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UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK FEDERAL HOUSING FINANCE AGENCY, AS CONSERVATOR FOR THE
FEDERAL NATIONAL MORTGAGE ASSOCIATION AND THE FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff, -againstGOLDMAN, SACHS & CO., GS MORTGAGE SECURITIES CORP., GOLDMAN SACHS MORTGAGE COMPANY, THE GOLDMAN SACHS GROUP, INC., GOLDMAN SACHS REAL ESTATE FUNDING CORP., PETER C. ABERG, HOWARD S. ALTARESCU, ROBERT J. CHRISTIE, KEVIN GASVODA, MICHELLE GILL, DAVID J. ROSENBLUM, JONATHAN S. SOBEL, DANIEL L. SPARKS, AND MARK WEISS, Defendants.
___ CIV. ___ (___)
COMPLAINT JURY TRIAL DEMANDED
TABLE OF CONTENTS Page NATURE OF ACTION ...................................................................................................................1 PARTIES .........................................................................................................................................9 The Plaintiff and the GSEs...................................................................................................9 The Defendants ..................................................................................................................10 JURISDICTION AND VENUE ....................................................................................................13 FACTUAL ALLEGATIONS ........................................................................................................14 I. The Securitizations.............................................................................................................14 A. B. C. Residential Mortgage-Backed Securitizations in General .....................................14 The Securitizations at Issue in This Case ..............................................................16 The Securitization Process .....................................................................................19 1. 2. II. Goldman Sachs Mortgage Company Pools Mortgage Loans in Special Purpose Trusts ...............................................................................19 The Trusts Issue Securities Backed by the Loans ......................................21
The Defendants’ Participation in the Securitization Process .............................................25 A. The Role of Each Defendant ..................................................................................25 1. 2. 3. 4. 5. 6. B. Goldman, Sachs & Co................................................................................25 GS Mortgage Securities Corp. ...................................................................26 Goldman Sachs Mortgage Company .........................................................27 The Goldman Sachs Group, Inc. ................................................................28 Goldman Sachs Real Estate Funding Corp. ...............................................29 The Individual Defendants .........................................................................29
Defendants Failed To Conduct Proper Due Diligence ..........................................32
III.
The Registration Statements and the Prospectus Supplements..........................................37 A. Compliance with Underwriting Guidelines ...........................................................37 i
B. C. D. IV.
Statements Regarding Occupancy Status of Borrower ..........................................40 Statements Regarding Loan-to-Value Ratios.........................................................43 Statements Regarding Credit Ratings ....................................................................45
Falsity of Statements in the Registration Statements and Prospectus Supplements ..........47 A. A Review of Loan-Level Data Indicates That the Statistical Data Provided in the Registration Statements and Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False ....................................47 1. 2. B. Owner-Occupancy Data Was Materially False..........................................48 LTV Data Was Materially False ................................................................50
The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines .........................................................54 1. Government Investigations Have Confirmed That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines ..............................................................55 The Collapse of the GSE Certificates’ Credit Ratings Further Indicates that the Mortgage Loans Were not Originated in Adherence to the Stated Underwriting Guidelines ....................................64 The Surge in Mortgage Delinquencies and Defaults Further Demonstrates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines ....................................66
2.
3.
V.
Goldman Sachs Knew Its Representations Were False .....................................................68 A. Evidence Regarding Goldman’s Due Diligence ....................................................69 1. 2. B. Goldman’s Due Diligence Benefitted From a Direct Window Into the Originators’ Practices ...........................................................................69 Goldman Had Actual Knowledge, on a Daily Basis, of the Number of Non-Performing Loans ..........................................................................72
Other Evidence Of Goldman’s Willingness to Capitalize on Its Unique Knowledge at the Expense Of Investors ................................................................75 1. 2. Goldman Began Shorting Its Own Offerings Beginning in 2006 ..............76 Goldman’s Targeted Campaign to “Put Back” Defective Loans to Originators Demonstrates That It Knew the Targeted Originators’ Loans Breached Underwriting Guidelines .................................................79 ii
C. D. VI. VII.
Numerous Government Investigations Have Confirmed Goldman Acted With Scienter .........................................................................................................82 Further Evidence that Goldman Knew the Appraisals Were Inflated ...................84
The GSEs Justifiably Relied on Goldman Sachs’s Representations .................................85 Fannie Mae’s and Freddie Mac’s Purchases of the GSE Certificates and the Resulting Damages ............................................................................................................87
FIRST CAUSE OF ACTION ........................................................................................................89 SECOND CAUSE OF ACTION ...................................................................................................93 THIRD CAUSE OF ACTION .......................................................................................................98 FOURTH CAUSE OF ACTION .................................................................................................103 FIFTH CAUSE OF ACTION ......................................................................................................107 SIXTH CAUSE OF ACTION .....................................................................................................112 SEVENTH CAUSE OF ACTION ...............................................................................................116 EIGHTH CAUSE OF ACTION ..................................................................................................122 NINTH CAUSE OF ACTION .....................................................................................................125 TENTH CAUSE OF ACTION ....................................................................................................128 PRAYER FOR RELIEF ..............................................................................................................131 JURY TRIAL DEMANDED .......................................................................................................131
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Plaintiff, The Federal Housing Finance Agency (“FHFA”), as conservator for The Federal National Mortgage Association (“Fannie Mae”) and The Federal Home Loan Mortgage Corporation (“Freddie Mac”), by its attorneys, Quinn Emanuel Urquhart & Sullivan, LLP, for its Complaint herein against Goldman, Sachs & Co., GS Mortgage Securities Corp., Goldman Sachs Mortgage Company, The Goldman Sachs Group, Inc., Goldman Sachs Real Estate Funding Corp. (collectively, “Goldman Sachs” or “Goldman”), Peter C. Aberg, Howard S. Altarescu, Robert J. Christie, Kevin Gasvoda, Michelle Gill, David J. Rosenblum, Jonathan S. Sobel, Daniel L. Sparks, and Mark Weiss (collectively, the “Individual Defendants,” and together with Goldman Sachs, the “Defendants”) alleges as follows: NATURE OF ACTION 1. This action arises out of Defendants’ actionable conduct in connection with the
offer and sale of certain residential mortgage-backed securities (“RMBS”) to Fannie Mae and Freddie Mac (collectively, the “Government Sponsored Enterprises” or the “GSEs”). These securities were sold pursuant to registration statements, including prospectuses and prospectus supplements that formed part of those registration statements, which contained materially false or misleading statements and omissions. Defendants falsely stated that the underlying mortgage loans and properties complied with certain underwriting guidelines and standards. These false statements and misleading omissions significantly overstated the ability of the borrowers to repay their mortgage loans and the value of the collateralized property. These statements were material to the GSEs, as reasonable investors, and their falsity violates Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. § 77a, et seq., Sections 13.1-522(A)(ii) and 13.1522(C) of the Virginia Code, Sections 31-5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, and constitutes negligent misrepresentation, common law fraud, and aiding and abetting fraud. 1
2.
Between September 7, 2005 and October 29, 2007, Fannie Mae and Freddie Mac
purchased from Goldman Sachs over $11.1 billion in residential mortgage-backed securities (the “GSE Certificates”) issued in connection with 40 securitizations for which Goldman served as sponsor, depositor, and/or lead underwriter.1 The GSE Certificates purchased by Freddie Mac, along with date and amount of the purchases, are listed below in Table 10. The GSE Certificates purchased by Fannie Mae, along with date and amount of the purchases, are listed below in Table 11. The 40 securitizations at issue (collectively, the “Securitizations”) are: i. Accredited Mortgage Loan Trust 2005-4, Asset-Backed Notes,
Series 2005-4 (“ACCR 2005-4”); ii. American Home Mortgage Assets Trust, Mortgage-Backed Pass-
Through Certificates, Series 2006-1 (“AHMA 2006-1”); iii. FFMLT Trust 2005-FF11, Mortgage Pass-Through Certificates,
Series 2005-FF11 (“FFML 2005-FF11”); iv. FFMLT Trust 2005-FF8, Mortgage Pass-Through Certificates,
Series 2005-FF8 (“FFML 2005-FF8”); v. FFMLT Trust 2006-FF13, Mortgage Pass-Through Certificates,
Series 2006-FF13 (“FFML 2006-FF13”); vi. Fremont Home Loan Trust 2006-E, Mortgage-Backed Certificates,
Series 2006-E (“FHLT 2006-E”);
For purposes of this Complaint, the securities issued under the Registration Statements (as defined in paragraph 4 below) are referred to as “Certificates,” while the particular Certificates that Fannie Mae and Freddie Mac purchased are referred to as the “GSE Certificates.” Holders of Certificates are referred to as “Certificateholders.”
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2
vii.
GSAA Home Equity Trust 2005-11, Asset-Backed Certificates,
Series 2005-11 (“GSAA 2005-11”); viii. GSAA Home Equity Trust 2005-14, Asset-Backed Certificates,
Series 2005-14 (“GSAA 2005-14”); ix. GSAA Home Equity Trust 2005-15, Asset-Backed Certificates,
Series 2005-15 (“GSAA 2005-15”); x. GSAA Home Equity Trust 2006-11, Asset-Backed Certificates,
Series 2006-11 (“GSAA 2006-11”); xi. GSAA Home Equity Trust 2006-2, Asset-Backed Certificates,
Series 2006-2 (“GSAA 2006-2”); xii. GSAA Home Equity Trust 2006-4, Asset-Backed Certificates,
Series 2006-4 (“(GSAA 2006-4”); xiii. GSAA Home Equity Trust 2006-5, Asset-Backed Certificates,
Series 2006-5 (“GSAA 2006-5”); xiv. GSAA Home Equity Trust 2006-8, Asset-Backed Certificates,
Series 2006-8 (“GSAA 2006-8”); xv. GSAA Home Equity Trust 2007-6, Asset-Backed Certificates,
Series 2007-6 (“GSAA 2007-6”); xvi. GSAMP Trust 2005-AHL2, Mortgage Pass-Through Certificates,
Series 2005-AHL2 (“GSAMP 2005-AHL2”); xvii. GSAMP Trust HE5, Mortgage Pass-Through Certificates, Series
2005-HE5 (“GSAMP 2005-HE5”);
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xviii.
GSAMP Trust 2005-HE6, Mortgage Pass-Through Certificates,
Series 2005-HE6 (“GSAMP 2005-HE6”); xix. GSAMP Trust 2005-WMC2, Mortgage Pass-Through Certificates,
Series 2005-WMC2 (“GSAMP 2005-WMC2”); xx. GSAMP Trust 2005-WMC3, Mortgage Pass-Through Certificates,
Series 2005-WMC3 (“GSAMP 2005-WMC3”); xxi. GSAMP Trust 2006-FM1, Mortgage Pass-Through Certificates,
Series 2006-FM1 (“GSAMP 2006-FM1”); xxii. GSAMP Trust 2006-FM2, Mortgage Pass-Through Certificates,
Series 2006-FM2 (“GSAMP 2006-FM2”); xxiii. GSAMP Trust 2006-FM3, Mortgage Pass-Through Certificates,
Series 2006-FM3 (“GSAMP 2006-FM3”); xxiv. GSAMP Trust 2006-HE3, Mortgage Pass-Through Certificates,
Series 2006-HE3 (“GSAMP 2006-HE3”); xxv. GSAMP Trust 2006-HE4, Mortgage Pass-Through Certificates,
Series 2006-HE4 (“GSAMP 2006-HE4”); xxvi. GSAMP Trust 2006-HE5, Mortgage Pass-Through Certificates,
Series 2006-HE5 (“GSAMP 2006-HE5”); xxvii. GSAMP Trust 2006-HE7, Mortgage Pass-Through Certificates,
Series 2006-HE7 (“GSAMP 2006-HE7”); xxviii. GSAMP Trust 2006-HE8, Mortgage Pass-Through Certificates,
Series 2006-HE8 (“GSAMP 2006-HE8”);
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xxix.
GSAMP Trust 2006-NC2, Mortgage Pass-Through Certificates,
Series 2006-NC2 (“GSAMP 2006-NC2”); xxx. GSAMP Trust 2007-FM1, Mortgage Pass-Through Certificates,
Series 2007-FM1 (“GSAMP 2007-FM1”); xxxi. GSAMP Trust 2007-FM2, Mortgage Pass-Through Certificates,
Series 2007-FM2 (“GSAMP 2007-FM2”); xxxii. GSAMP Trust 2007-HE1, Mortgage Pass-Through Certificates,
Series 2007-HE1 (“GSAMP 2007-HE1”); xxxiii. GSAMP Trust 2007-HE2, Mortgage Pass-Through Certificates,
Series 2007-HE2 (“GSAMP 2007-HE2”); xxxiv. GSAMP Trust 2007-NC1, Mortgage Pass-Through Certificates,
Series 2007-NC1 (“GSAMP 2007-NC1”); xxxv. GSR Mortgage Loan Trust 2006-OA1, Mortgage Pass-Through
Certificates, Series 2006-OA1 (“GSR 2006-OA1”); xxxvi. GSR Mortgage Loan Trust 2007-AR2, Mortgage Pass-Through
Certificates, Series 2007-AR2 (“GSR 2007-AR2”); xxxvii. GSR Mortgage Loan Trust 2007-OA1, Mortgage Pass-Through
Certificates, Series 2007-OA1 (“GSR 2007-OA1”); xxxviii. GSR Mortgage Loan Trust 2007-OA2, Mortgage Pass-Through
Certificates, Series 2007-OA2 (“GSR 2007-OA2”); xxxix. IndyMac INDX Mortgage Loan Trust 2005-AR18, Mortgage Pass-
Through Certificates, Series 2005-AR18 (“INDX 2005-AR18”); and
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xl.
IndyMac INDX Mortgage Loan Trust 2005-AR27, Mortgage Pass-
Through Certificates, Series 2005-AR27 (“INDX 2005-AR27”). 3. Each Certificate was offered for sale pursuant to one of eight shelf registration
statements (the “Shelf Registration Statements”) filed with the Securities and Exchange Commission (the “SEC”). Defendant GS Mortgage Securities Corp. filed four of the Shelf Registration Statements (the “GS Mortgage Shelf Registration Statements,” including any amendments thereto), which pertained to 35 of the Securitizations. The Individual Defendants signed one or more of the GS Mortgage Shelf Registration Statements and the amendments thereto. Accredited Mortgage Loan REIT Trust, American Home Mortgage Assets LLC, Fremont Mortgage Securities Corp., and IndyMac MBS, Inc., respectively, filed the remaining four Shelf Registration Statements. Goldman, Sachs & Co. was the lead underwriter and the underwriter who sold the GSE Certificates to Fannie Mae and Freddie Mac with respect to all the Securitizations. 4. For each Securitization, a prospectus (“Prospectus”) and prospectus supplement
(“Prospectus Supplement”) were filed with the SEC as part of the Registration Statement for that Securitization.2 The GSE Certificates were marketed and sold to Fannie Mae and Freddie Mac pursuant to the Registration Statements, including the Shelf Registration Statements and the corresponding Prospectuses and Prospectus Supplements. 5. The Registration Statements contained statements about the characteristics and
credit quality of the mortgage loans underlying the Securitizations and the origination and underwriting practices used to make and approve the loans. Such statements were material to a The term “Registration Statement,” as used herein, incorporates the Shelf Registration Statement, the Prospectus and the Prospectus Supplement for each referenced Securitization, except where otherwise indicated.
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reasonable investor’s decision to invest in mortgage-backed securities by purchasing the Certificates. Unbeknownst to Fannie Mae and Freddie Mac, these statements were materially false, as significant percentages of the underlying mortgage loans were not originated in accordance with the represented underwriting standards and origination practices, and had materially poorer credit quality than was represented in the Registration Statements. 6. The Registration Statements also contained statistical summaries of the collateral
groups and the entire group of mortgage loans in each Securitization, such as the percentage of loans secured by owner-occupied properties and the percentage of the loan group’s aggregate principal balance with loan-to-value ratios within specified ranges. This information was material to reasonable investors. However, a loan-level analysis of a sample of loans for each Securitization—a review that encompassed thousands of mortgages across all of the Securitizations—has revealed that these statistics were false and omitted material facts due to inflated property values and misrepresentations of other key characteristics of the mortgage loans. 7. The percentage of second homes or investment properties is a material risk factor
to purchasers of Certificates, such as Fannie Mae and Freddie Mac, since a borrower who lives in a mortgaged property is generally less likely to stop paying his or her mortgage and more likely to take better care of the property. The loan-level review reveals that the true percentage of owner-occupied properties for the loans supporting the GSE Certificates was materially lower than was stated in the Prospectus Supplements. Likewise, the Prospectus Supplements misrepresented other material factors, including the true value of the mortgaged properties relative to the amount of the underlying loans.
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8.
Defendants Goldman, Sachs & Co. (which lead underwrote and then sold the GSE
Certificates to the GSEs), GS Mortgage Securities Corp. (which acted as the depositor in 35 of the Securitizations), and the Individual Defendants (who signed the Registration Statements with respect to 35 of the Securitizations) are directly responsible for the misstatements and omissions of material fact contained in the Registration Statements because they prepared, signed, filed and/or used these documents to market and sell the Certificates to Fannie Mae and Freddie Mac. 9. Defendants Goldman Sachs Mortgage Company, The Goldman Sachs Group, Inc.
and Goldman Sachs Real Estate Funding Corp. are likewise responsible for the misstatements and omissions of material fact contained in the Registration Statements by virtue of their direction and control over Defendants GS Mortgage Securities Corp. and Goldman, Sachs & Co. 10. GS Mortgage Securities Corp. was a wholly owned subsidiary of Goldman Sachs
Mortgage Company and Goldman Sachs Real Estate Funding Corp., both of which were wholly owned by The Goldman Sachs Group, Inc. Goldman, Sachs & Co. was likewise a wholly owned subsidiary of The Goldman Sachs Group, Inc. 11. Goldman Sachs Mortgage Company, The Goldman Sachs Group, Inc. and
Goldman Sachs Real Estate Funding Corp. directly participated in and exercised dominion and control over the business operations of Defendant GS Mortgage Securities Corp. The Goldman Sachs Group, Inc. directly participated in and exercised dominion and control over the business operations of Defendant Goldman, Sachs & Co. 12. Fannie Mae and Freddie Mac purchased over $11.1 billion of the Certificates
pursuant to the Registration Statements filed with the SEC. The Registration Statements contained misstatements and omissions of material facts concerning the quality of the underlying mortgage loans and the practices used to originate and underwrite such loans. As a result of
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Defendants’ misstatements and omissions of material fact, Fannie Mae and Freddie Mac have suffered substantial losses as the value of their holdings has significantly deteriorated. 13. FHFA, as Conservator of Fannie Mae and Freddie Mac, brings this action against
the Defendants for violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. §§ 77k, 77l(a)(2), 77o, Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, Sections 31-5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, and for negligent misrepresentation, common law fraud, and aiding and abetting fraud. PARTIES The Plaintiff and the GSEs 14. The Federal Housing Finance Agency is a federal agency that has its principal
executive offices at 1700 G Street, N.W. in Washington, D.C. FHFA was created on July 30, 2008 pursuant to the Housing and Economic Recovery Act of 2008 (“HERA”), Pub. L. No. 110289, 122 Stat. 2654 (2008) (codified at 12 U.S.C. § 4617), to oversee Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. On September 6, 2008, under HERA, the Director of FHFA placed Fannie Mae and Freddie Mac into conservatorship and appointed FHFA as conservator. In that capacity, FHFA has the authority to exercise all rights and remedies of the GSEs, including but not limited to, the authority to bring suits on behalf of and/or for the benefit of Fannie Mae and Freddie Mac. 12 U.S.C. § 4617(b)(2). 15. Fannie Mae and Freddie Mac are government-sponsored enterprises chartered by
Congress with a mission to provide liquidity, stability and affordability to the United States housing and mortgage markets. As part of this mission, Fannie Mae and Freddie Mac invested in residential mortgage-backed securities. Fannie Mae has its principal executive offices at 3900 Wisconsin Avenue, N.W. in Washington, D.C. Freddie Mac has its principal executive offices at 8200 Jones Branch Drive in McLean, Virginia. 9
The Defendants 16. Defendant Goldman, Sachs & Co. is incorporated in New York and has its
principal executive offices at 200 West Street in New York, New York. Goldman, Sachs & Co. was the lead underwriter for each Securitization. Fannie Mae and Freddie Mac purchased all of the GSE Certificates from Goldman, Sachs & Co. in its capacity as underwriter of the Securitizations. Goldman, Sachs & Co. is a wholly owned subsidiary of The Goldman Sachs Group, Inc. and is its principal U.S. broker-dealer. 17. Defendant GS Mortgage Securities Corp. is incorporated in Delaware and has its
principal executive offices at 200 West Street in New York, New York. As described below, GS Mortgage Securities Corp. served as the depositor for 35 of the Securitizations. GS Mortgage Securities Corp. is a wholly owned subsidiary of The Goldman Sachs Group, Inc. and an affiliate of Defendants Goldman, Sachs & Co. and Goldman Sachs Mortgage Company. In addition, GS Mortgage Securities Corp., as the depositor, is the issuer of the GSE Certificates within the meaning of Section 2(a)(4) of the Securities Act, 15 U.S.C. § 77b(a)(4), and in accordance with Section 11(a) of the Securities Act. 18. Defendant Goldman Sachs Mortgage Company is a New York limited partnership
and has its principal executive offices at 200 West Street in New York, New York. Goldman Sachs Mortgage Company is (i) the sponsor of 36 of the Securitizations, (ii) the parent company of GS Mortgage Securities Corp. (the depositor in 35 of the Securitizations), and (iii) an affiliate of Goldman, Sachs & Co. (the lead underwriter in all 40 of the Securitizations) through ultimate parent ownership by The Goldman Sachs Group, Inc. By the end of 2006, Goldman Sachs Mortgage Company had sponsored the securitization of approximately $162 billion of residential mortgage loans, including prime, subprime, Alt-A, FHA/VA/RHS, second lien, and home equity lines of credit. See GSAMP 2007-NC1 Prospectus Supplement (filed Feb. 21, 2007). 10
19.
Defendant The Goldman Sachs Group, Inc. is incorporated in Delaware with its
principal executive offices at 200 West Street in New York, New York. The Goldman Sachs Group, Inc. is a bank holding company regulated by the Board of Governors of the Federal Reserve System and is the ultimate parent company of Goldman, Sachs & Co. (the selling and lead underwriter in all 40 Securitizations), Goldman Sachs Mortgage Company (the sponsor in 36 of the Securitizations), and GS Mortgage Securities Corp. (the depositor in 35 of the Securitizations). Last year, The Goldman Sachs Group, Inc. generated net revenues of $39.2 billion and net profits of $8.4 billion. See The Goldman Sachs Group, Inc., Form 10-K (filed Mar. 1, 2011). 20. Defendant Goldman Sachs Real Estate Funding Corp. is incorporated in the State
of New York and has its principal executive offices at 200 West Street in New York, New York. Goldman Sachs Real Estate Funding Corp. is a wholly owned subsidiary of Goldman Sachs Bank USA and is the general partner of Goldman Sachs Mortgage Company, the sponsor of 36 of the Securitizations. 21. Defendant Peter C. Aberg served at the time of the Securitizations as a Director of
Defendant GS Mortgage Securities Corp. and worked in New York, New York. Mr. Aberg signed one or more GS Mortgage Registration Statements, and did so in New York. 22. Defendant Howard S. Altarescu served at the time of the Securitizations as Vice
President, Chief Financial Officer, and Chief Accounting Officer of Defendant GS Mortgage Securities Corp. and worked in New York, New York. Mr. Altarescu signed one or more GS Mortgage Registration Statements, and did so in New York.
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23.
Defendant Robert J. Christie served at the time of the Securitizations as a Director
of Defendant GS Mortgage Securities Corp. and worked in New York, New York. Mr. Christie signed one or more GS Mortgage Registration Statements, and did so in New York. 24. Defendant Kevin Gasvoda served at the time of the Securitizations as a Director
of Defendant GS Mortgage Securities Corp., in addition to serving as Managing Director for Goldman’s Fixed Income, Currency, and Commodities business line and head of Residential Whole Loan Trading at Goldman Sachs, and worked in New York, New York. Mr. Gasvoda signed one or more GS Mortgage Registration Statements, and did so in New York. 25. Defendant Michelle Gill served at the time of the Securitizations as Vice
President and principal financial officer and principal accounting officer of Defendant GS Mortgage Securities Corp. and worked in New York, New York. Ms. Gill signed one or more GS Mortgage Registration Statements, and did so in New York. 26. Defendant David J. Rosenblum served at the time of the Securitizations as Vice
President and a Director of Defendant GS Mortgage Securities Corp., in addition to serving as the head of Goldman’s Collateralized Loan Obligation activities, and worked in New York, New York. Mr. Rosenblum signed one or more GS Mortgage Registration Statements, and did so in New York. 27. Defendant Jonathan S. Sobel served at the time of the Securitizations as a Director
of Defendant GS Mortgage Securities Corp., in addition to having served as the head of Goldman’s mortgage department, and worked in New York, New York. Mr. Sobel signed one or more GS Mortgage Registration Statements, and did so in New York. 28. Defendant Daniel L. Sparks served at the time of the Securitizations as Chief
Executive Officer, Vice President and a Director of Defendant GS Mortgage Securities Corp., in
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addition to serving as the head of Goldman’s mortgage department, and worked in New York, New York. Mr. Sparks signed one or more GS Mortgage Registration Statements, and did so in New York. 29. Defendant Mark Weiss served at the time of the Securitizations as Vice President
and principal financial officer and principal accounting officer of Defendant GS Mortgage Securities Corp. and worked in New York, New York. Mr. Weiss signed one or more GS Mortgage Registration Statements, and did so in New York. The Non-Party Originators 30. The loans underlying the Certificates were acquired by the sponsor for each
Securitization from non-party mortgage originators.3 The originators principally responsible for the loans underlying the Certificates were Accredited Home Lenders, Inc., American Home Mortgage Investment Corp., Argent Mortgage Company, L.L.C., Countrywide Home Loans, Inc., First Franklin Financial Corporation, Fremont Investment & Loan, GreenPoint Mortgage Funding, Inc., IndyMac Bank, F.S.B., Meritage Mortgage Corporation, NC Capital Corporation., New Century Mortgage Corporation, SouthStar Funding, LLC, and WMC Mortgage Company, Inc. JURISDICTION AND VENUE 31. Jurisdiction of this Court is founded upon 28 U.S.C. § 1345, which gives federal
courts original jurisdiction over claims brought by FHFA in its capacity as conservator for Fannie Mae and Freddie Mac.
Defendant Goldman Sachs Mortgage Company was the sponsor for 36 of the 40 Securitizations. The remaining four Securitizations were sponsored by non-parties. Specifically, Accredited Home Lenders, Inc., Fremont Investment & Loan, and IndyMac Bank, F.S.B. each sponsored one or more of those four Securitizations.
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32.
Jurisdiction of this Court is also founded upon 28 U.S.C. § 1331 because the
Securities Act claims asserted herein arise under Sections 11, 12(a)(2), and 15 of the Securities Act, 15 U.S.C. §§ 77k, 77l(a)(2), 77o. This Court further has jurisdiction over the Securities Act claims pursuant to Section 22 of the Securities Act, 15 U.S.C. § 77v. 33. This Court has jurisdiction over the statutory claims of violations of Sections
13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code and Sections 31-5606.05(a)(1)(B) and 315606.05(c) of the District of Columbia Code, pursuant to this Court’s supplemental jurisdiction under 28 U.S.C. § 1367(a). This Court likewise has jurisdiction over the common law claims of negligent misrepresentation, fraud, and aiding and abetting fraud, pursuant to this Court’s supplemental jurisdiction under 28 U.S.C. § 1367(a). 34. Venue is proper in this district pursuant to Section 22 of the Securities Act, 15
U.S.C. § 77v, and 28 U.S.C. § 1391(b). Many of the acts and transactions alleged herein, including the preparation, dissemination and signing of the Registration Statements, occurred in substantial part in the State of New York. Additionally, the GSE Certificates were actively marketed and sold from this State and several of the Defendants can be found and transact business in this District. Defendants are also subject to personal jurisdiction in this District. FACTUAL ALLEGATIONS I. The Securitizations A. 35. Residential Mortgage-Backed Securitizations in General
Asset-backed securitization distributes risk by pooling cash-producing financial
assets and issuing securities backed by those collateral groups. In residential mortgage-backed securitizations, the cash-producing financial assets are residential mortgage loans. 36. The most common form of securitization of mortgage loans involves a sponsor—
the entity that acquires or originates the mortgage loans and initiates the securitization—and the 14
creation of a trust, to which the sponsor directly or indirectly transfers a portfolio of mortgage loans. The trust is generally established pursuant to a Pooling and Servicing Agreement entered into by, among others, the “depositor” for that securitization. In many instances, the transfer of assets to a trust “is a two-step process: the financial assets are transferred by the sponsor first to an intermediate entity, often a limited purpose entity created by the sponsor … and commonly called a depositor, and then the depositor will transfer the assets to the [trust] for the particular asset-backed transactions.” Asset-Backed Securities, Securities Act Release No. 33-8518, Exchange Act Release No. 34-50905, 84 SEC Docket 1624 (Dec. 22, 2004). 37. Residential mortgage-backed securities are backed by the underlying mortgage
loans. Some residential mortgage-backed securitizations are created from more than one pool of loans called collateral groups, in which case the trust issues securities backed by different groups. For example, a securitization may involve two groups of mortgages, with some securities backed primarily by the first group, and others primarily by the second group. Purchasers of the securities acquire an ownership interest in the assets of the trust, which in turn owns the loans. Within this framework, the purchasers of the securities acquire rights to the cash-flows from the designated collateral group, such as homeowners’ payments of principal and interest on the mortgage loans held by the related trust. 38. Residential mortgage-backed securities are issued pursuant to registration
statements filed with the SEC. These registration statements include prospectuses, which explain the general structure of the investment, and prospectus supplements, which contain detailed descriptions of the collateral groups underlying the certificates. Certificates are issued by the trust pursuant to the registration statement and the prospectus and prospectus supplement. Underwriters sell the certificates to investors.
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39.
