proposed mortgage loan and, as applicable, the related monthly portion of property taxes, hazard insurance and mortgage insurance) to the borrower’s monthly gross income and the ratio of total monthly debt to the monthly gross income (the “debt-to-income” ratios) are within acceptable limits. . . . Exceptions to Countrywide Home Loans’ underwriting guidelines may be made if compensating factors are demonstrated by a prospective borrower. 104. The above statements of material fact and similar statements regarding the

originators whose loans back the Defendants’ RMBS in which Sealink invested, were materially false and misleading when made because, as explained above, they misrepresented the true facts, known by Defendants, that the originators: (i) systematically and flagrantly failed to follow their stated underwriting guidelines; (ii) allowed pervasive exceptions to their underwriting standards regardless of existing compensating factors; (iii) disregarded credit quality to fuel loan originations to sell to loan purchasers such as Defendants; and (iv) routinely allowed fraudulent representations of an applicant’s stated income, failed to verify a prospective borrowers documentation or statements regarding income or assets, and, in many cases, knowingly falsified the borrower’s stated or documented income or assets.
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B. 105.

The Offering Materials Misrepresented The Appraisals And LTV Ratios Of The Securitized Loans The adequacy of the mortgaged properties as security of the repayment of the The Offering Materials represented that

loans was purportedly determined by appraisals.

independent appraisals were prepared for each mortgaged property and that reports were prepared to substantiate these appraisals. For example, the AHMA 2007-2 prospectus

supplement described American Home’s appraisal practices as follows: Every American Home mortgage loan is secured by a property that has been appraised by a licensed appraiser in accordance with the Uniform Standards of Professional Appraisal Practice of the Appraisal Foundation. The appraisers perform on site inspections of the property and report on the neighborhood and property condition in factual and specific terms. Each appraisal contains an opinion of value that represents the appraiser’s professional conclusion based on market data of sales of comparable properties, a logical analysis with adjustments for differences between the comparable sales and the subject property and the appraiser's judgment. In addition, each appraisal is reviewed for accuracy and consistency by an American Home underwriter or a mortgage insurance company contract underwriter.

106.

As discussed above, the representations regarding appraisals and LTV ratios were

materially false and misleading in that they misrepresented that the appraisal process employed by the originators, including, among others things, the fact that: (i) the appraisers were not independent from the respective mortgage lenders, which pressured appraisers to value the mortgaged property at a pre-determined, preconceived, inflated, and false appraisal value; (ii) the actual LTV ratios for many of the mortgage loans underlying the RMBS would have exceeded 100% if the mortgaged properties had been appraised by an independent appraiser as represented in the Offering Documents; (iii) sales managers employed by the respective originators had and utilized the authority to override and inflate an appraiser’s final professional valuation of the

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mortgaged property; and, as such, (iv) the appraisals failed to conform to the standards set by Fannie Mae and Freddie Mac. C. 107. Defendants Materially Misrepresented The Accuracy Of The Credit Ratings Assigned To The Certificates Defendants represented in the Offering Materials that all of the RMBS purchased

by Sealink were worthy of being rated “AAA,” signifying that the risk of loss was virtually nonexistent. 108. By providing ratings, Defendants represented that they believed that the

information provided to the rating agencies to support these ratings accurately reflected the Defendants’ underwriting guidelines and practices, and the specific qualities of the underlying loans. Specifically, the Offering Materials prepared by Defendants represented, in sum or substance, that: It is a condition of the issuance of the Offered Certificates that each class of Offered Certificates set forth below be assigned the ratings at least as high as those designated below by Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc. (“S&P”) and together with Moody’s, the “Rating Agencies”). Class 1-A 2-A-1 2-A-2 2-A-3 A-R M-1 M-2 M-3 M-4 M-5 M-6 M-7 M-8 M-9 Moody’s Rating Aaa Aaa Aaa Aaa Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 S&P Rating AAA AAA AAA AAA AAA AA+ AA AAA+ A ABBB+ BBB BBB-

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*

*

*

The security ratings assigned to the Offered Certificates should be evaluated independently from similar ratings on other types of securities. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the Rating Agencies. The ratings on the Offered Certificates do not, however, constitute statements regarding the likelihood or frequency of prepayments on the Mortgage Loans, the payment of Net Rate Carryover or the anticipated yields in light of prepayments. 109. These statements regarding the ratings assigned to the RMBS were false and

misleading because Defendants stated the assigned ratings while knowing that misleading information was provided to the rating agencies by Defendants to guarantee AAA ratings were assigned to the RMBS. IX. SEALINK’S INVESTMENT IN THE RMBS AND RELIANCE ON DEFENDANTS’ MISREPRESENTATIONS 110. The RMBS for all offerings were issued pursuant to the Offering Materials,

which contained the false and misleading statements set forth above. These documents also generally explained the structure and provided an overview of the RMBS. depositor prepared the Offering Materials. 111. The Offering Materials contained detailed descriptions of the mortgage pools The relevant

underlying the RMBS and provided the specific terms of the particular RMBS offering. The Offering Materials included tabular data concerning the loans underlying the RMBS, including (but not limited to) the type of loans; the number of loans; the mortgage rate and net mortgage rate (the mortgage rate net of the premium for any lender paid mortgage insurance less the sum of the master servicing fee and the trustee fee on the mortgage loan); the aggregate scheduled principal balance of the loans; the weighted average original combined LTV ratio; occupancy rates; credit enhancement; and the geographic concentration of the mortgaged properties. The

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Offering Materials also contained a summary of the originators’ underwriting and appraisal standards, guidelines and practices. 112. In deciding to purchase the RMBS, Sealink relied on the Defendants’ false

representations and omissions of material fact regarding their underwriting standards and the characteristics of the mortgage loans underlying the RMBS in the Offering Materials. But for the Defendants’ fraudulent representations and omissions, Sealink would not have purchased the RMBS. 113. Sealink reasonably relied upon the Countrywide’s representations in the Offering

Materials regarding the underlying loan quality. Sealink did not know at the time it purchased the RMBS, and could not have known, that the originators were not following their underwriting guidelines, leading to a drastic increase in the origination of risky loans, nor did Sealink know that the property appraisals secured by the originators were not independent and resulted in false appraisal values. Sealink also did not know that the originators knowingly or recklessly accepted false information about material fact such as borrowers’ stated income, which caused the Defendants’ representations to be false. Sealink did not know that

Defendants’ due diligence had identified significant problems with the originators’ loans signifying that a substantial number of the loans underlying the RMBS would not be able to be repaid. If Sealink had known these and other material facts regarding Defendants’ fraudulent misrepresentations and omissions of material fact contained in the Offering Materials, Sealink would not have purchased the RMBS. 114. Defendants’ misrepresentations and omissions of material fact caused Sealink to

suffer losses on the RMBS, because the RMBS were far riskier—and their rate of default far higher—than the Offering Materials represented them to be. The mortgage loans underlying the

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RMBS experienced defaults and delinquencies at a much higher rate due to the originators’ abandonment of their loan-origination guidelines. 115. Sealink purchased each RMBS in reliance on the information contained in the

applicable Offering Materials. In connection with the offers and sales of the RMBS to Sealink, Defendants provided directly or indirectly to Sealink’s investment advisors the Offering Materials. Similar information was sent to and analyzed by Sealink’s investment advisors if the RMBS was sold to them in the secondary market. 116. Sealink reviewed and analyzed the Offering Materials provided directly or

indirectly by Defendants with respect to each offering of RMBS and performed various analyses of the RMBS-specific data for each offering before deciding to purchase RMBS in the offering. The analyses conducted by Sealink before deciding to purchase a RMBS included various credit analyses based on the information provided by Defendants with respect to both the credit characteristics of the mortgage loan pool (including, for example, geographic concentration; weighted average life; fixed- or floating-rate loans; full-, low-, or nodocumentation “stated income” loans; and owner-occupied, second home, or investment properties), and the structure of the securitization with respect to the seniority and risk characteristics of the particular tranche of RMBS (including, for example, position in the payment “waterfall”). 117. Thus, Sealink justifiably relied on the Offering Materials provided directly or

indirectly by Defendants for each offering of the RMBS. These documents contained numerous statements of material fact about the RMBS, including statements concerning: (i) the mortgage originators’ underwriting guidelines that were purportedly applied to evaluate the ability of the borrowers to repay the loans underlying the RMBS; (ii) the appraisal guidelines that were purportedly applied to evaluate the value and adequacy of the mortgaged properties as
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collateral; (iii) the LTV ratios and debt to income ratios; (iv) Defendants’ due diligence of the loans and the originators’ underwriting practices; and (v) the ratings assigned to the RMBS. 118. These statements of material fact were untrue because: (i) the originators

violated their stated underwriting guidelines and did not originate loans based on the borrowers’ ability to repay; and (ii) inflated appraisals caused the listed LTV ratios and levels of credit enhancement to be untrue. In addition, metrics such as debt-to-income ratios were untrue as a result of the other mortgage originators’ acceptance of untrue information from mortgage applicants. For example, Defendants and the mortgage originators allowed applicants for

“stated income” loans to provide untrue income information and did not verify the applicants’ purported income. In addition, the credit ratings on which Sealink relied were materially misleading, did not reflect the true credit quality of the RMBS and were the result of intentional manipulation. X. BECAUSE OF DEFENDANTS’ FRAUDULENT CONDUCT, SEALINK SUFFERED LOSSES ON ITS PURCHASES OF RMBS 119. The ratings on virtually all of the RMBS have since been downgraded and they

are no longer marketable or salable at the prices paid for them by Sealink. All of the RMBS in which Sealink purchased interests were rated “AAA” at issuance and the vast majority have since been downgraded to junk. 120. Further, the delinquency, bank ownership and foreclosure rates on the underlying

mortgages have soared since issuance. These current performance numbers do not reflect the number of loans which have been foreclosed since issuance and which are no longer included within the loan pools. A substantial number of the original loans contained in the loan pools have been removed from the pools, largely due to either foreclosure or early payout, negatively impacting the income payable to certificate-holders.

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XI.

AS COUNTRYWIDE’S SUCCESSOR, BANK OF AMERICA IS VICARIOUSLY LIABLE FOR COUNTRYWIDE’S ACTIONS 121. As Countrywide’s successor in liability, Bank of America is jointly and severally

liable for any and all damages resulting to Plaintiffs from the wrongful actions of Countrywide. Bank of America itself has acknowledged that its acquisition of all of Countrywide's assets through an all-stock transaction on July 1, 2008 was a “merger.” In a July 2008 press release, Barbara Desoer, identified as the head of the “combined mortgage, home equity and insurance businesses” of Bank of America and Countrywide, said: “Now we begin to combine the two companies and prepare to introduce our new name and way of operating.” According to Bank of America, it “anticipates substantial cost savings from combining the two companies,” from eliminating employment positions, and from reducing overlapping technology, vendor and marketing expenses. Desoer added that “the company is expected to benefit by leveraging its broad product set to deepen relationships with existing Countrywide customers.” Desoer was also interviewed for the May 2009 issue of Housing Wire, which reported that one of the assets [Bank of America] acquired with Countrywide was a vast technology platform for originating and servicing loans, and Desoer says that the bank will be migrating some aspects of BofA's mortgage operations over to Countrywide's platforms. Desoer was quoted as saying, “[w]e’re done with defining the target, and we're in the middle of doing the development work to prepare us to be able to do the conversion of the part of the portfolio going to the legacy Countrywide platforms.” Mozilo stated in another press release that “the combination of Countrywide and Bank of America will create one of the most powerful mortgage franchises in the world.” And in its 2008 Annual Report, Bank of America confirmed that by acquiring Countrywide it became the “No. 1 provider of both mortgage originations and servicing” and “as a combined

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company,” it would be recognized as a “responsible lender who is committed to helping our customers become successful homeowners.” 122. Bank of America has reported to the SEC that on November 7, 2008,

Countrywide Financial and Countrywide Home “transferred substantially all of their assets and operations to [Bank of America].” This transfer of assets was “in connection with the

integration of Countrywide Financial Corporation with [Bank of America’s] other businesses and operations.” A California federal court recently found that since the merger,

“Countrywide’s remaining operations and employees have been transferred to Bank of America, and Bank of America ceased using the Countrywide name in April 2009.” And the New York Supreme Court has denied the defendants’ motion to dismiss MBIA’s and Syncora’s – both monoline bond insurers – successor and vicarious liability claims against Bank of America based on Countrywide MBS. Countrywide also ceased submitting filings to the SEC, which are now submitted as part of Bank of America’s filings. Further, Bank of America has taken responsibility for Countrywide’s pre-merger liabilities, including restructuring hundreds of thousands of loans created and serviced by Countrywide and paying billions of dollars in settlements. 123. A spokesperson for Bank of America confirmed: “We bought the company and

all of its assets and liabilities.” Similarly, a January 23, 2009 New York Times article quoted Kenneth D. Lewis (who at the time was Bank of America’s Chairman and CEO), acknowledging that Bank of America had factored Countrywide’s liabilities into the price it paid to acquire Countrywide: “We looked at every aspect of the deal, from their assets to potential lawsuits and we think we have a price that is a good price.” 124. Consistent with its assumption of Countrywide’s liabilities, on October 6, 2008,

Bank of America settled lawsuits brought against Countrywide by state Attorneys General by
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agreeing to loan modifications for 390,000 borrowers, an agreement valued up to $8.4 billion. Bank of America also agreed to pay $150 million to help Countrywide customers who were already in or were at serious risk of foreclosure, and an additional $70 million to help Countrywide customers who had already lost their homes to make the transition to other living arrangements. In 2008, Bank of America restructured 300,000 home loans of which 87% had been originated or serviced by Countrywide. In announcing that its loan modification program, known as the National Homeowners Retention Program (“NHRP”), will now have a “principal forgiveness” component, Bank of America noted that it “developed and launched the NHRP to provide assistance to Countrywide borrowers.” 125. On January 3, 2011, Bank of America paid $2.8 billion to GSEs Freddie Mac

and Fannie Mae to settle claims of misrepresentations on billions of dollars in loans that went sour after Fannie and Freddie bought them from Countrywide. In exchange for the payments, Freddie Mac and Fannie Mae agreed to drop their demands that Bank of America buy back the mortgages. The payment of $1.28 billion to Freddie Mac settled 787,000 loan claims (current and future) sold by Countrywide through 2008. The payment of $1.34 billion (after applying credits to an agreed upon settlement amount of $1.52 billion) to Fannie Mae settled repurchase claims on 12,045 Countrywide loans (with approximately $2.7 billion of unpaid principal balance) and other specific claims on 5,760 Countrywide loans (nearly $1.3 billion of unpaid principal balance). 126. Upon information and belief, Bank of America has been operating Countrywide

Home effectively as a division of Bank of America. To that end, on April 27, 2009, Bank of America announced that “[t]he Countrywide brand has been retired.” Bank of America advised that it is operating the Countrywide home loan and mortgage business as a “division” named Bank of America Home Loans, which “represents the combined operations of Bank of
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America’s mortgage and home equity business and Countrywide Home Loans.” The Bank of America Home Loans division is headquartered at Countrywide’s offices in Calabasas, California. 127. Further, Bank of America’s website states that “Countrywide customers ... have

access to Bank of America's 6,100 banking centers.” Countrywide’s former website redirects customers to Bank of America’s website. XII. CAUSES OF ACTION FIRST CAUSE OF ACTION (Common Law Fraud Against Countrywide Financial, Countrywide Home Loans, Countrywide Securities, And The Depositor Defendants) 128. Plaintiffs repeat and reallege the allegations set forth in the preceding

paragraphs, as if fully set forth herein. 129. As alleged above, in the Offering Documents and in their public statements,

Countrywide Financial, Countrywide Home Loans, Countrywide Securities, and the Depositor Defendants made fraudulent and false statements of material fact, and omitted material facts necessary in order to make their statements, in light of the circumstances under which the statements were made, not misleading. 130. As a corporate parent, Countrywide Financial directed the activities of

Countrywide Home Loans, Countrywide Securities, and the Depositor Defendants. 131. Countrywide Financial, Countrywide Home Loans, Countrywide Securities, and

the Depositor Defendants knew at the time they sold and marketed each of the Certificates that the foregoing statements were false or, at the very least, made recklessly, without any belief in the truth of the statements.

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132.