A mortgage servicer is necessary to manage the collection of proceeds from the
mortgage loans. The servicer is responsible for collecting homeowners’ mortgage loan payments, which the servicer remits to the trustee after deducting a monthly servicing fee. The servicer’s duties include making collection efforts on delinquent loans, initiating foreclosure proceedings, and determining when to charge off a loan by writing down its balance. The servicer is required to report key information about the loans to the trustee. The trustee (or trust administrator) administers the trust’s funds and delivers payments due each month on the certificates to the investors. B. 40. The Securitizations at Issue in This Case
This case involves the 40 Securitizations listed in Table 1 below. Goldman Sachs
served as the lead underwriter and sold the GSE Certificates to the GSEs for all 40 of the Securitizations. In 36 of the Securitizations, Goldman also served as the sponsor, and in 35 of the Securitizations, Goldman was also the depositor and therefore the issuer and offeror of the Certificates. For each GSE Certificate, Table 1 identifies: (1) the sponsor; (2) the depositor; (3) the lead underwriter; (4) the principal amount issued for the tranches purchased by the GSEs; (5) the date of issuance; and (6) the loan group backing the GSE Certificates for that Securitization (referred to as the “Supporting Loan Group”).
Table 1
Transaction Tranche4 Sponsor Accredited Home Lenders, Inc. Depositor Accredited Mortgage Loan REIT Trust Lead Underwriter Goldman, Sachs & Co. Principal Amount Issued Date of Issuance November 23, 2005 Supporting Loan Group Group 1
ACCR 2005-4
A1
$354,752,000
A tranche is one of a series of certificates or interests created and issued as part of the same transaction.
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Transaction
Tranche4
Sponsor Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Fremont Investment & Loan Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company
Depositor American Home Mortgage Assets LLC American Home Mortgage Assets LLC GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. Fremont Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp.
Lead Underwriter Goldman, Sachs & Co.
Principal Amount Issued $165,000,000
Date of Issuance May 25, 2006
Supporting Loan Group Group 1
AHMA 2006-1
1A1
AHMA 2006-1
1A2
Goldman, Sachs & Co.
$101,477,000
May 25, 2006
Group 1
FFML 2005FF11
A1
$240,920,000
November 22, 2005
Group 1
FFML 2005-FF8
A1
$304,713,000
September 29, 2005
Group 1
FFML 2006FF13
A1
$244,303,000
September 28, 2006
Group 1
FHLT 2006-E
1A1
$468,289,000
December 6, 2006
Group 1
GSAA 2005-11
1A1
$103,804,000
September 29, 2005
Group 1
GSAA 2005-14
1A1
$168,059,000
November 22, 2005
Group 1
GSAA 2005-14
1A2
$18,674,000
November 22, 2005
Group 1
GSAA 2005-15
1A1
$243,018,000
December 29, 2005
Group 1
GSAA 2006-11
1A1
$242,367,000
June 30, 2006
Group 1
GSAA 2006-2
1A1
$148,975,000
February 6, 2006
Group 1
GSAA 2006-4
1A1
$223,080,000
March 6, 2006
Group 1
GSAA 2006-5
1A1
$186,376,000
March 30, 2006
Group 1
GSAA 2006-8
1A1
$199,053,000
April 28, 2006
Group 1
GSAA 2007-6
3A1A
$78,936,000
May 30, 2007
Group 3
17
Transaction
Tranche4
Sponsor Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company
Depositor GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp.
Principal Amount Issued
Date of Issuance December 28, 2005
GSAMP 2005AHL2
A1A
$108,759,000
GSAMP 2005HE5
A1
$405,814,000
November 22, 2005
Group 1
GSAMP 2005HE6
A1
$341,242,000
December 29, 2005
Group 1
GSAMP 2005WMC2
A1A
$266,290,000
November 23, 2005
Group 1
GSAMP 2005WMC3
A1A
$238,899,000
December 28, 2005
Group 1
GSAMP 2006FM1
A1
$241,822,000
April 27, 2006
Group 1
GSAMP 2006FM2
A1
$351,611,000
September 29, 2006
Group 1
GSAMP 2006FM3
A1
$257,050,000
December 21, 2006
Group 1
GSAMP 2006HE3
A1
$304,472,000
May 26, 2006
Group 1
GSAMP 2006HE4
A1
$352,415,000
June 29, 2006
Group 1
GSAMP 2006HE5
A1
$241,582,000
August 25, 2006
Group 1
GSAMP 2006HE7
A1
$333,098,000
October 31, 2006
Group 1
GSAMP 2006HE8
A1
$353,741,000
December 27, 2006
Group 1
GSAMP 2006NC2
A1
$239,618,000
June 29, 2006
Group 1
GSAMP 2007FM1
A1
$315,873,000
January 30, 2007
Group 1
GSAMP 2007FM2
A1
$351,823,000
January 30, 2007
Group 1
18
Transaction
Tranche4
Sponsor Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company Goldman Sachs Mortgage Company IndyMac Bank, F.S.B. IndyMac Bank, F.S.B.
Depositor GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. GS Mortgage Securities Corp. IndyMac MBS, Inc. IndyMac MBS, Inc.
Principal Amount Issued
Date of Issuance February 23, 2007
GSAMP 2007HE1
A1
$205,454,000
GSAMP 2007HE2
A1
$370,801,000
April 20, 2007
Group 1
GSAMP 2007NC1
A1
$479,787,000
February 20, 2007
Group 1
GSR 2006-OA1
1A1
$744,970,000
August 24, 2006
Group 1
GSR 2007-AR2
6A1
$89,703,000
May 24, 2007
Group 6
GSR 2007-OA1
1A1
$374,616,000
May 8, 2007
Group 1
GSR 2007-OA2
1A1
Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co.
$186,326,000
October 1, 2007
Group 1
INDX 2005AR18 INDX 2005AR27
1A1
$629,654,000
September 7, 2005 October 28, 2005
Group 1
2A1
$136,304,000
Group 2
C.
The Securitization Process 1. Goldman Sachs Mortgage Company Pools Mortgage Loans in Special Purpose Trusts
41.
As the sponsor for 36 of the 40 Securitizations, Defendant Goldman Sachs
Mortgage Company purchased mortgage loans underlying the Certificates for those 36 Securitizations after the loans were originated, either directly from the originators or through affiliates of the originators. Goldman Sachs Mortgage Company then sold or otherwise transferred the mortgage loans for the 36 Securitizations it sponsored to the depositor, which was an affiliated entity—Defendant GS Mortgage Securities Corp.—in 35 of the Securitizations. With respect to the remaining four Securitizations, non-party sponsors sold the mortgage loans to
19
non-party depositors, as reflected in Table 1 above. Defendant Goldman, Sachs & Co. was the lead and selling underwriter for all 40 Securitizations. 42. Both Goldman Sachs Mortgage Company (the sponsor) and GS Mortgage
Securities Corp. (the depositor) were controlled by their ultimate parent, The Goldman Sachs Group, Inc. The sole purpose of the depositor, and the common law trusts created through this process, was to act as a conduit through which loans acquired by the sponsor could be securitized and sold to investors. 43. The transfer of the mortgage loans to the trust was generally effected by means of
either a Master Servicing and Trust Agreement or a Pooling and Servicing Agreement (either referred to herein as a “PSA”) executed among the depositor and the parties responsible for monitoring and servicing the mortgage loans in that Securitization. The trust, administered by the trustee, held the mortgage loans pursuant to the related PSA and issued certificates, including the GSE Certificates, backed by such loans. The GSEs purchased the GSE Certificates, through which they obtained an ownership interest in the assets of the trust, including the mortgage loans. 44. The process by which loans were acquired by Goldman Sachs Mortgage
Company differed somewhat among Securitizations. For example, in a number of the Securitizations, the loans were acquired through Goldman Sachs Mortgage Company’s “conduit program.” Under the conduit program, Goldman Sachs Mortgage Company acquired mortgage loans from various banks, savings and loan associations, mortgage bankers and other mortgage loan originators, and purchasers of mortgage loans in the secondary market. According to the Registration Statements, mortgage loans acquired by Goldman Sachs through its conduit program were acquired in accordance with the underwriting criteria specified in the Registration Statements. Where the mortgage loans were acquired by the sponsor pursuant to Goldman
20
Sachs’ conduit program, the Registration Statement stated that the mortgage loans met certain criteria, including specified maximum loan-to-value ratios for each loan documentation program based upon borrower FICO scores. 45. In addition, Goldman Sachs Mortgage Company acquired other mortgage loans
by bulk purchases in the secondary market from numerous originators and intermediate purchasers of loans. The Registration Statements described the underwriting guidelines applicable to many of these originators and intermediate purchasers. Such guidelines typically included maximum loan-to-value ratios, the degree of verification of borrower information required, the means by which the originator assessed borrower creditworthiness and likelihood of default on the mortgage loan, the adequacy of the mortgaged property as collateral, and whether a primary mortgage guarantee policy was required. 2. 46. The Trusts Issue Securities Backed by the Loans
Once the mortgage loans were transferred to the trusts in accordance with the
PSAs, each trust issued Certificates backed by the underlying mortgage loans. The Certificates were then sold to investors like Fannie Mae and Freddie Mac, which thereby acquired an ownership interest in the assets of the corresponding trust. Each Certificate entitles its holder to a specified portion of the cashflows from the underlying mortgages in the Supporting Loan Group. The level of risk inherent in the Certificates is a function of the capital structure of the related transaction and the credit quality of the underlying mortgages. 47. Each Certificate was issued pursuant to one of eight Shelf Registration Statements
filed with the SEC on Form S-3. The Shelf Registration Statements were amended by one or more Forms S-3/A filed with the SEC. Each Individual Defendant signed one or more of the four GS Mortgage Shelf Registration Statements, including any amendments thereto, which were filed by GS Mortgage Securities Corp. The SEC filing number, registrants, signatories and filing 21
dates for the eight Shelf Registration Statements and amendments thereto, as well as the Certificates covered by each Shelf Registration Statement, are reflected in Table 2 below.
Table 2
Date Registration Statement Filed Date(s) Ame nded Registration Statement Filed Signatories of Registration Statement James H. Berglund, John S. Buchanan, Gary M. Erickson, Bowers W. Espy, Jody A. Gunderson, Joseph J. Lydon, Ray W. McKewon, Richard T. Pratt, James A. Konrath
SEC File No.
Registrants
Covered Certificates
Signatories of Amendments
333124435
4/28/2005
6/10/2005
Accredited Home Lenders, Inc. Accredited Mortgage Loan REIT Trust
ACCR 2005-4
James H. Berglund, John S. Buchanan, Gary M. Erickson, Bowers W. Espy, Jody A. Gunderson, Joseph J. Lydon, Ray W. McKewon, Ray W. McKewon, Richard T. Pratt, James A. Konrath 1. Michael Strauss, Stephen Hozie, Thomas McDonagh, Alan Horn; 2. Michael Strauss, Stephen Hozie, Thomas McDonagh, Alan Horn; 3. Michael Strauss, Stephen Hozie, Thomas McDonagh, Alan Horn; 4. Michael Strauss, Stephen Hozie, Thomas McDonagh, Alan Horn 1. Murray L. Zoota, Louis J. Rampino, Wayne R. Bailey, Thomas W. Hayes, Donald Puglisi, Patrick E. Lamb. 2. Kyle W. Walker, Murray L. Zoota, Louis J. Rampino, Wayne R. Bailey, Thomas W. Hayes, Donald Puglisi, Ronald S. Nicolas.
333131641
2/7/2006
1. 2. 3. 4.
3/23/2006, 4/6/2006, 4/18/2006, 4/21/2006
American Home Mortgage Assets LLC
AHMA 2006-1
Michael Strauss, Stephen Hozie, Thomas McDonagh, Alan Horn
333132540
3/17/2006
1. 5/16/2006, 2. 6/23/2006
Fremont Mortgage Securities Corporation
FHLT 2006-E
Murray L. Zoota; Louis J. Rampino; Wayne R. Bailey; Thomas W. Hayes; Donald Puglisi; Kyle R. Walker; Ronald Nicolas, Jr.,
333127620
8/17/2005
Not applicable
GS Mortgage Securities Corp.
333132809
3/29/2006
Not applicable
FFML 2005-FF11; FFML 2005-FF8; GSAA 2006-4; GSAA 2006-5; GSAMP 2005-AHL2; GSAMP 2005-HE5; GSAMP 2005-HE6; GSAMP 2005-WMC2; GSAMP 2005-WMC3 FFML 2006-FF13; GSAA 2006-11; GSAA 2006-8; GSAMP 2006-FM1; GSAMP 2006-FM2; GSAMP 2006-FM3; GSAMP 2006-HE3; GSAMP 2006-HE4; GSAMP 2006-HE5; GSAMP 2006-HE7; GSAMP 2006-HE8; GSAMP 2006-NC2; GSAMP 2007-FM1; GSAMP 2007-NC1; GSR 2006-OA1; GSR 2007-AR2
Daniel L. Sparks, Mark Weiss, Jonathan S. Sobel
Not applicable
Daniel L. Sparks, Mark Weiss, David J. Rosenblum, Jonathan S. Sobel
Not applicable
22
SEC File No.
Date Registration Statement Filed
Date(s) Ame nded Registration Statement Filed
Registrants
Signatories of Registration Statement Daniel L. Sparks, Howard S. Altarescu, Peter C. Aberg, Robert J. Christie, Jonathan S. Sobel Daniel L. Sparks, Michelle Gill, Kevin Gasvoda John Olinski; S. Blair Abernathy; Lynnette Antosh; Samir Grover
Signatories of Amendments
333120274
11/5/2004
11/24/2004
GSAA 2005-11; GSAA 2005-14; GSAA 2005-15; GSAA 2006-2 GSAA 2007-6; GSAMP 2007-FM2; GSAMP 2007-HE1; GSAMP 2007-HE2; GSR 2007-OA1; GSR 2007-OA2 INDX 2005-AR18, INDX 2005-AR27
Daniel L. Sparks, Howard S. Altarescu, Peter C. Aberg, Robert J. Christie, Jonathan S. Sobel
333139817
1/5/2007
1/31/2007
Daniel L. Sparks, Michelle Gill, Kevin Gasvoda
333127556
8/15/2005
Not applicable
IndyMac MBS, Inc.
Not applicable
48.
The Prospectus Supplement for each Securitization describes the underwriting
guidelines that purportedly were used in connection with the origination of the underlying mortgage loans. In addition, the Prospectus Supplements purport to provide accurate statistics regarding the mortgage loans in each group, including the ranges of and weighted average FICO credit scores of the borrowers, the ranges of and weighted average loan-to-value ratios of the loans, the ranges of and weighted average outstanding principal balances of the loans, the debtto-income ratios, geographic distribution of the loans, and the extent to which the loans were for purchase or refinance purposes; information concerning whether the loans were secured by a property to be used as a primary residence, second home, or investment property; and information concerning whether the loans were delinquent. 44. The Prospectus Supplements associated with each Securitization were filed with
the SEC as part of the Registration Statements. The Form 8-Ks attaching the PSAs for each Securitization were also filed with the SEC. The date on which the Prospectus Supplement and Form 8-K containing the PSAs were filed for each Securitization, as well as the filing number of the Shelf Registration Statement related to each, are set forth in Table 3 below.
23
Table 3
Transaction ACCR 2005-4 AHMA 2006-1 FFML 2005-FF11 FFML 2005-FF8 FFML 2006-FF13 FHLT 2006-E GSAA 2005-11 GSAA 2005-14 GSAA 2005-15 GSAA 2006-11 GSAA 2006-2 GSAA 2006-4 GSAA 2006-5 GSAA 2006-8 GSAA 2007-6 GSAMP 2005-AHL2 GSAMP 2005-HE5 GSAMP 2005-HE6 GSAMP 2005-WMC2 GSAMP 2005-WMC3 GSAMP 2006-FM1 GSAMP 2006-FM2 GSAMP 2006-FM3 GSAMP 2006-HE3 GSAMP 2006-HE4 GSAMP 2006-HE5 GSAMP 2006-HE7 GSAMP 2006-HE8 GSAMP 2006-NC2 GSAMP 2007-FM1 GSAMP 2007-FM2 GSAMP 2007-HE1 GSAMP 2007-HE2 GSAMP 2007-NC1 GSR 2006-OA1 GSR 2007-AR2 GSR 2007-OA1 GSR 2007-OA2 INDX 2005-AR18 INDX 2005-AR27 Date Prospectus Supplement Filed 11/21/2005 5/26/2006 11/21/2005 9/29/2005 9/29/2006 12/7/2006 9/29/2005 11/23/2005 12/8/2005 7/3/2006 1/25/2006 3/6/2006 3/31/2006 5/1/2006 5/30/2007 12/23/2005 11/23/2005 12/27/2005 11/21/2005 12/23/2005 4/27/2006 10/22/2006 12/22/2006 5/25/2006 6/30/2006 8/25/2006 10/31/2006 12/27/2006 6/29/2006 2/1/2007 2/21/2007 2/26/2007 4/19/2007 2/21/2007 8/25/2006 5/29/2007 5/10/2007 11/1/2007 9/8/2005 10/31/2005 Date Form 8-K Attaching PSA Filed5 12/2/2005 7/25/2006 12/7/2005 10/14/2005 10/13/2006 12/20/2006 10/28/2005(*) 12/12/2005(*) 1/17/2006(*) 7/13/2006(*) 2/21/2006(*) 3/17/2006(*) 4/14/2006(*) 6/9/2006(*) 6/14/2007(*) 1/12/2006 12/7/2005 1/13/2006 12/8/2005 1/12/2006 5/18/2006 9/29/2006 1/8/2007 6/30/2006 7/19/2006 9/14/2006 11/15/2006 1/24/2007 3/12/2007 2/16/2007 3/28/2007 3/21/2007 5/24/2007 3/22/2007 9/11/2006(*) 6/8/2007(*) 5/29/2007(*) 11/13/2007(*) 1/24/2006 1/24/2006 Filing No. of Related Registration Statement 333-124435 333-131641 333-127620 333-127620 333-132809 333-132540 333-120274 333-120274 333-120274 333-132809 333-120274 333-127620 333-127620 333-132809 333-139817 333-127620 333-127620 333-127620 333-127620 333-127620 333-132809 333-132809 333-132809 333-132809 333-132809 333-132809 333-132809 333-132809 333-132809 333-132809 333-139817 333-139817 333-139817 333-132809 333-139817 333-139817 333-139817 333-139817 333-127556 333-127556
45.
The Certificates were issued pursuant to the PSAs, and Defendants Goldman,
Sachs & Co. and GS Mortgage Securities Corp. together offered, marketed, and sold the GSE Certificates to Fannie Mae and Freddie Mac in the primary market pursuant to the Registration Statements, which, as noted previously, included the Prospectuses and Prospectus Supplements.
An asterisk indicates that the relevant agreement was a Master Servicing and Trust Agreement, rather than a Pooling and Servicing Agreement.
5
24
II.
The Defendants’ Participation in the Securitization Process A. The Role of Each Defendant
49.
Each Defendant, including the Individual Defendants, had a role in the
securitization process and marketing of the Certificates, which included purchasing the mortgage loans from the originators, arranging the Securitizations, selling the mortgage loans to the depositor, transferring the mortgage loans to the trustee on behalf of the Certificateholders, underwriting the public offering of the Certificates, structuring and issuing the Certificates, and marketing and selling the Certificates to investors including Fannie Mae and Freddie Mac. 50. Depositors, underwriters, and Individual Defendants who signed the Registration
Statements, as well as Defendants who exercise control over their activities, are liable, jointly and severally, as participants in the registration, issuance and offering of Certificates, including issuing, causing, or making materially misleading statements in the Registration Statement, and omitting material facts required to be stated therein or necessary to make the statements contained therein not misleading. 1. 51. Goldman, Sachs & Co.
Defendant Goldman, Sachs & Co. was the lead underwriter in each of the
Securitizations. Fannie Mae and Freddie Mac purchased all of the GSE Certificates from Goldman, Sachs & Co. in the primary market. Goldman, Sachs & Co. is a wholly owned subsidiary of The Goldman Sachs Group, Inc. and is its principal U.S. broker-dealer. 52. As the lead underwriter for the Securitizations, Goldman, Sachs & Co. was
responsible for underwriting and managing the offer and sale of the Certificates to Fannie Mae and Freddie Mac and other investors. Goldman, Sachs & Co. was also obligated to conduct meaningful due diligence to ensure that the Registration Statements did not contain any material
25
misstatements or omissions, including as to the manner in which the underlying mortgage loans were originated, transferred and underwritten. 2. 53. GS Mortgage Securities Corp.
Defendant GS Mortgage Securities Corp. served as the depositor for 35 of the
Securitizations. GS Mortgage Securities Corp. is a wholly owned subsidiary of The Goldman Sachs Group, Inc. and an affiliate of Goldman, Sachs & Co. (the underwriter) and Goldman Sachs Mortgage Company (the sponsor). 54. GS Mortgage Securities Corp. is a special purpose entity formed solely for the
purpose of purchasing mortgage loans, filing registration statements with the SEC, forming RMBS trusts, assigning mortgage loans and all of its rights and interests in such mortgage loans to the trustee for the benefit of certificateholders, and depositing the underlying mortgage loans into the issuing trusts. 55. In its capacity as depositor, GS Mortgage Securities Corp. purchased mortgage
loans from Goldman Sachs Mortgage Company and then sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trusts. GS Mortgage Securities Corp., together with the Individual Defendants, Goldman Sachs Mortgage Company, and Goldman, Sachs & Co., was also responsible for preparing and filing the Registration Statements pursuant to which the Certificates issued by GS Mortgage Securities Corp. were offered for sale. GS Mortgage Securities Corp., as the depositor, is the issuer of the GSE Certificates within the meaning of Section 2(a)(4) of the Securities Act, 15 U.S.C. § 77b(a)(4), and in accordance with Section 11(a), 15 U.S.C. § 77k(a), of the Securities Act. GS Securities Mortgage Corp. was controlled by the Individual Defendants, who served as directors and/or officers of GS Securities Mortgage Corp.
26
3. 56.
Goldman Sachs Mortgage Company
Defendant Goldman Sachs Mortgage Corp. is the sponsor for 36 of the
Securitizations and is the parent company of GS Mortgage Securities Corp. (the depositor) and is an affiliate of Goldman, Sachs & Co. (the underwriter) through common ownership by their ultimate parent, The Goldman Sachs Group, Inc. As stated in the Prospectus Supplement for GSAMP 2007-NC1, by the end of 2006, Goldman Sachs Mortgage Company had sponsored the securitization of approximately $162 billion of residential mortgage loans, including prime, subprime, Alt-A, FHA/VA/RHS, second lien, and home equity lines of credit. See GSAMP 2007-NC1 Prospectus Supplement (filed Feb. 21, 2007). 57. As the sponsor for 36 of the Securitizations, Goldman Sachs Mortgage Company
determined the structure of each of those Securitizations, initiated the Securitization, purchased the mortgage loans to be securitized, determined the distribution of principal and interest, and provided data to the credit rating agencies to secure investment grade ratings for the GSE Certificates. Goldman Sachs Mortgage Company also selected, in 35 of the Securitizations, GS Mortgage Securities Corp. as the special purpose vehicle that would be used to transfer the mortgage loans from Goldman Sachs Mortgage Company to the trusts, and selected Goldman, Sachs & Co. as the lead underwriter for all the Securitizations. 58. Pursuant to certain mortgage loan purchase and warranties agreements, the
original loan sellers sold mortgage loans to Goldman Sachs Mortgage Company, which loans were subsequently conveyed to the depositor and then to the trust. Pursuant to assignment, assumption, and recognition agreements, Goldman Sachs Mortgage Company also conveyed certain of its rights with respect to the underlying mortgage loans to the depositor, which subsequently transferred these rights to the trust pursuant to the applicable PSA.
27
4. 59.
The Goldman Sachs Group, Inc.
Defendant The Goldman Sachs Group, Inc. is a bank holding company regulated
by the Board of Governors of the Federal Reserve System and is the ultimate parent company of its wholly owned subsidiaries Goldman, Sachs & Co., GS Mortgage Securities Corp, and Goldman Sachs Mortgage Company. 60. The Goldman Sachs Group, Inc. employed its wholly owned or controlled
underwriter, sponsor and depositor (each a defendant in this action) in key steps of the securitization process. Unlike typical arms’ length securitizations, the Securitizations here involved various Goldman Sachs subsidiaries and affiliates at virtually each step in the chain— the sponsor and depositor were nearly always Goldman Sachs Mortgage Company and GS Mortgage Securities Corp., and the lead underwriter was always Goldman, Sachs & Co. 61. As the ultimate corporate parent of (i) Goldman Sachs Mortgage Company, (ii)
GS Mortgage Securities Corp., (iii) and Goldman, Sachs & Co., The Goldman Sachs Group, Inc. had the practical ability to direct and control the actions of the sponsor, depositor and underwriter in those Securitizations, and in fact exercised such direction and control by coordinating the activities of its subsidiaries related to the issuance and sale of the Certificates. 62. As detailed above, 35 of the Securitizations involved Goldman Sachs entities,
including the aforementioned subsidiaries of The Goldman Sachs Group, Inc., at virtually each step in the process. The Goldman Sachs Group, Inc. profited substantially from this vertically integrated approach to mortgage-backed securitization. Furthermore, The Goldman Sachs Group, Inc. shared overlapping management with other Defendant entities. For example, Defendant Kevin Gasvoda was a Director of GS Mortgage Securities Corp., in addition to serving as Managing Director for Goldman’s Fixed Income, Currency, and Commodities business and Managing Director and head of Residential Whole Loan Trading. In addition, 28
Defendant David J. Rosenblum, who was Vice President and a Director of GS Mortgage Securities Corp., also served as head of Goldman’s Collateralized Loan Obligation activities. Similarly, Defendant Jonathan S. Sobel, who was a Director of Defendant GS Mortgage Securities Corp., also headed Goldman’s mortgage department. Likewise, Defendant Daniel L. Sparks, who was Chief Executive Officer, Vice President and a Director of GS Mortgage Securities, also headed Goldman’s mortgage department. As the above clearly shows, there was significant overlap between the management of The Goldman Sachs Group, Inc., and the directors and officers of Defendant GS Mortgage Securities Corp. 5. 63. Goldman Sachs Real Estate Funding Corp.
Defendant Goldman Sachs Real Estate Funding Corp. is a wholly owned
subsidiary of Goldman Sachs Bank USA and is the general partner of Goldman Sachs Mortgage Company, the sponsor of the Securitizations. The parent company of Goldman Sachs Real Estate Funding Corp.—Goldman Sachs Bank USA—is itself a subsidiary of The Goldman Sachs Group, Inc. Goldman Sachs Real Estate Funding Corp. provided a vehicle for the ultimate controlling entity—The Goldman Sachs Group, Inc.—further to direct the activities of the sponsor of the Securitizations, Goldman Sachs Mortgage Company. 6. 64. The Individual Defendants
Defendant Peter C. Aberg served at the time of the Securitizations as a Director of
Defendant GS Mortgage Securities Corp. Mr. Aberg signed the GS Mortgage Shelf Registration Statement under file number 333-120274 filed with the SEC on November 5, 2004 and, through a power of attorney, the related pre-effective amendment on Form S-3/A filed with the SEC on November 24, 2004. 65. Defendant Howard S. Altarescu served at the time of the Securitizations as Vice
President, Chief Financial Officer, and Chief Accounting Officer of Defendant GS Mortgage 29
Securities Corp. Mr. Altarescu signed the GS Mortgage Shelf Registration Statement under file number 333-120274 filed with the SEC on November, 5 2004 and the related pre-effective amendments on Form S-3/A filed with the SEC on November 24, 2004. 66. Defendant Robert J. Christie served at the time of the Securitizations as a Director
of Defendant GS Mortgage Securities Corp. Mr. Christie signed the GS Mortgage Shelf Registration Statement under file number 333-120274 filed with the SEC on November 5, 2004 and, through a power of attorney, the related pre-effective amendment on Form S-3/A filed with the SEC on November 24, 2004. 67. Defendant Kevin Gasvoda served at the time of the Securitizations as a Director
of Defendant GS Mortgage Securities Corp. and Managing Director for Goldman’s Fixed Income, Currency, and Commodities business and head of Residential Whole Loan Trading. Mr. Gasvoda signed the GS Mortgage Shelf Registration Statement under file number 333-139817 filed with the SEC on January 5, 2007 and the related pre-effective amendment on Form S-3/A filed with the SEC on January 31, 2007. 68. Defendant Michelle Gill served at the time of the Securitizations as Vice
President and principal financial officer and principal accounting officer of Defendant GS Mortgage Securities Corp. Ms. Gill signed the GS Mortgage Shelf Registration Statement under file number 333-139817 filed with the SEC on January 5, 2007, and signed the related preeffective amendment on Form S-3/A filed with the SEC on January 31, 2007 in both her individual capacity and with a power of attorney on behalf of Defendant Daniel L. Sparks and Defendant Kevin Gasvoda. 69. Defendant David J. Rosenblum served at the time of the Securitizations as Vice
President and a Director of Defendant GS Mortgage Securities Corp., in addition to serving as
30
head of Goldman’s Collateralized Loan Obligation activities. Mr. Rosenblum signed the GS Mortgage Shelf Registration Statement under file number 333-120274 filed with the SEC on November 5, 2004 and, through a power of attorney, the related pre-effective amendment on Form S-3/A filed with the SEC on November 24, 2004. Mr. Rosenblum further signed the GS Mortgage Shelf Registration Statement under file number 333-132809 filed with the SEC on March 29, 2006. 70. Defendant Jonathan S. Sobel served at the time of the Securitizations as a Director
of Defendant GS Mortgage Securities Corp. and headed Goldman’s mortgage department. Mr. Sobel signed the GS Mortgage Shelf Registration Statement under file number 333-127620 filed with the SEC on August 17, 2005. Mr. Sobel further signed the GS Mortgage Shelf Registration Statement under file number 333-132809 filed with the SEC on March 29, 2006. Mr. Sobel also signed the GS Mortgage Shelf Registration Statement under file number 333-120274 filed with the SEC on November 5, 2004 and the related pre-effective amendment on Form S 3/A filed with the SEC on November 24, 2004. 71. Defendant Daniel L. Sparks served at the time of the Securitizations as Chief
Executive Officer, Vice President, and a Director of Defendant GS Mortgage Securities Corp., in addition to heading Goldman’s mortgage department. Mr. Sparks signed the GS Mortgage Shelf Registration Statement under file number 333-120274 filed with the SEC on November 5, 2004 and signed through a power of attorney the related pre-effective amendment on Form S-3/A filed with the SEC on November 24, 2004. Mr. Sparks further signed the GS Mortgage Shelf Registration Statement under file number 333-127620 filed with the SEC on August 17, 2005. Mr. Sparks also signed the GS Mortgage Shelf Registration Statement under file number 333132809 filed with the SEC on March 29, 2006. Mr. Sparks further signed the GS Mortgage
31
Shelf Registration Statement under file number 333-139817 filed with the SEC on January 5, 2007 and signed the related pre-effective amendment on Form S-3/A filed with the SEC on January 31, 2007. 72. Defendant Mark Weiss served at the time of the Securitizations as Vice President
and principal financial officer and principal accounting officer of Defendant GS Mortgage Securities Corp. Mr. Weiss signed the GS Mortgage Shelf Registration Statement under file number 333-127620 filed with the SEC on August 17, 2005. Mr. Weiss further signed the GS Mortgage Shelf Registration Statement under file number 333-132809 filed with the SEC on March 29, 2006. B. 73. Defendants Failed To Conduct Proper Due Diligence
The Defendants failed to conduct adequate and sufficient due diligence to ensure
that the mortgage loans underlying the Securitizations complied with the statements in the Registration Statements. 74. During the time period in which the Certificates were issued—approximately
2005 through 2007—Goldman’s involvement in mortgage-backed securitization increased dramatically as compared to prior years. For example, by the end of 2006, Goldman Sachs Mortgage Company had sponsored the securitization of approximately $162 billion of residential mortgage loans, including prime, subprime, Alt-A, FHA/VA/RHS, second lien, and home equity lines of credit. See GSAMP 2007-NC1 Prospectus Supplement (filed Feb. 21, 2007). In specific categories, such as subprime RMBS securitizations, Goldman’s deal volume increased from $2.1 billion in 2003, to $9.7 billion in 2004, to $14.5 billion in 2005, to $15.0 billion in 2006. Id. Similarly, in ALT-A RMBS securitizations, Goldman’s deal volume increased from $3.8 billion in 2004, to $10.4 billion in 2005, to a staggering $20.5 billion in 2006. See GSAA 2007-6 Prospectus Supplement (filed May 30, 2007). 32
75.