Countrywide Financial, Countrywide Home Loans, Countrywide Securities, and

the Depositor Defendants made these materially misleading statements and omissions for the purpose of inducing Plaintiffs to purchase the Certificates. related to these Defendants’ own acts and omissions. 133. Countrywide Financial, Countrywide Home Loans, Countrywide Securities, and Furthermore, these statements

the Depositor Defendants knew that Plaintiffs were relying on their expertise, and they encouraged such reliance through the Offering Documents, private placement memoranda, and their public representations, as described herein. Countrywide Financial, Countrywide Home Loans, Countrywide Securities, and the Depositor Defendants knew that Plaintiffs would rely upon their representations in connection with Plaintiffs’ decision to purchase the Certificates. Countrywide Financial, Countrywide Home Loans, Countrywide Securities, and the Depositor Defendants were in a position of unique and superior knowledge regarding the true facts concerning the foregoing material misrepresentations and omissions. 134. It was only by making such representations that Countrywide Financial,

Countrywide Home Loans, Countrywide Securities, and the Depositor Defendants were able to induce Plaintiffs to buy the Certificates. Plaintiffs would not have purchased or otherwise acquired the Certificates but for Countrywide Financial’s, Countrywide Home Loans’, Countrywide Securities’, and the Depositor Defendants’ fraudulent representations and omissions about the quality of the Certificates. 135. Plaintiffs justifiably, reasonably, and foreseeably relied on Countrywide

Financial’s, Countrywide Home Loans’, Countrywide Securities’, and the Depositor Defendants’ representations and false statements regarding the quality of the Certificates. 136. As a result of the false and misleading statements and omissions, as alleged

herein, Plaintiffs have suffered substantial damages.
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137.

Because Countrywide Financial, Countrywide Home Loans, Countrywide

Securities, and the Depositor Defendants committed these acts and omissions maliciously, wantonly and oppressively, and because the consequences of these acts knowingly affected the general public, including but not limited to all persons with interests in the Certificates, Plaintiffs are entitled to recover punitive damages. SECOND CAUSE OF ACTION (Fraudulent Inducement Against Countrywide Financial, Countrywide Home Loans, Countrywide Securities, And The Depositor Defendants) 138. Plaintiffs repeat and reallege the allegations set forth in the preceding

paragraphs, as if fully set forth herein. 139. As alleged above, in the Offering Documents and in their public statements,

Countrywide Financial, Countrywide Home Loans, Countrywide Securities, and the Depositor Defendants made fraudulent and false statements of material fact, and omitted material facts necessary in order to make their statements, in light of the circumstances under which the statements were made, not misleading. 140. This is a claim for fraudulent inducement against Countrywide Financial, As a

Countrywide Home Loans, Countrywide Securities, and the Depositor Defendants.

corporate parent, Countrywide Financial directed the activities of Countrywide Home Loans, Countrywide Securities, and the Depositor Defendants. 141. Countrywide Financial, Countrywide Home Loans, Countrywide Securities, and

the Depositor Defendants knew at the time they sold and marketed each of the Certificates that the foregoing statements were false or, at the very least, made recklessly, without any belief in the truth of the statements.

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142.

Countrywide Financial, Countrywide Home Loans, Countrywide Securities, and

the Depositor Defendants made these materially misleading statements and omissions for the purpose of inducing Plaintiffs to purchase the Certificates. related to these Defendants’ own acts and omissions. 143. Countrywide Financial, Countrywide Home Loans, Countrywide Securities, and Furthermore, these statements

the Depositor Defendants knew that Plaintiffs were relying on their expertise, and they encouraged such reliance through the Offering Documents and their public representations, as described herein. Countrywide Financial, Countrywide Home Loans, Countrywide Securities, and the Depositor Defendants knew that Plaintiffs would rely upon their representations in connection with Plaintiffs’ decision to purchase the Certificates. Countrywide Financial,

Countrywide Home Loans, Countrywide Securities, and the Depositor Defendants were in a position of unique and superior knowledge regarding the true facts concerning the foregoing material misrepresentations and omissions. 144. It was only by making such representations that Countrywide Financial,

Countrywide Home Loans, Countrywide Securities, and the Depositor Defendants were able to induce Plaintiffs to buy the Certificates. Plaintiffs would not have purchased or otherwise acquired the Certificates but for Countrywide Financial’s, Countrywide Home Loans’, Countrywide Securities’, and the Depositor Defendants’ fraudulent representations and omissions about the quality of the Certificates. 145. Plaintiffs justifiably, reasonably, and foreseeably relied on Countrywide

Financial’s, Countrywide Home Loans’, Countrywide Securities’, and the Depositor Defendants’ representations and false statements regarding the quality of the Certificates. 146. By virtue of Countrywide Financial’s, Countrywide Home Loans’, Countrywide

Securities’, and the Depositor Defendants’ false and misleading statements and omissions, as
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alleged herein, Plaintiffs have suffered substantial damages and are also entitled to a rescission of the sale of the Certificates. THIRD CAUSE OF ACTION (Aiding And Abetting Fraud Against Countrywide Financial, Countrywide Home Loans, Countrywide Securities, The Depositor Defendants, Mozilo And Sambol) 147. Plaintiffs repeat and reallege the allegations set forth in the preceding

paragraphs, as if fully set forth herein. 148. This is a claim against the above-named aiding and abetting Countrywide

Defendants for aiding and abetting the fraud by Countrywide Financial, Countrywide Home Loans, Countrywide Securities, and the Depositor Defendants. Each of these Defendants aided and abetted the fraud committed by all of the others among these Defendants. 149. The above-named aiding and abetting Countrywide Defendants knew of the

fraud perpetrated by Countrywide Financial, Countrywide Home Loans, Countrywide Securities, and the Depositor Defendants on Plaintiffs. As alleged in detail above, each of the above-named aiding and abetting Countrywide Defendants knew that the Certificates were not backed by high quality loans and were not underwritten according to Countrywide Home Loans’ underwriting standards, received internal reports about the violations of Countrywide Home Loan’ mortgage loan underwriting and appraisal standards, participated in those violations and had actual knowledge of their own acts, or participated in and had actual knowledge of Defendants’ failure to convey good title to the mortgage loans underlying the Certificates to the issuing trusts. 150. Furthermore, the above-named aiding and abetting Countrywide Defendants

provided Countrywide Financial, Countrywide Home Loans, Countrywide Securities, and the Depositor Defendants with substantial assistance in advancing the commission of the fraud. As alleged in detail above, each of the above-named aiding and abetting Countrywide Defendants

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participated in the violations of Countrywide Home Loans’ mortgage loan underwriting and appraisal standards, made false public statements about Countrywide Home Loans’ mortgage loan underwriting and appraisal standards, provided false information about the mortgage loans underlying the Certificates to the credit rating agencies, provided false information for use in the Offering Documents, or participated in the failure to properly endorse and deliver the mortgage notes and security documents to the issuing trusts. 151. It was foreseeable to the above-named aiding and abetting Countrywide

Defendants at the time they actively assisted in the commission of the fraud that Plaintiffs would be harmed as a result of their assistance. 152. As a direct and natural result of the fraud committed by Countrywide Financial,

Countrywide Home Loans, Countrywide Securities, and the Depositor Defendants and the above-named aiding and abetting Countrywide Defendants’ knowing and active participation therein, Plaintiffs have suffered substantial damages. FOURTH CAUSE OF ACTION (Negligent Misrepresentation Against Mozilo, Sambol, Countrywide Financial, Countrywide Securities, and Countrywide Home Loans) 153. Plaintiffs repeat and reallege each and every allegation set forth in the preceding

paragraphs above as if fully set forth herein, except any allegations that the Countrywide Defendants made any untrue statements and omissions intentionally or recklessly. For the purposes of this Count, Plaintiff expressly disclaims any claim of fraud or intentional misconduct. 154. This is a claim for negligent misrepresentation against Mozilo, Sambol,

Countrywide Financial Corp., Countrywide Securities Corporation, and Countrywide Home Loans, (the “Negligent Misrepresentation Defendants”).

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155.

Sealink made 31 separate investments in 30 Offerings of RMBS that the The Negligent Misrepresentation Defendants originated,

Defendants securitized and sold.

acquired, or underwrote all the loans in the Offerings. Mozilo and Sambol were closely involved in the everyday management of the other Negligent Misrepresentation Defendants. 156. Because the Negligent Misrepresentation Defendants arranged the

Securitizations, and originated, acquired, or underwrote all of the underlying mortgage loans, they had unique and special knowledge about the loans in the Offerings. In particular, the Negligent Misrepresentation Defendants had unique and special knowledge and expertise regarding the quality of the underwriting of those loans. 157. In particular, because Sealink neither had information regarding the lenders for

loans originated or acquired by Countrywide Home Loans nor had access to the loan files for the mortgage loans underlying the Countrywide RMBS, and because Sealink could not examine the underwriting quality of the mortgage loans in the securitizations on a loan-by-loan basis, it was heavily dependent on the Defendants’ unique and special knowledge regarding the Countrywide Home Loans loans that backed the RMBS at issue when determining whether to invest in each RMBS. Sealink was entirely dependent on the Defendants to provide accurate information regarding the loans in engaging in that analysis. Accordingly, the Defendants were uniquely situated to evaluate the economics of each RMBS. 158. Over the course of more than two years, for over 30 separate investments,

Sealink relied on the Negligent Misrepresentation Defendants’ unique and special knowledge regarding the quality of the underlying mortgage loans and their underwriting when determining whether to invest in the Offerings. This longstanding relationship, coupled with the Negligent Misrepresentation Defendants’ unique and special knowledge about the underlying loans,

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created a special relationship of trust, confidence, and dependence between the Negligent Misrepresentation Defendants and Plaintiffs. 159. The Negligent Misrepresentation Defendants were aware that Plaintiffs relied on

their unique and special expertise and experience and depended upon them for accurate and truthful information. The Negligent Misrepresentation Defendants also knew that the facts regarding Countrywide’s compliance with its underwriting standards were exclusively within their knowledge. 160. Based on their expertise, superior knowledge, and relationship with Plaintiffs,

the Negligent Misrepresentation Defendants owed a duty to Plaintiffs to provide complete, accurate, and timely information regarding the mortgage loans and the RMBS. The Negligent Misrepresentation Defendants breached their duty to provide such information to Plaintiffs. 161. The Negligent Misrepresentation Defendants likewise made misrepresentations

which they knew, or were negligent in not knowing at the time to be false, in order to induce Plaintiffs’ investment in the RMBS. The Negligent Misrepresentation Defendants provided the Offering Documents to Plaintiffs in connection with the RMBS, for the purpose of informing Plaintiffs of material facts necessary to make an informed judgment about whether to purchase the RMBS in the Offerings. In providing these documents, Countrywide knew that the

information contained and incorporated therein would be used for a serious purpose, and that Plaintiffs, like other reasonably prudent investors, intended to rely on the information. 162. As alleged above, the Offering Documents contained materially false and

misleading information. 163. The Negligent Misrepresentation Defendants should have known that the

information in the Offering Documents was materially false and misleading.

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164.

Unaware that the Offering Documents contained materially false and misleading

statements, Plaintiffs reasonably relied on those false and misleading statements when deciding to purchase the non-secondary Certificates in the Offerings. 165. Sealink purchased RMBS from the Depositor Defendants and from Countrywide

Securities, and are therefore in privity with Countrywide Securities and the Depositor Defendants. 166. Based on the Negligent Misrepresentation Defendants’ expertise and specialized

knowledge, and in light of the false and misleading representations in the Offering Documents, the Negligent Misrepresentation Defendants owed Sealink a duty to provide them with complete, accurate, and timely information regarding the quality of the RMBS, and breached their duty to provide such information to Plaintiffs. 167. Sealink reasonably relied on the information provided by the Negligent

Misrepresentation Defendants and have suffered substantial damages as a result of their misrepresentations. FIFTH CAUSE OF ACTION (Successor And Vicarious Liability Against The Bank Of America Defendants) 168. Plaintiffs repeat and reallege the allegations set forth in the preceding

paragraphs, as if fully set forth herein. 169. The Bank of America Defendants – BAC Home Loans Servicing, and NB

Holdings – are jointly and severally liable for any and all damages resulting from the wrongful actions of Countrywide Financial, Countrywide Home Loans, and Countrywide Securities, as alleged herein, because it is the successor-in-interest to Countrywide Financial and is vicariously liable for the conduct of Countrywide Financial, Countrywide Home Loans, and Countrywide Securities as a result of a de facto merger of the two entities.
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170.

This acquisition was a de facto merger because Bank of America intended to

take over and effectively took over Countrywide Financial and its subsidiaries in their entirety and, thus, should carry the liabilities of Countrywide Financial, Countrywide Home Loans, and Countrywide Securities, as a concomitant to the benefits it derived from the purchase. 171. The acquisition resulted in continuity of ownership – a hallmark of a de facto

merger – because the shareholders of Countrywide Financial became shareholders of Bank of America as a result of Bank of America’s acquisition of Countrywide Financial on July 1, 2008 through an all-stock transaction involving a wholly-owned Bank of America subsidiary that was created for the sole purpose of facilitating the acquisition of Countrywide Financial. Bank of America has described the transaction as a merger, and has actively incorporated the Countrywide’s mortgage business into Bank of America. 172. Bank of America assumed the liabilities ordinarily necessary for the

uninterrupted continuation of the business of Countrywide Financial, Countrywide Home Loans, and Countrywide Securities – another hallmark of a de facto merger. Among other things, the Countrywide brand has been retired and the old Countrywide website redirects customers to the mortgage and home loan sections of Bank of America’s website. On April 27, 2009, Bank of America announced that “[t]he Countrywide brand has been retired.” Instead, Bank of America operated its home loan and mortgage business through a new division named Bank of America Home Loans, which “represents the combined operations of Bank of America’s mortgage and home equity business and Countrywide Home Loans.” The

integration of Countrywide Financial, Countrywide Home Loans, and Countrywide Securities into Bank of America is complete. 173. The ordinary business of Countrywide Financial was ceased and the Company

dissolved soon after the acquisition – another hallmark of a de facto merger. On November 7,
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2008, Bank of America acquired substantially all of the assets of Countrywide Financial. And, at that time, Countrywide Financial ceased submitting filings to the SEC; Countrywide Financial’s assets and liabilities are now included in Bank of America’s filings. 174. Bank of America has also taken responsibility for the pre-merger liabilities of

Countrywide Financial, Countrywide Home Loans, and Countrywide Securities, including restructuring hundreds of thousands of loans created and serviced by these Defendants. As a spokesperson for Bank of America admitted: “We bought the company and all of its assets and liabilities.” 175. Because Bank of America has merged with Countrywide Financial, and acquired

substantially all of the assets of Countrywide Home Loans, and Countrywide Securities, through BAC Home Loans Servicing, NB Holdings and others, the Bank of America Defendants are the successors in liability to Countrywide Financial, Countrywide Home Loans, and Countrywide Securities, and are jointly and severally or otherwise vicariously liable for the wrongful conduct, as alleged herein, of these Defendants. PRAYER FOR RELIEF WHEREFORE, Plaintiffs pray for relief and judgment, as follows: (a) Awarding compensatory and/or rescissionary damages in favor of Plaintiffs

against all Defendants, jointly and severally, for all damages sustained as a result of Defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon; (b) (c) Awarding punitive damages for Plaintiffs’ common-law fraud claims; Awarding Plaintiffs their reasonable costs and expenses incurred in this action,

including counsel fees and expert fees; and (d) Such other relief as the Court may deem just and proper.

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JURY DEMAND Plaintiffs demand a trial by jury on all claims so triable. Dated: New York, New York September 29, 2011 Respectfully submitted, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP /s/ Gerald H Silk Gerald H. Silk Avi Josefson Michael D. Blatchley Ross Shikowitz 1285 Avenue of the Americas, 38th Floor New York, NY 10019 Tel: (212) 554-1400 Fax: (212) 554-1444 jerry@blbglaw.com avi@blbglaw.com michaelb@blbglaw.com ross@blbglaw.com Counsel for Plaintiff

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FILED: NEW YORK COUNTY CLERK 09/29/2011
NYSCEF DOC. NO. 1

INDEX NO. 652680/2011 RECEIVED NYSCEF: 09/29/2011

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

LANDESBANK BADEN-WÜRTTEMBERG, GEORGES QUAY FUNDING I LTD, and CALEDONIAN TRUST (CAYMAN) LIMITED, ON BEHALF AND FOR THE BENEFIT OF THE LEVERAGED ACCRUAL ASSET MANAGEMENT I SUB-TRUST, LEVERAGED ACCRUAL ASSET MANAGEMENT II SUB-TRUST, AND LEVERAGED ACCRUAL ASSET MANAGEMENT XI SUB-TRUST, Plaintiffs, v. BEAR STEARNS & CO. INC., BEAR STEARNS ASSET BACKED SECURITIES I LLC, EMC MORTGAGE LLC (f/k/a EMC MORTGAGE CORPORATION), STRUCTURED ASSET MORTGAGE INVESTMENTS II INC., J.P. MORGAN ACCEPTANCE CORPORATION I, J.P. MORGAN ACQUISITION CORPORATION., J.P. MORGAN SECURITIES LLC (f/k/a/ JPMORGAN SECURITIES INC.), WAMU ASSET ACCEPTANCE CORP., WAMU CAPITAL CORP., JPMORGAN CHASE & CO., and JPMORGAN CHASE BANK, N.A. Defendants.

Index No.

SUMMONS

TO THE ABOVE-NAMED DEFENDANTS: J.P. Morgan Chase & Co. 4001 Governor Printz Boulevard Wilmington, Delaware 19802 J.P. Morgan Securities LLC (f/k/a/ JP Morgan Securities Inc.) 227 Park Avenue New York, New York 10017

JP Morgan Chase Bank, N.A. 1111 Polaris Parkway Columbus, Ohio 43240 J.P. Morgan Acquisition Corp. 270 Park Avenue New York, New York 10017

J.P. Morgan Acceptance Corp. I 270 Park Avenue New York, New York 10017 Bear Stearns Asset Backed Securities I LLC 383 Madison Avenue New York, New York 1017

Bear Stearns & Co. Inc. 383 Madison Avenue New York, New York 10179 EMC Mortgage LLC (f/k/a/ EMC Mortgage Corp.) 2780 Lake Vista Drive Lewisville, Texas 75067 WaMu Capital Corp. 1301 Second Avenue, WMC 3501A Seattle, Washington 98101

Structured Asset Mortgage Investments II Inc., 383 Madison Avenue New York., New York 10179 WaMu Asset Acceptance Corp. 1301 Second Avenue, WMC 3501A Seattle, Washington 98101

You are hereby summoned to answer the complaint in this action and to serve a copy of your answer, or if the complaint is not served with this summons, to serve notice of appearance, on the plaintiff’s attorneys within twenty (20) days after the service of this summons, exclusive of the day of service (or within thirty (30) days after service is complete if this summons is not personally delivered to you within the State of New York); and in case of your failure to appear or answer, judgment will be taken against you by default for relief demanded herein. Venue is proper in this Court because several of the Defendants maintain their principal places of business in New York County.

Dated: New York, New York September 29, 2011

Respectfully submitted, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP /s/ Gerald H Silk Gerald H. Silk Avi Josefson Michael D. Blatchley Ross Shikowitz 1285 Avenue of the Americas, 38th Floor

New York, NY 10019 Tel: (212) 554-1400 Fax: (212) 554-1444 jerry@blbglaw.com avi@blbglaw.com michaelb@blbglaw.com ross@blbglaw.com Counsel for Plaintiff

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

LANDESBANK BADEN-WÜRTTEMBERG, GEORGES QUAY FUNDING I LTD, and CALEDONIAN TRUST (CAYMAN) LIMITED, ON BEHALF AND FOR THE BENEFIT OF THE LEVERAGED ACCRUAL ASSET MANAGEMENT I SUB-TRUST, LEVERAGED ACCRUAL ASSET MANAGEMENT II SUB-TRUST, AND LEVERAGED ACCRUAL ASSET MANAGEMENT XI SUB-TRUST, Plaintiffs, v. BEAR STEARNS & CO. INC., BEAR STEARNS ASSET BACKED SECURITIES I LLC, EMC MORTGAGE LLC (f/k/a EMC MORTGAGE CORPORATION), STRUCTURED ASSET MORTGAGE INVESTMENTS II INC., J.P. MORGAN ACCEPTANCE CORPORATION I, J.P. MORGAN ACQUISITION CORPORATION., J.P. MORGAN SECURITIES LLC (f/k/a/ JPMORGAN SECURITIES INC.), WAMU ASSET ACCEPTANCE CORP., WAMU CAPITAL CORP., JPMORGAN CHASE & CO., and JPMORGAN CHASE BANK, N.A. Defendants.

Index No.

COMPLAINT

JURY TRIAL DEMANDED

Plaintiffs Landesbank Baden-Württemberg, together with Georges Quay Funding I Ltd, and Caledonian Trust (Cayman) Limited, on behalf and for the benefit of the Leveraged Accrual Asset Management I Sub-Trust (“LAAM I”), Leveraged Accrual Asset Management II SubTrust (“LAAM II”), and Leveraged Accrual Asset Management XI Sub-Trust (“LAAM XI”) (collectively, “Plaintiffs”), by their attorneys Bernstein Litowitz Berger & Grossmann LLP, for its Complaint herein against Bear Stearns & Co. Inc., Bear Stearns Asset Backed Securities I LLC, EMC Mortgage LLC (f/k/a EMC Mortgage Corporation), Structured Asset Mortgage Investments II Inc., J.P. Morgan Acceptance Corporation I, J.P. Morgan Acquisition Corp., JP Morgan Securities LLC (f/k/a JP Morgan Securities Inc.), WaMu Asset Acceptance Corp., WaMu Capital Corp., JPMorgan Chase & Co., and JPMorgan Chase Bank, N.A. (collectively, “Defendants”), allege as follows: I. SUMMARY OF THE ACTION 1. This action arises from a fraud perpetrated by Defendants against Plaintiffs,

which invested in residential mortgage-backed securities (“RMBS”) that contained loans purchased, financed, and securitized by Defendants. Plaintiffs invested in highly-rated RMBS, bearing AAA ratings, in reliance on Defendants’ representations that those mortgages were originated according to specific underwriting guidelines and collateralized by accurately appraised properties. Those representations and the AAA ratings the RMBS carried led

Plaintiffs to believe that the Defendants’ RMBS it purchased were safe investments. 2. Plaintiffs purchased over $500 million worth of Defendants’ RMBS in 18

offerings between 2005 and 2007 (the “Certificates”) in reliance on registration statements, prospectuses, draft prospectus supplements, prospectus supplements and term sheets (the “Offering Materials”) prepared by and provided to them, directly or indirectly, by Defendants. The Offering Materials contained numerous representations about the purportedly conservative

1

mortgage underwriting standards applied by the mortgage originators, the appraisals of the mortgaged properties, and other facts regarding the collateral underlying the RMBS that were material to Plaintiffs’ investment decisions. 3. In truth, and as Plaintiffs and the world would only later discover, the originators

whose loans collateralized the Defendants’ RMBS purchased by Plaintiffs were among the worst of the worst culprits in the subprime lending industry. These infamous lenders included subsidiaries of Bear Stearns such as EMC Mortgage Company (“EMC”), subsidiaries of Washington Mutual such as Long Beach Mortgage Company (“Long Beach”) and Washington Mutual Bank, as well as other notorious originators such as Countrywide Home Loans (“Countrywide”). These originators have since folded up their operations, filed for bankruptcy or been shut down by regulators, and are the subject of numerous governmental investigations and private lawsuits alleging misconduct arising out of pervasive illegal and improper mortgage lending practices and other violations of law. 4. Defendants knew or recklessly disregarded that those lenders were issuing high-

risk loans that did not conform to their respective underwriting standards. Defendants did, in fact, conduct extensive due diligence on the loans it purchased for securitization, as represented in the Offering Materials. In the course of that extensive due diligence process, which, in many instances, included an extensive re-underwriting review of the loans it purchased by an independent third-party due diligence provider, Clayton Holdings, Inc. (“Clayton”), Defendants learned that the originators routinely and flagrantly disregarded their own underwriting guidelines, originated loans based on wildly inflated appraisal values, and manipulated the underwriting process in order to issue loans to borrowers who had no plausible means to repay them. Indeed, documents released by the Federal Crisis Inquiry Commission (“FCIC”) and Clayton reveal the extensive deficiencies identified through Defendants’ due diligence.
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Specifically, 27% of the loans JPMorgan and Washington Mutual (“WaMu”) evaluated for purchase and securitization at the height of the mortgage boom (from 2006 through mid-2007), and over 16% of such loans evaluated by Bear Stearns and EMC, were rejected by Clayton for failing to meet the originators’ own underwriting guidelines. 5. In fact, between January 2006 and June 2007, JPMorgan, WaMu and Bear

Stearns, together with EMC, purchased and securitized 51%, 29% and 42% respectively, of the sampled loans that Clayton determined failed to meet the originator’s underwriting guidelines, meaning that Defendants knew the loan pools it securitized were riddled with defective loans that were underwritten in a systematically deficient manner that flatly contradicted the representations in Defendants’ Offering Materials. 6. Defendants not only concealed from LBBS the truth about the poor quality of the

securitized loans, Defendants also knowingly provided false information to the credit rating agencies in order to secure a triple-A blessing for its RMBS. As a result of these practices, Defendants knew that the ratings assigned to its securitizations did not reflect the true credit quality of the Certificates Plaintiffs purchased. 7. This misconduct has resulted in astounding rates of default on the loans

underlying the Defendants RMBS and massive downgrades of the Certificates, the vast majority of which are now considered “junk.” Accordingly, the Certificates are no longer marketable or salable at or near the prices Plaintiffs paid for them, and Plaintiff have suffered significant losses as a result of the fraud perpetrated by Defendants. 8. Plaintiffs seek compensatory and/or rescissory damages against Defendants for

fraud, fraud in the inducement, aiding and abetting fraud, and negligent misrepresentation.

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II.

JURISDICTION AND VENUE 9. This Court has jurisdiction over each of the Defendants because each of them

transacts business within the State of New York within the meaning of CPLR § 302(a)(1) and each of them committed a tortious act inside the State of New York or outside the State of New York causing injury within the State of New York within the meaning of CPLR §§ 302(a)(2) and 302(a)(3). The amount in controversy exceeds $150,000. 10. Venue is proper in this Court because several of the Defendants maintain their

principal places of business in New York County. III. THE PARTIES A. 11. Plaintiffs Plaintiff Landesbank Baden-Württemberg (“LBBW”) is an international

commercial bank headquartered in Stuttgart, Germany. LBBW holds RMBS purchased by entities subsequently acquired by LBBW. 12. Plaintiff Caledonian Trust (Cayman) Limited, as trustee on behalf and for the

benefit of the Leveraged Accrual Asset Management I Sub-Trust (“LAAM I”), Leveraged Accrual Asset Management II Sub-Trust (“LAAM II”), and Leveraged Accrual Asset Management XI Sub-Trust (“LAAM XI,” and together with LAAM I, LAAM II, the “LAAM Sub-trusts”), was established in 1970 and is part of the Caledonian Group of companies operations. 13. Plaintiff Georges Quay Funding I Ltd. (“Georges Quay”) is a special purpose

vehicle incorporated in Ireland. 14. The claims asserted herein arise from the purchase of the RMBS described

herein by the LAAM Sub-trusts, Georges Quay, and entities acquired by LBBW.

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B. 15.

Defendants Defendant JPMorgan Chase & Co. is a financial holding company incorporated

under Delaware law. JPMorgan Chase & Co. is one of the largest banking institutions in the United States and is the ultimate owner of Defendants JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC (f/k/a J.P. Morgan Securities Inc.), J.P. Morgan Acceptance Corporation, I, and J.P. Morgan Acquisition Corp. JPMorgan Chase & Co. is also the

successor-in-interest to non-party The Bear Stearns Companies, Inc. 16. Defendant JPMorgan Chase Bank, N.A. is a national banking association, a

subsidiary of JPMorgan Chase & Co., and the sole owner of J.P. Morgan Acquisition Corp. Its main office is located in Columbus, Ohio. JPMorgan Chase Bank, N.A. is also the successorin-interest to Washington Mutual Bank. 17. Defendant J.P. Morgan Securities LLC (f/k/a J.P. Morgan Securities Inc.) is a

Delaware corporation with its principal place of business at 277 Park Avenue, New York, New York 10017. J.P Morgan Securities LLC is a SEC-registered broker-dealer that engages in investment banking activities in the U.S., and served as the underwriter for the JPALT 2007-A2 RMBS at issue here. 18. Defendant J.P. Morgan Acquisition Corporation is a Delaware corporation with

its principal place of business at 270 Park Avenue, New York, New York 10017. J.P. Morgan Acquisition Corporation is a direct, wholly-owned subsidiary of JPMorgan Chase Bank, N.A, and served as the sponsor for the JPALT 2007-A2 RMBS at issue here. 19. Defendant J.P. Morgan Acceptance Corporation I, is a Delaware corporation

with its principal executive offices at 270 Park Avenue, New York, New York 10017. J.P. Morgan Acceptance Corporation I is a direct, wholly-owned subsidiary of J.P. Morgan Securities Holdings LLC which, in turn, is a direct, wholly-owned subsidiary of JPMorgan

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Chase & Co. J.P. Morgan Acceptance Corporation I served as the depositor for the JPALT 2007-A2 RMBS at issue here. 20. Defendants JPMorgan Chase & Co., JPMorgan Chase Bank, N.A., J.P. Morgan

Securities LLC, J.P. Morgan Acquisition Corporation, and J.P. Morgan Acceptance Corporation I are collectively hereinafter referred to as “JPMorgan.” 21. Non-party The Bear Stearns Companies, Inc. was, at all relevant times, a holding

company that provided investment banking, securities, and derivative trading services to its clients through its subsidiaries. The Bear Stearns Companies Inc. was the sole owner, at the time of the securitizations, of Bear Stearns & Co. Inc., Bear Stearns Asset Backed Securities I LLC, EMC Mortgage LLC (f/k/a EMC Mortgage Corporation), and Structured Asset Mortgage Investments II Inc. On March 16, 2008, The Bear Sterns Companies, Inc. entered into an agreement and plan of merger with JPMorgan Chase & Co., making The Bear Sterns Companies, Inc. a wholly-owned subsidiary of JPMorgan Chase & Co. 22. Defendant Bear Stearns & Co. Inc. was, at all relevant times, an SEC-registered

broker-dealer with its principal place of business at 383 Madison Avenue, New York, New York 10179. Bear Stearns & Co. Inc. was a wholly-owned subsidiary of The Bear Stearns Companies, Inc., and served as the underwriter for 13 of the securitizations at issue here. Bear Stearns & Co. Inc. directed the activities of its affiliates EMC Mortgage LLC, Structured Asset Mortgage Investments II Inc. and Bear Stearns Asset Backed Securities I LLC. On or about October 1, 2008, following the merger effective May 30, 2008, Bear Stearns & Co. Inc. merged with J.P. Morgan Securities LLC (a subsidiary of JPMorgan Chase & Co.), and is now doing business as J.P. Morgan Securities LLC. All allegations against Bear Stearns & Co. Inc. are thus made against its successor-in-interest, J.P. Morgan Securities LLC, as well.

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23.