Defendants had enormous financial incentives to complete as many offerings as
quickly as possible without regard to ensuring the accuracy or completeness of the Registration Statements, or conducting adequate and reasonable due diligence. For example, the depositor in virtually all the Securitizations, GS Mortgage Securities Corp., was paid a percentage of the total dollar amount of the offering on completion of the Securitizations. Similarly, Goldman, Sachs & Co., as the underwriter, was paid a commission based on the amount it received from the sale of the Certificates to the public. 76. As revealed by the U.S. Senate Permanent Subcommittee on Investigations, a
March 9, 2007 e-mail from Defendant Daniel L. Sparks, who was both an officer and director of Defendant GS Mortgage Securities Corp., as well as the head of Goldman’s mortgage department, demonstrates that Goldman put the highest priority on packaging and selling Goldman’s warehoused mortgages, if for no other reason than to quickly get them off Goldman’s books: “Our current largest needs are to execute and sell our new issues—CDO’s and RMBS— and to sell our other cash trading positions…. I can’t overstate the importance to the business of selling these positions and new issues.” U.S. Senate Permanent Subcommittee on Investigations, Hearing on Wall Street and the Financial Crisis: The Role of Investment Banks, Ex. 76 (Apr. 27, 2010). 77. The push to securitize large volumes of mortgage loans contributed to the absence
of controls needed to prevent the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. In particular, Defendants failed to conduct adequate diligence or otherwise to ensure the accuracy of the statements in the Registration Statements pertaining to the Securitizations.
33
78.
For instance, Goldman retained third-party due diligence providers such as
Clayton Holdings, Inc. (“Clayton”) and The Bohan Group, Inc. (“Bohan”) to analyze the loans it was considering placing in its securitizations, but waived a significant number of loans into the Securitizations that these firms had recommended for exclusion, and did so without taking adequate steps to ensure that these loans had in fact been underwritten in accordance with applicable guidelines or had compensating factors that excused the loans’ non-compliance with those guidelines. On January 27, 2008, Clayton revealed that it had entered into an agreement with the New York Attorney General (the “NYAG”) to provide documents and testimony regarding its due diligence reports, including copies of the actual reports provided to its clients. According to The New York Times, as reported on January 27, 2008, Clayton told the NYAG “that starting in 2005, it saw a significant deterioration of lending standards and a parallel jump in lending expectations” and “some investment banks directed Clayton to halve the sample of loans it evaluated in each portfolio.” 79. Goldman Sachs was negligent in allowing into the Securitizations a substantial
number of mortgage loans that, as reported to Goldman by third-party due diligence firms, did not conform to the underwriting standards stated in the Registration Statements, including the Prospectuses and Prospectus Supplements. Even upon learning from its third-party due diligence firms that there were high percentages of defective or at least questionable loans in the sample of loans reviewed by the third-party due diligence firms, Goldman failed to take any additional steps to verify that the population of loans in the Securitizations did not include a similar percentage of defective and/or questionable loans.
34
80.
The Financial Crisis Inquiry Commission (the “FCIC”)6 found that in the period
from the first quarter of 2006 to the second quarter of 2007, 23 percent of the mortgage loans Goldman submitted to Clayton to review in RMBS loan pools were rejected by Clayton as falling outside the applicable underwriting guidelines. Of the mortgage loans that Clayton found defective, 29 percent of the loans were subsequently waived in by Goldman without proper consideration and analysis of compensating factors and included in securitizations such as the ones in which Fannie Mae and Freddie Mac invested here. See The Financial Crisis Inquiry Report, at 167, Jan. 2011, available at http://fcic-static.law.stanford.edu/cdn_media/fcicreports/fcic_final_report_full.pdf. 81. As disclosed in a report as part of the NYAG’s ongoing investigation of
investment banking misconduct in underwriting mortgage-backed securities, Clayton routinely provided investment banks with detailed reports of loans that were not compliant with underwriting guidelines, but the investment banks, including Goldman Sachs, routinely overrode the exclusion of a significant percentage of rejected loans from purchase and securitization. 82. Goldman has been the subject of numerous regulatory actions and investigations
for matters similar to those raised in this Complaint. In May 2009, the Massachusetts Attorney General announced a settlement agreement with Goldman arising out of an investigation into the role of Goldman and other banks in: (i) facilitating the origination of illegal or otherwise improper mortgages; (ii) failing to ascertain whether loans purchased from originators complied with stated underwriting guidelines; (iii) failing to prevent problem loans from being put into securitization collateral groups; (iv) failing to correct inaccurate information in securitization The Financial Crisis Inquiry Commission was created by the Fraud Enforcement and Recovery Act of 2009, and was established to examine the causes, domestic and global, of the current financial and economic crisis in the United States.
6
35
trustee reports concerning repurchases of bad loans; and (v) failing to disclose to investors the problems with loans placed into securitization collateral groups. The Massachusetts Attorney General, in announcing the settlement, specifically stated that Goldman did not take “sufficient steps to avoid placing problem loans in securitization pools.” As part of its settlement with the Massachusetts Attorney General, Goldman agreed to provide approximately $50 million in relief to homeowners and an additional $10 million to the Commonwealth of Massachusetts. See Attorney General Martha Coakley and Goldman Sachs Reach Settlement Regarding Subprime Lending Issues (May 11, 2009), available at http://www.mass.gov/Cago/docs/press/2009_ 05_07_goldman_settlement.pdf. 83. In addition, Goldman has been the subject of investigations by both the Securities
and Exchange Commission and the New York Attorney General. On July 15, 2010, the SEC announced that Goldman had agreed to pay $550 million to settle SEC charges that Goldman misled investors in a subprime mortgage product just as the U.S. housing market was starting to collapse. In agreeing to the SEC’s largest-ever penalty paid by a Wall Street firm, Goldman also acknowledged that its marketing materials for the subprime product contained incomplete information. See Goldman Sachs to Pay Record $550 Million to Settle SEC Charges Related to Subprime Mortgage CDO, SEC Litig. Release No. 21592 (July 15, 2010), available at http://www.sec.gov/litigation/litreleases/2010/lr21592.htm. 84. More recently, in May 2011, the New York Attorney General began investigating
Goldman’s mortgage securities operations, including the pooling of mortgage loans. See Gretchen Morgenson, New York Investigates Banks’ Role in Financial Crisis, N.Y. Times, May 16, 2011, available at http://www.nytimes.com/2011/05/17/business/17bank.html. In June 2011,
36
the Manhattan District Attorney’s Office issued a subpoena to Goldman in connection with its investigation of Goldman’s mortgage-backed securities. Both investigations are ongoing. III. The Registration Statements and the Prospectus Supplements A. 85. Compliance with Underwriting Guidelines
The Prospectus Supplement for each Securitization describes the mortgage loan
underwriting guidelines pursuant to which mortgage loans underlying the related Securitizations were supposed to have been originated. These guidelines were intended to assess the creditworthiness of the borrower, the ability of the borrower to repay the loan, and the adequacy of the mortgaged property as security for the loan. 86. The statements made in the Prospectus Supplements, which, as discussed, formed
part of the Registration Statement for each Securitization, were material to a reasonable investor’s decision to purchase and invest in the Certificates because the failure to originate a mortgage loan in accordance with the applicable guidelines creates a higher risk of delinquency and default by the borrower, as well as a risk that losses upon liquidation will be higher, thus resulting in a greater economic risk to an investor. 87. The Prospectus Supplements for the Securitizations contained several key
statements with respect to the underwriting standards of the entities that originated the loans in the Securitizations. For example, the Prospectus Supplement for GSAMP 2006-HE7 stated that: “The mortgage loans were originated or acquired generally in accordance with the underwriting guidelines of the original loan sellers.”7 In that Securitization, Goldman Sachs Mortgage
7
In GSAMP 2006-HE7, the mortgage loans were primarily originated by, or sold through, the Goldman Sachs Mortgage Conduit Program, SouthStar Funding, LLC, Aames Capital Corporation, and NovaStar Mortgage, Inc. The securitization was sponsored by Goldman Sachs Mortgage Company, underwritten and sold to Fannie Mae by Goldman, Sachs & Co., and the depositor was GS Mortgage Securities Corp. 37
Company and GS Mortgage Securities Corp. acquired approximately 30.87 percent of the mortgage loans in the Securitization from SouthStar Funding, LLC. The Defendants represented in the Prospectus Supplement for this securitization that “SouthStar’s guidelines are intended to evaluate the borrower’s ability to repay the mortgage loan, evaluate the borrower’s credit and evaluate the value and adequacy of the collateral. SouthStar does not approve mortgage loans based solely on the value of the collateral.” In the Prospectus Supplement, Defendants further (a) described the level of documentation SouthStar required under its various documentation programs, and represented that “the borrowers must show the ability to repay the mortgage loan, have acceptable credit, and acceptable collateral”; (b) described the criteria for acceptable collateral; and (c) described the borrower eligibility criteria, including maximum debt-to-income ratios, minimum FICO scores, and valid credit scores, which “must be met.” SouthStar also stated that it “realize[d] the soundness of a portfolio depends to a significant extent on the quality and accuracy of the real estate appraisal,” and explained that its policy was to, among other things, comply with federal and state rules and use automated valuation models in the review process. 88. According to the Prospectus Supplements, many of the underlying mortgage loans
in the Securitizations were also acquired by Goldman Sachs Mortgage Company through its “conduit program”—whereby the loans were originated by third parties and sold or otherwise transferred to the sponsor. In those cases, although Goldman Sachs did not originate the loans, it generally made representations in the deal documents as to the creditworthiness of the borrower and the quality of the loans. 89. For example, the Prospectus Supplement for GSAMP 2006-HE4 stated that
“[p]ursuant to the mortgage conduit program, the sponsor purchases mortgage loans originated
38
by the original loan sellers if the mortgage loans generally satisfy the sponsor’s underwriting guidelines.” Further, that Prospectus Supplement stated that Goldman Sachs Mortgage Company would, “[p]rior to acquiring any residential mortgage loans … conduct a review of the related mortgage loan seller” and that “[a]ll of the mortgage loans that [Goldman Sachs Mortgage Company’s] may acquire through its conduit program will be acquired generally in accordance with the underwriting criteria described in this section.” The Prospectus Supplement further stated that the sponsor’s “review process consists of reviewing select financial information for credit and risk assessment and underwriting guideline review, senior level management discussion and background checks. The scope of the mortgage loan due diligence will depend on the credit quality of the mortgage loans.” 90. The Prospectus and Prospectus Supplement for each of the Securitizations had
similar statements to those quoted above. The relevant statements in the Prospectus and Prospectus Supplement pertaining to underwriting standards for each Securitization are reflected in Appendix A to this Complaint. As discussed in Section IV.B. below, in fact, the originators of the mortgage loans in the Supporting Loan Groups for the Securitizations did not adhere to their stated underwriting guidelines, thus rendering the description of those guidelines in the Prospectuses and Prospectus Supplements false and misleading. 91. Further, the Prospectuses and Prospectus Supplements included additional
representations by the sponsor regarding the purported quality of the mortgage loans that collateralized the Certificates. These representations and warranties were part of the PSA—the document that effected the transfer of the mortgage loans to the respective trusts—but were repeated in the Prospectuses and Prospectus Supplements prepared by the depositor, underwriter and others. In many cases, the Prospectuses and Prospectus Supplements stated that the
39
applicable representations and warranties were “brought down” as of the close of the Securitization, meaning that the representations and warranties were true as of the time the GSE Certificates were issued. See, e.g., GSR 2006-OA1 Prospectus Supplement (filed Aug. 26, 2006) (“GSMC [Goldman Sachs Mortgage Company] will bring down all loan level representations and warranties through the Closing Date.”). 92. These representations, which are described in greater detail for each
Securitization in Appendix A, included the following:  “Underwriting Guidelines. The Mortgage Loan was underwritten in accordance with the Seller’s underwriting guidelines in effect at the time of origination with exceptions thereto exercised in a reasonable manner”; and “No Defaults. Except with respect to delinquencies identified on the Mortgage Loan schedule… there is no default, breach, violation or event of acceleration existing under any mortgage or mortgage note and no event that, with the passage of time or with notice and the expiration of any grace or cure period, would constitute a default, breach, violation or event of acceleration ….” Id. The inclusion of these representations in the Prospectuses and Prospectus

93.
Supplements had the purpose and effect of providing additional assurances to investors regarding the quality of the mortgage collateral underlying the Securitizations and its compliance with the underwriting guidelines described in the Prospectuses and Prospectus Supplements. These representations were material to a reasonable investor’s decision to purchase the Certificates. B. 94. Statements Regarding Occupancy Status of Borrower
The Prospectus Supplements contained collateral group-level information about
the occupancy status of the borrowers of the loans in the Securitizations. Occupancy status refers to whether the property securing a mortgage is to be the primary residence of the borrower, a second home, or an investment property. The Prospectus Supplements for each of the Securitizations presented this information in tabular form, usually in a table entitled “Occupancy” or “Occupancy Status.” This table divided all the loans in the collateral group by 40
occupancy status, generally into the following categories: (i) “Owner Occupied”; (ii) “Second Home”; and (iii) “Investor.” For each category, the table stated the number of loans in that category. Occupancy statistics for the Supporting Loan Groups for each Securitization were reported in the Prospectus Supplements as follows:8
Table 4
Transaction ACCR 2005-4 AHMA 2006-1 FFML 2005-FF11 FFML 2005-FF8 FFML 2006-FF13 FHLT 2006-E GSAA 2005-11 GSAA 2005-14 GSAA 2005-15 GSAA 2006-11 GSAA 2006-2 GSAA 2006-4 GSAA 2006-5 GSAA 2006-8 GSAA 2007-6 GSAMP 2005-AHL2 GSAMP 2005-HE5 GSAMP 2005-HE6 GSAMP 2005-WMC2 GSAMP 2005-WMC3 GSAMP 2006-FM1 GSAMP 2006-FM2 GSAMP 2006-FM3 GSAMP 2006-HE3 GSAMP 2006-HE4 GSAMP 2006-HE5 GSAMP 2006-HE7 GSAMP 2006-HE8 GSAMP 2006-NC29 GSAMP 2007-FM1 GSAMP 2007-FM2 GSAMP 2007-HE1 Supporting Loan Group Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 3 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Owner Occupied (%) 94.21 57.90 94.06 95.99 100.00 86.23 55.48 44.48 68.42 74.48 97.51 78.06 67.10 52.80 57.94 90.70 88.94 91.70 95.91 95.32 94.38 88.84 89.25 89.27 86.04 94.48 91.04 87.74 92.16 88.31 89.84 89.48 Second Home (%) 0.97 7.41 0.67 0.00 0.00 1.37 3.44 12.20 8.54 7.11 2.49 9.22 5.65 11.09 5.15 0.61 3.30 1.76 2.76 2.99 0.83 1.26 0.89 2.66 2.54 1.15 1.40 1.68 0.81 1.19 1.40 1.32 Investor (%) 4.83 34.69 5.27 4.01 0.00 12.40 41.08 43.32 23.03 18.41 0.00 12.72 27.25 36.11 36.91 8.69 7.77 6.54 1.32 1.69 4.79 9.90 9.87 8.07 11.42 4.37 7.55 10.58 6.23 10.50 8.76 9.21
Each Prospectus Supplement provides the total number of loans and the number of loans in the following categories: owner occupied, second home, and investor. These numbers have been converted to percentages as set forth in Table 4. As described more fully in note 16, infra, the GSAMP 2006-NC2 Prospectus Supplement misstates all relevant characteristics for the Supporting Loan Group, by reporting the statistical and tabular information for the Securitization as a whole in place of the statistical and tabular information for Loan Group 1. Tables 4–7, infra, in the interest of avoiding further confusion, utilize the data in the GSAMP 2006-NC2 Prospectus Supplement that appears to have been intended to correspond to Loan Group 1, notwithstanding that this information is reported in a section of the Prospectus Supplement titled, “All Collateral.”
9
8
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Transaction GSAMP 2007-HE2 GSAMP 2007-NC1 GSR 2006-OA1 GSR 2007-AR2 GSR 2007-OA1 GSR 2007-OA2 INDX 2005-AR18 INDX 2005-AR27
Supporting Loan Group Group 1 Group 1 Group 1 Group 6 Group 1 Group 1 Group 1 Group 2
Owner Occupied (%) 88.04 91.80 79.40 83.85 70.61 66.22 90.69 83.19
Second Home (%) 2.74 1.08 3.91 11.20 6.04 6.09 2.48 4.79
Investor (%) 9.22 7.11 16.69 4.95 23.34 27.69 6.83 12.02
95.
As Table 4 makes clear, the Prospectus Supplements for each Securitization
reported that an overwhelming majority of the mortgage loans in the Supporting Loan Groups were owner occupied, while a small percentage were reported to be non-owner occupied (i.e., a second home or investment property). 96. The statements about occupancy status were material to a reasonable investor’s
decision to invest in the Certificates. Information about occupancy status is an important factor in determining the credit risk associated with a mortgage loan and, therefore, the securities that it collateralizes. Because borrowers who reside in mortgaged properties are less likely to default than borrowers who purchase homes as second homes or investments and live elsewhere, and are more likely to care for their primary residence, the percentage of loans in the collateral group of a securitization that are secured by mortgage loans on owner-occupied residences is an important measure of the risk of the certificates sold in that securitization. 97. All other things being equal, the higher the percentage of loans not secured by
owner-occupied residences, the greater the risk of loss to the certificateholders. Even small differences in the percentages of owner-occupied, second home, and investment properties in the collateral group of a securitization can have a significant effect on the risk of each certificate sold in that securitization, and thus, are important to the decision of a reasonable investor whether to purchase any such certificate. As discussed in Section IV.A.1. below, the Registration Statement for each Securitization materially overstated the percentage of loans in the Supporting Loan
42
Groups that were owner occupied, thereby misrepresenting and understating the degree of risk of the GSE Certificates. C. 98. Statements Regarding Loan-to-Value Ratios
The loan-to-value ratio of a mortgage loan, or LTV ratio, is the ratio of the
balance of the mortgage loan to the value of the mortgaged property when the loan is made. 99. The denominator in the LTV ratio is the value of the mortgaged property, and is
generally the lower of the purchase price or the appraised value of the property. In a refinancing or home-equity loan, there is no purchase price to use as the denominator, so the denominator is often equal to the appraised value at the time of the origination of the refinanced or home-equity loan. Accordingly, an accurate appraisal is essential to an accurate LTV ratio. In particular, an inflated appraisal will understate, sometimes greatly, the credit risk associated with a given loan. 100. The Prospectus Supplements for each Securitization also contained group-level
information about the LTV ratio for the underlying group of loans as a whole. The percentage of loans by aggregate principal balance with an LTV ratio at or less than 80 percent and the percentage of loans with an LTV ratio greater than 100 percent as reported in the Prospectus Supplements for the Supporting Loan Groups are reflected in Table 5 below.10
Table 5
Transaction ACCR 2005-4 AHMA 2006-1 10 Supporting Loan Group Group 1 Group 1 Percentage of loans, by aggregate principal balance, with LTV less than or equal to 80% 79.52 84.90 Percentage of loans, by aggregate principal balance, with LTV greater than 100% 0.00 0.00
As used in this Complaint, “LTV” refers to the original loan-to-value ratio for first lien mortgages and for properties with second liens that are subordinate to the lien that was included in the securitization (i.e., only the securitized lien is included in the numerator of the LTV calculation). However, for second lien mortgages, where the securitized lien is junior to another loan, the more senior lien has been added to the securitized one to determine the numerator in the LTV calculation (this latter calculation is sometimes referred to as the combined-loan-to-value ratio, or “CLTV”).
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Transaction FFML 2005-FF11 FFML 2005-FF8 FFML 2006-FF13 FHLT 2006-E GSAA 2005-11 GSAA 2005-14 GSAA 2005-15 GSAA 2006-11 GSAA 2006-2 GSAA 2006-4 GSAA 2006-5 GSAA 2006-8 GSAA 2007-6 GSAMP 2005-AHL2 GSAMP 2005-HE5 GSAMP 2005-HE6 GSAMP 2005-WMC2 GSAMP 2005-WMC3 GSAMP 2006-FM1 GSAMP 2006-FM2 GSAMP 2006-FM3 GSAMP 2006-HE3 GSAMP 2006-HE4 GSAMP 2006-HE5 GSAMP 2006-HE7 GSAMP 2006-HE8 GSAMP 2006-NC211 GSAMP 2007-FM1 GSAMP 2007-FM2 GSAMP 2007-HE1 GSAMP 2007-HE2 GSAMP 2007-NC1 GSR 2006-OA1 GSR 2007-AR2 GSR 2007-OA1 GSR 2007-OA2 INDX 2005-AR18 INDX 2005-AR27
Supporting Loan Group Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 3 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 6 Group 1 Group 1 Group 1 Group 2
Percentage of loans, by aggregate principal balance, with LTV less than or equal to 80% 91.49 56.61 68.93 54.11 88.20 93.87 89.93 91.47 60.24 94.93 94.71 79.43 96.98 57.58 68.15 51.58 70.77 70.06 60.16 66.94 60.86 67.69 57.61 67.62 61.99 61.21 56.07 56.47 57.71 39.37 46.03 58.37 93.41 84.03 82.23 83.17 96.84 93.95
Percentage of loans, by aggregate principal balance, with LTV greater than 100% 0.00 0.00 0.00 0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
101.
As Table 5 makes clear, the Prospectus Supplement for each Securitization
reported that many or most of the mortgage loans in the Supporting Loan Groups had an LTV ratio of 80 percent or less, and all but one of the Securitizations reported that zero mortgage loans in the Supporting Loan Group had an LTV ratio over 100 percent.12
11 12
See supra note 9.
The only Securitization reporting any mortgage loans with an LTV ratio over 100 percent was FHLT 2006-E, and in that case, only 0.01 percent of its mortgage loans were reported to have an LTV ratio in excess of 100 percent.
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102.
The LTV ratio is among the most important measures of the risk of a mortgage
loan, and thus, it is one of the most important indicators of the default risk of the mortgage loans underlying the Certificates. The lower the ratio, the less likely that a decline in the value of the property will wipe out an owner’s equity, and thereby give an owner an incentive to stop making mortgage payments and abandon the property. This ratio also predicts the severity of loss in the event of default. The lower the LTV ratio, the greater the “equity cushion,” so the greater the likelihood that the proceeds of foreclosure will cover the unpaid balance of the mortgage loan. 103. Thus, LTV ratio is a material consideration to a reasonable investor in deciding
whether to purchase a certificate in a securitization of mortgage loans. Even small differences in the LTV ratios of the mortgage loans in the collateral group of a securitization have a significant effect on the likelihood that the collateral groups will generate sufficient funds to pay certificateholders in that securitization, and thus are material to the decision of a reasonable investor whether to purchase any such certificate. As discussed in Section IV.A.2. below, the Registration Statements for the Securitizations materially overstated the percentage of loans in the Supporting Loan Groups with an LTV ratio at or less than 80 percent, and materially understated the percentage of loans in the Supporting Loan Groups with an LTV ratio over 100 percent, thereby misrepresenting and understating the degree of risk of the GSE Certificates. D. 104. Statements Regarding Credit Ratings
Credit ratings are assigned to the tranches of mortgage-backed securitizations by
the credit rating agencies, including Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings. Each credit rating agency uses its own scale with letter designations to describe various levels of risk. In general, AAA or its equivalent ratings are at the top of the credit rating scale and are intended to designate the safest investments. C and D ratings or their equivalents are at the bottom of the scale and refer to investments that are currently in default and exhibit little or 45
no prospect for recovery. At the time the GSEs purchased the GSE Certificates, investments with AAA or its equivalent ratings historically experienced loss rates of less than 0.05 percent. Investments with a BBB rating, or its equivalent, historically experienced loss rates of under one percent. As a result, securities with credit ratings between AAA through BBB- or their equivalents were generally referred to as “investment grade.” 105. Rating agencies determine the credit rating for each tranche of a mortgage-backed
securitization by comparing the likelihood of contractual principal and interest repayment to the “credit enhancements” available to protect investors. Rating agencies determine the likelihood of repayment by estimating cashflows based on the quality of the underlying mortgages by using sponsor provided loan-level data. Credit enhancements, such as subordination, represent the amount of “cushion” or protection from loss incorporated into a given securitization.13 This cushion is intended to improve the likelihood that holders of highly rated certificates receive the interest and principal to which they are contractually entitled. The level of credit enhancement offered is based on the make-up of the loans in the underlying collateral group and entire securitization. Riskier loans underlying the securitization necessitate higher levels of credit enhancement to insure payment to senior certificate holders. If the collateral within the deal is of a higher quality, then rating agencies require less credit enhancement for AAA or its equivalent rating. 106. Credit ratings have been an important tool to gauge risk when making investment
decisions. For almost a hundred years, investors like pension funds, municipalities, insurance “Subordination” refers to the fact that the certificates for a mortgage-backed securitization are issued in a hierarchical structure, from senior to junior. The junior certificates are “subordinate” to the senior certificates in that, should the underlying mortgage loans become delinquent or default, the junior certificates suffer losses first. These subordinate certificates thus provide a degree of protection to the senior certificates from losses on the underlying loans.
13
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companies, and university endowments have relied heavily on credit ratings to assist them in distinguishing between safe and risky investments. Fannie Mae and Freddie Mac’s respective internal policies limited their purchases of private label residential mortgage-backed securities to those rated AAA (or its equivalent), and in very limited instances, AA or A bonds (or their equivalent). 107. Each tranche of the Securitizations received a credit rating upon issuance, which
purported to describe the riskiness of that tranche. The Defendants reported the credit ratings for each tranche in the Prospectus Supplements. The credit rating provided for each of the GSE Certificates was “investment grade,” always “AAA” or its equivalent. The accuracy of these ratings was material to a reasonable investor’s decision to purchase the Certificates. As set forth in Table 8 below, the ratings for the Securitizations were inflated as a result of Defendants’ provision of incorrect data concerning the attributes of the underlying mortgage collateral to the ratings agencies, and, as a result, Defendants marketed and sold the GSE Certificates as AAA (or its equivalent) when, in fact, they were not. IV. Falsity of Statements in the Registration Statements and Prospectus Supplements A. A Review of Loan-Level Data Indicates That the Statistical Data Provided in the Registration Statements and Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False
108.
A review of loan-level data was conducted in order to assess whether the
statistical information provided in the Prospectus Supplements was true and accurate. For each Securitization, the sample consisted of 1,000 randomly selected loans per Supporting Loan Group, or all of the loans in the group if there were fewer than 1,000 loans in the Supporting Loan Group. The sample data confirms, on a statistically significant basis, material misrepresentations of underwriting standards and of certain key characteristics of the mortgage 47
loans across the Securitizations. The review demonstrates that the data concerning owner occupancy and LTV ratios was materially false and misleading. 1. 109. Owner-Occupancy Data Was Materially False
The data review has revealed that the owner-occupancy statistics reported in the
Prospectus Supplements were materially false and inflated. In fact, far fewer underlying properties were occupied by their owners than disclosed in the Prospectus Supplements, and more correspondingly were held as second homes or investment properties. 110. To determine whether a given borrower actually occupied the property as
claimed, a number of tests were conducted, including, inter alia, whether, months after the loan closed, the borrower’s tax bill was being mailed to the property or to a different address; whether the borrower had claimed a tax exemption on the property; and whether the mailing address of the property was reflected in the borrower’s credit reports, tax records, or lien records. Failing two or more of these tests is a strong indication that the borrower did not live at the mortgaged property and instead used it as a second home or an investment property, both of which make it much less likely the borrower will repay the loan. 111. A significant number of the loans failed two or more of these tests, indicating that
the owner-occupancy statistics provided to Fannie Mae and Freddie Mac were materially false and misleading. For example, in GSAA 2006-4, for which Goldman Sachs Mortgage Company was the sponsor and Goldman, Sachs & Co. was the underwriter, the Prospectus Supplement stated that 21.94 percent of the underlying properties by loan count in the Supporting Loan Group were not owner-occupied, and therefore 78.06 percent were owner-occupied. The data review revealed that 17.07 percent of the properties represented as owner-occupied in the sample showed strong indications that their owners lived elsewhere. Therefore, recalculating that an additional 17.07 percent of the 78.06 percent of loans represented as owner occupied in the 48
Supporting Loan Group were in fact not owner occupied, indicates that the true percentage of non-owner-occupied properties was 35.27 percent, nearly double the percentage reported in the Prospectus Supplement.14 112. The data review revealed that for each Securitization, the Prospectus Supplement
misrepresented the percentage of non-owner-occupied properties, as determined by the data review. The true percentage of non-owner-occupied properties versus the percentage stated in the Prospectus Supplement for each Securitization is reflected in Table 6 below. Table 6 demonstrates that the Prospectus Supplements for each Securitization understated the percentage of non-owner-occupied properties by at least 5.96 percent, and for many Securitizations by 10 percent or more.