Defendant EMC Mortgage LLC (f/k/a EMC Mortgage Corporation) is

incorporated in Delaware and was, at all relevant times, a wholly-owned subsidiary of The Bear Stearns Companies, Inc. EMC Mortgage LLC served as sponsor for 11 of the securitizations at issue here. As a result of the merger between The Bear Stearns Companies, Inc. and JPMorgan Chase & Co., EMC Mortgage LLC became a wholly-owned subsidiary of JPMorgan Chase & Co. 24. Defendant Structured Asset Mortgage Investments II Inc. was, at all relevant

times, a Delaware corporation with its principal place of business at 383 Madison Avenue, New York., New York 10179. Structured Asset Mortgage Investments II Inc. was a wholly-owned subsidiary of The Bear Stearns Companies, Inc., and served as depositor for 11 of the securitizations at issue here. As a result of the merger between The Bear Stearns Companies, Inc. and JPMorgan Chase & Co., Structured Asset Mortgage Investments II Inc. became a wholly-owned subsidiary of JPMorgan Chase & Co. 25. Defendant Bear Stearns Asset Backed Securities I LLC was, at all relevant times,

a Delaware limited liability company and a limited purpose finance subsidiary of The Bear Stearns Companies, Inc., and an affiliate of Bear Stearns & Co., Inc. Bear Stearns Asset Backed Securities I LLC served as the depositor for three of the securitizations at issue here. As a result of the merger between The Bear Stearns Companies, Inc. and JPMorgan Chase & Co., Bear Stearns Asset Backed Securities I LLC became a wholly-owned subsidiary of JPMorgan Chase & Co. 26. Defendants Bear Stearns & Co. Inc., EMC Mortgage LLC, Structured Asset

Mortgage Investments II Inc., Bear Stearns Asset Backed Securities I LLC, J.P. Morgan Securities LLC (as successor-in-interest to Bear Stearns & Co., Inc.), and JPMorgan Chase &

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Co. (as successor-in-interest to The Bear Stearns Companies, Inc.), are collectively hereinafter referred to as “Bear Stearns.” 27. At all relevant times, Washington Mutual Bank was a federal savings association At the time of the

that provided financial services to consumer and commercial clients.

securitizations, Washington Mutual Bank was the sole owner of Defendants WaMu Asset Acceptance Corporation and WaMu Capital Corporation. Washington Mutual Bank served as a sponsor of the WMHE 2007-HE4 RMBS and was also the depositor of three of the securitizations at issue here. On September 25, 2008, JPMorgan Chase Bank, N.A. entered into a purchase and assumption agreement with the FDIC, under which JPMorgan Chase Bank, N.A. agreed to assume substantially all of Washington Mutual Bank’s liabilities and purchase substantially all of Washington Mutual Bank’s assets, including WaMu Asset Acceptance Corporation and WaMu Capital Corporation. As such, this action is brought against JPMorgan Chase Bank, N.A. as the successor to Washington Mutual Bank. 28. Defendant WaMu Capital Corporation was, at all relevant times, an SEC-

registered broker-dealer principally located at 1301 Second Avenue, WMC 3501A, Seattle, Washington 98101. WaMu Capital Corporation was a wholly-owned subsidiary of Washington Mutual Bank, and served as the underwriter for four of the securitizations at issue here. WaMu Capital Corporation is not currently affiliated with Washington Mutual Bank and is now a wholly-owned subsidiary of JPMorgan Chase Bank, N.A. 29. Defendant WaMu Asset Acceptance Corporation was, at all relevant times, a

wholly-owned subsidiary of Washington Mutual Bank and was principally located at 1301 Second Avenue, WMC 3501A, Seattle, Washington 98101. WaMu Asset Acceptance

Corporation served as the sponsor for three of the securitizations at issue here. WaMu Asset Acceptance Corporation is not currently affiliated with Washington Mutual Bank and is now a
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wholly-owned subsidiary of JPMorgan Chase Bank, N.A, successor-in-interest to Washington Mutual Bank. 30. Defendants WaMu Capital Corporation, WaMu Asset Acceptance Corporation,

and JPMorgan Chase Bank, N.A. (as successor-in-interest to Washington Mutual Bank) are collectively hereinafter referred to as “WaMu.” IV. FACTUAL BACKGROUND UNDERLYING PLAINTIFFS’ CLAIMS A. 31. The RMBS Purchased By Plaintiffs RMBS, such as the RMBS sold by Defendants and purchased by Plaintiffs,

provide the RMBS investor with an interest in income generated by a pool of mortgages. The actual securities themselves represent a participating interest in an “issuing trust” that holds the mortgage loan pool. Although the structure and underlying collateral of the mortgages varies among the 18 offerings of the RMBS that Plaintiffs purchased, they all function in a similar manner: The cash flows from the borrowers who make interest and principal payments on the individual mortgages comprising the mortgage pool are “passed through” to the certificate holders, like Plaintiffs. Accordingly, failure by those borrowers to make their mortgage

payments directly impacts the returns Plaintiffs earn on their investment. Moreover, a default resulting in foreclosure may cause the trust to sell the subject property at a loss – a risk that increases when the appraisals utilized in underwriting the loans overstated the value of the property that serves as collateral for the mortgage. For these reasons, the proper underwriting of the mortgages underlying the RMBS – including verifying the credit quality of the borrower and the value of the real estate – is essential to ensuring that the RMBS perform according to the representations made to investors like Plaintiffs. 32. The first step in creating an RMBS is the acquisition by a “depositor” of an

inventory of loans from a “sponsor” or “seller,” which either originates the loans or acquires the

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loans from other mortgage originators, in exchange for cash. The type of loans in the inventory varies, and can include conventional, fixed-rate or adjustable-rate mortgage loans, secured by first liens, junior liens, or a combination of first and junior liens, with various lifetimes to maturity. The depositor then transfers, or deposits, the acquired pool of loans to an “issuing trust.” Although there can be more than one “sponsor” or “depositor” in a given securitization, in most of the RMBS purchased by Plaintiffs at issue here, affiliates and/or subsidiaries of the Defendants acted as the “depositor” and “sponsor” of the securitization. 33. The depositor then securitizes the pool of loans in the issuing trust so that the

rights to the cash flows from the pool can be sold to investors. The securitization transactions are structured such that the risk of loss is divided among different levels of investment, or “tranches,” with each having a different level of risk and reward. Typically, losses on the underlying loans—whether due to default, delinquency, or otherwise—are generally applied in reverse order of seniority. As such, the most senior tranches of pass-through securities are rated by credit rating agencies as the best quality, or “AAA/Aaa.” Junior tranches, which usually obtained lower ratings, ranging from “AA/Aa” to “BB/Ba,” are less insulated from risk, but offer greater potential returns in the form of higher rates of interest. All of the Defendants RMBS purchased by Plaintiffs were among the most senior, risk-averse tranches of the relevant offerings and were all rated “AAA/Aaa” by at least one credit rating agency at issuance and when purchased by Plaintiffs. 34. Once the tranches are established, the issuing trust passes the securities back to

the depositor, which becomes the issuer of the RMBS. The depositor then passes the RMBS to the underwriter, which offers and sells the securities to Plaintiffs and other investors in exchange for cash that is passed back to the depositor, less any fees collected by the underwriter. Typically, underwriters collect between 0.2% to 1.5% in discounts, concessions or
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commissions in serving as an underwriter of an RMBS securitization. By serving as a sponsor and depositor of the securitizations, the Defendants earned even more. 35. Defendants were involved in almost every step of the process of selling the

RMBS to Plaintiffs. Sponsors such as EMC Mortgage Corporation, J.P. Morgan Mortgage Acquisition Corp. and Washington Mutual Bank provided warehouse financing to the originators that issued the mortgage loans, acquired the mortgage loans from the originators, and initiated the securitization of the mortgage loans into RMBS by transferring the loans to the relevant depositor, such as Structured Asset Mortgage Investments II Inc. The relevant

depositor, controlled by Defendants in most of the RMBS purchased by Plaintiffs, obtained the mortgage loans from the relevant sponsor to place into the issuing trust for sale in privately negotiated transactions to investors like Plaintiffs. Importantly, Defendants provided the

information that Plaintiffs used to decide whether to purchase the securities. 36. Because the cash flow from the loans in the collateral pool of a securitization is

the source of funds to pay the holders of the RMBS issued by the trust, the credit quality of those securities depends upon the credit quality of the loans in the collateral pool. The most important information about the credit quality of the loans is contained in the “loan files” that the mortgage originator develops while making the loans. For residential mortgage loans, each loan file normally contains documents including: the borrower’s application for the loan; verification of the borrower’s income, assets, and employment; references; credit reports on the borrower; an appraisal of the property that will secure the loan and provide the basis for important measures of credit quality, such as loan-to-value ratios. 37. The collateral pool of loans for each securitization usually includes thousands of

loans. Instead of each potential investor reviewing thousands of loan files, Defendants, in their roles as a sponsor and underwriter of the securitization, is responsible for gathering, verifying
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and presenting to potential investors accurate and complete information about the credit quality and characteristics of the loans that are deposited into the trust. Indeed, the single most important factors for Plaintiffs—and, for any investor—in purchasing Defendants RMBS were: (1) the ability of the underlying borrowers to repay their mortgages; (2) the ability for the trust to recover its losses in case of default by ensuring the properties were appropriate collateral for the loans and were accurately valued; and (3) the rate of interest received on the RMBS. The loan files themselves are not provided or available to RMBS investors like Plaintiffs, who must instead rely upon Defendants’ representations about the mortgages underlying the RMBS and the process used to select and review those loans. 38. As noted, all of the Defendants RMBS purchased by Plaintiffs were assigned

investment grade ratings at issuance, as set forth below:
Offering &  Original  Top Three   Tranche  Expenditure  Originators BALTA  $143,000,000 Countrywide Home Loans    2005‐9 11A1  EMC  Mortgage Company   BALTA  $6,493,000 Countrywide Home Loans   2007‐1 1M1  EMC Mortgage Company  BALTA  $11,500,000 Bear Stearns Residential Mortgage   2007‐2 1A1  EMC Mortgage Company  BALTA  $30,000,000 Bear Stearns Residential Mortgage   2007‐3 1A1  EMC Mortgage Company  BSABS  $70,000,000 Impac Funding Corporation   2006‐IM1 A1  BSMF  $34,457,127 Bear Stearns Residential Mortgage   2006‐AR2 1A2G  EMC Mortgage Company  BSMF  $6,898,000 Bear Stearns Residential Mortgage    2007‐AR1 1B1  EMC Mortgage Company  BSMF  $6,323,000 Bear Stearns Residential Mortgage   2007‐AR1 1B2  EMC Mortgage Company  BSMF  $30,000,000 Bear Stearns Residential Mortgage   2007‐AR1 2A3  EMC Mortgage Company  BSMF  $50,000,000 Bear Stearns Residential Mortgage   2007‐AR4 G2AB  EMC Mortgage Company  JPALT  $49,062,000 Chase Originators   2007‐A2 12A4  American Home Mortgage Corp.   GreenPoint Mortgage Funding, Inc. 
Initial 
Moody's  Fitch  S&P 

Current
Moody's Fitch  S&P 

1  2  3  4  5  6  7  8  9  10  11 

Aaa Aa2 Aaa Aaa Aaa Aaa Aaa Aa1 Aaa Aaa

                             

AAA  Caa3 AA  C 

                              C 

CCC D  CC  CC  D  CC  D  D  CCC CCC CCC

AAA  Ca  AAA  Ca  AAA  Ca  AAA  C  AA+  C  AA  C 

AAA  Ca  AAA  C 

Aaa AAA  AAA  C 

12

12 

Offering &  Tranche  LUM  2006‐6 A1 

13 

SAMI  2006‐AR4 2A1 

14 

SAMI  2006‐AR7 A1A  15  SAMI  2006‐AR8 A2  16  SAMI  2007‐AR3 1A3  17  18  19  20  21  WAMU  2007‐OA2 B1  WAMU  2007‐OA2 B2  WAMU  2007‐OA5 CA1C  WAMU  2007‐OA6 CA1C  WMHE  2007‐HE4 2A4 

Original  Top Three   Expenditure  Originators $25,000,000 GMAC Mortgage Corporation   Residential Funding Corp   MortgageIT, Inc.     $50,000,000 Countrywide Home Loans    SouthStar Funding LLC    Horizon Home Loan Corporation   $40,000,000 Countrywide Home Loans Servicing LP   $85,000,000 Countrywide Home Loans   SouthStar Funding LLC  $50,000,000 Countrywide Home Loans    Aegis Mortgage Corporation    Opteum Financial Services   $2,500,000 Washington Mutual Bank   $5,731,000 Washington Mutual Bank   $45,000,000 Washington Mutual Bank   $55,000,000 Washington Mutual Bank   $12,000,000 Washington Mutual Bank  

Initial 
Moody's  Fitch  S&P 

Current
Moody's Fitch  S&P 

Aaa

  

AAA  Caa2

  

A‐ /*‐

Aaa

  

AAA  Caa3

   BB/* ‐           CCC CCC CCC

Aaa Aaa Aaa

        

AAA  Caa3 AAA  Caa3 AAA  Ca 

Aa1 Aa1 Aaa Aaa Aaa

              

AA+  C  CC  C 

              

D  D  D  CC  CCC

AAA  C  AAA  C  AAA  Ca 

B. 40.

The Defendants’ Activities In The Subprime Mortgage Arena Defendants’ activities as buyers, financers and securitizers of residential

mortgage loans have been the focus of numerous government investigations and prosecutions as well as private investor lawsuits. Indeed, Defendants’ activities were integral to the growth and proliferation of high-risk mortgages that contributed to the financial crisis. Mortgage

originators generated profits primarily through the sale of their loans to investment banks like Defendants, and the originators were therefore driven to originate and sell as many loans as possible. Increased demand for mortgages by banks like Defendants, which, as noted above, were competing to sell mortgage-backed products, led to increased volume in mortgage originations. That increased volume, in turn, led to a decrease in the gain-on-sale margins that mortgage originators received from selling pools of loans. As a result, originators began to

13

borrow money from the same large banks that were buying their mortgages in order to fund the origination of even more mortgages. 41. One of the principal ways originators obtained such capital was by establishing a

warehouse line of credit with an investment bank. The line of credit, in turn, would be secured by the very mortgage loans that the investment bank would purchase for securitization. Investment banks, such as Defendants, earned fees and interest income on those warehouse lines of credit. C. 42. Defendants’ Role Was To Ensure The Quality Of The Loans Backing The RMBS Defendants and the mortgage originators utilized two methods to securitize

mortgages into RMBS for sale to investors. Specifically, the originators aggregated the loans into pools and would either (1) deposit them into a trust that would issue RMBS backed by the loans (referred to herein as an “originator securitization”), or (2) sell the loan pools to an investment bank, and the investment bank would then deposit the securities into a trust that would issue securities backed by the loans (“principal securitization”). Under the first

approach, Defendants profited by the fees they received by serving as an underwriter of the securities issued by the originator. Under the second approach, referred to herein as a “principal securitization” because the investment bank is securitizing the loans on its own behalf, Defendants profited off of the difference in the price it paid for the loan pools it purchased from the originator and that which it received from the sale of those loans as RMBS. 43. Most of the RMBS purchased by Plaintiffs at issue in this action were securitized

through principal securitization, whereby Defendants would first purchase loan pools originated by third-party originators and/or loan sellers and then sell those loans into the RMBS trust as the sponsor of a mortgage securitization. Some investors prefer principal securitizations to

14

originator securitizations because the involvement of a sophisticated investment bank throughout the securitization process indicates a higher degree of oversight and due diligence on the mortgages being selected for inclusion in the RMBS. 44. Indeed, Defendants routinely used an outside third-party due diligence provider,

Clayton Holdings, Inc. (“Clayton”), to perform due diligence on the pools of mortgages that Defendants would securitize. 45. Specifically, before purchasing loans from an originator in a principal

securitization, Defendants would perform due diligence on the mortgage loan pools by examining three areas—credit, compliance and valuation. First, credit diligence examined a sampling of the individual loans in a given loan pool to assess their quality and compliance with the underwriting guidelines of the originator. An originator’s underwriting guidelines are a critical tool for investors to evaluate the risk of default on the loans that serve as collateral for RMBS. Prudent lending standards—as articulated in an originator’s underwriting guidelines— are addressed in numerous federal guidance statements requiring that federally-regulated institutions adopt well-defined underwriting parameters such as acceptable loan-to-value ratios, debt-to-income ratios, and minimum acceptable credit scores.1 Those federal standards have been adopted by the subprime industry as a whole through substantially similar guidance published by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators. These standards are intended not only to protect borrowers to ensure that they can repay their loans, but also to ensure the safety and soundness of individual lending institutions and the financial system as a whole. Second, compliance diligence focused
1

See, e.g., 12 C.F.R. Part 34, subpart D (Office of the Comptroller of Currency standards); 12 C.F.R. Part 208, subpart C (Board of Governors of the Federal Reserve standards); 12 C.F.R. Part 365 (Federal Deposit Insurance Corporation standards); 12 C.F.R. 560.100 and 12 C.F.R. 560.101 (Office of Thrift Supervision standards); and 12 CFR 701.21 (National Credit Union Administration standards).
15

on whether the loans were originated in compliance with state, federal and local laws, including predatory lending and truth-in-lending statutes. Third, valuation diligence checked the accuracy of the originator’s reported property valuations of the collateral backing the loans. In a

principal securitization, this due diligence provides comfort to investors that Defendants has ensured that only mortgages that conform to the requirements of the RMBS at issue are being securitized. 46. In truth, Defendants routinely ignored the pervasive defects that their due

diligence identified in the loans they had purchased for securitization. Defendants deliberately concealed these defects from Plaintiffs and other investors in order to increase their own profits, preserve their ongoing business relationships with the RMBS originators, and move risk from their own balance sheet onto investors. Instead, as discussed in further detail below, Defendants used their asymmetrical informational advantage to reap illicit profits. D. 47. Factors Impacting The Quality Of The Defendants RMBS Federal regulators have long recognized the importance of sound lending and

have for years issued guidance on subprime mortgage products to ensure that borrowers are able to repay their loans. For example, the 1993 Interagency Guidelines for Real Estate Lending, issued jointly by the Board of Governors of the Federal Reserve System (Defendants’ primary federal regulator), the Office of the Comptroller of the Treasury, the Federal Depository Insurance Commission, the Office of Thrift Supervision, and the National Credit Union Administration, provided that prudently underwritten real estate loans (subprime or otherwise) “should reflect all relevant credit factors, including . . . the capacity of the borrower, or income from the underlying property, to adequately service the debt.” Federal regulators responded to the growth of newer subprime products with enhanced guidance in 1999, warning that if risks

16

associated with subprime lending were “not properly controlled, the agencies consider subprime lending a high-risk activity that is unsafe and unsound.” 48. The 1999 guidance recognized the critical role that banks such as Defendants,

which comprised the primary market for the sale of subprime loans, played in dictating and enforcing underwriting standards for subprime mortgage lending: Institutions should not accept loans from originators that do not meet their underwriting criteria, and should regularly review loans offered to ensure that loans purchased continue to meet those criteria. Deterioration in the quality of purchased loans or in the portfolio’s actual performance versus expectations requires a thorough reevaluation of the lenders or dealers who originated or sold the loans, as well as a reevaluation of the institution’s criteria for underwriting loans and selecting dealers and lenders. Any such deterioration may also highlight the need to modify or terminate the correspondent relationship or make adjustments to underwriting and dealer/lender selection criteria. 49. The guidance also required that “institutions . . . perform an ongoing analysis of

subprime loans,” “have information systems in place to segment and stratify their portfolio (e.g., by originator, loan-to-value, debt-to-income ratios, credit scores) and produce reports for management to evaluate the performance of subprime loans,” determine “whether performance meets expectations,” and “consider the source and characteristics of loans that do not meet expectations and make changes in their underwriting policies and loan administration procedures to restore performance to acceptable levels.” 50. Indeed, the fundamental basis upon which RMBS are valued is the ability of the

borrowers to repay the principal and interest on the underlying loans and the adequacy of the collateral. Thus, proper loan underwriting is critical to assessing the borrowers’ ability to repay the loans, and a necessary consideration when purchasing and pooling loans. If the loans pooled in the RMBS suffer defaults and delinquencies in excess of the assumptions built into

17

the certificate payment structure, RMBS investors suffer losses because of the diminished cash flow into the RMBS. 51. Likewise, independent and accurate appraisals of the collateralized real estate are

essential to ensure that the mortgage or home equity loan can be satisfied in the event of a default and foreclosure on a particular property. An accurate appraisal is necessary to determine the likely price at which the foreclosed property can be sold and, thus, the amount of money available to pass through to certificate holders. 52. An accurate appraisal is also critical to calculating the loan-to-value (“LTV”)

ratio, which is a financial metric commonly used to evaluate the price and risk of RMBS. The LTV ratio expresses the amount of mortgage or loan as a percentage of the appraised value of the collateral property. For example, if a borrower seeks to borrow $90,000 to purchase a home worth $100,000, the LTV ratio is equal to $90,000 divided by $100,000, or 90%. If, however, the appraised value of the house has been artificially inflated to $100,000 from $90,000, the real LTV ratio would be 100% ($90,000 divided by $90,000). The term combined loan-to-value ratio (“CLTV”) applies to the situation in which more than one loan is secured by a particular property. For example, a property valued at $100,000 with a single mortgage of $50,000 has an LTV of 50%. A similar property with a value of $100,000 with a first mortgage of $50,000 and a second lien mortgage of $25,000 has an aggregate mortgage balance of $75,000, and a CLTV of 75%. 53. From an investor’s perspective, a high LTV or CLTV ratio represents a greater

risk of default on the loan. First, borrowers with a small equity position in the underlying property have “less to lose” in the event of a default. Second, even a slight drop in housing prices might cause a loan with a high LTV ratio to exceed the value of the underlying collateral,

18

which might cause the borrower to default and would prevent the issuing trust from recouping its expected return in the case of foreclosure and subsequent sale of the property. 54. Consequently, the LTV ratios of the loans underlying the RMBS are important to

investors’ assessment of the value of such RMBS. Prospectuses typically provide information regarding the LTV ratios, and even guarantee certain LTV ratio limits for the loans that will support the RMBS. Each of the prospectus supplements expressly stated, in sum or substance, that none of the mortgage loans have loan-to-value ratios at origination, or with respect to second-lien mortgages, combined loan-to-value ratios at origination, in excess of 100%. As discussed below, this representation was false because a substantial portion of the loans purchased and securitized by Defendants had LTVs and CLTVs that exceeded 100% as calculated under independent property valuations obtained by Defendants. 55. Another important metric when considering a borrower’s ability to repay a loan is

a borrower’s debt-to-income ratio, or DTI, which reflects the increased risk that borrowers whose debt is relatively high compared to their income will default on their loans. While a borrower’s current DTI is good measure of his or her capacity to repay a fixed rate mortgage, other loan products, such as adjustable rate mortgages (“ARMs”), have initial “teaser” rates that reset at much higher index rates after a certain period. A “fully indexed rate” accounts for this interest rate reset, and represents the interest rate over the life of the loan, calculated by adding the index rate at origination and the margin that a lender adds to the index rate after the initial “teaser” period. For example, if the current index rate is 2.5%, and if the margin on a particular loan is 3%, the fully indexed rate on that loan is 5.5%. Because the fully indexed rate accounts for the current value of the interest rate index used by an ARM, it is a better measure of a borrower’s ability to repay the loan.

19

56.

In 2006, the interagency regulators, responding to the explosive growth of non-

traditional mortgage products, provided revised guidance explicitly addressing how institutions should calculate a borrower’s DTI. Specifically, the underwriting guidelines state that “[w]hen an institution offers nontraditional mortgage loan products, underwriting standards should address the effect of a substantial payment increase on the borrower’s capacity to repay when loan amortization begins.” Moreover, according to the guidance: For all nontraditional mortgage loan products, an institution’s analysis of a borrower’s repayment capacity should include an evaluation of their ability to repay the debt by final maturity at the fully indexed rate, assuming a fully amortizing repayment schedule. In addition, for products that permit negative amortization, the repayment analysis should be based upon the initial loan amount plus any balance increase that may accrue from the negative amortization provision.2 57. The federal guidance thus served to provide assurance to investors that

investments in instruments backed by subprime mortgages could be safe and conservative products so long as the underlying loans were properly underwritten and scrutinized. Indeed, the federal guidance made clear that heightened attention to and rigorous compliance with strict underwriting standards was critical for institutions engaged in subprime lending due to the unique risks posed by that borrower population. As regulators made clear, in the context of RMBS such as those purchased by Plaintiffs here, representations concerning underwriting guidelines, appraisals, LTVs and DTIs were paramount. V. THE OFFERING MATERIALS MISREPRESENTED THE UNDERWRITING AND QUALITY OF THE LOANS BACKING THE DEFENDANTS RMBS 58. Contrary to the statements in the Offering Materials and other communications by

Defendants used to solicit Plaintiffs’ investment in the RMBS, the originators whose loans served as collateral for Plaintiffs’ investments routinely and egregiously violated their stated
2

All emphasis added unless otherwise indicated.
20

underwriting guidelines. As a result, the mortgages they originated and sold to Defendants for securitization presented a materially higher risk to investors than represented by Defendants in the Offering Materials. 59. For example, the BALTA 2005-9 prospectus supplement described EMC

Mortgage Corporation’s underwriting standards, in relevant part, as follows: The EMC mortgage loans have either been originated or purchased by an originator and were generally underwritten in accordance with the standards described herein. Exceptions to the underwriting guidelines are permitted when the seller’s performance supports such action and the variance request is approved by credit management. Such underwriting standards are applied to evaluate the prospective borrower’s credit standing and repayment ability and the value and adequacy of the mortgaged property as collateral. These standards are applied in accordance with the applicable federal and state laws and regulations. Exceptions to the underwriting standards are permitted where compensating factors are present and are managed through a formal exception process. 60. Further, like the other originators whose loans backed the Defendants RMBS

purchased by Plaintiffs, the Offering Materials described the documentation that EMC purportedly required prospective borrowers to produce in order to properly obtain a mortgage loan. For example, the BALTA 2005-9 prospectus supplement stated, in relevant part, as

follows: Generally, each mortgagor will have been required to complete an application designed to provide to the lender pertinent credit information concerning the mortgagor. The mortgagor will have given information with respect to its assets, liabilities, income (except as described below), credit history, employment history and personal information, and will have furnished the lender with authorization to obtain a credit report which summarizes the mortgagor’s credit history.

21

61.

The Offering Materials also provided information regarding the appraisal For example, the BALTA 2005-9

standards and practices employed by the Defendants.

prospectus supplement described Countrywide’s appraisal practices as follows: Except with respect to mortgage loans originated pursuant to its Streamlined Documentation Program, Countrywide obtains appraisals from independent appraisers or appraisal services for properties that are to secure mortgage loans. The appraisers inspect and appraise the proposed mortgaged property and verify that the property is in acceptable condition. Following each appraisal, the appraiser prepares a report which includes a market data analysis based on recent sales of comparable homes in the area and, when deemed appropriate, a replacement cost analysis based on the current cost of constructing a similar home. All appraisals are required to conform to Fannie Mae or Freddie Mac appraisal standards then in effect. 62. These statements of material fact, and materially similar statements appearing in

all of the Defendants’ RMBS Offering Materials, were false and misleading when made because the originators discussed below failed to adhere to their established underwriting standards. Indeed, the reckless practices of the mortgage originators whose loans backed the Defendants RMBS rendered numerous statements concerning the originator’s guidelines, the LTV ratios, property appraisal values, and the credit ratings assigned to the RMBS materially false and misleading. As such, the riskiness of the loans underlying the RMBS purchased by Plaintiffs, and thus the true risk profile of the RMBS was materially misrepresented. Through the due diligence reports Defendants received before purchasing the loans securitized as RMBS purchased by Plaintiffs, Defendants knew of these violations, and concealed them from Plaintiffs. A. 63. EMC Violated Its Underwriting Guidelines EMC was one of the primary mortgage originators of the loans backing

Plaintiffs’ Bear Stearns-related RMBS investments. The Offering Materials relied upon by

22

Plaintiffs in purchasing the RMBS backed by loans originated by EMC contained false and misleading statements of material fact regarding its underwriting practices and guidelines. For example, the BALTA 2007-2 prospectus supplement described EMC’s underwriting guidelines, in relevant part, as follows: The EMC mortgage loans have either been originated or purchased by an originator and were generally underwritten in accordance with the standards described herein. Exceptions to the underwriting guidelines are permitted when the seller’s performance supports such action and the variance request is approved by credit management. Such underwriting standards are applied to evaluate the prospective borrower’s credit standing and repayment ability and the value and adequacy of the mortgaged property as collateral. These standards are applied in accordance with the applicable federal and state laws and regulations. Exceptions to the underwriting standards are permitted where compensating factors are present and are managed through a formal exception process. 64. The Offering Materials relied upon by Plaintiffs also contained misstatements of

material fact concerning the documentation that EMC’s prospective borrowers were purportedly required to submit in order to properly obtain a mortgage loan. For example, the BALTA 20072 prospectus supplement represented, in relevant part, as follows: Generally, each mortgagor will have been required to complete an application designed to provide to the lender pertinent credit information concerning the mortgagor. The mortgagor will have given information with respect to its assets, liabilities, income (except as described below), credit history, employment history and personal information, and will have furnished the lender with authorization to obtain a credit report which summarizes the mortgagor’s credit history. 65. These statements were false and misleading when made. In fact, EMC

systematically disregarded a borrower’s ability to pay when originating or acquiring loans, without regard to any “compensating factors.”

23

66.

The Offering Materials for the BALTA 2007-2 used to solicit Plaintiffs’

purchase of Bear Stearns RMBS backed by EMC-originated loans also represented that EMC ensured proper appraisals when issuing loans to borrowers. For example, the BALTA 2007-2 prospectus supplement explained that: Each mortgaged property relating to an EMC mortgage loan has been appraised by a qualified independent appraiser who is approved by each lender. All appraisals are required to conform to the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standard Board of the Appraisal Foundation. Each appraisal must meet the requirements of Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac require, among other things, that the appraiser, or its agent on its behalf, personally inspect the property inside and out, verify whether the property was in good condition and verify that construction, if new, had been substantially completed. The appraisal generally will have been based on prices obtained on recent sales of comparable properties, determined in accordance with Fannie Mae and Freddie Mac guidelines. In certain cases an analysis based on income generated from the property or a replacement cost analysis based on the current cost of constructing or purchasing a similar property may be used. 67. These statements were false and misleading when made. In order to increase

loan origination volume, EMC routinely originated or acquired mortgages that were issued utilizing biased appraisers and used inflated appraisals as a matter of course to issue loans to borrowers who would not otherwise qualify for the mortgage. B. 68. Countrywide Violated Its Underwriting Guidelines Countrywide originated a substantial percentage of the loans in several of the

Defendants RMBS purchased by Plaintiffs. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding Countrywide’s underwriting standards and practices. For example, the prospectus supplement for the BALTA 2007-1 RMBS

represented Countrywide’s underwriting guidelines, in relevant part, as follows:

24

As part of its evaluation of potential borrowers, Countrywide Home Loans generally requires a description of income. If required by its underwriting guidelines, Countrywide Home Loans obtains employment verification providing current and historical income information and/or a telephonic employment confirmation. Such employment verification may be obtained, either through analysis of the prospective borrower’s recent pay stub and/or W-2 forms for the most recent two years, relevant portions of the most recent two years’ tax returns, or from the prospective borrower’s employer, wherein the employer reports the length of employment and current salary with that organization. Self-employed prospective borrowers generally are required to submit relevant portions of their federal tax returns for the past two years. * * *

Countrywide Home Loans’ underwriting standards are applied by or on behalf of Countrywide Home Loans to evaluate the prospective borrower’s credit standing and repayment ability and the value and adequacy of the mortgaged property as collateral. Under those standards, a prospective borrower must generally demonstrate that the ratio of the borrower’s monthly housing expenses (including principal and interest on the proposed mortgage loan and, as applicable, the related monthly portion of property taxes, hazard insurance and mortgage insurance) to the borrower’s monthly gross income and the ratio of total monthly debt to the monthly gross income (the “debt-to-income” ratios) are within acceptable limits… Exceptions to Countrywide Home Loans’ underwriting guidelines may be made if compensating factors are demonstrated by a prospective borrower. * * *

The nature of the information that a borrower is required to disclose and whether the information is verified depends, in part, on the documentation program used in the origination process. In general under the Full Documentation Loan Program (the “Full Documentation Program”), each prospective borrower is required to complete an application which includes information with respect to the applicant’s assets, liabilities, income, credit history, employment history and other personal information. Self-employed individuals are generally required to submit their two most recent federal income tax returns. Under the Full Documentation Program, the underwriter verifies the information contained in the application relating to employment, income, assets and mortgages.

25

*

*

*

Except with respect to the mortgage loans originated pursuant to its Streamlined Documentation Program, whose values were confirmed with a Fannie Mae proprietary automated valuation model, Countrywide Home Loans obtains appraisals from independent appraisers or appraisal services for properties that are to secure mortgage loans. The appraisers inspect and appraise the proposed mortgaged property and verify that the property is in acceptable condition. Following each appraisal, the appraiser prepares a report which includes a market data analysis based on recent sales of comparable homes in the area and, when deemed appropriate, a replacement cost analysis based on the current cost of constructing a similar home. All appraisals are required to conform to Fannie Mae or Freddie Mac appraisal standards then in effect. 69. These statements were false and misleading when made in that they

misrepresented that Countrywide: (i) systematically failed to follow its stated underwriting standards; (ii) allowed pervasive exceptions to its stated underwriting standards in the absence of compensating factors; (iii) disregarded credit quality in favor of generating increased loan volume; and (iv) violated its stated appraisal standards and in many instances materially inflated the values of the underlying mortgage properties in the loan origination and underwriting process. C. 70. Washington Mutual Bank Violated Its Underwriting Guidelines Washington Mutual Bank (“WaMu Bank”) originated or acquired a substantial

percentage of the loans for several of the RMBS purchased by Plaintiffs. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding WaMu Bank’s underwriting standards and practices. For example, the prospectus supplement for the WMHE 2007-HE4 RMBS described WaMu Bank’s underwriting guidelines, in relevant part, as follows: All of the mortgage loans owned by the trust have been, or will be, originated by the sponsor through wholesale brokers or re-

26

underwritten upon acquisition from correspondents by the sponsor generally in accordance with the WMB sub-prime underwriting standards described in this section. The WMB sub-prime underwriting standards are primarily intended to evaluate the prospective borrower’s credit standing and repayment ability as well as the value and adequacy of the mortgaged property as collateral.