Table 6
Reported Percentage of NonOwner-Occupied Properties 5.79 42.10 5.94 4.01 0.00 13.77 44.52 55.52 31.58 25.52 2.49 21.94 32.90 47.20 Percentage of Properties Reported as Owner-Occupied With Strong Indication of NonOwner Occupancy15 11.10 19.96 8.25 10.96 10.56 12.09 16.67 13.39 14.48 16.23 12.00 17.07 13.17 12.38 Prospectus Percentage Understatement of Non-Owner-Occupied Properties 10.46 11.56 7.76 10.52 10.56 10.42 9.24 5.96 9.91 12.10 11.71 13.32 8.84 6.54
Transaction
Supporting Loan Group
Actual Percentage of Non-OwnerOccupied Properties 16.25 53.66 13.70 14.53 10.56 24.20 53.76 61.48 41.48 37.62 14.20 35.27 41.74 53.74
ACCR 2005-4 AHMA 2006-1 FFML 2005-FF11 FFML 2005-FF8 FFML 2006-FF13 FHLT 2006-E GSAA 2005-11 GSAA 2005-14 GSAA 2005-15 GSAA 2006-11 GSAA 2006-2 GSAA 2006-4 GSAA 2006-5 GSAA 2006-8
Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1
This conclusion is arrived at by summing (a) the stated non-owner-occupied percentage in the Prospectus Supplement (here, 21.94 percent) and (b) the product of (i) the stated owner-occupied percentage (here, 78.06 percent) and (ii) the percentage of the properties represented as owner-occupied in the sample that showed strong indications that their owners in fact lived elsewhere (here, 17.07 percent). As described more fully in paragraph 110, failing two or more tests of owner occupancy is a strong indication that the borrower did not live at the mortgaged property and instead used it as a second home or an investment property.
15
14
49
Transaction
Reported Percentage of NonOwner-Occupied Properties 42.06 9.30 11.06 8.30 4.09 4.68 5.62 11.16 10.75 10.73 13.96 5.52 8.96 12.26 7.04 11.69 10.16 10.52 11.96 8.20 20.60 16.15 29.39 33.78 9.31 16.81
GSAA 2007-6 GSAMP 2005-AHL2 GSAMP 2005-HE5 GSAMP 2005-HE6 GSAMP 2005WMC2 GSAMP 2005WMC3 GSAMP 2006-FM1 GSAMP 2006-FM2 GSAMP 2006-FM3 GSAMP 2006-HE3 GSAMP 2006-HE4 GSAMP 2006-HE5 GSAMP 2006-HE7 GSAMP 2006-HE8 GSAMP 2006-NC216 GSAMP 2007-FM1 GSAMP 2007-FM2 GSAMP 2007-HE1 GSAMP 2007-HE2 GSAMP 2007-NC1 GSR 2006-OA1 GSR 2007-AR2 GSR 2007-OA1 GSR 2007-OA2 INDX 2005-AR18 INDX 2005-AR27
Group 3 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 6 Group 1 Group 1 Group 1 Group 2
Percentage of Properties Reported as Owner-Occupied With Strong Indication of NonOwner Occupancy15 11.76 12.16 9.98 13.25 11.38 11.73 13.75 12.86 10.88 8.84 12.50 12.96 9.27 11.55 10.68 11.81 11.47 10.22 8.86 9.76 15.21 20.19 15.15 16.01 14.69 15.61
Actual Percentage of Non-OwnerOccupied Properties 48.88 20.33 19.94 20.44 15.00 15.86 18.59 22.58 20.46 18.62 24.71 17.77 17.39 22.39 16.97 22.12 20.47 19.66 19.76 17.15 32.68 33.08 40.09 44.38 22.63 29.79
Prospectus Percentage Understatement of Non-Owner-Occupied Properties 6.82 11.03 8.88 12.14 10.91 11.18 12.97 11.42 9.71 7.89 10.75 12.25 8.43 10.13 9.93 10.43 10.31 9.14 7.80 8.95 12.08 16.93 10.70 10.60 13.32 12.99
2. 113.
LTV Data Was Materially False
The data review has further revealed that the LTV ratios disclosed in the
Prospectus Supplements were materially false and understated as more specifically set out
As described in note 9, supra, the GSAMP 2006-NC2 Prospectus Supplement misstates all relevant characteristics associated with the Supporting Loan Group. Specifically, the section of the GSAMP 2006-NC2 Prospectus Supplement that purports to provide statistical information about Loan Group 1 (which collateralized the GSE Certificates that Fannie Mae purchased) in fact describes, not the applicable Supporting Loan Group, but the entire Securitization. As a consequence, the Prospectus Supplement misstates information about, among other things, the number of loans in the group, the distributions by LTV and CLTV, the distribution by owner occupancy, the distribution by current principal balance, the distribution by current principal rate, the distribution by FICO credit score, the distribution by lien, the distribution by documentation, the distribution by purpose of the loan, the distribution by property type, the distribution by state, the distribution by zip code, and numerous other relevant factors. Such gross misstatements of the relevant characteristics of the Securitization’s collateral provide further evidence of Defendants’ lack of care and due diligence.
16
50
below. For each of the sampled loans, an industry standard automated valuation model (“AVM”) was used to calculate the value of the underlying property at the time the mortgage loan was originated. AVMs are routinely used in the industry as a way of valuing properties during prequalification, origination, portfolio review and servicing. AVMs rely upon similar data as appraisers—primarily county assessor records, tax rolls, and data on comparable properties.17 AVMs produce independent, statistically derived valuation estimates by applying modeling techniques to this data. 114. Applying the retroactive AVM to the available data for the properties securing the
sampled loans shows that the appraised value given to such properties at the time of origination was significantly higher than the actual value of such properties. The result of this overstatement of property values is a material understatement of the LTV ratios. That is, if a property’s true value is significantly less than the value used in the loan underwriting, then the loan represents a significantly higher percentage of the property’s value. This, of course, increases the risk a borrower will not repay the loan and the risk of greater losses in the event of a default. As stated in the Prospectus Supplement for GSAA 2006-8: “Mortgage loans with higher original loan-tovalue ratios may present a greater risk of loss than mortgage loans with original loan-to-value ratios of 80% or below.” 115. For GSAA 2006-2, for example, which was sponsored by Goldman Sachs
Mortgage Company and underwritten by Goldman, Sachs & Co., the Prospectus Supplement stated that no LTV ratios for the Supporting Loan Group were above 100 percent. In fact, 20.79 percent of the sample of loans included in the data review had LTV ratios above 100 percent, meaning that the amount of the underlying mortgage was more than the value of the property. In
17
Where no AVM data was available, the appraised value was used.
51
addition, the GSAA 2006-2 Prospectus Supplement stated that 60.24 percent of the loans had LTV ratios at or below 80 percent. The data review indicated that only 27.80 percent of the loans had LTV ratios at or below 80 percent. 116. The data review revealed that for each Securitization, the Prospectus Supplement
misstated several key statistics, including (i) the percentage of loans that had LTV ratios at or below 80 percent, and (ii) the percentage of loans that had LTV ratios above 100 percent. Table 7 reflects (i) the true percentage of mortgages in the Supporting Loan Group with LTV ratios at or below 80 percent, versus the percentage as reported in the Prospectus Supplement; and (ii) the true percentage of mortgages in the Supporting Loan Group with LTV ratios above 100 percent, versus the percentage as reported in the Prospectus Supplement. The percentages listed in Table 7 were calculated by aggregate principal balance.
Table 7
PROSPECTUS Percentage of Loans Reported to Have LTV Ratio At or Less Than 80% 79.52 84.90 91.49 56.61 68.93 54.11 88.20 93.87 89.93 91.47 60.24 94.93 94.71 79.43 96.98 57.58 68.15 51.58 70.77 DATA REVIEW True Percentage of Loans With LTV Ratio At or Less Than 80% 50.71 48.58 64.75 45.37 41.03 31.23 56.87 55.30 51.05 53.42 27.80 57.62 54.38 51.84 44.37 39.60 42.68 37.28 38.67 PROSPECTUS Percentage of Loans Reported to Have LTV Ratio Over 100 0.00 0.00 0.00 0.00 0.00 0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 DATA REVIEW True Percentage of Loans With LTV Ratio Over 100% 10.14 11.98 2.97 11.63 13.78 23.53 6.95 6.23 7.56 4.70 20.79 6.69 6.09 8.97 14.35 15.35 11.38 15.37 14.78
Transaction ACCR 2005-4 AHMA 2006-1 FFML 2005-FF11 FFML 2005-FF8 FFML 2006-FF13 FHLT 2006-E GSAA 2005-11 GSAA 2005-14 GSAA 2005-15 GSAA 2006-11 GSAA 2006-2 GSAA 2006-4 GSAA 2006-5 GSAA 2006-8 GSAA 2007-6 GSAMP 2005-AHL2 GSAMP 2005-HE5 GSAMP 2005-HE6 GSAMP 2005WMC2
Supporting Loan Group Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 3 Group 1 Group 1 Group 1 Group 1
52
Transaction GSAMP 2005WMC3 GSAMP 2006-FM1 GSAMP 2006-FM2 GSAMP 2006-FM3 GSAMP 2006-HE3 GSAMP 2006-HE4 GSAMP 2006-HE5 GSAMP 2006-HE7 GSAMP 2006-HE8 GSAMP 2006-NC218 GSAMP 2007-FM1 GSAMP 2007-FM2 GSAMP 2007-HE1 GSAMP 2007-HE2 GSAMP 2007-NC1 GSR 2006-OA1 GSR 2007-AR2 GSR 2007-OA1 GSR 2007-OA2 INDX 2005-AR18 INDX 2005-AR27
Supporting Loan Group Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 6 Group 1 Group 1 Group 1 Group 2
PROSPECTUS Percentage of Loans Reported to Have LTV Ratio At or Less Than 80% 70.06 60.16 66.94 60.86 67.69 57.61 67.62 61.99 61.21 56.07 56.47 57.71 39.37 46.03 58.37 93.41 84.03 82.23 83.17 96.84 93.95
DATA REVIEW True Percentage of Loans With LTV Ratio At or Less Than 80% 40.17 36.41 43.17 39.06 38.98 36.15 36.03 33.74 32.58 37.13 36.70 35.48 24.29 29.42 37.35 52.91 51.27 48.89 40.57 66.76 55.40
PROSPECTUS Percentage of Loans Reported to Have LTV Ratio Over 100 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
DATA REVIEW True Percentage of Loans With LTV Ratio Over 100% 14.63 20.59 15.49 19.51 16.21 13.36 18.14 18.13 21.33 19.54 23.44 23.20 27.36 23.20 20.65 8.39 5.74 16.45 22.50 5.70 5.87
117.
As Table 7 demonstrates, the Prospectus Supplements for all of the
Securitizations reported that only one of the mortgage loans in the Supporting Loan Groups had an LTV ratio over 100 percent.19 In contrast, the data review revealed that at least 2.97 percent of the mortgage loans for each Securitization had an LTV ratio over 100 percent, and for most Securitizations this figure was much larger. Indeed, for 28 of the 42 GSE Certificates, the data
As described in note 16, supra, the GSAMP 2006-NC2 Prospectus Supplement misstated all the statistical and tabular information about the Supporting Loan Group. As noted above, the only Securitization reporting in its respective Prospectus Supplement any mortgage loans with an LTV ratio over 100 percent was FHLT 2006-E, and in that case, only 0.01 percent of its mortgage loans were reported to have an LTV ratio in excess of 100 percent, in comparison to the 23.53 percent that the AVM revealed.
19
18
53
review revealed that at least 10 percent of the mortgages in the Supporting Loan Group had a true LTV ratio over 100 percent. For 10 of the 42 GSE Certificates, the data review revealed that at least 20 percent of the mortgages in the Supporting Loan Group had a true LTV ratio over 100 percent. 118. These inaccuracies with respect to reported LTV ratios also indicate that the
statements in the Registration Statements relating to appraisal practices were false, and that the appraisers themselves, in many instances, furnished appraisals that they understood were inaccurate and that they knew bore no reasonable relationship to the actual value of the underlying properties. Indeed, independent appraisers following proper practices, and providing genuine estimates as to valuation, would not systematically generate appraisals that deviate so significantly (and so consistently upward) from the true values of the appraised properties. This conclusion is further confirmed by the findings of the Financial Crisis Inquiry Commission, which identified “inflated appraisals” as a pervasive problem during the period of the Securitizations, and determined through its investigation that appraisers were often pressured by mortgage originators, among others, to produce inflated results. See Financial Crisis Inquiry Commission, Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (2011). B. 119. The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines
The Registration Statements contained material misstatements and omissions
regarding compliance with applicable underwriting guidelines. Indeed, the originators for the loans underlying the Securitizations systematically disregarded their respective underwriting guidelines in order to increase production and profits derived from their mortgage-lending businesses. This is confirmed by the systematically misreported owner occupancy and LTV 54
statistics, discussed above, and by (1) government investigations into originators’ underwriting practices, which have revealed widespread abandonment of originators’ reported underwriting guidelines during the relevant period; (2) the collapse of the GSE Certificates’ credit ratings; and (3) the surge in delinquency and default in the mortgages in the Securitizations. 1. Government Investigations Have Confirmed That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines
120.
The abandonment of underwriting guidelines is further confirmed by several
government reports and investigations that have described rampant underwriting failures throughout the period of the Securitizations, and, more specifically, have described underwriting failures by the very originators whose loans were included by the Defendants in the Securitizations. 121. For instance, in November 2008, the Office of the Comptroller of the Currency,
an office within the United States Department of the Treasury, issued a report identifying the “Worst Ten” mortgage originators in the “Worst Ten” metropolitan areas. The worst originators were defined as those with the largest number of non-prime mortgage foreclosures for 2005– 2007 originations. Countrywide, Fremont, IndyMac, WMC, and GreenPoint, which originated many of the loans for the Securitizations at issue here, were on that list. See “Worst Ten in the Worst Ten,” Office of the Comptroller of the Currency Press Release (Nov. 13, 2008), available at http://www.occ.treas.gov/news-issuances/news-releases/2009/nr-occ-2009-112b.pdf. 122. Countrywide originated loans for at least 10 of the Securitizations. In January
2011, the FCIC issued its final report, which detailed, among other things, the collapse of mortgage underwriting standards and subsequent collapse of the mortgage market and wider economy. See Financial Crisis Inquiry Commission, Final Report of the National Commission
55
of the Causes of the Financial and Economic Crisis in the United States (2011) (“FCIC Report”). The FCIC Report singled out Countrywide for its role: Lenders made loans that they knew borrowers could not afford and that could cause massive losses to investors in mortgage securities. As early as September 2004, Countrywide executives recognized that many of the loans they were 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. But they did not stop. See FCIC Report, at xxii. 123. Countrywide has also been the subject of several investigations and actions
concerning its lax and deficient underwriting practices. In June 2009, for instance, the SEC initiated a civil action against Countrywide executives Angelo Mozilo (founder and Chief Executive Officer), David Sambol (Chief Operating Officer), and Eric Sieracki (Chief Financial Officer) for securities fraud and insider trading. In a September 16, 2010 opinion denying these defendants’ motions for summary judgment, the United States District Court for the Central District of California found that the SEC raised genuine issues of fact as to, among other things, whether the defendants had misrepresented the quality of Countrywide’s underwriting processes. The court noted that the SEC presented evidence that Countrywide “routinely ignored its official underwriting to such an extent that Countrywide would underwrite any loan it could sell into the secondary mortgage market,” and that “a significant portion (typically in excess of 20%) of Countrywide’s loans were issued as exceptions to its official underwriting guidelines ….” The court concluded that “a reasonable jury could conclude that Countrywide all but abandoned managing credit risk through its underwriting guidelines ….” SEC v. Mozilo, No. CV 09-3994, 2010 WL 3656068, at *10 (C.D. Cal. Sept. 16, 2010). Mozilo, Sambol, and Sieracki subsequently settled with the SEC. 56
124.
The testimony and documents only recently made available to the GSEs by way
of the SEC’s investigation confirm that Countrywide was systematically abusing “exceptions” and low-documentation processes in order to circumvent its own underwriting standards. For example, in an April 13, 2006 e-mail, Mozilo wrote to Sieracki and others that he was concerned that certain subprime loans had been originated “with serious disregard for process [and] compliance with guidelines,” resulting in the delivery of loans “with deficient documentation.” Mozilo further stated that “I have personally observed a serious lack of compliance within 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].” 125. On October 4, 2007, the Commonwealth of Massachusetts, through its Attorney
General, brought an enforcement action against Fremont, which originated loans for at least eight of the Securitizations, for an array of “unfair and deceptive business conduct,” “on a broad scale.” See Complaint, Commonwealth v. Fremont Inv. & Loan & Fremont Gen. Corp., No. 074373 (Mass. Super. Ct.) (“Fremont Complaint”). According to the complaint, Fremont (i) “approve[ed] borrowers without considering or verifying the relevant documentation related to the borrower’s credit qualifications, including the borrower’s income”; (ii) “approv[ed] borrowers for loans with inadequate debt-to-income analyses that do not properly consider the borrowers’ ability to meet their overall level of indebtedness and common housing expenses”; (iii) “failed to meaningfully account for [ARM] payment adjustments in approving and selling loans”; (iv) “approved borrowers for these ARM loans based only on the initial fixed ‘teaser’ rate, without regard for borrowers’ ability to pay after the initial two year period”; (v) “consistently failed to monitor or supervise brokers’ practices or to independently verify the information provided to Fremont by brokers”; and (vi) “ma[de] loans based on information that
57
Fremont knew or should have known was inaccurate or false, including, but not limited to, borrowers’ income, property appraisals, and credit scores.” See Fremont Complaint. 126. On December 9, 2008, the Supreme Judicial Court of Massachusetts affirmed a
preliminary injunction that prevented Fremont from foreclosing on thousands of its loans issued to Massachusetts residents. As a basis for its unanimous ruling, the Supreme Judicial Court found that the record supported the lower court’s conclusions that “Fremont made no effort to determine whether borrowers could ‘make the scheduled payments under the terms of the loan,’” and that “Fremont knew or should have known that [its lending practices and loan terms] would operate in concert essentially to guarantee that the borrower would be unable to pay and default would follow.” Commonwealth v. Fremont Inv. & Loan, 897 N.E.2d 548, 556 (Mass. 2008). The terms of the preliminary injunction were made permanent by a settlement reached on June 9, 2009. 127. IndyMac, which originated the loans for at least two of the Securitizations, was
the subject of a February 26, 2009 report issued by the Office of Inspector General (“OIG”) of the U.S. Department of Treasury entitled “Safety and Soundness: Material Loss Review of IndyMac Bank, FSB” (the “OIG Report”). The OIG Report found that IndyMac Bank had “embarked on a path of aggressive growth” that was supported by its high risk business strategy of “originating … Alt-A loans on a large scale” and then “packag[ing] them together in securities” and selling “them on the secondary market” to investors. OIG Report at 2, 6, 7. The OIG Report further stated that: “To facilitate this level of [loan] production … IndyMac often did not perform adequate underwriting.” Id. at 2. 128. A June 30, 2008 report issued by the Center for Responsible Lending (“CRL”)
also found that IndyMac Bank often ignored its stated underwriting and appraisal standards and
58
encouraged its employees to approve loans regardless of the borrower’s ability to repay them. See Center for Responsible Lending, IndyMac: What Went Wrong? How an ‘Alt-A’ Leader Fueled its Growth with Unsound and Abusive Mortgage Lending (Jun. 30, 2008) (the “CRL Report”). For example, the CRL Report noted that IndyMac Bank “engaged in unsound and abusive lending practices” and “allowed outside mortgage brokers and in-house sales staffers to inflate applicants’ [financial information] … [to] make them look like better credit risks.” See CRL Report at 2, 8. 129. WMC, which originated the loans for at least two of the Securitizations, employed
reckless underwriting standards and practices, as described more fully below, that resulted in a huge amount of foreclosures, ranking WMC fourth in the report presented to the FCIC in April 2010 identifying the “Worst Ten” mortgage originators in the “Worst Ten” metropolitan areas. See “Worst Ten in the Worst Ten,” Office of the Comptroller of the Currency Press Release, November 13, 2008. General Electric, which had purchased WMC in 2004, closed down operations at WMC in late 2007 and took a $1.4 billion charge in the third quarter of that year. See, e.g., Diane Brady, Adventures of a Subprime Survivor, Bloomberg Businessweek, Oct. 29, 2007, available at http://www.businessweek.com/magazine/content/07_44/b4056074.htm. 130. WMC’s reckless loan originating practices were noticed by regulatory authorities.
In June 2008, the Washington State Department of Financial Institutions, Division of Consumer Services filed a Statement of Charges and Notice of Intention to Enter an Order to Revoke License, Prohibit From Industry, Impose Fine, Order Restitution and Collect Investigation Fees (the “Statement of Charges”) against WMC Mortgage and its principal owners individually. See Statement of Charges, No. C-07-557-08-SC01, Jun. 4, 2008. The Statement of Charges included 86 loan files, which revealed that at least 76 loans were defective or otherwise in violation of
59
Washington state law. Id. Among other things, the investigation uncovered that WMC had originated loans with unlicensed or unregistered mortgage brokers, understated amounts of finance charges on loans, understated amounts of payments made to escrow companies, understated annual percentage rates to borrowers and committed many other violations of Washington State deceptive and unfair practices laws. Id. 131. GreenPoint, which originated the underlying mortgage loans for at least seven of
the Securitizations, systematically disregarded its underwriting standards, granted exceptions in the absence of compensating factors, required less documentation, and granted no-documentation or limited-documentation loans to individuals without sound credit histories. In November 2008, Businessweek Magazine reported that GreenPoint’s employees and independent mortgage brokers targeted borrowers who were less able to afford the loan payments they were required to make, and many had no realistic ability to pay back the loans. GreenPoint Mortgage Funding, Inc.’s parent corporation, Capital One Financial Corp., eventually liquidated GreenPoint in December 2008, taking an $850 million write-down due to mortgage-related losses associated with GreenPoint’s origination business. 132. GreenPoint’s pervasive disregard of underwriting standards resulted in its
inclusion among the worst ten originators in the 2008 “Worst Ten in the Worst Ten” Report. GreenPoint was identified 7th worst in Stockton, California, and 9th worst in both Sacramento, California, and Las Vegas, Nevada. In the 2009 “Worst Ten in the Worst Ten” Report, GreenPoint was listed as 3rd worst in Modesto, California, 4th worst in Stockton, Merced, and Vallejo-Fairfield-Napa, California, 6th worst in Las Vegas, Nevada; and 9th in Reno, Nevada. 133. GreenPoint is now a defendant in numerous lawsuits alleging misrepresentations
regarding the quality of the loans GreenPoint underwrote and originated. For example, in U.S.
60
Bank Nat’l Ass’n v. GreenPoint Mortgage Funding, Inc., No. 09-600352 (N.Y. Sup. Ct. filed Apr. 22, 2009), a consultant’s investigation concluded that 93 percent of the loans that GreenPoint sold contained errors, omissions, misrepresentations, and negligence related to origination and underwriting. The investigation found that GreenPoint loans suffered from serious defects including:   Pervasive misrepresentations and/or negligence with respect to the statement of the income, assets or employment of the borrower. Violations of GreenPoint’s own underwriting guidelines and prudent mortgage lending practices, including loans made to borrowers (i) who made unreasonable claims as to their income, (ii) with multiple, unverified social security numbers, (iii) with credit scores below the required minimum, (iv) with debt-to-income and/or loan-to-value ratios above the allowed maximum or (v) with relationships to GreenPoint or other non-arm’s-length relationships. Misrepresentations of the borrower’s intent to occupy the property as the borrower’s residence and subsequent failure to so occupy the property. Inflated appraisal values.
 
On March 3, 2010, the court denied GreenPoint’s motion to dismiss this claim, holding that discovery would be required to determine whether GreenPoint would be required under the parties’ contract to repurchase all 30,000 loans based on the deficiencies in individual loans identified by U.S. Bank. 134. New Century and its subsidiary, Home123, originated loans for at least one of the
Securitizations. As stated in the GSAMP 2006-NC2 Prospectus Supplement, “[f]or the year ending December 31, 2005, New Century Financial Corporation originated $56.1 billion in mortgage loans.” And before its collapse in the first half of 2007, New Century was one of the largest subprime lenders in the country. 135. In 2010, the OCC identified New Century as the worst subprime lender in the
country based on the delinquency rates of the mortgages it originated in the ten metropolitan 61
areas between 2005 and 2007 with the highest rates of delinquency. See “Worst Ten in the Worst Ten,” Office of the Comptroller of the Currency Press Release (Nov. 13, 2008), available at http://www.occ.treas.gov/news-issuances/news-releases/2009/nr-occ-2009-112b.pdf. Further, in January 2011, the FCIC issued its final report, which detailed, among other things, the collapse of mortgage underwriting standards and subsequent collapse of the mortgage market and wider economy. See FCIC Report. The FCIC Report singled out New Century for its role: New Century—once the nation’s second-largest subprime lender—ignored early warnings that its own loan quality was deteriorating and stripped power from two risk-control departments that had noted the evidence. In a June 2004 presentation, the Quality Assurance staff reported they had found severe underwriting errors, including evidence of predatory lending, federal and state violations, and credit issues, in 25% of the loans they audited in November and December 2003. In 2004, Chief Operating Officer and later CEO Brad Morrice recommended these results be removed from the statistical tools used to track loan performance, and in 2005, the department was dissolved and its personnel terminated. The same year, the Internal Audit department identified numerous deficiencies in loan files; out of nine reviews it conducted in 2005, it gave the company’s loan production department “unsatisfactory” ratings seven times. Patrick Flanagan, president of New Century’s mortgage-originating subsidiary, cut the department’s budget, saying in a memo that the “group was out of control and tries to dictate business practices instead of audit.” 136. On February 29, 2008, after an extensive document review and conducting over
100 interviews, Michael J. Missal, the Bankruptcy Court Examiner for New Century, issued a detailed report on the various deficiencies at New Century, including lax mortgage standards and a failure to follow its own underwriting guidelines. Among his findings, the Examiner reported:  “New Century had a brazen obsession with increasing loan originations, without due regard to the risks associated with that business strategy …. Although a primary goal of any mortgage banking company is to make more loans, New Century did so in an aggressive manner that elevated the risks to dangerous and ultimately fatal levels.” New Century also made frequent exceptions to its underwriting guidelines for borrowers who might not otherwise qualify for a 62

particular loan. A senior officer of New Century warned in 2004 that the “number one issue is exceptions to the guidelines.” Moreover, many of the appraisals used to value the homes that secured the mortgages had deficiencies.  “New Century … layered the risks of loan products upon the risks of loose underwriting standards in its loan originations to high risk borrowers.”
Final Report of Michael J. Missal, Bankruptcy Examiner, In re New Century TRS Holdings, Inc., No. 07-10416 (KJC) (Bankr. Del. Feb. 29, 2008), available at http://graphics8.nytimes.com/ packages/pdf/business/Final_Report_New_Century.pdf. 137. On December 9, 2009, the SEC charged three of New Century’s top officers with
violations of federal securities laws. The SEC’s complaint details how New Century’s representations regarding its underwriting guidelines, e.g., that New Century was committed to “adher[ing] to high origination standards in order to sell [its] loan products in the secondary market” and “only approv[ing] subprime loan applications that evidence a borrower’s ability to repay the loan,” were blatantly false. 138. Patricia Lindsay, a former Vice President of Corporate Risk at New Century,
testified before the FCIC in April 2010 that, beginning in 2004, underwriting guidelines had been all but abandoned at New Century. Ms. Lindsay further testified that New Century systematically approved loans with 100 percent financing to borrowers with extremely low credit scores and no supporting proof of income. See Written Testimony of Patricia Lindsay for the FCIC Hearing, April 7, 2010, http://fcic-static.law.stanford.edu/cdn-media/fcic.testimony/20100407-Lindsay.pdf, at 3. 139. The originators of the mortgage loans underlying the Securitizations went beyond
the systematic disregard of their own underwriting guidelines. Indeed, as the FCIC has confirmed, mortgage loan originators throughout the industry pressured appraisers, during the 63
period of the Securitizations, to issue inflated appraisals that met or exceeded the amount needed for the subject loans to be approved, regardless of the accuracy of such appraisals, and especially when the originators aimed at putting the mortgages into a package of mortgages that would be sold for securitization. This resulted in lower LTV ratios, discussed above, which in turn made the loans appear to the investors less risky than they were. 140. As described by New Century’s Patricia Lindsay, appraisers “fear[ed]” for their
“livelihoods,” and therefore cherry-picked data “that would help support the needed value rather than finding the best comparables to come up with the most accurate value.” See Written Testimony of Patricia Lindsay to the FCIC, at 5 (Apr. 7, 2010). Likewise, Jim Amorin, President of the Appraisal Institute, confirmed in his testimony that “[i]n many cases, appraisers are ordered or severely pressured to doctor their reports and to convey a particular, higher value for a property, or else never see work from those parties again …. [T]oo often state licensed and certified appraisers are forced into making a ‘Hobson’s Choice.’” See Testimony of Jim Amorin to the FCIC, available at www.appraisalinstitute.org/newsadvocacy/downloads/ltrs_tstmny/ 2009/AI-ASA-ASFMRA-NAIFATestimonyonMortgageReform042309final.pdf. Faced with this choice, appraisers systematically abandoned applicable guidelines and over-valued properties in order to facilitate the issuance of mortgages that could then be collateralized into mortgagebacked securities. 2. The Collapse of the GSE Certificates’ Credit Ratings Further Indicates that the Mortgage Loans Were not Originated in Adherence to the Stated Underwriting Guidelines
141.
The total collapse in the credit ratings of the GSE Certificates, typically from
AAA or its equivalent to non-investment speculative grade, is further evidence of the originators’ systematic disregard of underwriting guidelines, indicating that the GSE Certificates were impaired from the start. 64
142.