*

*

*

Prospective borrowers are required to complete a standard loan application in which they provide financial information regarding the amount of income and related sources, liabilities and related monthly payments, credit history and employment history, as well as certain other personal information. During the underwriting or re-underwriting process, the sponsor reviews and verifies the prospective borrower’s sources of income (only under the full documentation residential loan program), calculates the amount of income from all such sources indicated on the loan application, reviews the credit history and credit score(s) of the prospective borrower and calculates the debt-to-income ratio to determine the prospective borrower’s ability to repay the loan, and determines whether the mortgaged property complies with the WMB sub-prime underwriting standards.

*

*

*

The adequacy of the mortgaged property as collateral is generally determined by an appraisal of the mortgaged property that generally conforms to Fannie Mae and Freddie Mac appraisal standards and a review of that appraisal. The mortgaged properties are appraised by licensed independent appraisers who have satisfied the servicer’s appraiser screening process. In most cases, properties in below average condition, including properties requiring major deferred maintenance, are not acceptable under the WMB sub-prime underwriting programs. Each appraisal includes a market data analysis based on recent sales of comparable homes in the area and, where deemed appropriate, replacement cost analysis based on the current cost of constructing a similar home. * Underwriting Exceptions * *

27

On a case-by-case basis and only with the approval of an employee with appropriate risk level authority, the sponsor may determine that, based upon compensating factors, a prospective borrower not strictly qualifying under the WMB sub-prime underwriting risk category guidelines warrants an underwriting exception. Compensating factors may include, but are not limited to, low loan-to-value ratio, low debt-to-income ratio, good credit history, stable employment and time in residence at the prospective borrower’s current address. It is expected that some of the mortgage loans owned by the trust will be underwriting exceptions. Documentation Programs The mortgage loans have been, or will be, originated or reunderwritten upon acquisition, generally in accordance with the WMB sub-prime underwriting standards under the WMB subprime full documentation, limited documentation or stated income documentation residential loan programs. * Quality Control Review As part of its quality control system, the sponsor re-verifies information that has been provided by the mortgage brokerage company prior to funding a loan and the sponsor conducts a post-funding audit of every origination file. In addition, Washington Mutual Bank periodically audits files based on a statistical sample of closed loans. In the course of its pre-funding review, the sponsor re-verifies the income of each prospective borrower or, for a self-employed prospective borrower, reviews the income documentation obtained under the full documentation and limited documentation residential loan programs. The sponsor generally requires evidence of funds to close on the mortgage loan. 71. The above statements of material fact were false and misleading when made * *

because in truth, WaMu Bank: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in

28

many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. D. 72. Impac Funding Corporation Violated Its Underwriting Guidelines Impac Funding Corporation (“Impac”) originated a substantial percentage of the

loans for several of the RMBS purchased by Plaintiffs. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding Impac’s underwriting standards and practices. For example, the prospectus supplement for the BSABS 2006-IM1 RMBS described Impac’s underwriting guidelines, in relevant part, as follows: Approximately 90.90% of the mortgage loans were underwritten pursuant to, or in accordance with, the standards of the Originator’s Progressive Series Program. * The Progressive Series Program General. The underwriting guidelines utilized in the Progressive Series Program, as developed by the Originator, are intended to assess the borrower’s ability and willingness to repay the mortgage loan obligation and to assess the adequacy of the mortgaged property as collateral for the mortgage loan. The Progressive Series Program is designed to meet the needs of borrowers with excellent credit, as well as those whose credit has been adversely affected. . . . The philosophy of the Progressive Series Program is that no single borrower characteristic should automatically determine whether an application for a mortgage loan should be approved or disapproved. Lending decisions are based on a risk analysis assessment after the review of the entire mortgage loan file. Each mortgage loan is individually underwritten with emphasis placed on the overall quality of the mortgage loan. * * * * *

Each prospective borrower completes a mortgage loan application which includes information with respect to the applicant’s liabilities, income, credit history, employment history and personal information. The Originator requires a credit report on each applicant from a credit reporting company. The report
29

typically contains information relating to credit history with local and national merchants and lenders, installment debt payments and any record of defaults, bankruptcies, repossessions or judgments. * * *

Appraisals. The Originator does not publish an approved appraiser list for the conduit seller. Each conduit seller maintains its own list of appraisers, provided that each appraiser must: • be a state licensed or certified appraiser; • meet the independent appraiser requirements for staff appraisers, or, if appropriate, be on a list of appraisers specified by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the FDIC and the Office of Thrift Supervision under their respective real estate appraisal regulations adopted in accordance with Title XI of the Financial Institutions Reform Recovery and Enforcement Act of 1989, regardless of whether the seller is subject to those regulations; • be experienced in the appraisal of properties similar to the type being appraised; • be actively engaged in appraisal work; and • subscribe to a code of ethics that is at least as strict as the code of the American Institute of Real Estate Appraisers or the Society of Real Estate Appraisers. * * * Variations. The Originator uses the following parameters as guidelines only. On a case-by-case basis, the Originator may determine that the prospective mortgagor warrants an exception outside the standard program guidelines. An exception may be allowed if the loan application reflects certain compensating factors, including instances where the prospective mortgagor: • has demonstrated an ability to save and devote a greater portion of income to basic housing needs; • may have a potential for increased earnings and advancement because of education or special job training, even if the prospective mortgagor has just entered the job market; • has demonstrated an ability to maintain a debt free position;

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• may have short term income that is verifiable but could not be counted as stable income because it does not meet the remaining term requirements; and • has net worth substantial enough to suggest that repayment of the loan is within the prospective mortgagor’s ability.

73.

The above statements of material fact were false and misleading when made

because in truth, Impac: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. E. 74. The Chase Originators Violated Their Underwriting Guidelines Chase Home Finance LLC and JPMorgan Chase Bank, N.A. (collectively, the

“Chase Originators”) originated a substantial percentage of the loans for several of the RMBS purchased by Plaintiffs. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding Chase’s underwriting standards and practices. For

example, the prospectus supplement for the JPALT 2007-A2 RMBS described Chase’s underwriting guidelines, in relevant part, as follows: The depositor believes that such Mortgage Loans subject to the exception in the previous sentence were originated generally in accordance with the underwriting guidelines set forth under the heading “The Originators—General Underwriting Guidelines” in this prospectus supplement. * * *

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General Underwriting Guidelines Underwriting standards are applied by or on behalf of a lender to evaluate a borrower’s credit standing and repayment ability, and the value and adequacy of the related Mortgaged Property as collateral. In general, a prospective borrower applying for a loan is required to fill out a detailed application designed to provide to the underwriting officer pertinent credit information. As part of the description of the borrower’s financial condition, the borrower generally is required to provide a current list of assets and liabilities and a statement of income and expenses, as well as an authorization to apply for a credit report which summarizes the borrower’s credit history with local merchants and lenders and any record of bankruptcy. In most cases, an employment verification is obtained from an independent source (typically the borrower’s employer), which verification reports, among other things, the length of employment with that organization, the current salary, and whether it is expected that the borrower will continue such employment in the future. * * *

Based on the data provided in the application and certain verification (if required), a determination is made by the original lender that the mortgagor’s monthly income (if required to be stated) will be sufficient to enable the mortgagor to meet its monthly obligations on the mortgage loan and other expenses related to the property such as property taxes, utility costs, standard hazard insurance and other fixed obligations other than housing expenses. * * *

The adequacy of the mortgaged property as security for repayment of the related mortgage loan will generally have been determined by an appraisal in accordance with pre-established appraisal procedure guidelines for appraisals established by or acceptable to the originator. All appraisals conform to the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal Foundation and must be on forms acceptable to Fannie Mae and/or Freddie Mac. * * *

From time to time, exceptions to a lender’s underwriting policies may be made. Such exceptions may be made on a loan by loan basis at the discretion of the lender’s underwriter. Exceptions may be made after careful consideration of certain mitigating factors
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such as borrower liquidity, employment and residential stability and local economic conditions. 75. The above statements of material fact were false and misleading when made

because in truth, the Chase Originators: (i) abandoned their underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to their underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded their stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. VI. DEFENDANTS KNEW THE TRUTH ABOUT THE ORIGINATORS’ LENDING PRACTICES 76. Defendants scrutinized the loans they purchased and identified the rampant

underwriting deficiencies at the mortgage originators discussed above. Notwithstanding their knowledge about the real risks of default those loans presented, they securitized them into the RMBS sold to Plaintiffs. Moreover, for the loans that were originated and/or acquired by the Defendants’ own affiliates, the Defendants had actual knowledge of the poor underwriting practices that led to the issuance of the loans that securitized the RMBS purchased by Plaintiffs. A. 77. Defendants’ Due Diligence Identified Defects In The Loan Pools Defendants Purchased For Securitization Defendants learned, through their due diligence process, that a substantial

portion of the loans they securitized woefully failed to meet the stated underwriting standards of those originators, had other deficiencies, violated state and federal law, and/or were based on inflated property valuations. 78. As described in the FCIC, Defendants rejected Clayton’s credit due diligence

findings as a matter of course. During its review, Clayton would assign each loan a number—1,
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2 or 3—to reflect Clayton’s evaluation of the soundness of the loan. The numbering referred to three different levels, “1” being the best—i.e., the loan met the originators’ underwriting guidelines—and a “3” being the worst. 79. As revealed by the FCIC and reports released by Clayton, approximately 27% of

the JPMorgan- and WaMu-securitized loans sampled by Clayton during the height of the mortgage boom (from 2006 to mid-2007), and over 16% of such Bear Stearns and EMC loans, failed to meet the originator’s underwriting guidelines. The FCIC’s findings confirm that, over this same period, JPMorgan, WaMu and Bear Stearns (together with EMC) overruled Clayton’s findings and “waived” approximately 51%, 29%, and 42% respectively, of all such defective “exception” loans and securitized them into RMBS that were sold to investors like Plaintiffs. 80. Extrapolating the results of Defendants’ “waive in” rate of the loans Clayton had

rejected for failing to meet originator’s guidelines to the entire loan pools backing their RMBS purchased by Plaintiffs reveals the extent to which Defendants knew the loans they had securitized were destined to fail. As the FCIC Report concluded with regard to the Offering Materials for RMBS securitized by Defendants: [M]any prospectuses indicated that the loans in the pool either met guidelines outright or had compensating factors, even though Clayton’s records show that only a portion of the loans were sampled, and that of those that were sampled, a substantial percentage of Grade 3 loans were waived in….[O]ne could reasonably expect [the untested loans] to have many of the same deficiencies, at the same rate, as the sampled loans. Prospectuses for the ultimate investors in the mortgage-backed securities did not contain this information, or information on how few of the loans were reviewed, raising the question of whether the disclosures were materially misleading, in violation of the securities laws. FCIC Report at 167, 170.

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81.

Defendants’ astounding “waive in” rate, and the implications for the quality of

the RMBS underwritten by Defendants, rendered materially false and misleading numerous statements in the Offering Materials relied on by Plaintiffs in purchasing the RMBS. The Defendants’ prospectus supplements represented, for example, that “[e]xceptions to the underwriting standards are permitted where compensating factors are present and are managed through a formal exception process.” Defendants knew that these statements were materially false and misleading because, through their due diligence process, they had determined that a substantial number of the loans were exception loans that did not have compensating factors and, in fact, deliberately included those exception loans in the loan pools they securitized. Moreover, given that the loans actually reviewed by Clayton represented only a fraction of the loans Defendants actually purchased and securitized, Defendants either knew or recklessly disregarded that a highly material number of the loans underlying their RMBS purchased by Plaintiffs were not underwritten in compliance with the originator’s guidelines. VII. DEFENDANTS KNEW THE CREDIT RATINGS ASSIGNED TO THE DEFENDANTS RMBS MATERIALLY MISREPRESENTED THE CREDIT RISK OF THE RMBS 82. To bring its RMBS to market, Defendants knew that they needed to obtain the

highest “investment grade” ratings possible from the credit rating agencies (“CRAs”)— Moody’s, S&P and Fitch—that rated Defendants’ securitizations. Indeed, Defendants featured the ratings prominently in the Offering Materials and discussed at length the ratings received by the different tranches of the RMBS, and the bases for the ratings. Yet, Defendants knew that the ratings were not reliable because those ratings were supported by false information that Defendants provided. 83. “Investment grade” products are understood in the marketplace to be stable,

secure and safe. Using S&P’s scale, “investment grade” ratings are AAA, AA, A and BBB, and

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represent, high credit quality (AAA), upper-medium credit quality (AA and A) and medium credit quality (BBB). Any instrument rated below BBB is considered below investment grade or “junk bond.” 84. The Offering Materials for the Defendants RMBS Plaintiffs purchased state that

the issuance of each tranche of the RMBS was conditioned on the assignment of particular investment-grade ratings, and listed the ratings in a chart. All of the tranches of RMBS purchased by Plaintiffs were rated investment grade, with all but two the securities purchased by Plaintiffs rated triple-A at issuance. The triple-A rating denotes “high credit-quality,” and is the same rating as those typically assigned to bonds backed by the full faith and credit of the United States Government, such as Treasury Bills. For example, Bear Stearns represented in the BALTA 2005-9 prospectus supplement that: It is a condition to the issuance of the certificates that the offered certificates receive the following ratings from Standard & Poors Rating Services, a division of The McGraw-Hill Companies, Inc., which is referred to herein as S&P, and Moody's Investors Service, Inc., which is referred to herein as Moody's: Offered Certificates Class I-1A-1 Class I-1A-2 Class II-1A-1 Class II-2A-1 Class II-3A-1 Class II-3A-2 Class II-4A-1 Class II-5A-1 Class II-5A-2 Class II-6A-1 Class II-6A-2 Class I-M-1 Class I-M-2 Class II-M-1 Class II-M-2 Class II-M-3 Class II-M-4 Class II-M-5 S&P AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AA A AA+ AA AA AAA+
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Moody’s Aaa Aaa Aa1 Aaa Aaa Aa1 Aaa Aaa Aaa Aaa Aa1 Aa2 A2 Aa1 Aa2 Aa3 A1 A2

Class I-B-1 Class I-B-2 Class II-B-1 Class II-B-2 Class II-B-3

BBB BBBA ABBB

Baa2 Baa3 A3 Baa1 Baa2

The ratings assigned by S&P and Moody's to mortgage passthrough certificates address the likelihood of the receipt of all distributions on the mortgage loans by the related certificateholders under the agreements pursuant to which such certificates were issued. S&P's and Moody's ratings take into consideration the credit quality of the related mortgage pool, structural and legal aspects associated with such certificates, and the extent to which the payment stream in the mortgage pool is adequate to make payments required under such certificates. S&P's and Moody's ratings on such certificates do not, however, constitute a statement regarding frequency of prepayments on the mortgages. 85. The above statements (and the substantially similar statements appearing in all of

the Defendants RMBS Offering Materials) regarding the ratings assigned to the Defendants RMBS, as well as the ratings themselves, were materially false and misleading because Defendants touted these ratings while knowing that those ratings were based on the misleading information Defendants provided to the CRAs. 86. The credit ratings of the RMBS were further compromised by misinformation

provided by Defendants regarding the abandonment of the originators’ underwriting standards, rampant use of aggressive exceptions, Defendants’ knowledge or reckless disregard of pervasive fraud in the stated income loan programs, and the inflated appraisals assigned to the underlying collateral, as described above. The Defendants knew that the AAA ratings assigned to the RMBS were false because the originators did not follow their own underwriting standards and, as such, no reliable estimate could be made concerning the level of enhancement necessary to ensure that the top tranches purchased by Plaintiffs were of AAA quality. By including and endorsing these AAA ratings in the Offering Materials, Defendants made a false representation

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that it actually believed that the AAA ratings were an accurate reflection of the credit quality of the RMBS. 87. Subsequent downgrades confirm that the investment grade ratings reported in the

Offering Materials were unjustifiably high and misstated the true credit risk of the RMBS purchased by Plaintiffs. The RMBS purchased by Plaintiffs—all of which were rated

investment grade, and all but two of which were initially awarded a triple-A rating—have almost without exception been downgraded to junk. The en masse downgrade of AAA-rated RMBS indicates that the ratings set forth in the Offering Materials were false, unreliable and inflated. VIII. DEFENDANTS’ FALSE AND MISLEADING MISSTATEMENTS AND OMISSIONS OF MATERIAL FACT IN THE OFFERING DOCUMENTS 88. The Offering Materials Plaintiffs relied upon in purchasing the Defendants

RMBS contained numerous misrepresentations of material fact, or omitted to state material fact necessary to make the statements therein not misleading, regarding: (i) the originators’ underwriting practices and guidelines by which the loans were originated, including the prevalence and type of exceptions to those guidelines being applied to the underlying loans, and the rampant fraud in stated income loans; (ii) the value of the underlying property securing the loans, in terms of LTV and CLTV ratios and the appraisal standards by which such mortgaged properties were measured; (iii) the due diligence that Defendants conducted into the mortgage loans backing the RMBS, which identified pervasive defects in the loans underlying the securitizations; (iv) the credit ratings assigned to the RMBS; and (v) the true risks of the RMBS. Indeed, As the FCIC Report concluded with regard to the Offering Materials for Defendants RMBS: [M]any prospectuses indicated that the loans in the pool either met guidelines outright or had compensating factors, even though

38

Clayton’s records show that only a portion of the loans were sampled, and that of those that were sampled, a substantial percentage of Grade 3 loans were waived in….[O]ne could reasonably expect [the untested loans] to have many of the same deficiencies, at the same rate, as the sampled loans. Prospectuses for the ultimate investors in the mortgage-backed securities did not contain this information, or information on how few of the loans were reviewed, raising the question of whether the disclosures were materially misleading, in violation of the securities laws. A. 89. The Offering Materials Misrepresented The Originators’ Underwriting Guidelines. The originators discussed above originated the mortgage loans that backed the

RMBS purchased by Plaintiffs. The Offering Materials for the RMBS all contained identical or materially similar statements of material fact regarding the originators’ underwriting guidelines and practices. For example, the prospectus supplement for the BALTA 2005-9 described EMC’s underwriting guidelines, in relevant part, as follows: The EMC mortgage loans have either been originated or purchased by an originator and were generally underwritten in accordance with the standards described herein. Exceptions to the underwriting guidelines are permitted when the seller’s performance supports such action and the variance request is approved by credit management. Such underwriting standards are applied to evaluate the prospective borrower’s credit standing and repayment ability and the value and adequacy of the mortgaged property as collateral. These standards are applied in accordance with the applicable federal and state laws and regulations. Exceptions to the underwriting standards are permitted where compensating factors are present and are managed through a formal exception process. 90. The above statements of material fact and similar statements regarding the

originators whose loans back the Defendants RMBS in which Plaintiffs invested, were materially false and misleading when made because, as explained above, they misrepresented the true facts, known by Defendants, that the originators: (i) systematically and flagrantly failed to follow their

39

stated underwriting guidelines; (ii) allowed pervasive exceptions to their underwriting standards regardless of existing compensating factors; (iii) disregarded credit quality to fuel loan originations to sell to loan purchasers such as Defendants; and (iv) routinely allowed fraudulent representations of an applicant’s stated income, failed to verify a prospective borrowers documentation or statements regarding income or assets, and, in many cases, knowingly falsified the borrower’s stated or documented income or assets. B. 91. The Offering Materials Misrepresented The Appraisals And LTV Ratios Of The Securitized Loans The adequacy of the mortgaged properties as security of the repayment of the The Offering Materials represented that

loans was purportedly determined by appraisals.

independent appraisals were prepared for each mortgaged property and that reports were prepared to substantiate these appraisals. For example, the BALTA 2007-1 prospectus

supplement described EMC Mortgage Corporation’s appraisal practices as follows: Each mortgaged property relating to an EMC mortgage loan has been appraised by a qualified independent appraiser who is approved by each lender. All appraisals are required to conform to the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standard Board of the Appraisal Foundation. Each appraisal must meet the requirements of Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac require, among other things, that the appraiser, or its agent on its behalf, personally inspect the property inside and out, verify whether the property was in good condition and verify that construction, if new, had been substantially completed. The appraisal generally will have been based on prices obtained on recent sales of comparable properties, determined in accordance with Fannie Mae and Freddie Mac guidelines. In certain cases an analysis based on income generated from the property or a replacement cost analysis based on the current cost of constructing or purchasing a similar property may be used. 92. As discussed above, the representations regarding appraisals and LTV ratios were

materially false and misleading in that they misrepresented that the appraisal process employed

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by the originators, including, among others things, the fact that: (i) the appraisers were not independent from the respective mortgage lenders, which pressured appraisers to value the mortgaged property at a pre-determined, preconceived, inflated, and false appraisal value; (ii) the actual LTV ratios for many of the mortgage loans underlying the RMBS would have exceeded 100% if the mortgaged properties had been appraised by an independent appraiser as represented in the Offering Documents; (iii) sales managers employed by the respective originators had and utilized the authority to override and inflate an appraiser’s final professional valuation of the mortgaged property; and, as such, (iv) the appraisals failed to conform to the standards set by Fannie Mae and Freddie Mac. C. 93. Defendants Materially Misrepresented The Accuracy Of The Credit Ratings Assigned To The Certificates Defendants represented in the Offering Materials that all of the RMBS purchased

by Plaintiffs were worthy of investment grade ratings, with all but two rated “AAA,” signifying that the risk of loss was virtually non-existent. 94. By providing ratings, Defendants represented that they believed that the

information provided to the rating agencies to support these ratings accurately reflected the Defendants’ underwriting guidelines and practices, and the specific qualities of the underlying loans. Specifically, the Offering Materials prepared by Defendants represented, in sum or substance, that: It is a condition to the issuance of the certificates that the offered certificates receive the following ratings from Standard & Poors Rating Services, a division of The McGraw-Hill Companies, Inc., which is referred to herein as S&P, and Moody's Investors Service, Inc., which is referred to herein as Moody's: Offered Certificates Class I-1A-1 Class I-1A-2 Class II-1A-1 S&P AAA AAA AAA Moody’s Aaa Aaa Aa1

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Class II-2A-1 Class II-3A-1 Class II-3A-2 Class II-4A-1 Class II-5A-1 Class II-5A-2 Class II-6A-1 Class II-6A-2 Class I-M-1 Class I-M-2 Class II-M-1 Class II-M-2 Class II-M-3 Class II-M-4 Class II-M-5 Class I-B-1 Class I-B-2 Class II-B-1 Class II-B-2 Class II-B-3

AAA AAA AAA AAA AAA AAA AAA AAA AA A AA+ AA AA AAA+ BBB BBBA ABBB

Aaa Aaa Aa1 Aaa Aaa Aaa Aaa Aa1 Aa2 A2 Aa1 Aa2 Aa3 A1 A2 Baa2 Baa3 A3 Baa1 Baa2

The ratings assigned by S&P and Moody's to mortgage passthrough certificates address the likelihood of the receipt of all distributions on the mortgage loans by the related certificateholders under the agreements pursuant to which such certificates were issued. S&P's and Moody's ratings take into consideration the credit quality of the related mortgage pool, structural and legal aspects associated with such certificates, and the extent to which the payment stream in the mortgage pool is adequate to make payments required under such certificates. S&P's and Moody's ratings on such certificates do not, however, constitute a statement regarding frequency of prepayments on the mortgages. 95. These statements regarding the ratings assigned to the RMBS were false and

misleading because Defendants stated the assigned ratings while knowing that misleading information was provided to the rating agencies by Defendants to guarantee superior-grade ratings were assigned to the RMBS. IX. PLAINTIFFS’ INVESTMENT IN THE RMBS AND RELIANCE ON DEFENDANTS’ MISREPRESENTATIONS 96. The RMBS for all offerings were issued pursuant to the Offering Materials,

which contained the false and misleading statements set forth above. These documents also

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generally explained the structure and provided an overview of the RMBS. depositor prepared the Offering Materials. 97.

The relevant

The Offering Materials contained detailed descriptions of the mortgage pools

underlying the RMBS and provided the specific terms of the particular RMBS offering. The Offering Materials included tabular data concerning the loans underlying the RMBS, including (but not limited to) the type of loans; the number of loans; the mortgage rate and net mortgage rate (the mortgage rate net of the premium for any lender paid mortgage insurance less the sum of the master servicing fee and the trustee fee on the mortgage loan); the aggregate scheduled principal balance of the loans; the weighted average original combined LTV ratio; occupancy rates; credit enhancement; and the geographic concentration of the mortgaged properties. The Offering Materials also contained a summary of the originators’ underwriting and appraisal standards, guidelines and practices. 98. In deciding to purchase the RMBS, Plaintiffs relied on the Defendants’ false

representations and omissions of material fact regarding their underwriting standards and the characteristics of the mortgage loans underlying the RMBS in the Offering Materials. But for the Defendants’ fraudulent representations and omissions, Plaintiffs would not have purchased the RMBS. 99. Plaintiffs reasonably relied upon the Defendants’ representations in the Offering

Materials regarding the underlying loan quality. Plaintiffs did not know at the time it purchased the RMBS, and could not have known, that the originators were not following their underwriting guidelines, leading to a drastic increase in the origination of risky loans, nor did Plaintiffs know that the property appraisals secured by the originators were not independent and resulted in false appraisal values. Plaintiffs also did not know that the originators knowingly or recklessly accepted false information about material fact such as borrowers’ stated income,
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which caused the Defendants’ representations to be false.

Plaintiffs did not know that

Defendants’ due diligence had identified significant problems with the originators’ loans signifying that a substantial number of the loans underlying the RMBS would not be able to be repaid. If Plaintiffs had known these and other material facts regarding Defendants’ fraudulent misrepresentations and omissions of material fact contained in the Offering Materials, Plaintiffs would not have purchased the RMBS. 100. Defendants’ misrepresentations and omissions of material fact caused Plaintiffs

to suffer losses on the RMBS, because the RMBS were far riskier—and their rate of default far higher—than the Offering Materials represented them to be. The mortgage loans underlying the RMBS experienced defaults and delinquencies at a much higher rate due to the originators’ abandonment of their loan-origination guidelines. 101. Plaintiffs purchased each RMBS in reliance on the information contained in the In connection with the offers and sales of the RMBS to

applicable Offering Materials.

Plaintiffs, Defendants provided directly or indirectly to Plaintiffs’ investment advisors the Offering Materials. 102. Plaintiffs reviewed and analyzed the Offering Materials provided directly or

indirectly by Defendants with respect to each offering of RMBS and performed various analyses of the RMBS-specific data for each offering before deciding to purchase RMBS in the offering. The analyses conducted by Plaintiffs before deciding to purchase a RMBS included various credit analyses based on the information provided by Defendants with respect to both the credit characteristics of the mortgage loan pool (including, for example, geographic concentration; weighted average life; fixed- or floating-rate loans; full-, low-, or nodocumentation “stated income” loans; and owner-occupied, second home, or investment properties), and the structure of the securitization with respect to the seniority and risk
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characteristics of the particular tranche of RMBS (including, for example, position in the payment “waterfall”). 103. Thus, Plaintiffs justifiably relied on the Offering Materials provided directly or

indirectly by Defendants for each offering of the RMBS. These documents contained numerous statements of material fact about the RMBS, including statements concerning: (i) the mortgage originators’ underwriting guidelines that were purportedly applied to evaluate the ability of the borrowers to repay the loans underlying the RMBS; (ii) the appraisal guidelines that were purportedly applied to evaluate the value and adequacy of the mortgaged properties as collateral; (iii) the LTV ratios and debt to income ratios; (iv) Defendants’ due diligence of the loans and the originators’ underwriting practices; and (v) the ratings assigned to the RMBS. 104. These statements of material fact were untrue because: (i) the originators

violated their stated underwriting guidelines and did not originate loans based on the borrowers’ ability to repay; and (ii) inflated appraisals caused the listed LTV ratios and levels of credit enhancement to be untrue. In addition, metrics such as debt-to-income ratios were untrue as a result of the other mortgage originators’ acceptance of untrue information from mortgage applicants. For example, Defendants and the mortgage originators allowed applicants for

“stated income” loans to provide untrue income information and did not verify the applicants’ purported income. In addition, the credit ratings on which Plaintiffs relied were materially misleading, did not reflect the true credit quality of the RMBS and were the result of intentional manipulation. X. BECAUSE OF DEFENDANTS’ FRAUDULENT CONDUCT, PLAINTIFFS SUFFERED LOSSES ON ITS PURCHASES OF RMBS 105. The ratings on all of the RMBS have since been downgraded and they are no

longer marketable or salable at the prices paid for them by Plaintiffs. All of the RMBS in which

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Plaintiffs purchased interests were rated investment grade at issuance, and all but two were rated “AAA,” and the vast majority have since been downgraded to junk. 106. Further, the delinquency, bank ownership and foreclosure rates on the underlying

mortgages have soared since issuance. These current performance numbers do not reflect the number of loans which have been foreclosed since issuance and which are no longer included within the loan pools. A substantial number of the original loans contained in the loan pools have been removed from the pools, largely due to either foreclosure or early payout, negatively impacting the income payable to certificate-holders. FIRST CAUSE OF ACTION (Common Law Fraud Against Defendants) 107. Plaintiffs repeat and reallege the allegations set forth in the preceding

paragraphs, as if fully set forth herein. 108. As alleged above, in the Offering Materials and in their public statements,

Defendants made fraudulent and false statements of material fact, and omitted material facts necessary in order to make their statements, in light of the circumstances under which the statements were made, not misleading. 109. As a corporate parent, JPMorgan Chase & Co. directed the activities of

JPMorgan Chase Bank, N.A. (which is the successor to Washington Mutual Bank), J.P. Morgan Securities LLC (which is the successor to Bear Stearns & Co. Inc.), J.P. Morgan Acquisition Corporation and J.P. Morgan Acceptance Corporation I. 110. Defendants knew at the time they sold and marketed each of the RMBS that the

foregoing statements were false or, at the very least, made recklessly, without any belief in the truth of the statements.

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111.

Defendants made these materially false and misleading statements and omissions

for the purpose of inducing Plaintiffs to purchase the RMBS. Furthermore, these statements related to these Defendants’ own acts and omissions. 112. Defendants knew or recklessly disregarded that investors like Plaintiffs were

relying on their expertise, and they encouraged such reliance through the Offering Materials and their public representations, as described herein. Defendants knew or recklessly disregarded that investors like Plaintiffs would rely upon their representations in connection their decision to purchase the RMBS. Defendants were in a position of unique and superior knowledge

regarding the true facts concerning the foregoing material misrepresentations and omissions. 113. It was only by making such representations that Defendants were able to induce

Plaintiffs to buy the RMBS. Plaintiffs would not have purchased or otherwise acquired the RMBS but for Defendants’ fraudulent representations and omissions about the quality of the RMBS. 114. Plaintiffs justifiably, reasonably and foreseeably relied upon Defendants’

representations and false statements regarding the quality of the RMBS. 115. As a result of the false and misleading statements and omissions, as alleged

herein, Plaintiffs have suffered substantial damages. SECOND CAUSE OF ACTION (Fraudulent Inducement Against Defendants) 116. Plaintiffs repeat and reallege the allegations set forth in the preceding

paragraphs, as if fully set forth herein. 117. As alleged above, in the Offering Materials and in other communications to

Plaintiffs, Defendants made fraudulent and false statements of material fact, and omitted

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material facts necessary in order to make their statements, in light of the circumstances under which the statements were made, not misleading. 118. This is a claim for fraudulent inducement against Defendants. As a corporate

parent, JPMorgan Chase & Co. directed the activities of JPMorgan Chase Bank, N.A. (which is the successor to Washington Mutual Bank), J.P. Morgan Securities LLC (which is the successor to Bear Stearns & Co. Inc.), J.P. Morgan Acquisition Corporation and J.P. Morgan Acceptance Corporation I. 119. Defendants knew at the time they sold and marketed each of the RMBS that the

foregoing statements were false or, at the very least, made recklessly, without any belief in the truth of the statements. 120. Defendants made these materially misleading statements and omissions for the

purpose of inducing Plaintiffs to purchase the RMBS. Furthermore, these statements related to these Defendants’ own acts and omissions. 121. Defendants knew or recklessly disregarded that investors like Plaintiffs were

relying on their expertise, and they encouraged such reliance through the Offering Materials and their public representations, as described herein. Defendants knew or recklessly disregarded that investors like Plaintiffs would rely upon their representations in connection with their decision to purchase the RMBS. Defendants were in a position of unique and superior

knowledge regarding the true facts concerning the foregoing material misrepresentations and omissions. 122. It was only by making such representations that Defendants were able to induce

Plaintiffs to buy the RMBS. Plaintiffs would not have purchased or otherwise acquired the RMBS but for Defendants’ fraudulent representations and omissions about the quality of the RMBS.
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123.