The GSE Certificates that Fannie Mae and Freddie Mac purchased were originally
assigned credit ratings of AAA or its equivalent, which purportedly reflected the description of the mortgage loan collateral and underwriting practices set forth in the Registration Statements. These ratings were artificially inflated, however, as a result of the very same misrepresentations that the Defendants made to investors in the Prospectus Supplements. 143. Goldman provided or caused to be provided loan-level information to the rating
agencies that they relied upon in order to calculate the Certificates’ assigned ratings, including the borrower’s LTV ratio, debt-to-income ratio, owner-occupancy status, and other loan-level information described in aggregation reports in the Prospectus Supplements. Because the information that Goldman provided or caused to be provided was false, the ratings were inflated and the level of subordination that the rating agencies required for the sale of AAA or its equivalent certificates was inadequate to provide investors with the level of protection that those ratings signified. As a result, the GSEs paid Defendants inflated prices for purported AAA (or its equivalent) Certificates, unaware that those Certificates actually carried a severe risk of loss and inadequate credit enhancement. 144. Since the issuance of the GSE Certificates, the ratings agencies have dramatically
downgraded their ratings to reflect the revelations regarding the true underwriting practices used to originate the mortgage loans, and the true value and credit quality of the mortgage loans. Table 8 details the extent of the downgrades.20
Applicable ratings are shown in sequential order separated by forward slashes: Moody’s/S&P/Fitch. A hyphen after a forward-slash indicates that the relevant agency did not provide a rating at issuance.
20
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Table 8
Transaction ACCR 2005-4 AHMA 2006-1 AHMA 2006-1 FFML 2005-FF11 FFML 2005-FF8 FFML 2006-FF13 FHLT 2006-E GSAA 2005-11 GSAA 2005-14 GSAA 2005-14 GSAA 2005-15 GSAA 2006-11 GSAA 2006-2 GSAA 2006-4 GSAA 2006-5 GSAA 2006-8 GSAA 2007-6 GSAMP 2005-AHL2 GSAMP 2005-HE5 GSAMP 2005-HE6 GSAMP 2005-WMC2 GSAMP 2005-WMC3 GSAMP 2006-FM1 GSAMP 2006-FM2 GSAMP 2006-FM3 GSAMP 2006-HE3 GSAMP 2006-HE4 GSAMP 2006-HE5 GSAMP 2006-HE7 GSAMP 2006-HE8 GSAMP 2006-NC2 GSAMP 2007-FM1 GSAMP 2007-FM2 GSAMP 2007-HE1 GSAMP 2007-HE2 GSAMP 2007-NC1 GSR 2006-OA1 GSR 2007-AR2 GSR 2007-OA1 GSR 2007-OA2 INDX 2005-AR18 INDX 2005-AR27 Tranche A1 1A1 1A2 A1 A1 A1 1A1 1A1 1A1 1A2 1A1 1A1 1A1 1A1 1A1 1A1 3A1A A1A A1 A1 A1A A1A A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 1A1 6A1 1A1 1A1 1A1 2A1 Ratings at Issuance (Moody’s/S&P/Fitch) Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/---/AAA/AAA Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Ratings as of July 31, 2011 (Moody’s/S&P/Fitch) A3/AAA/-Ca/D/-Caa2/CCC/-Baa1/AAA/-A1/AAA/-Caa2/ CCC/-Ca/CCC/C B3/A+/-Caa3/B-/-C/CCC/-Caa2/CCC/-Ca/CCC/-Caa2/B/-Caa3/CCC/-Ca/CCC/-Ca/CCC/-Caa2/CCC/-Ba1/A/-Aa2/AAA/-A2/AA-/-Aaa/AAA/-Caa1/A-/-Ca/CCC/-Ca/CCC/-Ca/CCC/-Caa1/A-/-Caa2/BB+/-Caa1/BBB/-Caa2/CCC/-Caa3/B-/-Ca/CCC/-Ca/CCC/-Ca/CCC/-Caa3/BBB+/-Caa3/B-/-Ca/CCC/-Ca/CCC/---/CCC/C Caa3/CCC/-Ca/CCC/-Caa2/BB+/-Ca/D/--
3.
The Surge in Mortgage Delinquencies and Defaults Further Demonstrates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines
145.
Even though the Certificates purchased by Fannie Mae and Freddie Mac were
supposed to represent long-term, stable investments, a significant percentage of the mortgage loans backing the Certificates have defaulted, have been foreclosed upon, or are delinquent, resulting in massive losses to the Certificateholders. The overall poor performance of the
66
mortgage loans is a direct consequence of the fact that they were not underwritten in accordance with the applicable underwriting guidelines as represented in the Registration Statements. 146. Loan groups that were properly underwritten and contained loans with the
characteristics represented in the Registration Statements would have experienced substantially fewer payment problems and substantially lower percentages of defaults, foreclosures, and delinquencies than occurred here. Table 9 reflects the percentage of loans in the Supporting Loan Groups that are in default, have been foreclosed on, or are delinquent as of July 2011.
Table 9
Transaction ACCR 2005-4 AHMA 2006-1 FFML 2005-FF11 FFML 2005-FF8 FFML 2006-FF13 FHLT 2006-E GSAA 2005-11 GSAA 2005-14 GSAA 2005-15 GSAA 2006-11 GSAA 2006-2 GSAA 2006-4 GSAA 2006-5 GSAA 2006-8 GSAA 2007-6 GSAMP 2005-AHL2 GSAMP 2005-HE5 GSAMP 2005-HE6 GSAMP 2005-WMC2 GSAMP 2005-WMC3 GSAMP 2006-FM1 GSAMP 2006-FM2 GSAMP 2006-FM3 GSAMP 2006-HE3 GSAMP 2006-HE4 GSAMP 2006-HE5 GSAMP 2006-HE7 GSAMP 2006-HE8 GSAMP 2006-NC2 GSAMP 2007-FM1 GSAMP 2007-FM2 GSAMP 2007-HE1 GSAMP 2007-HE2 GSAMP 2007-NC1 GSR 2006-OA1 GSR 2007-AR2 GSR 2007-OA1 GSR 2007-OA2 INDX 2005-AR18 INDX 2005-AR27 Supporting Loan Group Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 3 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 6 Group 1 Group 1 Group 1 Group 2 Percentage of Delinquent/Defaulted/Foreclosed Loans (60 or more days delinquent) 31.20 31.90 50.20 46.30 50.20 55.70 27.30 22.80 40.70 47.50 53.40 40.80 40.40 43.70 40.20 37.70 49.90 38.50 47.00 53.20 53.40 55.50 53.60 50.50 43.90 45.90 47.60 48.50 36.20 54.50 50.90 51.50 46.00 49.30 47.60 14.50 45.30 51.50 34.30 24.70
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147.
The confirmed misstatements concerning owner occupancy and LTV ratios, the
confirmed systematic underwriting failures by the originators responsible for the mortgage loans across the Securitizations, and the extraordinary drop in credit ratings and rise in delinquencies across those Securitizations, all confirm that the mortgage loans in the Supporting Loan Groups, contrary to the representations in the Registration Statements, were not originated in accordance with the stated underwriting guidelines. V. 148. Goldman Sachs Knew Its Representations Were False The allegations in this Section V are made in support of Plaintiff’s common law
fraud and aiding and abetting fraud claims, and not in support of Plaintiff’s claims under (i) Sections 11, 12(a)(2) and 15 of the Securities Act, (ii) Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, (iii) Sections 31-5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, or (iv) negligent misrepresentation, which are based solely on strict liability and negligence. 149. The same evidence discussed above not only shows that the representations were
untrue, but also that Goldman Sachs knew, or was reckless in not knowing, that it was falsely representing the underlying process and riskiness of the mortgage loans that collateralized the GSE Certificates. As discussed above, such evidence includes:  The startling discrepancies in basic information about the underlying mortgage loans, such as owner occupancy and LTV statistics, demonstrates a systemic underwriting failure about which Goldman knew or was reckless in not knowing. Clayton, who acted as credit risk manager in many of the Securitizations, admitted that in the period from the first quarter of 2006 to the second quarter of 2007, 23 percent of the mortgage loans Goldman submitted to Clayton to review in RMBS loan pools were rejected by Clayton as falling outside the applicable underwriting guidelines. Of the 23 percent of mortgage loans that Clayton found defective, 29 percent of the loans were subsequently waived in by Goldman without 68


proper consideration and analysis of compensating factors and included in securitizations such as the ones in which Fannie Mae and Freddie Mac invested here. Goldman’s waiver of nearly a third of the defective loans shows that Goldman knew, or was reckless in not knowing, of the systemic failure in underwriting and misstatements in the offering materials received by the GSEs. A. 1. 150. Evidence Regarding Goldman’s Due Diligence Goldman’s Due Diligence Benefitted From a Direct Window Into the Originators’ Practices
Goldman benefited from a direct window into the lax origination practices that led
to the creation of the mortgage loans underlying the GSE Certificates. In connection with its purchase from the loan originators of the underlying mortgage loans in the 36 Securitizations it sponsored, Goldman performed due diligence to determine the quality of the loans it was purchasing. Goldman conducted due diligence on the originators it was purchasing loans from, and on the loans included in each offering to review compliance with the approved underwriting guidelines. 151. Goldman acquired the securitized loans through two primary channels: its
conduit program (pursuant to which it acquired mortgage loans from various banks, savings and loan associations, mortgage bankers and others) or bulk acquisitions in the secondary market. Goldman’s offering materials represented that, in both channels, Goldman conducted due diligence on the lenders who originated the loans, and carefully inspected their underwriting standards: “Prior to acquiring any residential mortgage loans, GSMC [Goldman Sachs Mortgage Company] will conduct a review of the related mortgage loan seller. GSMC’s review process consists of reviewing select financial information for credit and risk assessment and underwriting guideline review, senior level management discussion and background checks. The scope of the mortgage loan due diligence will depend on the credit quality of the mortgage loans.” GSAMP 2006-2 Prospectus Supplement, at S-62 (filed Jan. 26, 2006). The Prospectus Supplements 69
further provided that “[t]he underwriting guideline review considers mortgage loan origination processes and systems. In addition, such review considers corporate policy and procedures relating to HOEPA [i.e., high-rate, high-fee loans] and state and federal predatory lending, origination practices by jurisdiction, historical loan level loss experience, quality control practices, significant litigation and material investors.” Id. Similar representations were made in the Prospectus Supplements for the other GSE Certificates. 152. Goldman also stated that it re-underwrote sample pools of the loans it purchased
to determine whether they were originated in compliance with applicable underwriting guidelines. For example, in the GSAMP 2006-HE7 Prospectus Supplement, Goldman explained that it had the option to re-underwrite a sample of the RMBS loan pool: We may, in connection with the acquisition of mortgage loans, reunderwrite the mortgage loans based upon criteria we believe are appropriate depending to some extent on our or our affiliates’ prior experience with the lender and the servicer, as well as our prior experience with a particular type of loan or with loans relating to mortgaged properties in a particular geographical region. A standard approach to reunderwriting will be to compare loan file information and information that is represented to us on a tape with respect to a percentage of the mortgage loans we deem appropriate in the circumstances. GSAMP 2006-HE7 Prospectus Supplement, at S-29 (filed Oct. 31, 2006). Similar representations were made in the Prospectus Supplements relating to the other Goldmansponsored Securitizations. See also U.S. Senate Permanent Subcommittee on Investigations, Wall Street & The Financial Crisis: Anatomy of a Financial Collapse, at 483 (Apr. 13, 2011) (the “Senate PSI Report”) (“Goldman, either directly or through a third party due diligence firm, routinely conducted due diligence review of the mortgage loan pools it bought from lenders or third party brokers for use in its securitizations ….”). Thus, Goldman had access to the true quality of the loans collateralizing the Securitizations it sponsored.
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153.
The initial step, in many of the Securitizations, was often done with Goldman’s
funds, as Goldman provided “warehouse” lines of credit to originators. In other words, Goldman provided money to originators to fund the mortgages they were granting; Goldman’s warehouse loan was then repaid when the originator’s loan pool was sold to Goldman for securitization. As the FCIC found: Under Paulson’s leadership, Goldman Sachs had played a central role in the creation and sale of mortgage securities. From 2004 through 2006, the company provided billions of dollars in loans to mortgage lenders; most went to the subprime lenders Ameriquest, Long Beach, Fremont, New Century, and Countrywide through warehouse lines of credit, often in the form of repos. During the same period, Goldman acquired $53 billion of loans from these and other subprime loan originators, which it securitized and sold to investors. From 2004 to 2006, Goldman issued 318 mortgage securitizations totaling $184 billion (about a quarter were subprime) …. FCIC Report, at 142. Consequently, Goldman’s longstanding relationships with the problematic originators, and its numerous roles in the securitization chain, made it uniquely positioned to know the originators had abandoned their underwriting guidelines. 154. Goldman’s privileged position as a source of “warehouse” lines of credit gave it
unique knowledge of the conditions under which mortgage loans were originated. The lines of credit allowed Goldman to control the origination practices of these lenders and gave Goldman an inside look into the true quality of the loans they originated. As one industry publication explained, warehouse lenders like Goldman have “detailed knowledge of the lender’s operations.” Kevin Connor, Wall Street and the Making of the Subprime Disaster, at 11 (Nov. 2007). 155. These warehouse lines gave Goldman the inside track on acquiring the loans that
were generated using Goldman funds. Because of its financial arrangements with warehouse lenders, Goldman was essentially committed to buying the loans that secured its warehouse lines regardless of their quality and the results of Goldman’s due diligence. Indeed, Goldman needed 71
to purchase the loans with little or no objection to keep the lenders supplied with capital to pay fees and interest owed on the lines of credit. It was also important to Goldman that it protect its business relationships with warehouse lenders in order to ensure a steady flow of loans for securitization. Therefore, Goldman was incentivized to allow defective mortgages to remain in the securitizations because: (i) mortgage originators would not maintain a relationship with a bank that consistently kicked out large numbers of loans; and (ii) the securitization became smaller as loans were kicked out, thus decreasing the underwriting fees and other fees. 2. 156. Goldman Had Actual Knowledge, on a Daily Basis, of the Number of Non-Performing Loans
Documents recently released by Goldman’s third-party due diligence firm,
Clayton, confirm that Goldman was aware—on a daily basis—of the weakness in the loan pool and in the underwriting standards of the originators it used in its RMBS transactions. As discussed above, according to an internal Clayton “Trending Report” made public by the Government in conjunction with testimony given in September 2010, Goldman Sachs was informed that 23 percent of the loans Clayton reviewed for Goldman “failed to meet guidelines.” These loans were not subject to any proper “exceptions,” as they did not have any “compensating factors.” Rather, these loans were plainly defective. 157. Confronted with such a high failure rate, Goldman should have either rejected the
pool outright, or investigated whether that originator could be considered a trusted source of loans in the future. Even assuming Goldman incredibly believed a 23 percent failure rate could be chalked up to “sampling error” (e.g., due to the fact that Clayton Holdings did not review every loan in a pool), the proper response would have been to increase the sample size to test that hypothesis.
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158.
Goldman not only continued to work with problematic originators, but, rather
than expanding the sample size to truly investigate the problems, Goldman simply ignored and did not disclose the red flags revealed by Clayton’s review. According to Clayton’s “Trending Report,” Goldman “waived in” to its pools 29 percent of those toxic loans that Clayton had identified as being outside the guidelines. 159. Clayton’s “Trending Report” provides compelling evidence that Goldman knew it
was securitizing defective loans and selling the resulting securities to investors like Fannie Mae and Freddie Mac. According to the September 23, 2010 testimony of Clayton’s Vice President Vicki Beal, through its numerous roles of underwriter, sponsor, and depositor, Goldman was made fully aware on a regular basis that a significant percentage of its loans failed to meet stated underwriting guidelines, but were being included anyway in the pools underlying securities sold to investors, such as those collateralizing the GSE Certificates. 160. Goldman was not content simply to let poor loans pass into its securitizations in
exchange for its fees and repayment of its warehouse loans. Goldman took the fraud further, affirmatively seeking to profit from this knowledge. According to the September 2010 FCIC testimony of Clayton’s former president, D. Keith Johnson, the investment banks would use the exception reports to force a lower price for itself, and not to benefit investors at all: I don’t think that we added any value to the investor, the end investor, to get down to your point. I think only our value was done in negotiating the purchase between the seller and securitizer. Perhaps the securitizer was able to negotiate a lower price, and could maximize the line. We added no value to the investor, to the rating agencies. FCIC Staff Int’v with D. Keith Johnson, Clayton Holdings, LLC (Sept. 2, 2010), available at http://fcic.law.stanford.edu/resource/interviews. In other words, rather than reject defective loans from collateral pools, or cease doing business with consistently failing originators,
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investment banks like Goldman would instead use the Clayton data simply to insist on a lower price from the loan originators, leaving more room for its own profits while the defective loans were hidden from investors such as Fannie Mae and Freddie Mac in securitization pools. 161. Goldman further sought to leverage this information in its warehouse lending
business. Goldman used the discovery of poor lending practices to increase its profits—by charging higher warehouse fees to those originators identified as being problematic. See FCIC Report, at 484 n.2038 (citing Goldman email dated Feb. 2, 2007 which discussed proposal to charge higher warehouse fees to mortgage originators with higher EPD [early payment default] and “drop out” rates, including Fremont and New Century). 162. In light of the fact that Clayton was operating under extreme pressure from its
clients to allow as many loans as possible to remain in the securitization pools and to conduct increasingly cursory reviews, the high rejection and waiver rates are even more damning for Goldman. Based upon such pressure on Clayton, Goldman knew the true rates of defects were actually much higher than Clayton reported, and that it was allowing in even more defective loans than Clayton’s Trending Reports have since revealed. 163. For example, Melissa Toy and Irma Aninger, two contract risk analysts who
reviewed loan files for Bohan from 2004 to 2006—a company that performed similar work to Clayton—have stated that their supervisors overrode the majority of their challenges to shaky loans on behalf of Goldman and other firms:  “They couldn’t recall specific examples involving loans bought by Goldman, but they said their supervisors cleared half-million-dollar loans to a gardener, a housekeeper and a hairdresser.” “Aninger, whose job was to review the work of other contract analysts, said that she objected to numerous applications for loans that required no income verification, her supervisor would typically tell her, “You can’t call him a liar ... You have to take (his) word for it.” (Alterations in original.) 74

 
“I don’t even know why I was there,” she said, “because the stuff was gonna get pushed through anyway.” “Toy said she concluded that the reviews were mostly ‘for appearances’, because the Wall Street firms planned to repackage ‘bogus’ loans swiftly and sell them as bonds, passing any future liabilities to the buyers. The investment banks and mortgage lenders each seemed to be playing ‘hot potato’, trying to pass the risks ‘before they got burned’, she said. “There was nobody involved in this who didn’t know what was going on, no matter what they say,” she said. “We all knew.”

Greg Gordon, Why Did Goldman Stop Scrutinizing Loans It Bought?, McClatchy Newspapers, Nov. 1, 2009, available at http://www.mcclatchydc.com/2009/11/01/77788/why-did-goldmanstop-scrutinizing.html. B. 164. Other Evidence Of Goldman’s Willingness to Capitalize on Its Unique Knowledge at the Expense Of Investors
That Goldman knew of the originators’ abandonment of applicable underwriting
guidelines and of the true nature of the mortgage loans it was securitizing is further evidenced by how Goldman handled its own investments. Goldman internally characterized its offerings as “junk,” “dogs,” “big old lemons,” and “monstrosities.” FCIC Report at 235–36. Nevertheless, it congratulated itself for successfully offloading such “junk” onto others. As the public learned in the FCIC’s Report, by January 2007, “Daniel Sparks, the head of Goldman’s mortgage department, extolled Goldman’s success in reducing its subprime inventory, writing that the team had ‘structured like mad and traveled the world, and worked their tails off to make some lemonade from some big old lemons.” Id. at 236. 165. Even more damning than Goldman’s decision to use securitization as a tool to
move declining loans off of Goldman’s own books are the huge bets Goldman placed against the very mortgage-backed investments it sold to the GSEs and that are at issue in this Complaint. Goldman coupled those sales with an aggressive campaign to force lenders (the very same ones 75
who originated loans in the Certificates) to repurchase defective loans which, due to the slowing securitization market, had been stuck on Goldman’s own books. 1. 166. Goldman Began Shorting Its Own Offerings Beginning in 2006
Beginning in 2005 and into 2006, Goldman began to take an increasingly
pessimistic view of the subprime mortgage market. Goldman’s sophisticated and powerful proprietary models analyzed trends in the performance of the hundreds of thousands of mortgages that collateralized its RMBS, and those models and superior access to data regarding the underlying mortgage positions on its books gave Goldman unique knowledge that those securities were not as safe as their offering materials and ratings represented to investors. In fact, Goldman’s models and data showed that the RMBS had declined up to 70 percent from their face amounts. In his book, Money and Power: How Goldman Sachs Came to Rule the World 494–95 (2011) William D. Cohan explained: Goldman’s RMBS model could analyze all the underlying mortgages and value the cash flows, as well as what would happen if interest rates changed, if prepayments were made, or if the mortgages were refinanced. The model could also spit out a valuation if defaults suddenly spiked upward …. [Goldman’s] proprietary model was telling [Goldman] that it would not take much to wipe out the value of tranches of a mortgage-backed security that had previously looked very safe, at least in the estimation of the credit-rating agencies that had been paid (by Wall Street) to rate them investment grade. By tweaking the various assumptions based on events that seemed increasingly likely, [Goldman’s] models were showing a marked decrease in the value of mortgage-related securities. Goldman’s models said even if you don’t believe housing prices are going to go down, even if we apply low-probability scenarios about it going negative … there’s no way this stuff can be worth anywhere near one hundred [cents on the dollar]…. [Goldman’s] models had them pegged anywhere between 30 cents and 70 cents …. According to a former Goldman employee, these models as well as other information in Goldman’s exclusive possession showed it “the writing on the wall in this market as early as 2005,” Gretchen Morgenson & Louise Story, Banks Bundled Bad Debt, Bet Against It and Won, N.Y. Times, Dec. 24, 2009, and into the “the early summer of 2006,” Senate PSI Report at 398. 76
Goldman exploited its asymmetric access to, and possession of, information about the weakness in the mortgage loans collateralizing the Certificates it marketed and sold. 167. To reduce its massive financial exposure to the subprime mortgage market,
Goldman began looking for ways to short the market (i.e., to make investments which would rise in value and/or make payments to Goldman as the subprime mortgage market declined). Its shorting strategies included the purchase of credit default swap protection on the very RMBS positions it sold into the market. Goldman bet that the RMBS would decline in value and/or default; if so, its swap counterparty would be required to pay Goldman. 168. Goldman entered into swaps worth hundreds of millions of dollars during this
time period, where it stood of the “short” side of the transaction, while its counterparty went “long.” For example, according to the Senate PSI Report, Goldman underwrote GSAMP 2007FM2, a securitization it sold to Freddie Mac, and then turned around and bet against that same securitization through use of credit default swaps. As the Senate PSI Report explained: Goldman marketed and sold the Fremont securities to its customers, while at the same time purchasing $15 million in CDS contracts referencing some of the Fremont securities it underwrote. Seven months later, by October 2007, the ratings downgrades had begun; by August 2009, every tranche in the GSAMP securitization had been downgraded to junk status. Senate PSI Report at 516 (footnotes omitted). Goldman’s shorting of GSAMP 2007-FM2 was emblematic of its approach to the Securitizations it marketed and sold to the GSEs. As a recent magazine article explained, “Goldman was like a car dealership that realized it had a whole lot full of cars with faulty brakes. Instead of announcing a recall, it surged ahead with a two-fold plan to make a fortune: first, by dumping the dangerous products on other people, and second, by taking out life insurance against the fools who bought the deadly cars.” Matt Taibbi, The People
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vs. Goldman Sachs, Rolling Stone, May 26, 2011, available at http://www.rollingstone.com/ politics/news/the-people-vs-goldman-sachs-20110511. 169. Continuing from 2006 and 2007, Goldman used its shorting strategy as a way to
reduce its own mortgage risk while continuing to create and sell mortgage-related products to its clients. In 2006, Goldman made a massive $9 billion bet that the same type of assets it was selling to investors like Fannie Mae and Freddie Mac would collapse. See id. at 419. The $9 billion short bet was placed in 2006 by Goldman’s mortgage department, the same department that oversaw the sale of the Certificates to the GSEs. Goldman’s net short position in 2007 rose as high as $13.9 billion. Id. at 430. As the Senate PSI Report explained, Goldman “sold RMBS and CDO securities to its clients without disclosing its own net short position against the subprime market or its purchase of CDS contracts to gain from the loss in value of some of the very securities it was selling to its client.” Id. at 9. 170. On March 9, 2007, Goldman’s Daniel Sparks wrote: “Our current largest needs
are to execute and sell our new issues—CDO’s and RMBS—and to sell our other cash trading positions …. I can’t overstate the importance to the business of selling these positions and new issues.” A leading structured finance expert reportedly called Goldman’s practice “the most cynical use of credit information that I have ever seen,” and compared it to “buying fire insurance on someone else’s house and then committing arson.” Senate PSI Hearing Ex. 4/2776. As the Senate PSI found, Goldman “sold RMBS securities to customers at the same time it was shorting the securities and essentially betting that they would lose value.” Senate PSI Report at 513.
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2.
Goldman’s Targeted Campaign to “Put Back” Defective Loans to Originators Demonstrates That It Knew the Targeted Originators’ Loans Breached Underwriting Guidelines
171.
Another tactic that Goldman used to reduce its subprime exposure in 2006 was to
force originators from which it bought mortgages to buy them back. Goldman’s repurchase rights arose from mortgage purchase agreements that it entered into with originators. These agreements typically required originators to warrant that their loans were underwritten according to standard guidelines and conformed to certain characteristics, including the accuracy of the mortgage loan schedule, the absence of fraud by the originator or borrower, and compliance with federal and state laws. If a representation was breached, Goldman (as sponsor) could demand that the originator repurchase the defective loans as required by the mortgage purchase agreement. Goldman hired third party re-underwriting firms to assist in this “put back” process and to find defects in the loans which would then be used as a basis to require their repurchase. 172. Goldman targeted its “put back” campaign at the originators whose loans
Goldman knew were most likely to yield underwriting breaches upon examination. Goldman had unique insight into the quality of the loans purchased from originators, arising from diligence on the originators themselves as well as their loans. Goldman knew based on its many years of dealing with originators such as New Century and Fremont that their loans were the worst on its books and thus the most likely to yield put back claims. 173. For example, the Senate PSI Report published a December 14, 2006 email from
Goldman’s Daniel Sparks which told colleagues, “stay focused and aggressive on MLN [Mortgage Lenders Network] ….” See Senate PSI Report at 405. On January 8, 2007, Daniel Sparks wrote to a colleague, “I just can’t see how any originator in the industry is worth a premium. I’m also a bit scared of [A]ccredited [Aames’ parent company] and [N]ew [C]entury, and I’m not sure about taking a bunch of new exposures.” Id. at 484 n.2036. 79
174.
On February 2, 2007, Sparks identified other prime targets of Goldman’s
repurchase campaign. He said that his “team is working on putting loans in the deals back to the originators (New Century, WAMU [Long Beach’s parent], and Fremont – all real counterparties) as there seem to be issues potentially including some fraud at origination, but resolution will take months and be contentious.” Id. at 484. 175. On March 7, 2007, Sparks continued emphasizing Goldman’s priority in ridding
itself of loans issued by certain originators. He described Goldman’s exposure as follows: As for the big 3 originators – Accredited, New Century and Fremont, our real exposure is in the form of put-back claims. Basically, if we get nothing back we would lose around $60mm vs loans on our books (we have a reserve of $30mm) and the loans in the [CDO and RMBS] trusts could lose around $60mm (we probably suffer about 1/3 of this in ongoing exposures) …. Id. at 485. 176. In March 2007, following an analysis of a pool of loans originated by Fremont,
Goldman concluded that about 50 percent of the 200 files reviewed “look to be repurchase obligations.” Id. at 486. Goldman made it a “priority” to re-underwrite and put back loans purchased from originators it considered weak. Id. at 485. 177. In total, between 2006 and 2007, Goldman made approximately $475 million in
repurchase claims to the originators and others for loans in its inventory. All told, Goldman recovered approximately $82 million from this process. Id. at 483. Among the securitizations for which Goldman put back (or tried to put back) loans out of its inventory was GSAMP 2006NC2, a deal Goldman sold to Fannie Mae. After reviewing the loan files in one New Century deal, Goldman’s analysts recommended to Goldman putting back 26 percent of the loan pool. See Senate PSI Report at 485–86.
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178.
Goldman’s actions in 2006 and 2007 present compelling evidence of Goldman’s
complete abandonment of its customers’ interests in its drive to rid itself of declining and defective mortgage assets. 179. Many of the Individual Defendants, who were officers and directors of Defendant
GS Mortgage Securities Corp. and therefore together with its parent company Goldman Sachs Mortgage Company controlled it, had extensive knowledge of the underlying collateral and therefore of Goldman’s fraudulent scheme based on other positions they held at Goldman Sachs. For example, Daniel Sparks, was both head of Goldman Sachs Group’s Inc.’s Mortgage Department and also the CEO and Director of GS Mortgage Securities Corp. Kevin Gasvoda, the head of the Mortgage Department’s Residential Whole Loan Trading Desk, which oversaw the purchase of mortgages and constructed and sold RMBS securitizations, was also director of GS Mortgage Securities Corp. Similarly, Michelle Gill, who worked on Goldman’s “put back” campaign, was a vice president of GS Mortgage Securities Corp. and also a managing director of Goldman Sachs Group, Inc. 180. Each of these executives played critical roles in establishing and implementing
Goldman’s de-risking strategies in 2006 and 2007. For example, in February 2007, Mr. Gasvoda issued a directive or “axe” to the Goldman sales force to sell the remaining RMBS securities from Goldman-originated RMBS securitizations. On February 9, 2007, the sales force reported a substantial number of sales, and Mr. Gasvoda replied: “Great job syndicate and sales, appreciate the focus.” Senate PSI Report at 408. Ms. Gill was responsible, in part, for Goldman’s “put back” campaign in 2006, including the review of faulty Fremont loans. Id. at 484. Each worked under Sparks, who managed and coordinated Goldman’s put back and other de-risking efforts. The Individual Defendants’ overlapping personnel and intertwined business strategies meant that
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the entities they controlled and were affiliated with had the means and incentives to defraud the GSEs with respect to the Certificates. C. 181. Numerous Government Investigations Have Confirmed Goldman Acted With Scienter
Goldman is the subject of numerous criminal and regulatory probes related to its
mortgage underwriting practices. See Wall Street Probe Widens, The Wall Street Journal, May 12, 2010 (reporting on federal criminal and regulatory investigations of whether Goldman and others “misled investors about their roles in mortgage-bond deals”). These investigations further confirm that Goldman’s misrepresentations were not mere isolated, innocent mistakes, but the result of the company’s reckless or intentional misconduct. 182. For example, Goldman’s misconduct prompted the Attorney General of
Massachusetts to examine whether Goldman:     failed to ascertain whether loans purchased from originators complied with the originators’ stated underwriting guidelines; failed to take sufficient steps to avoid placing problem loans into securitization pools; failed to correct inaccurate information in securitization trustee reports concerning repurchases of loans; and failed to make available to potential investors certain information concerning allegedly unfair or problem loans, including information obtained during loan due diligence and the pre-securitization process, as well as information concerning Goldman Sachs’ practices in making repurchase claims relating to loans in and out of securitizations.