Plaintiffs justifiably, reasonably and foreseeably relied upon Defendants’

representations and false statements regarding the quality of the RMBS. 124. By virtue of Defendants’ false and misleading statements and omissions, as

alleged herein, Plaintiffs has suffered substantial damages and is also entitled to a rescission of the sale of the RMBS. THIRD CAUSE OF ACTION (Aiding And Abetting Fraud Against Defendants) 125. Plaintiffs repeat and reallege the allegations set forth in the preceding

paragraphs, as if fully set forth herein. 126. This is a claim against the above-named Defendants for aiding and abetting the

fraud by Defendants. Each of these Defendants aided and abetted the fraud committed by and among all of the other Defendants. 127. As alleged above, each of the above-named Defendants knew that the RMBS

were not backed by high quality loans and were not underwritten according to the originators’ underwriting standards, conducted third-party due diligence on the loan pools securitized into the Defendants RMBS purchased by Plaintiffs that identified the originators’ deviations from loan underwriting and appraisal standards, participated in those violations and had actual knowledge of their own acts, or participated in or had actual knowledge of Defendants’ reckless or intentional dissemination of false and misleading information to the credit rating agencies. 128. Furthermore, the above-named Defendants provided to each other substantial

assistance in advancing the commission of the fraud. As alleged above, each of the abovenamed Defendants participated in the violations of concealing the originators’ deviations from their stated mortgage loan underwriting and appraisal standards, made false statements about the originators’ mortgage loan underwriting and appraisal standards and Defendants’ own
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underwriting guidelines, provided false information about the mortgage loans underlying the certificates to the credit rating agencies, provided false information for use in the Offering Materials, or participated in the failure to properly endorse and deliver the mortgage notes and security documents to the issuing trusts. 129. It was foreseeable to the above-named Defendants at the time they actively

assisted in the commission of the fraud that Plaintiffs would be harmed as a result of their assistance. 130. As a direct and natural result of the fraud committed by the Defendants, and the

above-named Defendants’ knowing and active participation therein, Plaintiffs has suffered substantial damages. FOURTH CAUSE OF ACTION (Negligent Misrepresentation Against Defendants) 131. Plaintiffs repeat and reallege each and every allegation set forth in the preceding

paragraphs above as if fully set forth herein, except any allegations that Defendants made any untrue statements and omissions intentionally or recklessly. For the purposes of this Count, Plaintiffs expressly disclaims any claim of fraud or intentional misconduct. 132. 133. This is a claim for negligent misrepresentation against Defendants. As a corporate parent, JPMorgan Chase & Co. directed the activities of

JPMorgan Chase Bank, N.A. (which is the successor to Washington Mutual Bank), J.P. Morgan Securities LLC (which is the successor to Bear Stearns & Co. Inc.), J.P. Morgan Acquisition Corporation and J.P. Morgan Acceptance Corporation I. 134. LBBW made at least 21 separate investments in 18 offerings of RMBS that

Defendants securitized and sold.

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135.

It is commonly accepted industry practice for underwriters of RMBS to perform

due diligence on the loans backing the RMBS to ensure that the quality of the loans are as represented in the offering materials provided to investors. The understanding that RMBS underwriters generally perform such due diligence, caused LBBW to believe that it could reasonably rely upon the Offering Materials. Moreover, by virtue of the third-party due

diligence Defendants performed, and Defendants’ extensive role in originating, purchasing, securitizing and selling the RMBS that LBBW purchased, Defendants had unique and special knowledge and expertise regarding the loans backing those securities, including their quality, the nature of the underwriting, and the value of the collateral. 136. In particular, because LBBW neither had the same level of information regarding

the mortgage lenders for the loans purchased by Defendants nor had access to the loan files for the mortgage loans underlying the Defendants RMBS, and because LBBW could not examine the underwriting quality of the mortgage loans in the securitizations on a loan-by-loan basis, LBBW was heavily dependent on the Defendants’ unique and special knowledge regarding the underwriting standards of the relevant mortgage originators and the underlying loans when determining whether to invest in each RMBS. Plaintiffs were entirely dependent on the

Defendants to provide accurate information regarding the underwriting standards for the loans and the quality of those loans in engaging in their analysis. Accordingly, the Defendants were uniquely situated to evaluate the economics of each RMBS. 137. Because Plaintiffs were without access to critical information regarding the

underwriting standards of the mortgage originators for the Defendants RMBS, coupled with the industry understanding that RMBS underwriters perform due diligence, Defendants had a duty to Plaintiffs to verify the accuracy of the Offering Materials.

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138.

Over the course of almost two years, for 21 separate investments, Plaintiffs relied

on Defendants’ unique and special knowledge regarding the quality of the underlying mortgage loans and their underwriting when determining whether to invest in the RMBS. This

longstanding relationship, coupled with Defendants’ unique and special knowledge about the underlying loans and the underwriting standards of the mortgage originators, created a special relationship of trust, confidence, and dependence between Defendants and Plaintiffs. 139. Defendants were aware that Plaintiffs relied on their unique and special expertise

and experience and depended upon them for accurate and truthful information. Defendants also knew that the facts regarding the originators’ compliance with their underwriting standards were exclusively within Defendants’ knowledge. 140. Based on their expertise, superior knowledge, and relationship with Plaintiffs,

Defendants owed a duty to Plaintiffs to provide complete, accurate, and timely information regarding the mortgage loans and the RMBS. Defendants breached their duty to provide such information to Plaintiffs. 141. Defendants likewise made misrepresentations, which they were negligent in not

knowing at the time to be false, in order to induce Plaintiffs’ investment in the RMBS. Defendants provided the Offering Materials to LBBW in connection with the RMBS for the purpose of informing Plaintiffs of material facts necessary to make an informed judgment about whether to purchase the RMBS. In providing these documents, Defendants knew that the information contained and incorporated therein would be used for a serious purpose, and that Plaintiffs, like other reasonably prudent investors, intended to rely on the information. 142. As alleged above, the Offering Materials contained materially false and

misleading information.

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143.

Defendants should have known that the information in the Offering Materials

was materially false and misleading. 144. Unaware that the Offering Materials contained materially false and misleading

statements, Plaintiffs reasonably relied on those false and misleading statements when deciding to purchase the RMBS in the offerings. 145. Plaintiffs purchased RMBS from Bear Stearns & Co. Inc., J.P. Morgan Securities

LLC, and WaMu Capital Corporation in the RMBS offerings, and is therefore in privity with J Bear Stearns & Co. Inc., J.P. Morgan Securities LLC, and WaMu Capital Corporation. 146. Based on Defendants’ expertise and specialized knowledge, and in light of the

false and misleading representations in the Offering Materials, Defendants owed Plaintiffs a duty to provide it with complete, accurate, and timely information regarding the quality of the RMBS, and breached their duty to provide such information to Plaintiffs. 147. Plaintiffs reasonably relied on the information provided by Defendants and have

suffered substantial damages as a result of their misrepresentations. FIFTH CAUSE OF ACTION (Successor and Vicarious Liability Against JPMorgan Chase & Co., JPMorgan Chase Bank, N.A., and J.P. Morgan Securities LLC) 148. Plaintiffs repeat and reallege each and every allegation set forth in the preceding

paragraphs above as if fully set forth herein. 149. Defendant JPMorgan Chase & Co. is the successor to The Bear Stearns

Companies, Inc., pursuant to the Merger JP Morgan Chase & Co. is liable for The Bear Stearns Companies, Inc.’s wrongdoing, in its entirety, under common law, because The Bear Stearns Companies, Inc. merged and consolidated with JPMorgan Chase & Co., because JPMorgan Chase & Co. has expressly or impliedly assumed The Bear Stearns Companies, Inc.’s tort

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liabilities, and because JPMorgan Chase & Co. is a mere continuation of The Bear Stearns Companies, Inc. As such, this action is brought against JPMorgan Chase & Co. both in its own capacity and as successor-in-interest to The Bear Stearns Companies Inc. 150. Defendant J.P. Morgan Securities LLC is the successor to Bear Stearns & Co.

Inc., pursuant to the Merger. J.P. Morgan Securities LLC is liable for Bear Stearns & Co. Inc.’s wrongdoing, in its entirety, under common law, because Bear Stearns & Co. Inc. merged and consolidated with J.P. Morgan Securities LLC, because J.P. Morgan Securities LLC has expressly or impliedly assumed Bear Stearns & Co. Inc.’s tort liabilities, and because J.P. Morgan Securities LLC is a mere continuation of Bear Stearns & Co. Inc. This action is thus brought against J.P Morgan Securities LLC both in its own capacity and as successor-in-interest to Bear Stearns & Co. Inc. 151. Defendant JPMorgan Chase Bank, N.A. succeeded to Washington Mutual

Bank’s liabilities pursuant to the PAA. JPMorgan Chase Bank, N.A. is liable for Washington Mutual Bank’s wrongdoing, in its entirety, under common law, because Washington Mutual Bank merged and consolidated with JPMorgan Chase Bank, N.A., because JPMorgan Chase Bank, N.A. has expressly or impliedly assumed Washington Mutual Bank’s tort liabilities, and because JPMorgan Chase Bank, N.A. is a mere continuation of Washington Mutual Bank. This action is thus brought against JPMorgan Chase Bank, N.A. both in its own capacity and as a successor to Washington Mutual Bank.

PRAYER FOR RELIEF WHEREFORE, Plaintiffs pray for relief and judgment, as follows:

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(a)

Awarding compensatory and/or rescissory damages in favor of Plaintiff against

all Defendants, jointly and severally, for all damages sustained as a result of Defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon; (b) (c) Awarding punitive damages for Plaintiff’s common-law fraud claims; Awarding Plaintiff its reasonable costs and expenses incurred in this action,

including counsel fees and expert fees; and (d) Such other relief as the Court may deem just and proper. JURY DEMAND Plaintiffs demand a trial by jury on all claims so triable. Dated: September 29, 2011 BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP /s Gerald H. Silk Gerald H. Silk Avi Josefson Michael D. Blatchley Ross Shikowitz 1285 Avenue of the Americas, 38th Floor New York, NY 10019 Tel: (212) 554-1400 Fax: (212) 554-1444 jerry@blbglaw.com avi@blbglaw.com michaelb@blbglaw.com ross@blbglaw.com Counsel for Plaintiffs

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FILED: NEW YORK COUNTY CLERK 09/01/2011
NYSCEF DOC. NO. 1

INDEX NO. 652427/2011 RECEIVED NYSCEF: 09/01/2011

FILED: NEW YORK COUNTY CLERK 09/29/2011
NYSCEF DOC. NO. 1

INDEX NO. 652678/2011 RECEIVED NYSCEF: 09/29/2011

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK HSH NORDBANK AG; HSH NORDBANK AG, LUXEMBOURG BRANCH; POSEIDON FUNDING LTD.; and HSH NORDBANK SECURITIES S.A., Plaintiffs, -againstBARCLAYS BANK PLC, BARCLAYS CAPITAL INC., and SECURITIZED ASSET BACKED RECEIVABLES LLC, Defendants. TO: BARCLAYS BANK PLC 200 Park Avenue New York, NY 10166 BARCLAYS CAPITAL INC. 200 Park Avenue New York, NY 10166 SECURTTIZED ASSET BACKED RECEIVABLES LLC 200 Park Avenue New York, NY 10166 Index No. Summons with Notice

TO THE ABOVE NAMED DEFENDANTS: PLEASE TAKE NOTICE THAT YOU ARE HEREBY SUMMONED and required to serve upon Plaintiffs' attorneys a notice of appearance or demand for a complaint within twenty (20) days after service of this Summons, exclusive of the day of service, or within thirty (30) days after service is complete if this Summons is not personally delivered to you within the State of New York. In case of your failure to appear or answer, judgment will be taken against you on default for the relief demanded herein.

Plaintiffs designate New York County as the place of trial. Venue is proper because Barclays Capital Inc. and Securitized Asset Backed Receivables LLC are principally located in this district, Barclays Bank PLC maintains a branch in this district, and many of the wrongful acts alleged herein occurred in this County. NOTICE This is an action for,damages arising from Plaintiffs' investment in residential mortgagebacked securities (the "Securities") which were securitized by Defendants and sold to Plaintiffs, or an affiliate of the Plaintiffs, Carrera Capital Finance LLC ("Carrera"), by Defendants. Plaintiffs purchased $123 million in Securities in the following offerings (the "Offerings"): Securitized Asset Backed Receivables LLC Trust 2005-FR4 ("SABR 2005-FR4"), Securitized Asset Backed Receivables LLC Trust 2006-FRi ("SABR 2006-FR1"), Securitized Asset Backed Receivables LLC Trust 2007-NC2 ("SABR 2007-NC2"), and RASC Series 2006-EMX2 Trust ("RASC 2006-EMX2"). The Securities (or, in the case of Securities purchased by Carrera, the claims arising from the Securities) are currently held by Plaintiffs. Defendants were actively involved in each step of the securitization and sale of the Securities to Plaintiffs. Defendants acted as depositor, underwriter, seller, sponsor, and/or broker dealer for the Offerings. Securitized Asset Backed Receivables LLC was the Depositor for the SABR Offerings. Barclays Capital Inc. was an Underwriter for each of the Offerings, and sold the Securities to Plaintiffs. Barclays Bank PLC was the Sponsor for SABR 2006-FR1, purchased the mortgage loans for SABR 2005-FR4, and is the parent company of Securitized Asset Backed Receivables LLC. The offering materials issued by Defendants for the Offerings (the "Offering Materials") contained material misrepresentations and omissions regarding the underwriting standards used

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to issue the mortgage loans that were pooled together into the Offerings. The Offering Materials also contained material misrepresentations and omissions regarding key statistical characteristics of the mortgage loans underlying the Securities, including the loans' loan-to-value ratios and combined loan-to-value ratios, as well as the percentage of owner-occupied properties. A recent loan-level analysis of the mortgage loans underlying Plaintiffs' Securities has shown that statistical information about the loans was materially and falsely misrepresented, and that the mortgage loans therefore posed a much greater credit risk and were more prone to default than represented. The Offering Materials also contained material misrepresentations about the Securities' credit ratings, which understated the Securities' risk profile. Each of the Defendants knew, or at a minimum was negligent in not knowing, that its representations and omissions were false and/or misleading at the time they were made. Each Defendant made the false and/or misleading statements with the intent for Plaintiffs to rely upon those statements. The originators of loans in the Offerings, Fremont Investment & Loan ("Fremont"), New Century Mortgage Corporation ("New Century"), and Mortgage Lenders Network USA, Inc., knowingly issued mortgage loans to homeowners that could not afford them, which Defendants knew. Fremont and New Century, in particular, were among the most notorious subprime lenders in the mortgage market, known for flaunting their underwriting guidelines in order to maximize the number of loan sold to Defendants and similar banks. Defendants obtained mortgage loans from the originators and created securities from them. Defendants knew about problems with the mortgages due to reports they received from Clayton Holdings ("Clayton"), a due-diligence company they hired to review the mortgage loans. Clayton reported to Barclays that a certain percentage of the loans it sampled were defective, yet a large percentage of those defective loans were nonetheless included in the Offerings. The due

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diligence revealed material misrepresentations and omissions to Defendants. The underwriters underwrote the Offerings and sold the Securities to Plaintiffs by means of Offering Materials which contained material misrepresentations and omissions, with knowledge of the misrepresentations. Plaintiffs did not know the true facts regarding Defendants' misrepresentations and omissions in the Offering Materials, and justifiably relied on those misrepresentations and omissions. The Securities have performed worse than expected due to the poorer-quality collateral, and Defendants' wrongdoing has led directly to Plaintiffs' damages, which include loss of market value on the Securities. Plaintiffs' causes of action include common-law fraud, fraudulent inducement, negligent misrepresentation, and aiding and abetting fraud. Upon your failure to appear, judgment will be taken against you by default for money damages for an amount currently calculated at a minimum of $40 million, and legal fees with interest thereon, together with the costs of this action. DATED: New York, New York September 29, 2011 QUINN EMANUEL URQUHART & SULLIVAN, LLP

By: Philippe Z. e endy David D. Burnett 51 Madison Avenue, 22nd Floor New York, New York 10010 (212) 849-7000

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Attorneys for Plaintffs