183.
Goldman settled with the Commonwealth of Massachusetts, paying it $60 million.
FCIC Report at 226. In announcing the settlement, the Massachusetts Attorney General stated that Goldman did not take “sufficient steps to avoid placing problem loans in securitization pools.” Goldman was also required to forgive all or portions of the balances on many loans it
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had bought and securitized, which resulted in tens of millions of dollars in additional expenses to Goldman. 184. Similarly, the Senate PSI Report concluded that Goldman “knowingly sold high
risk, poor quality mortgage products to clients around the world, saturating financial markets with complex, financially engineered instruments that magnified risk and losses when their underlying assets began to fail.” Senate PSI Report at 476; see also id. at 513 (“Goldman originated and sold RMBS securities that it knew had poor quality loans that were likely to incur abnormally high rates of default.”) (emphasis added). 185. In addition, the Senate investigation revealed that Goldman had to disclose that
the GSE Certificates’ credit ratings were false and misleading because Defendants fed the same misinformation found in the term sheets and Prospectus Supplements to the credit rating agencies in an attempt to manufacture predetermined ratings. In testimony before the Senate Permanent Subcommittee on Investigations, Susan Barnes, the North American Practice Leader for RMBS at S&P from 2005 to 2008, confirmed that the rating agencies relied upon investment banks to provide accurate information about the loan pools: The securitization process relies on the quality of the data generated about the loans going into the securitizations. S&P relies on the data produced by others and reported to both S&P and investors about those loans …. S&P does not receive the original loan files for the loans in the pool. Those files are reviewed by the arranger or sponsor of the transaction, who is also responsible for reporting accurate information about the loans in the deal documents and offering documents to potential investors. Senate Homeland Security and Governmental Affairs Subcommittee on Investigations, Hearing on Wall Street and the Financial Crisis: The Role of Credit Rating Agencies, Apr. 23, 2010 (emphasis added). As a result, the ratings themselves failed to reflect accurately the actual risk
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underlying the GSE Certificates because the ratings agencies were in fact analyzing a mortgage pool that had no relation to the pool that actually backed the Certificates purchased by the GSEs. 186. Even more recently, on September 1, 2011, the Federal Reserve Board sanctioned
Goldman Sachs for “a pattern of misconduct and negligence relating to deficient practices” in its former mortgage unit, Litton Loan Servicing LP., including those involving “robo-signing”—a practice that often results in defective foreclosures. As a result of this sanction, Goldman must retain an independent consultant to review certain foreclosure proceedings initiated by Litton. The Federal Reserve has also announced that it believes monetary sanctions are appropriate against Goldman and plans to announce monetary penalties. Goldman’s “pattern of misconduct” is further evidence that Goldman Sachs knew of the weakness in the mortgage loans collateralizing the Securitizations and had both an ability and willingness to exploit it. D. 187. Further Evidence that Goldman Knew the Appraisals Were Inflated
The appraised value of a mortgaged property is a key component in the stated
LTV ratios. Goldman knew at the time the appraisals were false and baseless, and thus did not genuinely believe at the time the disclosed statistics were accurate. This is supported by the extent of the wide disparities between reported and actual LTV information for the GSE Certificates, discovered through the use of loan-level, contemporaneous information. It is also supported by evidence of the other systemic problems at issue here, testimony and investigations into the originators at issue here, and other testimony that has been provided by industry insiders. 188. For instance, Richard Bitner, a former executive of a subprime lender for fifteen
years, testified in April 2010 before the FCIC that “the appraisal process [was] highly susceptible to manipulation,” and that the rise in property values was in part due to “the subprime industry’s acceptance of overvalued appraisals.” Similarly, New Century’s Patricia Lindsay, a former wholesale lender, stated in her testimony to the FCIC that appraisers “fear[ed]” for their 84
“livelihoods,” and therefore cherry-picked data “that would help support the needed value rather than finding the best comparables to come up with the most accurate value.” See Written Testimony of Patricia Lindsay to the FCIC, at 5 (Apr. 7, 2010). Likewise, Jim Amorin, President of the Appraisal Institute, confirmed in his testimony that “[i]n many cases, appraisers are ordered or severely pressured to doctor their reports and to convey a particular, higher value for a property, or else never see work from those parties again …. [T]oo often state licensed and certified appraisers are forced into making a ‘Hobson’s Choice.’” See Testimony of Jim Amorin to the FCIC, available at www.appraisalinstitute.org/newsadvocacy/downloads/ltrs_tstmny/ 2009/AI-ASA-ASFMRA-NAIFATestimonyonMortgageReform042309final.pdf. 189. The FCIC’s January 2011 report recounts the similar testimony of Dennis J.
Black, an appraiser with 24 years of experience who held continuing education services across the country. “He heard complaints from appraisers that they had been pressured to ignore missing kitchens, damaged walls, and inoperable mechanical systems. Black told the FCIC, ‘The story I have heard most often is the client saying he could not use the appraisal because the value was [not] what they needed.’ The client would hire somebody else.” 190. Such testimony provides further evidence that Goldman—as an industry insider
with a unique window into the quality of the underlying mortgage loans by virtue of its role as sponsor and depositor in many of the Securitizations—knew at the time it made representations to the GSEs regarding the strength of the Certificates and the underlying mortgage loans, that such representations were false when made. VI. 191. The GSEs Justifiably Relied on Goldman Sachs’s Representations Fannie Mae and Freddie Mac purchased the GSE Certificates based upon the
representations by Goldman Sachs as the sponsor, depositor, and lead and selling underwriter in all 36 of the Goldman-sponsored Securitizations. Goldman Sachs provided term sheets to the 85
GSEs that contained critical data as to the Securitizations, including with respect to anticipated credit ratings by the credit rating agencies, loan-to-value ratios for the underlying collateral, and owner-occupancy statistics. This data was subsequently incorporated into Prospectus Supplements that were received by the GSEs upon the close of each Securitization. 192. The GSEs relied upon the accuracy of the data transmitted to them and
subsequently reflected in the Prospectus Supplements. In particular, the GSEs relied upon the credit ratings that the credit rating agencies indicated they would bestow on the Certificates based on the information provided by Goldman Sachs Mortgage Company and Goldman, Sachs & Co. relating to the collateral quality of the underlying loans and the structure of the Securitization. These credit ratings represented a determination by the credit rating agencies that the GSE Certificates were “AAA” quality (or its equivalent)—meaning the Certificates had an extremely strong capacity to meet the payment obligations described in the respective PSAs and Prospectus Supplements. 193. Goldman Sachs, as sponsor, depositor, and lead and selling underwriter in all 36
of the Goldman-sponsored Securitizations, provided detailed information about the underlying collateral and structure of each Securitization it sponsored to the credit rating agencies. The credit rating agencies based their ratings on the information provided to them by Goldman Sachs, and the agencies’ anticipated ratings of the Certificates were dependent on the accuracy of that information. The GSEs relied on the accuracy of the anticipated credit ratings and the actual credit ratings assigned to the Certificates by the credit rating agencies, and upon the accuracy of Goldman’s representations in the term sheets and Prospectus Supplements. 194. The GSEs relied on the fact that the originators of the mortgage loans in the
Securitizations had acted in conformity with their underwriting guidelines, which were described
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in the Prospectus Supplements. Compliance with underwriting guidelines was a precondition to the GSE’s purchase of the GSE Certificates in that the GSEs’ decision to purchase the Certificates was directly premised on their reasonable belief that the originators complied with applicable underwriting guidelines and standards. 195. In purchasing the GSE Certificates, the GSEs justifiably relied on Goldman’s
false representations and omissions of material fact detailed above, including the misstatements and omissions in the term sheets about the underlying collateral, which were reflected in the Prospectus Supplements. 196. But for the above misrepresentations and omissions, the GSEs would not have
purchased or acquired the Certificates as they ultimately did, because those representations and omissions were material to their decision to acquire the GSE Certificates, as described above. VII. 197. Fannie Mae’s and Freddie Mac’s Purchases of the GSE Certificates and the Resulting Damages In total, between September 7, 2005 and October 29, 2007, Fannie Mae and
Freddie Mac purchased from Goldman Sachs over $11.1 billion in residential mortgage-backed securities issued in connection with the Securitizations. Table 10 reflects Freddie Mac’s purchases of the Certificates.21
Table 10
Transaction ACCR 2005-4 AHMA 2006-1 FFML 2005-FF11 FFML 2005-FF8 FHLT 2006-E GSAA 2005-14 GSAA 2005-14 GSAA 2006-8 21 CUSIP 004375EE7 02660WAA4 362341YA1 362341QL6 35729NAA3 362341ZS1 362341B32 362348AA2 Settlement Date of Purchase by Freddie Mac November 23, 2005 May 25, 2006 November 22, 2005 September 29, 2005 December 6, 2006 November 22, 2005 November 22, 2005 April 28, 2006 Initial Unpaid Principal Balance $354,752,000 $165,000,000 $240,920,000 $304,713,000 $468,289,000 $168,059,000 $18,674,000 $199,053,000 Purchase Price (% of Par) 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 Seller to Freddie Mac Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co.
Purchased securities in Tables 10 and 11 are stated in terms of unpaid principal balance of the relevant Certificates. Purchase prices are stated in terms of percentage of par.
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Transaction GSAA 2007-6 GSAMP 2005-HE5 GSAMP 2005-HE6 GSAMP 2006-FM2 GSAMP 2006-FM3 GSAMP 2006-HE3 GSAMP 2006-HE4 GSAMP 2006-HE5 GSAMP 2007-FM1 GSAMP 2007-FM2 GSAMP 2007-HE1 GSAMP 2007-HE2 GSR 2006-OA1 GSR 2007-OA1 GSR 2007-OA2 INDX 2005-AR18
CUSIP 36245RAD1 362341YW3 362341F87 36245DAA8 36245TAA3 36244KAA3 362439AA9 362437AA3 3622MAAA9 3622MHAA4 3622MDAA3 362440AA7 362631AA1 3622NAAA8 3622NCAA4 45660LVZ9
Settlement Date of Purchase by Freddie Mac May 30, 2007 November 22, 2005 December 29, 2005 September 29, 2006 December 21, 2006 May 26, 2006 June 29, 2006 August 25, 2006 January 30, 2007 February 21, 2007 February 23, 2007 April 20, 2007 August 25, 2006 May 8, 2007 October 29, 2007 September 7, 2005
Initial Unpaid Principal Balance $78,936,000 $405,564,000 $341,242,000 $351,611,000 $257,050,000 $304,472,000 $352,415,000 $241,582,000 $315,873,000 $351,823,000 $205,454,000 $370,801,000 $744,970,000 $374,616,000 $186,326,000 $314,827,000
Purchase Price (% of Par) 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 101.0625 100.0000
Seller to Freddie Mac Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co.
198.
Table 11 reflects Fannie Mae’s purchases of the Certificates:
Table 11
Settlement Date of Purchase by Fannie Mae May 25, 2006 September 28, 2006 September 29, 2005 December 29, 2005 June 30, 2006 February 6, 2006 March 2, 2006 March 30, 2006 December 28, 2005 November 23, 2005 December 28, 2005 April 27, 2006 November 22, 2006 December 27, 2006 June 29, 2006 February 20, 2007 May 24, 2007 October 28, 2005 Initial Unpaid Principal Balance $101,477,000 $244,303,000 $103,804,000 $241,820,000 $242,367,000 $148,331,000 $223,080,000 $186,376,000 $108,759,000 $266,290,000 $238,899,000 $241,822,000 $333,098,000 $353,741,000 $239,618,000 $479,787,000 $89,703,000 $136,304,000 Purchase Price (% of Par) 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.4648 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0586 100.5352
Transaction AHMA 2006-1 FFML 2006-FF13 GSAA 2005-11 GSAA 2005-15 GSAA 2006-11 GSAA 2006-2 GSAA 2006-4 GSAA 2006-5 GSAMP 2005AHL2 GSAMP 2005WMC2 GSAMP 2005WMC3 GSAMP 2006-FM1 GSAMP 2006-HE7 GSAMP 2006-HE8 GSAMP 2006-NC2 GSAMP 2007-NC1 GSR 2007-AR2 INDX 2005-AR27
CUSIP 02660WAB2 30247DAA9 362341NV7 362341D48 362367AA2 3623415N5 362334FD1 362334GQ1 362341B81 362341UV9 362341K99 362334PF5 36245EAA6 3622M8AA4 362463AA9 3622MGAA6 3622N6AL3 45660LN96
Seller to Fannie Mae Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co.
199.
The statements and assurances in the Registration Statements regarding the credit
quality and characteristics of the mortgage loans underlying the GSE Certificates, and the underwriting practices pursuant to which the mortgage loans were originated, which were summarized in such documents, were material to a reasonable investor’s decision to purchase the Certificates.
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200.
The false statements of material facts and omissions of material facts in the
Registration Statements, including the Prospectuses and Prospectus Supplements, directly caused Fannie Mae and Freddie Mac to suffer hundreds of millions of dollars in damages, including without limitation depreciation in the value of the Certificates. The mortgage loans underlying the GSE Certificates experienced defaults and delinquencies at a much higher rate than they would have had the loan originators adhered to the underwriting guidelines set forth in the Registration Statements, and the payments to the trusts were therefore much lower than they would have been had the loans been underwritten as described in the Registration Statements. 201. Fannie Mae’s and Freddie Mac’s losses have been much greater than they would
have been if the mortgage loans had the credit quality stated in the Registration Statements. 202. Goldman Sachs’ misstatements and omissions in the Registration Statements
regarding the true characteristics of the loans were the proximate cause of Fannie Mae’s and Freddie Mac’s losses relating to their purchases of the GSE Certificates. Based upon sales of the Certificates or similar certificates in the secondary market, Goldman proximately caused hundreds of millions of dollars in damages to Fannie Mae and Freddie Mac in an amount to be determined at trial.22 FIRST CAUSE OF ACTION Violation of Section 11 of the Securities Act of 1933 (Against Defendants GS Mortgage Securities Corp., Goldman, Sachs & Co., Kevin Gasvoda, Michelle Gill, David J. Rosenblum, Jonathan S. Sobel, Daniel L. Sparks, and Mark Weiss) 203. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes from this cause of action any allegation that could be Plaintiff does not bring claims in this Complaint against GS Mortgage Securities Corp. arising from GSAMP 2006-FM1, GSAMP 2006-FM2, GSAMP 2006-FM3, GSAMP 2007-FM1, and GSAMP 2007-FM2.
22
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construed as alleging fraudulent or intentional or reckless conduct. This cause of action specifically excludes the allegations as to Defendants’ scienter, including those set forth in Section V. 204. This claim is brought by Plaintiff pursuant to Section 11 of the Securities Act and
is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements. This claim is brought against Defendant Goldman, Sachs & Co. with respect to each of the Registration Statements. This claim is also brought against (i) Defendant GS Mortgage Securities Corp. and (ii) Defendants Kevin Gasvoda, Michelle Gill, David J. Rosenblum, Jonathan S. Sobel Daniel L. Sparks, and Mark Weiss (the foregoing Individual Defendants collectively referred to as the “Section 11 Individual Defendants”), each with respect to the Registration Statements filed by GS Mortgage Securities Corp. that registered securities that were bona fide offered to the public on or after September 6, 2005. 205. Defendant Goldman, Sachs & Co. is strictly liable for making false and materially
misleading statements in each of the Registration Statements, and for omitting facts necessary to make the facts stated therein not misleading. Defendant GS Mortgage Securities Corp. and the Section 11 Individual Defendants are strictly liable for making false and materially misleading statements in the GS Mortgage Shelf Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005, which are applicable to 31 of the 40 Securitizations (as specified in Tables 1 and 2 above), including the related Prospectus Supplements, and for omitting facts necessary to make the facts stated therein not misleading.
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206.
Goldman, Sachs & Co. served as the lead underwriter in each Securitization. As
an underwriter in each Securitization, Goldman, Sachs & Co. is strictly liable under Section 11 of the Securities Act for the misstatements and omissions in each Registration Statement. 207. GS Mortgage Securities Corp. filed four Registration Statements under which 35
of the 40 Securitizations were carried out. As depositor, GS Mortgage Securities Corp. is an issuer of the GSE Certificates issued pursuant to the Registration Statements it filed within the meaning of Section 2(a)(4) of the Securities Act, 15 U.S.C. § 77b(a)(4), and in accordance with Section 11(a), 15 U.S.C. § 77k(a). As such, it is liable under Section 11 of the Securities Act for the misstatements and omissions in the GS Mortgage Shelf Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005. 208. At the time GS Mortgage Securities Corp. filed four Registration Statements
applicable to 35 of the Securitizations, the Section 11 Individual Defendants were officers and/or directors of GS Mortgage Securities Corp. In addition, the Section 11 Individual Defendants signed those Registration Statements and either signed or authorized another to sign on their behalf the amendments to those Registration Statements. As such, the Section 11 Individual Defendants are liable under Section 11 of the Securities Act for the misstatements and omissions in those Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005. 209. At the time that they became effective, each Registration Statement contained
material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading, as set forth above. The facts misstated or omitted were material to a reasonable investor reviewing the Registration Statement, including to Fannie Mae and Freddie Mac.
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210.
The untrue statements of material facts and omissions of material facts in the
Registration Statements are set forth above in Section IV and pertain to, among other things, compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 211. Fannie Mae and Freddie Mac purchased or otherwise acquired the GSE
Certificates in the primary market pursuant to the materially false, misleading, and incomplete Registration Statements. At the time they purchased the GSE Certificates, Fannie Mae and Freddie Mac did not know, and in the exercise of reasonable diligence could not have known, of the facts concerning the false and misleading statements and omissions alleged herein, and if the GSEs had known those facts, they would not have purchased the GSE Certificates. 212. Goldman, Sachs & Co. owed to Fannie Mae, Freddie Mac, and other investors a
duty to make a reasonable and diligent investigation of the statements contained in the applicable Registration Statements at the time they became effective to ensure that such statements were true and correct and that there were no omissions of material facts required to be stated in order to make the statements contained therein not misleading. The Section 11 Individual Defendants owed the same duty with respect to the GS Mortgage Shelf Registration Statements that they signed that registered securities that were bona fide offered to the public on or after September 6, 2005, which are applicable to 31 of the Securitizations. 213. Goldman, Sachs & Co. and the Section 11 Individual Defendants did not exercise
such due diligence and failed to conduct a reasonable investigation. In the exercise of reasonable care, these Defendants should have known of the false statements and omissions contained in or omitted from such Registration Statements, as set forth herein. In addition, GS Mortgage
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Securities Corp., though subject to strict liability without regard to whether it performed diligence, also failed to take reasonable steps to ensure the accuracy of the representations. 214. Fannie Mae and Freddie Mac sustained substantial damages as a result of the
misstatements and omissions in the Registration Statements, for which they are entitled to compensation. 215. The time period from June 5, 2009 through August 30, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and The Goldman Sachs Group, Inc. (on its own behalf and on behalf of its affiliated entities). The time period from July 15, 2011 through August 30, 2011 has been tolled for statute of limitations purposes by virtue of a tolling agreement entered into among the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, and The Goldman Sachs Group, Inc. (on its own behalf and on behalf of its affiliated entities). This action is brought within three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. § 4617(b)(12). 216. By reason of the conduct herein alleged, Goldman, Sachs & Co., GS Mortgage
Securities Corp., and the Section 11 Individual Defendants are jointly and severally liable for their wrongdoing. SECOND CAUSE OF ACTION Violation of Section 12(a)(2) of the Securities Act of 1933 (Against GS Mortgage Securities Corp. and Goldman, Sachs & Co.) 217. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes from this cause of action any allegation that could be construed as alleging fraudulent or intentional or reckless conduct. This cause of action
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specifically excludes the allegations as to Defendants’ scienter, including those set forth in Section V. 218. This claim is brought by Plaintiff pursuant to Section 12(a)(2) of the Securities
Act of 1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements. 219. Defendant Goldman, Sachs & Co. negligently made false and materially
misleading statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as “Prospectuses”) for each Securitization. Defendant GS Mortgage Securities Corp. negligently made false and materially misleading statements in the Prospectuses for the Securitizations effected under the GS Mortgage Shelf Registration Statements, which are applicable to 35 of the Securitizations. 220. Goldman, Sachs & Co. is prominently identified in the Prospectuses, the primary
documents it used to sell the GSE Certificates. Goldman, Sachs & Co. offered the Certificates publicly, including selling to Fannie Mae and Freddie Mac the GSE Certificates, as set forth in the “Method of Distribution” or equivalent underwriting section of each Prospectus. 221. Goldman, Sachs & Co. offered and sold the GSE Certificates to Fannie Mae and
Freddie Mac by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. Goldman, Sachs & Co. reviewed and participated in drafting the Prospectuses. 222. Goldman, Sachs & Co. successfully solicited Fannie Mae’s and Freddie Mac’s
purchases of the GSE Certificates. As underwriter, Goldman, Sachs & Co. was paid a
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substantial commission based on the amount it received from the sale of the Certificates to the public. 223. Goldman, Sachs & Co. offered the GSE Certificates for sale, sold them, and
distributed them by the use of means or instruments of transportation and communication in interstate commerce, including communications between its representatives in New York and representatives of Fannie Mae in the District of Columbia and Freddie Mac in McLean, Virginia. 224. GS Mortgage Securities Corp. is prominently identified in the Prospectuses for
the Securitizations carried out under the GS Mortgage Shelf Registration Statements. These Prospectuses were the primary documents used to sell Certificates for the 35 Securitizations under the GS Mortgage Shelf Registration Statements. GS Mortgage Securities Corp. offered the Certificates publicly and actively solicited their sale, including to Fannie Mae and Freddie Mac. GS Mortgage Securities Corp. was paid a percentage of the total dollar amount of the offering upon completion of the Securitizations effected pursuant to the GS Mortgage Shelf Registration Statements. 225. With respect to the 35 Securitizations for which it filed the GS Mortgage Shelf
Registration Statements, including the related Prospectus Supplements, GS Mortgage Securities Corp. offered the GSE Certificates to Fannie Mae and Freddie Mac by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. GS Mortgage Securities Corp. reviewed and participated in drafting the Prospectuses. 226. GS Mortgage Securities Corp. offered the GSE Certificates for sale by the use of
means or instruments of transportation and communication in interstate commerce.
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227.
Each of Goldman, Sachs & Co. and GS Mortgage Securities Corp. actively
participated in the solicitation of the GSEs’ purchase of the GSE Certificates, and did so in order to benefit itself. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates. 228. Each of the Prospectuses contained material misstatements of fact and omitted
facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectuses, and specifically to Fannie Mae and Freddie Mac. 229. The untrue statements of material facts and omissions of material facts in the
Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 230. Goldman, Sachs & Co. and GS Mortgage Securities Corp. offered and sold the
GSE Certificates directly to Fannie Mae and Freddie Mac pursuant to the materially false, misleading, and incomplete Prospectuses. 231. Goldman, Sachs & Co. owed to Fannie Mae and Freddie Mac, as well as to other
investors in these trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. GS Mortgage Securities Corp. owed the same duty with respect to the Prospectuses for the Securitizations effected under the four GS Mortgage Shelf Registration Statements.
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232.
Goldman, Sachs & Co. and GS Mortgage Securities Corp. failed to exercise such
reasonable care. These defendants in the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations, as set forth above. 233. In contrast, Fannie Mae and Freddie Mac did not know, and in the exercise of
reasonable diligence could not have known, of the untruths and omissions contained in the Prospectuses at the time they purchased the GSE Certificates. If the GSEs had known of those untruths and omissions, they would not have purchased the GSE Certificates. 234. Fannie Mae and Freddie Mac acquired the GSE Certificates in the primary market
pursuant to the Prospectuses. 235. Fannie Mae and Freddie Mac sustained substantial damages in connection with
their investments in the GSE Certificates and have the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 236. The time period from June 5, 2009 through August 30, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and The Goldman Sachs Group, Inc. (on its own behalf and on behalf of its affiliated entities). The time period from July 15, 2011 through August 30, 2011 has been tolled for statute of limitations purposes by virtue of a tolling agreement entered into among the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, and The Goldman Sachs Group, Inc. (on its own behalf and on behalf of its affiliated entities). This action is brought within three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. § 4617(b)(12).
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THIRD CAUSE OF ACTION Violation of Section 15 of the Securities Act of 1933 (Against Goldman Sachs Mortgage Company, The Goldman Sachs Group, Inc., Goldman Sachs Real Estate Funding Corp., and the Individual Defendants) 237. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes from this cause of action any allegation that could be construed as alleging fraudulent or intentional or reckless conduct. This cause of action specifically excludes the allegations as to Defendants’ scienter, including those set forth in Section V. 238. This claim is brought under Section 15 of the Securities Act against Goldman
Sachs Mortgage Company, The Goldman Sachs Group, Inc., Goldman Sachs Real Estate Funding Corp., and the Individual Defendants for controlling-person liability with regard to the Section 11 and Section 12(a)(2) causes of actions set forth above. 239. The Individual Defendants at all relevant times participated in the operation and
management of GS Mortgage Securities Corp. and its related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of GS Mortgage Securities Corp.’s business affairs. Defendant Peter C. Aberg was a Director of Defendant GS Mortgage Securities Corp. Defendant Howard S. Altarescu was Vice President, Chief Financial Officer, and Chief Accounting Officer of Defendant GS Mortgage Securities Corp. Defendant Robert J. Christie was a Director of Defendant GS Mortgage Securities Corp. Defendant Kevin Gasvoda was a Director of Defendant GS Mortgage Securities Corp. and Managing Director for Goldman’s Fixed Income, Currency, and Commodities business line and head of Residential Whole Loan Trading at Goldman Sachs. Defendant Michelle Gill was Vice President and principal financial officer and principal accounting officer of Defendant GS Mortgage Securities Corp. Defendant David J. Rosenblum was Vice President and a Director of Defendant GS Mortgage Securities 98
Corp., and also served as head of Goldman’s Collateralized Loan Obligation activities. Defendant Jonathan S. Sobel was a Director of Defendant GS Mortgage Securities Corp. and headed Goldman’s mortgage department. Defendant Daniel L. Sparks was Chief Executive Officer, Vice President and a Director of Defendant GS Mortgage Securities Corp., and also served as the head of Goldman’s mortgage department. Defendant Mark Weiss was Vice President and principal financial officer and principal accounting officer of Defendant GS Mortgage Securities Corp. 240. Because of their positions of authority and control as senior officers and directors
of GS Mortgage Securities Corp., the Individual Defendants were able to, and in fact did, control the contents of the GS Mortgage Shelf Registration Statements, including the related Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 241. Defendant Goldman Sachs Mortgage Company was the sponsor for 36 of the
Securitizations, and culpably participated in the violations of Sections 11 and 12(a)(2) set forth above with respect to the offering of those GSE Certificates by initiating the Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting the depositor (which was Defendant GS Mortgage Securities Corp. in 35 of those Securitizations), and selecting Goldman, Sachs & Co. as the sole or lead underwriter for the Securitizations. In its role as sponsor, Goldman Sachs Mortgage Company knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. Goldman Sachs Mortgage Company also acted as the seller of the mortgage loans for 36 of the Securitizations, in that it conveyed such mortgage loans to the
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depositor, which, in 35 of the Securitizations, was its wholly owned subsidiary Defendant GS Mortgage Securities Corp. 242. Goldman Sachs Mortgage Company controlled all aspects of the business of GS
Mortgage Securities Corp., as that entity was merely a special purpose vehicle created to act as a pass-through for the issuance of the Certificates. In addition, because of its position as sponsor for 36 of the Securitizations, Goldman Sachs Mortgage Company was able to, and did in fact, control the contents of the Registration Statements filed by GS Mortgage Securities Corp., including the Prospectuses and Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 243. Defendant The Goldman Sachs Group, Inc. controlled the business operations of
each of Defendants Goldman Sachs Mortgage Company, GS Mortgage Securities Corp., Goldman, Sachs & Co., and Goldman Sachs Real Estate Funding Corp. The Goldman Sachs Group, Inc. is the ultimate corporate parent of its wholly owned subsidiaries Defendants Goldman Sachs Mortgage Company, GS Mortgage Securities Corp., Goldman, Sachs & Co., and Goldman Sachs Real Estate Funding Corp. As such, The Goldman Sachs Group, Inc. upon information and belief held the voting power and therefore the practical ability to direct and control the actions of GS Mortgage Securities Corp. and Goldman, Sachs & Co. in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of GS Mortgage Securities Corp. and Goldman, Sachs & Co. in connection with the issuance and sale of the Certificates. 244. The Goldman Sachs Group, Inc. expanded its share of the residential mortgage-
backed securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material
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facts and omissions of material facts in the Registration Statements. The Goldman Sachs Group, Inc. culpably participated in the violations of Section 11 and 12(a)(2) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans’ characteristics in the Registration Statements and established special-purpose financial entities such as GS Mortgage Securities Corp. and the issuing trusts to serve as conduits for the mortgage loans. In addition, there was substantial overlap between the management of the business entities of The Goldman Sachs Group, Inc. and the directors and officers of Defendant GS Mortgage Securities Corp. For example, Defendant Kevin Gasvoda was a Director of GS Mortgage Securities Corp., in addition to serving as Managing Director for Goldman’s Fixed Income, Currency, and Commodities business line and Managing Director and head of Residential Whole Loan Trading at Goldman Sachs. In addition, Defendant David J. Rosenblum, who was Vice President and a Director of GS Mortgage Securities Corp., also served as head of Goldman’s Collateralized Loan Obligation activities. Similarly, Defendant Jonathan S. Sobel was a Director of Defendant GS Mortgage Securities Corp., and also headed Goldman’s mortgage department. Likewise, Defendant Daniel L. Sparks was Chief Executive Officer, Vice President and a Director of GS Mortgage Securities, while also heading Goldman’s mortgage department. Such overlapping control made The Goldman Sachs Group, Inc. a controlling person of Defendant GS Mortgage Securities Corp. for purposes of Section 15. 245. Defendant Goldman Sachs Real Estate Funding Corp. is a wholly owned
subsidiary of Goldman Sachs Bank USA and is the general partner of Goldman Sachs Mortgage Company, the sponsor of the Securitizations. The parent company of Goldman Sachs Real Estate Funding Corp.—Goldman Sachs Bank USA—is itself a subsidiary of The Goldman Sachs Group, Inc. Goldman Sachs Real Estate Funding Corp. provided a further vehicle for the
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ultimate controlling entity—The Goldman Sachs Group, Inc.—to further direct the activities of the sponsor of the Securitizations, Goldman Sachs Mortgage Company. Defendant Goldman Sachs Real Estate Funding Corp., as the general partner of Goldman Sachs Mortgage Company, controlled Goldman Sachs Mortgage Company and was able to, and did in fact, control the contents of the Registration Statements, including the Prospectuses and Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 246. Goldman Sachs Mortgage Company, The Goldman Sachs Group, Inc., Goldman
Sachs Real Estate Funding Corp., and the Individual Defendants are controlling persons within the meaning of Section 15 of the Securities Act by virtue of their actual power over, control of, ownership of, and/or directorship of GS Mortgage Securities Corp. and Goldman, Sachs & Co. at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 247. Fannie Mae and Freddie Mac purchased in the primary market the GSE
Certificates, which were issued pursuant to the Registration Statements, including the Prospectuses and Prospectus Supplements, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements, and specifically to Fannie Mae and Freddie Mac. 248. Fannie Mae and Freddie Mac did not know, and in the exercise of reasonable
diligence could not have known, of the misstatements and omissions in the Registration Statements; had the GSEs known of those misstatements and omissions, they would not have purchased the GSE Certificates.
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249.
Fannie Mae and Freddie Mac have sustained substantial damages as a result of the
misstatements and omissions in the Registration Statements, for which they are entitled to compensation. 250. The time period from June 5, 2009 through August 30, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and The Goldman Sachs Group, Inc. (on its own behalf and on behalf of its affiliated entities). The time period from July 15, 2011 through August 30, 2011 has been tolled for statute of limitations purposes by virtue of a tolling agreement entered into among the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, and The Goldman Sachs Group, Inc. (on its own behalf and on behalf of its affiliated entities). This action is brought within three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. § 4617(b)(12). FOURTH CAUSE OF ACTION Primary Violations of Section 13.1-522(A)(ii) of the Virginia Code (Against Goldman, Sachs & Co. and GS Mortgage Securities Corp.) 251. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes from this cause of action any allegation that could be construed as alleging fraudulent or intentional or reckless conduct. This cause of action specifically excludes the allegations as to Defendants’ scienter, including those set forth in Section V. 252. This claim is brought by Plaintiff pursuant to Section 13.1-522(A)(ii) of the
Virginia Code and is asserted on behalf of Freddie Mac. The allegations set forth in this cause of action pertain only to those GSE Certificates identified in Table 10 above that were purchased by Freddie Mac on or after September 6, 2006. 103
253.
Defendant Goldman, Sachs & Co. negligently made false and materially
misleading statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as “Prospectuses”) for each Securitization. Defendant GS Mortgage Securities Corp. negligently made false and materially misleading statements in the Prospectuses for the Securitizations effected under the GS Mortgage Shelf Registration Statements. 254. Goldman, Sachs & Co. is prominently identified in the Prospectuses, the primary
documents it used to sell the GSE Certificates. Goldman, Sachs & Co. offered the Certificates publicly, including selling to Freddie Mac the GSE Certificates, as set forth in the “Method of Distribution” or equivalent underwriting section of each Prospectus. 255. Goldman, Sachs & Co. offered and sold the GSE Certificates to Freddie Mac by
means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. Goldman, Sachs & Co. reviewed and participated in drafting the Prospectuses. 256. Goldman, Sachs & Co. successfully solicited Freddie Mac’s purchases of the GSE
Certificates. As underwriter, Goldman, Sachs & Co. was paid a substantial commission based on the amount it received from the sale of the Certificates to the public. 257. Goldman, Sachs & Co. offered the GSE Certificates for sale, sold them, and
distributed them to Freddie Mac in the State of Virginia. 258. GS Mortgage Securities Corp. is prominently identified in the Prospectuses for
the Securitizations carried out under the GS Mortgage Shelf Registration Statements. These Prospectuses were the primary documents used to sell Certificates for the Securitizations under
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the GS Mortgage Shelf Registration Statements. GS Mortgage Securities Corp. offered the Certificates publicly and actively solicited their sale, including to Freddie Mac. GS Mortgage Securities Corp. was paid a percentage of the total dollar amount of the offering upon completion of the Securitizations effected pursuant to the GS Mortgage Shelf Registration Statements. 259. With respect to the Securitizations for which it filed the GS Mortgage Shelf
Registration Statements, including the related Prospectus Supplements, GS Mortgage Securities Corp. offered the GSE Certificates to Freddie Mac by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. GS Mortgage Securities Corp. reviewed and participated in drafting the Prospectuses. 260. Each of Goldman, Sachs & Co. and GS Mortgage Securities Corp. actively
participated in the solicitation of Freddie Mac’s purchase of the GSE Certificates, and did so in order to benefit itself. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates. 261. Each of the Prospectuses contained material misstatements of fact and omitted
facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectuses, and specifically to Freddie Mac. 262. The untrue statements of material facts and omissions of material facts in the
Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings.
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263.
Goldman, Sachs & Co. and GS Mortgage Securities Corp. offered and sold the
GSE Certificates directly to Freddie Mac pursuant to the materially false, misleading, and incomplete Prospectuses. 264. Goldman, Sachs & Co. owed to Freddie Mac, as well as to other investors in these
trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. GS Mortgage Securities Corp. owed the same duty with respect to the Prospectuses for the Securitizations effected under the four GS Mortgage Shelf Registration Statements. 265. Goldman, Sachs & Co. and GS Mortgage Securities Corp. failed to exercise such
reasonable care. These Defendants in the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations, as set forth above. 266. In contrast, Freddie Mac did not know, and in the exercise of reasonable diligence
could not have known, of the untruths and omissions contained in the Prospectuses at the time it purchased the GSE Certificates. If Freddie Mac had known of those untruths and omissions, it would not have purchased the GSE Certificates. 267. Freddie Mac sustained substantial damages in connection with its investments in
the GSE Certificates and has the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 268. The time period from July 15, 2011 through August 30, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into among the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, and The Goldman Sachs Group, Inc. (on its
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own behalf and on behalf of its affiliated entities). This action is brought within three years of the date that FHFA was appointed as Conservator of Freddie Mac, and is thus timely under 12 U.S.C. § 4617(b)(12). FIFTH CAUSE OF ACTION Controlling Person Liability Under Section 13.1-522(C) of the Virginia Code (Against Goldman Sachs Mortgage Company, The Goldman Sachs Group, Inc., Goldman Sachs Real Estate Funding Corp., and the Individual Defendants) 269. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes from this cause of action any allegation that could be construed as alleging fraudulent or intentional or reckless conduct. This cause of action specifically excludes the allegations as to Defendants’ scienter, including those set forth in Section V. 270. This claim is brought under Section 13.1-522(C) of the Virginia Code and is
asserted on behalf of Freddie Mac. The allegations set forth in this cause of action pertain only to those GSE Certificates identified in Table 10 above that were purchased by Freddie Mac on or after September 6, 2006. This claim is brought against Goldman Sachs Mortgage Company, The Goldman Sachs Group, Inc., Goldman Sachs Real Estate Funding Corp., and the Individual Defendants for controlling-person liability with regard to the Fourth Cause of Action set forth above. 271. The Individual Defendants at all relevant times participated in the operation and
management of GS Mortgage Securities Corp. and its related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of GS Mortgage Securities Corp.’s business affairs. Defendant Peter C. Aberg was a Director of Defendant GS Mortgage Securities Corp. Defendant Howard S. Altarescu was Vice President, Chief Financial Officer, and Chief Accounting Officer of Defendant GS Mortgage Securities Corp. Defendant Robert J. Christie 107
was a Director of Defendant GS Mortgage Securities Corp. Defendant Kevin Gasvoda was a Director of Defendant GS Mortgage Securities Corp. and Managing Director for Goldman’s Fixed Income, Currency, and Commodities business line and head of Residential Whole Loan Trading at Goldman Sachs. Defendant Michelle Gill was Vice President and principal financial officer and principal accounting officer of Defendant GS Mortgage Securities Corp. Defendant David J. Rosenblum was Vice President and a Director of Defendant GS Mortgage Securities Corp., and also served as head of Goldman’s Collateralized Loan Obligation activities. Defendant Jonathan S. Sobel was a Director of Defendant GS Mortgage Securities Corp. and headed Goldman’s mortgage department. Defendant Daniel L. Sparks was Chief Executive Officer, Vice President and a Director of Defendant GS Mortgage Securities Corp., and also served as the head of Goldman’s mortgage department. Defendant Mark Weiss was Vice President and principal financial officer and principal accounting officer of Defendant GS Mortgage Securities Corp. 272. Because of their positions of authority and control as senior officers and directors
of GS Mortgage Securities Corp., the Individual Defendants were able to, and in fact did, control the contents of the GS Mortgage Shelf Registration Statements, including the related Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 273. Defendant Goldman Sachs Mortgage Company culpably participated in the
violation of Section 13.1-522(A)(ii) set forth above with respect to the offering of GSE Certificates in transactions it sponsored by initiating the Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting the depositor (GS Mortgage Securities Corp.), and selecting Goldman, Sachs & Co. as the lead underwriter. In
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its role as sponsor, Goldman Sachs Mortgage Company knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. Goldman Sachs Mortgage Company also acted as the seller of the mortgage loans for the Securitizations it sponsored, in that it conveyed such mortgage loans to the depositor, which was generally its wholly owned subsidiary Defendant GS Mortgage Securities Corp. 274. Goldman Sachs Mortgage Company controlled all aspects of the business of GS
Mortgage Securities Corp., as that entity was merely a special purpose vehicle created to act as a pass-through for the issuance of the Certificates. In addition, because of its position as sponsor, Goldman Sachs Mortgage Company was able to, and did in fact, control the contents of the Registration Statements filed by GS Mortgage Securities Corp., including the Prospectuses and Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 275. Defendant The Goldman Sachs Group, Inc. controlled the business operations of
each of Defendants Goldman Sachs Mortgage Company, GS Mortgage Securities Corp., Goldman, Sachs & Co., and Goldman Sachs Real Estate Funding Corp. The Goldman Sachs Group, Inc. is the ultimate corporate parent of its wholly owned subsidiaries Defendants Goldman Sachs Mortgage Company, GS Mortgage Securities Corp., Goldman, Sachs & Co., and Goldman Sachs Real Estate Funding Corp. As such, The Goldman Sachs Group, Inc. upon information and belief held the voting power and therefore the practical ability to direct and control the actions of GS Mortgage Securities Corp. and Goldman, Sachs & Co. in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of GS
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Mortgage Securities Corp. and Goldman, Sachs & Co. in connection with the issuance and sale of the Certificates. 276. The Goldman Sachs Group, Inc. expanded its share of the residential mortgage-
backed securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. The Goldman Sachs Group, Inc. culpably participated in the violation of Section 13.1-522(A)(ii) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans’ characteristics in the Registration Statements and established special-purpose financial entities such as GS Mortgage Securities Corp. and the issuing trusts to serve as conduits for the mortgage loans. 277. In addition, there was substantial overlap between the management of the
business entities of The Goldman Sachs Group, Inc. and the directors and officers of Defendant GS Mortgage Securities Corp. For example, Defendant Kevin Gasvoda was a Director of GS Mortgage Securities Corp., in addition to serving as Managing Director for Goldman’s Fixed Income, Currency, and Commodities business line and Managing Director and head of Residential Whole Loan Trading at Goldman Sachs. In addition, Defendant David J. Rosenblum, who was Vice President and a Director of GS Mortgage Securities Corp., also served as head of Goldman’s Collateralized Loan Obligation activities. Similarly, Defendant Jonathan S. Sobel was a Director of Defendant GS Mortgage Securities Corp., and also headed Goldman’s mortgage department. Likewise, Defendant Daniel L. Sparks was Chief Executive Officer, Vice President and a Director of GS Mortgage Securities, while also heading Goldman’s mortgage department. Such overlapping control made The Goldman Sachs Group, Inc. a
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controlling person of Defendant GS Mortgage Securities Corp. for purposes of Section 13.1522(C). 278. Defendant Goldman Sachs Real Estate Funding Corp. is a wholly owned
subsidiary of Goldman Sachs Bank USA and is the general partner of Goldman Sachs Mortgage Company, the sponsor of the Securitizations. The parent company of Goldman Sachs Real Estate Funding Corp.—Goldman Sachs Bank USA—is itself a subsidiary of The Goldman Sachs Group, Inc. Goldman Sachs Real Estate Funding Corp. provided a further vehicle for the ultimate controlling entity—The Goldman Sachs Group, Inc.—to further direct the activities of the sponsor of the Securitizations, Goldman Sachs Mortgage Company. Defendant Goldman Sachs Real Estate Funding Corp., as the general partner of Goldman Sachs Mortgage Company, controlled Goldman Sachs Mortgage Company and was able to, and did in fact, control the contents of the Registration Statements, including the Prospectuses and Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 279. Goldman Sachs Mortgage Company, The Goldman Sachs Group, Inc., Goldman
Sachs Real Estate Funding Corp., and the Individual Defendants are controlling persons within the meaning of Section 13.1-522(C) of the Virginia Code by virtue of their actual power over, control of, ownership of, and/or directorship of GS Mortgage Securities Corp. and Goldman, Sachs & Co. at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 280. Freddie Mac purchased the GSE Certificates, which were issued pursuant to the
Registration Statements, including the Prospectuses and Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated
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therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements, and specifically to Freddie Mac. 281. Freddie Mac did not know, and in the exercise of reasonable diligence could not
have known, of the misstatements and omissions in the Registration Statements; had Freddie Mac known of those misstatements and omissions, it would not have purchased the GSE Certificates. 282. Freddie Mac has sustained substantial damages as a result of the misstatements
and omissions in the Registration Statements, for which it is entitled to compensation, and for which Goldman Sachs Mortgage Company, The Goldman Sachs Group, Inc., Goldman Sachs Real Estate Funding Corp., and the Individual Defendants are jointly and severally liable. 283. The time period from July 15, 2011 through August 30, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into among the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, and The Goldman Sachs Group, Inc. (on its own behalf and on behalf of its affiliated entities). This action is brought within three years of the date that FHFA was appointed as Conservator of Freddie Mac, and is thus timely under 12 U.S.C. § 4617(b)(12). SIXTH CAUSE OF ACTION Primary Violations of Section 31-5606.05(a)(1)(B) of the District of Columbia Code (Against GS Mortgage Securities Corp. and Goldman, Sachs & Co.) 284. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes from this cause of action any allegation that could be construed as alleging fraudulent or intentional or reckless conduct. This cause of action specifically excludes the allegations as to Defendants’ scienter, including those set forth in Section V. 112
285.
This claim is brought by Plaintiff pursuant to Section 31-5606.05(a)(1)(B) of the
District of Columbia Code and is asserted on behalf of Fannie Mae. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 11 above that were purchased by Fannie Mae. 286. Defendant Goldman, Sachs & Co. negligently made false and materially
misleading statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as “Prospectuses”) for each Securitization. Defendant GS Mortgage Securities Corp. negligently made false and materially misleading statements in the Prospectuses for the Securitizations effected under the GS Mortgage Shelf Registration Statements. 287. Goldman, Sachs & Co. is prominently identified in the Prospectuses, the primary
documents it used to sell the GSE Certificates. Goldman, Sachs & Co. offered the Certificates publicly, including selling to Fannie Mae the GSE Certificates, as set forth in the “Method of Distribution” or equivalent underwriting section of each Prospectus. 288. Goldman, Sachs & Co. offered and sold the GSE Certificates to Fannie Mae by
means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. Goldman, Sachs & Co. reviewed and participated in drafting the Prospectuses. 289. Goldman, Sachs & Co. successfully solicited Fannie Mae’s purchases of the GSE
Certificates. As underwriter, Goldman, Sachs & Co. was paid a substantial commission based on the amount it received from the sale of the Certificates to the public.
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290.
Goldman, Sachs & Co. offered the GSE Certificates for sale, sold them, and
distributed them to Fannie Mae in the District of Columbia. 291. GS Mortgage Securities Corp. is prominently identified in the Prospectuses for
the Securitizations carried out under the GS Mortgage Shelf Registration Statements. These Prospectuses were the primary documents used to sell Certificates for the Securitizations under the GS Mortgage Shelf Registration Statements. GS Mortgage Securities Corp. offered the Certificates publicly and actively solicited their sale, including to Fannie Mae. GS Mortgage Securities Corp. was paid a percentage of the total dollar amount of the offering upon completion of the Securitizations effected pursuant to the GS Mortgage Shelf Registration Statements. 292. With respect to the Securitizations for which it filed the GS Mortgage Shelf
Registration Statements, including the related Prospectus Supplements, GS Mortgage Securities Corp. offered the GSE Certificates to Fannie Mae by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. GS Mortgage Securities Corp. reviewed and participated in drafting the Prospectuses. 293. Each of Goldman, Sachs & Co. and GS Mortgage Securities Corp. actively
participated in the solicitation of Fannie Mae’s purchase of the GSE Certificates, and did so in order to benefit itself. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates. 294. Each of the Prospectuses contained material misstatements of fact and omitted
facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectuses, and specifically to Fannie Mae.
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295.
The untrue statements of material facts and omissions of material facts in the
Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 296. Goldman, Sachs & Co. and GS Mortgage Securities Corp. offered and sold the
GSE Certificates directly to Fannie Mae pursuant to the materially false, misleading, and incomplete Prospectuses. 297. Goldman, Sachs & Co. owed to Fannie Mae, as well as to other investors in these
trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. GS Mortgage Securities Corp. owed the same duty with respect to the Prospectuses for the Securitizations effected under the four GS Mortgage Shelf Registration Statements. 298. Goldman, Sachs & Co. and GS Mortgage Securities Corp. failed to exercise such
reasonable care. These Defendants in the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations, as set forth above. 299. In contrast, Fannie Mae did not know, and in the exercise of reasonable diligence
could not have known, of the untruths and omissions contained in the Prospectuses at the time it purchased the GSE Certificates. If Fannie Mae had known of those untruths and omissions, it would not have purchased the GSE Certificates.
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300.
Fannie Mae sustained substantial damages in connection with its investments in
the GSE Certificates and has the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 301. The time period from June 5, 2009 through August 30, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and The Goldman Sachs Group, Inc. (on its own behalf and on behalf of its affiliated entities). The time period from July 15, 2011 through August 30, 2011 has been tolled for statute of limitations purposes by virtue of a tolling agreement entered into among the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, and The Goldman Sachs Group, Inc. (on its own behalf and on behalf of its affiliated entities). This action is brought within three years of the date that FHFA was appointed as Conservator of Fannie Mae, and is thus timely under 12 U.S.C. § 4617(b)(12). SEVENTH CAUSE OF ACTION Controlling Person Liability Under Section 31-5606.05(c) of the District of Columbia Code (Against Goldman Sachs Mortgage Company, The Goldman Sachs Group, Inc., Goldman Sachs Real Estate Funding Corp., and the Individual Defendants) 302. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes from this cause of action any allegation that could be construed as alleging fraudulent or intentional or reckless conduct. This cause of action specifically excludes the allegations as to Defendants’ scienter, including those set forth in Section V. 303. This claim is brought under Section 31-5606.05(c) of the District of Columbia
Code and is asserted on behalf of Fannie Mae. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 11 above that were purchased by Fannie Mae. This claim is brought against Goldman Sachs Mortgage Company, The Goldman 116
Sachs Group, Inc., Goldman Sachs Real Estate Funding Corp., and the Individual Defendants for controlling-person liability with regard to the Sixth Cause of Action set forth above. 304. The Individual Defendants at all relevant times participated in the operation and
management of GS Mortgage Securities Corp. and its related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of GS Mortgage Securities Corp.’s business affairs. Defendant Peter C. Aberg was a Director of Defendant GS Mortgage Securities Corp. Defendant Howard S. Altarescu was Vice President, Chief Financial Officer, and Chief Accounting Officer of Defendant GS Mortgage Securities Corp. Defendant Robert J. Christie was a Director of Defendant GS Mortgage Securities Corp. Defendant Kevin Gasvoda was a Director of Defendant GS Mortgage Securities Corp. and Managing Director for Goldman’s Fixed Income, Currency, and Commodities business line and head of Residential Whole Loan Trading at Goldman Sachs. Defendant Michelle Gill was Vice President and principal financial officer and principal accounting officer of Defendant GS Mortgage Securities Corp. Defendant David J. Rosenblum was Vice President and a Director of Defendant GS Mortgage Securities Corp., and also served as head of Goldman’s Collateralized Loan Obligation activities. Defendant Jonathan S. Sobel was a Director of Defendant GS Mortgage Securities Corp. and headed Goldman’s mortgage department. Defendant Daniel L. Sparks was Chief Executive Officer, Vice President and a Director of Defendant GS Mortgage Securities Corp., and also served as the head of Goldman’s mortgage department. Defendant Mark Weiss was Vice President and principal financial officer and principal accounting officer of Defendant GS Mortgage Securities Corp. 305. Because of their positions of authority and control as senior officers and directors
of GS Mortgage Securities Corp., the Individual Defendants were able to, and in fact did, control
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the contents of the GS Mortgage Shelf Registration Statements, including the related Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 306. Defendant Goldman Sachs Mortgage Company culpably participated in the
violation of Section 31-5606.05(a)(1)(B) set forth above with respect to the offering of GSE Certificates in transactions it sponsored by initiating the Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting the depositor (GS Mortgage Securities Corp.), and selecting Goldman, Sachs & Co. as the lead underwriter. In its role as sponsor, Goldman Sachs Mortgage Company knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. Goldman Sachs Mortgage Company also acted as the seller of the mortgage loans for the Securitizations it sponsored, in that it conveyed such mortgage loans to the depositor, which was generally its wholly owned subsidiary Defendant GS Mortgage Securities Corp. 307. Goldman Sachs Mortgage Company controlled all aspects of the business of GS
Mortgage Securities Corp., as that entity was merely a special purpose vehicle created to act as a pass-through for the issuance of the Certificates. In addition, because of its position as sponsor, Goldman Sachs Mortgage Company was able to, and did in fact, control the contents of the Registration Statements filed by GS Mortgage Securities Corp., including the Prospectuses and Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading.
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308.
Defendant The Goldman Sachs Group, Inc. controlled the business operations of
each of Defendants Goldman Sachs Mortgage Company, GS Mortgage Securities Corp., Goldman, Sachs & Co., and Goldman Sachs Real Estate Funding Corp. The Goldman Sachs Group, Inc. is the ultimate corporate parent of its wholly owned subsidiaries Defendants Goldman Sachs Mortgage Company, GS Mortgage Securities Corp., Goldman, Sachs & Co., and Goldman Sachs Real Estate Funding Corp. As such, The Goldman Sachs Group, Inc. upon information and belief held the voting power and therefore the practical ability to direct and control the actions of GS Mortgage Securities Corp. and Goldman, Sachs & Co. in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of GS Mortgage Securities Corp. and Goldman, Sachs & Co. in connection with the issuance and sale of the Certificates. 309. The Goldman Sachs Group, Inc. expanded its share of the residential mortgage-
backed securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. The Goldman Sachs Group, Inc. culpably participated in the violation of Section 31-5606.05(a)(1)(B) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans’ characteristics in the Registration Statements and established special-purpose financial entities such as GS Mortgage Securities Corp. and the issuing trusts to serve as conduits for the mortgage loans. 310. In addition, there was substantial overlap between the management of the
business entities of The Goldman Sachs Group, Inc. and the directors and officers of Defendant GS Mortgage Securities Corp. For example, Defendant Kevin Gasvoda was a Director of GS
119
Mortgage Securities Corp., in addition to serving as Managing Director for Goldman’s Fixed Income, Currency, and Commodities business line and Managing Director and head of Residential Whole Loan Trading at Goldman Sachs. In addition, Defendant David J. Rosenblum, who was Vice President and a Director of GS Mortgage Securities Corp., also served as head of Goldman’s Collateralized Loan Obligation activities. Similarly, Defendant Jonathan S. Sobel was a Director of Defendant GS Mortgage Securities Corp., and also headed Goldman’s mortgage department. Likewise, Defendant Daniel L. Sparks was Chief Executive Officer, Vice President and a Director of GS Mortgage Securities, while also heading Goldman’s mortgage department. Such overlapping control made The Goldman Sachs Group, Inc. a controlling person of Defendant GS Mortgage Securities Corp. for purposes of Section 315606.05(c). 311. Defendant Goldman Sachs Real Estate Funding Corp. is a wholly owned
subsidiary of Goldman Sachs Bank USA and is the general partner of Goldman Sachs Mortgage Company, the sponsor of the Securitizations. The parent company of Goldman Sachs Real Estate Funding Corp.—Goldman Sachs Bank USA—is itself a subsidiary of The Goldman Sachs Group, Inc. Goldman Sachs Real Estate Funding Corp. provided a further vehicle for the ultimate controlling entity—The Goldman Sachs Group, Inc.—to further direct the activities of the sponsor of the Securitizations, Goldman Sachs Mortgage Company. Defendant Goldman Sachs Real Estate Funding Corp., as the general partner of Goldman Sachs Mortgage Company, controlled Goldman Sachs Mortgage Company and was able to, and did in fact, control the contents of the Registration Statements, including the Prospectuses and Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading.
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312.
Goldman Sachs Mortgage Company, The Goldman Sachs Group, Inc., Goldman
Sachs Real Estate Funding Corp., and the Individual Defendants are controlling persons within the meaning of Section 31-5606.05(c) of the District of Columbia Code by virtue of their actual power over, control of, ownership of, and/or directorship of GS Mortgage Securities Corp. and Goldman, Sachs & Co. at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 313. Fannie Mae purchased the GSE Certificates, which were issued pursuant to the
Registration Statements, including the Prospectuses and Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements, and specifically to Fannie Mae. 314. Fannie Mae did not know, and in the exercise of reasonable diligence could not
have known, of the misstatements and omissions in the Registration Statements; had Fannie Mae known of those misstatements and omissions, it would not have purchased the GSE Certificates. 315. Fannie Mae has sustained substantial damages as a result of the misstatements and
omissions in the Registration Statements, for which it is entitled to compensation, and for which Goldman Sachs Mortgage Company, The Goldman Sachs Group, Inc., Goldman Sachs Real Estate Funding Corp., and the Individual Defendants are jointly and severally liable. 316. The time period from June 5, 2009 through August 30, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and The Goldman Sachs Group, Inc. (on its own behalf and on behalf of its affiliated entities). The time period from July 15, 2011 through August 30, 2011 has been tolled for statute of limitations purposes by virtue of a tolling agreement entered into among the Federal Housing
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Finance Agency, Fannie Mae, Freddie Mac, and The Goldman Sachs Group, Inc. (on its own behalf and on behalf of its affiliated entities). This action is brought within three years of the date that FHFA was appointed as Conservator of Fannie Mae, and is thus timely under 12 U.S.C. § 4617(b)(12). EIGHTH CAUSE OF ACTION Common Law Negligent Misrepresentation (Against GS Mortgage Securities Corp. and Goldman, Sachs & Co.) 317. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes from this cause of action any allegation that could be construed as alleging fraudulent or intentional or reckless conduct. This cause of action specifically excludes the allegations as to Defendants’ scienter, including those set forth in Section V. 318. This is a claim for common law negligent misrepresentation against Defendants
GS Mortgage Securities Corp. and Goldman, Sachs & Co. 319. Between September 7, 2005 and October 29, 2007, GS Mortgage Securities Corp.
and Goldman, Sachs & Co. sold the GSE Certificates to the GSEs as described above. Because GS Mortgage Securities Corp. owned and then conveyed the underlying mortgage loans that collateralized the Securitizations for which it served as depositor, GS Mortgage Securities Corp. had unique, exclusive, and special knowledge about the mortgage loans in the Securitizations through its possession of the loan files and other documentation. 320. Likewise, because Goldman, Sachs & Co. acted as underwriter for the
Securitizations it underwrote, under the Securities Act it was obligated—and had the opportunity—to perform sufficient due diligence to ensure that the Registration Statements, including without limitation the relevant Prospectus Supplements, for which it served as
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underwriter did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. As a result of this privileged position as underwriter—which gave it access to loan file information and obligated it to perform adequate due diligence to ensure the accuracy of the Registration Statements—Goldman, Sachs & Co. had unique, exclusive, and special knowledge about the underlying mortgage loans in the Securitizations. 321. Goldman, Sachs & Co. also had unique, exclusive, and special knowledge of the
work of third-party due diligence providers, such as Clayton, who identified significant failures of originators to adhere to the underwriting standards represented in the Registration Statements. The GSEs, like other investors, had no access to borrower loan files prior to the closing of the Securitizations and their purchase of the Certificates. Accordingly, when determining whether to purchase the GSE Certificates, the GSEs could not evaluate the underwriting quality or the servicing practices of the mortgage loans in the Securitizations on a loan-by-loan basis. The GSEs therefore reasonably relied on Goldman, Sachs & Co.’s knowledge and its express representations made prior to the closing of the Securitizations regarding the underlying mortgage loans. 322. GS Mortgage Securities Corp. and Goldman, Sachs & Co. were aware that the
GSEs reasonably relied on GS Mortgage Securities Corp.’s and Goldman, Sachs & Co.’s reputations and unique, exclusive, and special expertise and experience, as well as their express representations made prior to the closing of the Securitizations, and depended upon these Defendants for complete, accurate, and timely information. The standards under which the underlying mortgage loans were actually originated were known to these Defendants and were not known, and could not be determined, by the GSEs prior to the closing of the Securitizations.
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In purchasing the GSE Certificates from GS Mortgage Securities Corp. and Goldman, Sachs & Co., the GSEs relied on their special relationship with those Defendants, and the purchases were made, in part, in reliance on that special relationship. 323. Based upon their unique, exclusive, and special knowledge and expertise about
the loans held by the trusts in the Securitizations, GS Mortgage Securities Corp. and Goldman, Sachs & Co. had a duty to provide the GSEs complete, accurate, and timely information regarding the mortgage loans and the Securitizations. GS Mortgage Securities Corp. and Goldman, Sachs & Co. negligently breached their duty to provide such information to the GSEs by instead making to the GSEs untrue statements of material facts in the Securitizations, or otherwise misrepresenting to the GSEs material facts about the Securitizations. The misrepresentations are set forth in Section IV above, and include misrepresentations as to the accuracy of the represented credit ratings, compliance with underwriting guidelines for the mortgage loans, and the accuracy of the owner-occupancy statistics and the loan-to-value ratios applicable to the Securitizations, as disclosed in the term sheets and Prospectus Supplements. 324. In addition, having made actual representations about the underlying collateral in
the Securitizations and the facts bearing on the riskiness of the Certificates, GS Mortgage Securities Corp. and Goldman, Sachs & Co. had a duty to correct misimpressions left by their statements, including with respect to any “half truths.” The GSEs were entitled to rely upon GS Mortgage Securities Corp. and Goldman, Sachs & Co.’s’ representations about the Securitizations, and these Defendants failed to correct in a timely manner any of their misstatements or half truths, including misrepresentations as to compliance with underwriting guidelines for the mortgage loans.
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325.
The GSEs reasonably relied on the information GS Mortgage Securities Corp. and
Goldman, Sachs & Co. did provide, and GS Mortgage Securities Corp. and Goldman, Sachs & Co. knew that the GSEs were acting in reliance on such information. 326. The GSEs were damaged in an amount to be determined at trial as a direct,
proximate, and foreseeable result of GS Mortgage Securities Corp.’s and Goldman, Sachs & Co.’s misrepresentations, including any half truths. 327. The time period from June 5, 2009 through August 30, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and The Goldman Sachs Group, Inc. (on its own behalf and on behalf of its affiliated entities). The time period from July 15, 2011 through August 30, 2011 has been tolled for statute of limitations purposes by virtue of a tolling agreement entered into among the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, and The Goldman Sachs Group, Inc. (on its own behalf and on behalf of its affiliated entities). This action is brought within three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. § 4617(b)(12). NINTH CAUSE OF ACTION Common Law Fraud (Against Goldman Sachs Mortgage Company, GS Mortgage Securities Corp. and Goldman, Sachs & Co.) 328. forth herein. 329. This is a claim for common law fraud against Defendants Goldman Sachs Plaintiff realleges each allegation in paragraphs 1 through 202 above as if fully set
Mortgage Company, GS Mortgage Securities Corp. and Goldman, Sachs & Co. with respect to the Securitizations Goldman Sachs Mortgage Company sponsored.
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330.
The material representations set forth above were fraudulent, and Goldman, Sachs
& Co.’s representations to the GSEs in the term sheets and Prospectus Supplements falsely and misleadingly misrepresented and omitted material statements of fact. The misrepresentations are set forth in Section IV above, and include misrepresentations as to the accuracy of the represented credit ratings, compliance with underwriting guidelines for the mortgage loans, and the accuracy of the owner-occupancy statistics and the loan-to-value ratios applicable to the Securitizations, as disclosed in the term sheets and Prospectus Supplements. The representations on which the GSEs relied were directly communicated to them by Goldman, Sachs & Co. Goldman, Sachs & Co. knew, or was reckless in not knowing, that its representations and omissions were false and/or misleading at the time they were made. Goldman, Sachs & Co. made the misleading statements for the purpose of inducing the GSEs to purchase the GSE Certificates. 331. The basis for the false representations in the term sheets and Prospectus
Supplements that Goldman, Sachs & Co. made to the GSEs was information that Goldman Sachs Mortgage Company and GS Mortgage Securities Corp. provided to Goldman, Sachs & Co. as to the strength of the collateral underlying the GSE Certificates and the structure of the Securitizations. Goldman Sachs Mortgage Company and GS Mortgage Securities Corp. communicated this information to Goldman, Sachs & Co. with the knowledge and intent that Goldman, Sachs & Co. would communicate this information to purchasers of the GSE Certificates. Goldman Sachs Mortgage Company and GS Mortgage Securities Corp. each had reason to expect that the GSEs were among the class of persons who would receive and rely on such representations.
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332.
Each of Goldman Sachs Mortgage Company, GS Mortgage Securities Corp. and
Goldman, Sachs & Co. intended that the above misleading statements were to be made for the purpose of inducing the GSEs to purchase the GSE Certificates. Goldman Sachs Mortgage Company made misleading statements with reason to expect that Fannie Mae and Freddie Mac would be among the class of persons who would receive and rely upon the statements. 333. The GSEs justifiably relied on Goldman Sachs Mortgage Company, GS Mortgage
Securities Corp. and Goldman, Sachs & Co.’s false representations and misleading omissions. 334. Had the GSEs known the true facts regarding Goldman’s underwriting practices
and the quality of the mortgage loans collateralizing the GSE Certificates, they would not have purchased the GSE Certificates. 335. As a result of the foregoing, the GSEs have suffered damages according to proof.
In the alternative, Plaintiff hereby demands rescission and makes any necessary tender of the GSE Certificates. 336. Goldman Sachs Mortgage Company, GS Mortgage Securities Corp. and
Goldman, Sachs & Co.’s misconduct was intentional and wanton. The immediate victims of Goldman Sachs Mortgage Company, GS Mortgage Securities Corp. and Goldman, Sachs & Co.’s fraud was Fannie Mae and Freddie Mac, two Government-sponsored entities whose primary mission is assuring affordable housing to millions of Americans. Further, the public nature of Goldman Sachs Mortgage Company, GS Mortgage Securities Corp. and Goldman, Sachs & Co.’s harm is apparent in—and conclusively demonstrated by—the congressional hearings and federal enforcement actions that have been pursued against Goldman as a direct result of the fraudulent conduct at issue in this Complaint. See, e.g., the Senate PSI Report at 376–636; the FCIC Report, passim; Goldman Sachs to Pay Record $550 Million to Settle SEC
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Charges Related to Subprime Mortgage CDO, SEC Litig. Release No. 21592 (July 15, 2010). Punitive damages are therefore warranted for Goldman Sachs Mortgage Company, GS Mortgage Securities Corp. and Goldman, Sachs & Co.’s actions in order to punish them, deter them from future misconduct, and protect the public. 337. The time period from June 5, 2009 through August 30, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and The Goldman Sachs Group, Inc. (on its own behalf and on behalf of its affiliated entities). The time period from July 15, 2011 through August 30, 2011 has been tolled for statute of limitations purposes by virtue of a tolling agreement entered into among the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, and The Goldman Sachs Group, Inc. (on its own behalf and on behalf of its affiliated entities). This action is brought within three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. § 4617(b)(12). TENTH CAUSE OF ACTION Aiding and Abetting Fraud (Against Goldman Sachs Mortgage Company and GS Mortgage Securities Corp.) 338. forth herein. 339. This is a claim for aiding and abetting fraud against Defendants Goldman Sachs Plaintiff realleges each allegation in paragraphs 1 through 202 above as if fully set
Mortgage Company and GS Mortgage Securities Corp. with respect to the Securitizations Goldman Sachs Mortgage Company sponsored. 340. Goldman Sachs Mortgage Company, as sponsor for 36 of the Securitizations,
substantially assisted Goldman, Sachs & Co.’s fraud by choosing which mortgage loans would be included in those Securitizations. It also extended warehouse lines of credit to mortgage
128
originators that it knew had shoddy standards with the intent of later purchasing and securitizing those loans to purchasers, such as the GSEs. Goldman Sachs Mortgage Company’s action in assisting in the origination of, and then purchasing, poorly underwritten loans was an integral part of the Securitizations. 341. Likewise, GS Mortgage Securities Corp., as depositor for 35 of the
Securitizations, substantially assisted Goldman, Sachs & Co.’s fraud by issuing the Registration Statements that were used to offer publicly the Certificates. As the issuer of the Certificates, GS Mortgage Securities Corp. was an integral part of Goldman, Sachs & Co.’s sale of the Certificates to the GSEs. 342. As described above, Goldman, Sachs & Co. made fraudulent and untrue
statements of material fact and omitted to state material facts regarding the true credit quality of the GSE Certificates, the true rate of owner occupancy, the true LTV ratio of the underlying mortgage loans, and compliance by the originators with applicable underwriting guidelines. 343. Each of Goldman Sachs Mortgage Company and GS Mortgage Securities Corp.
had unique access to the loan files, and therefore was aware of the extreme weakness of the loans. In fact, Goldman Sachs during the same period it was selling the GSE Certificates to the GSEs was also shorting those same Certificates and engaging in put back requests with originators and other parties based upon the weakness of the underlying loans. Accordingly, Goldman Sachs Mortgage Company and GS Mortgage Securities Corp. were aware that the representations and omissions of Goldman, Sachs & Co. were fraudulent. 344. The central role of Goldman Sachs Mortgage Company and GS Mortgage
Securities Corp. in Goldman, Sachs & Co.’s vertically integrated sales strategy substantially assisted Goldman, Sachs & Co. in its fraud. Goldman Sachs Mortgage Company, as the
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purchaser of the underlying mortgage loans, worked closely with GS Mortgage Securities Corp., as the vehicle for securitizing the mortgage loans, which in turn worked closely with Goldman, Sachs & Co., as the distribution arm for the Certificates that were collateralized by those mortgage loans and then sold to the GSEs. Goldman Sachs Mortgage Company and GS Mortgage Securities Corp. worked hand-in-glove to provide Goldman, Sachs & Co. with Certificates that it could fraudulently sell to the GSEs. 345. Goldman Sachs Mortgage Company and GS Mortgage Securities Corp.’s
substantial assistance in Goldman, Sachs & Co.’s fraud played a significant and material role in inducing the GSEs to purchase the GSE Certificates. As a direct, proximate and foreseeable result of Goldman Sachs Mortgage Company and GS Mortgage Securities Corp. aiding and abetting Goldman, Sachs & Co. in its fraud against the GSEs, the GSEs have been damaged in an amount to be determined at trial. 346. Because Goldman Sachs Mortgage Company and GS Mortgage Securities Corp.
aided and abetted Goldman, Sachs & Co.’s fraud willfully and wantonly, and because, by their acts, Goldman Sachs Mortgage Company and GS Mortgage Securities Corp. knowingly affected the general public, including but not limited to all persons with interests in the Certificates, Plaintiff is entitled to recover punitive damages. 347. The time period from June 5, 2009 through August 30, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and The Goldman Sachs Group, Inc. (on its own behalf and on behalf of its affiliated entities). The time period from July 15, 2011 through August 30, 2011 has been tolled for statute of limitations purposes by virtue of a tolling agreement entered into among the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, and The Goldman Sachs Group, Inc. (on its own
130
behalf and on behalf of its affiliated entities). This action is brought within three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. § 4617(b)(12). PRAYER FOR RELIEF WHEREFORE Plaintiff prays for relief as follows: 348. An award 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, but including: a. Rescission and recovery of the consideration paid for the GSE Certificates, with
interest thereon; b. Each GSE’s monetary losses, including any diminution in value of the GSE
Certificates, as well as lost principal and lost interest payments thereon; c. d. e. f. Punitive damages; Attorneys’ fees and costs; Prejudgment interest at the maximum legal rate; and Such other and further relief as the Court may deem just and proper. JURY TRIAL DEMANDED 349. Pursuant to Federal Rule of Civil Procedure 38(b), Plaintiff hereby demands a
trial by jury on all issues triable by jury.
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UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK FEDERAL HOUSING FINANCE AGENCY, AS CONSERVATOR FOR THE FEDERAL NATIONAL MORTGAGE ASSOCIATION AND THE FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff, -againstCREDIT SUISSE HOLDINGS (USA), INC., CREDIT SUISSE (USA), INC., CREDIT SUISSE SECURITIES (USA) LLC, DLJ MORTGAGE CAPITAL, INC., CREDIT SUISSE FIRST BOSTON MORTGAGE SECURITIES CORPORATION, ASSET BACKED SECURITIES CORPORATION, CREDIT SUISSE FIRST BOSTON MORTGAGE ACCEPTANCE CORPORATION, ANDREW A. KIMURA, JEFFREY A. ALTABEF, EVELYN ECHEVARRIA, MICHAEL A. MARRIOTT, ZEV KINDLER, JOHN P. GRAHAM, THOMAS E. SIEGLER, THOMAS ZINGALLI, CARLOS ONIS, STEVEN L. KANTOR, JOSEPH M. DONOVAN, JULIANA JOHNSON, and GREG RICHTER, Defendants. ___ CIV. ___ (___)
COMPLAINT JURY TRIAL DEMANDED
TABLE OF CONTENTS Page NATURE OF ACTION ...................................................................................................................1 PARTIES .........................................................................................................................................9 The Plaintiff and the GSEs...................................................................................................9 The Defendants ....................................................................................................................9 The Non-Party Originators ................................................................................................13 JURISDICTION AND VENUE ....................................................................................................13 FACTUAL ALLEGATIONS ........................................................................................................14 I. THE SECURITIZATIONS................................................................................................14 A. B. C. Residential Mortgage-Backed Securitizations In General .....................................14 The Securitizations At Issue In This Case .............................................................16 The Securitization Process .....................................................................................20 1. 2. II. DLJ Mortgage Capital Groups Mortgage Loans in Special Purpose Trusts..........................................................................................................20 The Trusts Issue Securities Backed by the Loans ......................................21
THE DEFENDANTS’ PARTICIPATION IN THE SECURITIZATION PROCESS ..........................................................................................................................26 A. The Role of Each of the Defendants ......................................................................26 1. 2. 3. 4. 5. 6. DLJ Mortgage Capital................................................................................26 CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance ................................................................................28 CS Securities ..............................................................................................28 CS USA......................................................................................................29 CS Holdings ...............................................................................................29 The Individual Defendants .........................................................................30 i
B. III.
The Defendants’ Failure To Conduct Proper Due Diligence.................................32
THE REGISTRATION STATEMENTS AND THE PROSPECTUS SUPPLEMENTS................................................................................................................34 A. B. C. D. Compliance With Underwriting Guidelines ..........................................................34 Statements Regarding Occupancy Status of Borrower ..........................................37 Statements Regarding Loan-to-Value Ratios.........................................................40 Statements Regarding Credit Ratings ....................................................................43
IV.
FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS......................................................................................45 A. The Statistical Data Provided in the Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False ....................................45 1. 2. B. Owner Occupancy Data Was Materially False ..........................................46 Loan-to-Value Data Was Materially False ................................................48
The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines .........................................................52 1. A Forensic Review of Loan Files Has Revealed Pervasive Failure to Adhere to Underwriting Guidelines.......................................................53 (a) (b) (c) (d) 2. Stated Income Was Not Reasonable ..............................................55 Evidence of Occupancy Misrepresentations ..................................57 Debts Incorrectly Calculated..........................................................58 Credit Inquiries That Indicated Misrepresentation of Debt ...........59
Government Investigations and Other Evidence Have Confirmed That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines .........61 Credit Suisse Routinely Included in Securitizations Mortgage Loans That Failed to Meet Underwriting Standards ..................................70 Credit Suisse’s Own Insurers Have Found That Loan Groups Securitized by Credit Suisse Are Full of Loans Originated in Violation of Underwriting Guidelines .......................................................72
3. 4.
ii
5.
The Collapse of the Certificates’ Credit Ratings Further Indicates That the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines .................................................................75 The Surge in Mortgage Delinquency and Default Further Demonstrates That the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines ....................................77
6.
V.
FANNIE MAE’S AND FREDDIE MAC’S PURCHASES OF THE GSE CERTIFICATES AND THE RESULTING DAMAGES .................................................80
FIRST CAUSE OF ACTION ........................................................................................................83 Violation of Section 11 of the Securities Act of 1933 .......................................................83 SECOND CAUSE OF ACTION ...................................................................................................87 Violation of Section 12(a)(2) of the Securities Act of 1933 ..............................................87 THIRD CAUSE OF ACTION .......................................................................................................91 Violation of Section 15 of the Securities Act of 1933 .......................................................91 FOURTH CAUSE OF ACTION ...................................................................................................95 Violation of Section 13.1-522(A)(ii) of the Virginia Code ...............................................95 FIFTH CAUSE OF ACTION ........................................................................................................99 Violation of Section 13.1-522(C) of the Virginia Code ....................................................99 SIXTH CAUSE OF ACTION .....................................................................................................103 Violation of Section 31-5606.05(a)(1)(B) of the District of Columbia Code..................103 SEVENTH CAUSE OF ACTION ...............................................................................................107 Violation of Section 31-5606.05(c) of the District of Columbia Code............................107 EIGHTH CAUSE OF ACTION ..................................................................................................111 Common Law Negligent Misrepresentation ....................................................................111 PRAYER FOR RELIEF ..............................................................................................................117 JURY TRIAL DEMANDED .......................................................................................................118
iii
Plaintiff Federal Housing Finance Agency (“FHFA”), as conservator of The Federal National Mortgage Association (“Fannie Mae”) and The Federal Home Loan Mortgage Corporation (“Freddie Mac”), by its attorneys, Quinn Emanuel Urquhart & Sullivan, LLP, for its Complaint herein against Credit Suisse Holdings (USA), Inc. (“CS Holdings”); Credit Suisse (USA), Inc. (“CS USA”), Credit Suisse Securities (USA) LLC (“CS Securities”), DLJ Mortgage Capital, Inc. (“DLJ Mortgage Capital”), Credit Suisse First Boston Mortgage Securities Corporation (“CSFB Mortgage Securities”), Asset Backed Securities Corporation (“Asset Backed Securities”), Credit Suisse First Boston Mortgage Acceptance Corporation (“CSFB Mortgage Acceptance”) (collectively, “Credit Suisse” or the “Credit Suisse Defendants”), Andrew A. Kimura, Jeffrey A. Altabef, Evelyn Echevarria, Michael A. Marriott, Zev Kindler, John P. Graham, Thomas E. Siegler, Thomas Zingalli, Carlos Onis, Steven L. Kantor, Joseph M. Donovan, Juliana Johnson, and Greg Richter (the “Individual Defendants”) (together with the Credit Suisse Defendants, the “Defendants”) alleges as follows: NATURE OF ACTION 1. This action arises out of Defendants’ actionable conduct in connection with the
offer and sale of certain residential mortgage-backed securities to Fannie Mae and Freddie Mac (collectively, the “Government Sponsored Enterprises” or “GSEs”). These securities were sold pursuant to registration statements, including prospectuses and prospectus supplements that formed part of those registration statements, which contained materially false or misleading statements and omissions. Defendants falsely represented that the underlying mortgage loans complied with certain underwriting guidelines and standards, including representations that significantly overstated the ability of the borrowers to repay their mortgage loans. These representations were material to the GSEs, as reasonable investors, and their falsity violates Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. § 77a et seq., Sections 1
13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, Sections 31-5606.05(a)(1)(B) and 315606.05(c) of the District of Columbia Code, and constitutes common law negligent misrepresentation. 2. Between September 28, 2005 and November 23, 2007, Fannie Mae and Freddie
Mac purchased over $14.1 billion in residential mortgage-backed securities (the “GSE Certificates”) issued in connection with 43 Credit Suisse-sponsored and/or Credit Suisseunderwritten securitizations.1 The GSE Certificates purchased by Freddie Mac, along with date and amount of the purchases, are listed below in Table 11. The GSE Certificates purchased by Fannie Mae, along with date and amount of the purchases, are listed below in Table 12. The 43 securitizations at issue are: i. American Home Mortgage Assets Trust Mortgage-Backed Pass-Through Certificates, Series 2005-1 (“AHMA 2005-1”); Ameriquest Mortgage Securities, Inc. Asset-Backed Pass-Through Certificates, Series 2005-R8 (“AMSI 2005-R8”); Ameriquest Mortgage Securities, Inc. Asset-Backed Pass-Through Certificates, Series 2005-R11 (“AMSI 2005-R11”); Ameriquest Mortgage Securities, Inc. Asset-Backed Pass-Through Certificates, Series 2006-R2 (“AMSI 2006-R2”); Asset Backed Securities Corporation Home Equity Loan Trust Asset Backed PassThrough Certificates, Series NC 2005-HE8 (“ABSHE 2005-HE8”); Asset Backed Securities Corporation Home Equity Loan Trust Asset Backed PassThrough Certificates, Series AEG 2006-HE1(“ABSHE 2006-HE1”); Asset Backed Securities Corporation Home Equity Loan Trust Asset Backed PassThrough Certificates, Series NC 2006-HE2 (“ABSHE 2006-HE2”);
ii.
iii.
iv.
v.
vi.
vii.
For purposes of this Complaint, the securities issued under the Registration Statements (as defined in note 3 below) are referred to as “Certificates,” while the particular Certificates that Fannie Mae and Freddie Mac purchased are referred to as the “GSE Certificates.” Holders of Certificates are referred to as “Certificateholders.” 2
1
viii.
Asset Backed Securities Corporation Home Equity Loan Trust Asset Backed PassThrough Certificates, Series OOMC 2006-HE3 (“ABSHE 2006-HE3”); Asset Backed Securities Corporation Home Equity Loan Trust Asset Backed PassThrough Certificates, Series NC 2006-HE4 (“ABSHE 2006-HE4”); Asset Backed Securities Corporation Home Equity Loan Trust Asset Backed PassThrough Certificates, Series OOMC 2006-HE5 (“ABSHE 2006-HE5”); Asset Backed Securities Corporation Home Equity Loan Trust Asset Backed PassThrough Certificates, Series MO 2006-HE6 (“ABSHE 2006-HE6”); Asset Backed Securities Corporation Home Equity Loan Trust Asset Backed PassThrough Certificates, Series AMQ 2006-HE7 (“ABSHE 2006-HE7”); Asset Backed Securities Corporation Home Equity Loan Trust Asset Backed PassThrough Certificates, Series RFC 2007-HE1 (“ABSHE 2007-HE1”); Asset Backed Securities Corporation Home Equity Loan Trust Asset Backed PassThrough Certificates, Series AMQ 2007-HE2 (“ABSHE 2007-HE2”); Adjustable Rate Mortgage Trust Adjustable Rate Mortgage-Backed Pass-Through Certificates, Series 2005-10 (“ARMT 2005-10”); Adjustable Rate Mortgage Trust Adjustable Rate Mortgage-Backed Pass-Through Certificates, Series 2005-11 (“ARMT 2005-11”); Adjustable Rate Mortgage Trust Adjustable Rate Mortgage-Backed Pass-Through Certificates, Series 2005-12 (“ARMT 2005-12”); Adjustable Rate Mortgage Trust Adjustable Rate Mortgage-Backed Pass-Through Certificates, Series 2006-1 (“ARMT 2006-1”); CSFB Mortgage-Backed Trust Mortgage-Backed Pass-Through Certificates, Series 2005-11 (“CSFB 2005-11”); CSFB Mortgage-Backed Trust Mortgage-Backed Pass-Through Certificates, Series 2005-12 (“CSFB 2005-12”); CSMC Mortgage-Backed Trust Mortgage-Backed Pass-Through Certificates, Series 2006-1 (“CSMC 2006-1”); CSMC Asset-Backed Trust Asset-Backed Pass-Through Certificates, Series 2007NC1 OSI (“CSMC 2007-NC1”);
ix.
x.
xi.
xii.
xiii.
xiv.
xv.
xvi.
xvii.
xviii.
xix.
xx.
xxi.
xxii.
3
xxiii.
Fieldstone Mortgage Investment Trust Mortgage-Backed Notes, Series 2005-3 (“FMIC 2005-3”); Fieldstone Mortgage Investment Trust Mortgage-Backed Notes, Series 2007-1 (“FMIC 2007-1”); Fremont Home Loan Trust Mortgage-Backed Certificates, Series 2005-E (“FHLT 2005-E”); Home Equity Asset Trust Home Equity Pass-Through Certificates, Series 2005-7 (“HEAT 2005-7”); Home Equity Asset Trust Home Equity Pass-Through Certificates, Series 2005-8 (“HEAT 2005-8”); Home Equity Asset Trust Home Equity Pass-Through Certificates, Series 2005-9 (“HEAT 2005-9”); Home Equity Asset Trust Home Equity Pass-Through Certificates, Series 2006-1 (“HEAT 2006-1”); Home Equity Asset Trust Home Equity Pass-Through Certificates, Series 2006-3 (“HEAT 2006-3”); Home Equity Asset Trust Home Equity Pass-Through Certificates, Series 2006-4 (“HEAT 2006-4”); Home Equity Asset Trust Home Equity Pass-Through Certificates, Series 2006-5 (“HEAT 2006-5”); Home Equity Asset Trust Home Equity Pass-Through Certificates, Series 2006-6 (“HEAT 2006-6”); Home Equity Asset Trust Home Equity Pass-Through Certificates, Series 2006-7 (“HEAT 2006-7”); Home Equity Asset Trust Home Equity Pass-Through Certificates, Series 2006-8 (“HEAT 2006-8”); Home Equity Asset Trust Home Equity Pass-Through Certificates, Series 2007-1 (“HEAT 2007-1”); Home Equity Asset Trust Home Equity Pass-Through Certificates, Series 2007-2 (“HEAT 2007-2”);
xxiv.
xxv.
xxvi.
xxvii.
xxviii.
xxix.
xxx.
xxxi.
xxxii.
xxxiii.
xxxiv.
xxxv.
xxxvi.
xxxvii.
4
xxxviii.
Home Equity Asset Trust Home Equity Pass-Through Certificates, Series 2007-3 (“HEAT 2007-3”); Home Equity Mortgage Trust Home Equity Mortgage Pass-Through Certificates, Series 2006-6 (“HEMT 2006-6”); Home Equity Mortgage Loan Asset-Backed Certificates, Series INABS 2006-B (“INABS 2006-B”); Home Equity Mortgage Loan Asset-Backed Certificates, Series INABS 2006-C (“INABS 2006-C”); Home Equity Mortgage Loan Asset-Backed Certificates, Series INABS 2006-E (“INABS 2006-E”); New Century Home Equity Trust Asset Backed Notes, Series 2006-1 (“NCHET 2006-1”);
xxxix.
xl.
xli.
xlii.
xliii.
(collectively, the “Securitizations”). 3. Each Certificate was offered for sale pursuant to one of seventeen shelf
registration statements (the “Shelf Registration Statements”) filed with the Securities and Exchange Commission (the “SEC”). CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance filed eight of the Shelf Registration Statements that pertained to 32 of the Securitizations at issue.2 Those eight Shelf Registration Statements, and the amendments thereto, were signed by or on behalf of the Individual Defendants. With respect to all 43 of the Securitizations, CS Securities was the lead or co-lead underwriter, and with respect to all but two of the Securitizations, CS Securities was also the underwriter who sold the Certificates to the GSEs.
The remaining nine Shelf Registration Statements, accounting for the remaining eleven Securitizations, were filed and signed by non-parties. CS Securities was one of the lead underwriters for all nine of the remaining Shelf Registration Statements (pertaining to eleven securitizations). It served as the seller underwriter for seven of the Shelf Registration Statements (pertaining to nine securitizations). 5
2
4.
For each Securitization, a prospectus (“Prospectus”) and prospectus supplement
(“Prospectus Supplement”) were filed with the SEC as part of the Registration Statement3 for that Securitization. The GSE Certificates were marketed and sold to Fannie Mae and Freddie Mac pursuant to the Registration Statements, including the Shelf Registration Statements and the corresponding Prospectuses and Prospectus Supplements. 5. The Registration Statements contained statements about the characteristics and
credit quality of the mortgage loans underlying the Securitizations, the creditworthiness of the borrowers of those underlying mortgage loans, and the origination and underwriting practices used to make and approve the loans. Such statements were material to a reasonable investor’s decision to invest in mortgage-backed securities by purchasing the Certificates. Unbeknownst to Fannie Mae and Freddie Mac, these statements were materially false, as significant percentages of the underlying mortgage loans were not originated in accordance with the represented underwriting standards and origination practices, and had materially poorer credit quality than what was represented in the Registration Statements. 6. For example, a forensic review of nearly 2,000 loan files for the supporting loan
groups of two Securitizations—HEAT 2007-1 and HEAT 2007-2—has revealed that for a majority of the loans in those Securitizations, there were numerous breaches of the originators’ underwriting guidelines, such as failure to evaluate the reasonableness of the borrower’s stated income or to correctly account for the borrower’s debt, both key factors bearing on eligibility for a mortgage loan. Adherence to underwriting guidelines, particularly on key criteria bearing on loan eligibility, is a material consideration to reasonable investors.
The term “Registration Statement” as used herein incorporates the Shelf Registration Statement, the Prospectus and the Prospectus Supplement for each referenced Securitization, except where otherwise indicated. 6
3
7.
Registration Statements also contained statistical summaries of the groups of
mortgage loans in each Securitization, such as the percentage of loans secured by owneroccupied properties and percentage of the loan group’s aggregate principal balance with loan-tovalue ratios within specified ranges. This information was also material to reasonable investors. However, a loan level analysis of a sample of loans for each Securitization—a review that encompassed thousands of mortgages across all of the Securitizations—has revealed that these statistics were also false and omitted material facts due to widespread misstatement of borrowers’ incomes and debts, inflated property values, and misrepresentations of other key characteristics of the mortgage loans. 8. For example, the percentage of owner-occupied properties is a material risk factor
to the purchasers of Certificates, such as Fannie Mae and Freddie Mac, since a borrower who lives in a mortgaged property is generally less likely to stop paying his or her mortgage and more likely to take better care of the property. The loan level review reveals that the true percentage of owner-occupied properties for the loans supporting the GSE Certificates was materially lower than what was stated in the Prospectus Supplements. Likewise, the Prospectus Supplements misrepresented other material factors, including the true value of the mortgaged properties relative to the amount of the underlying loans, and the actual ability of the individual mortgage borrowers to satisfy their debts. 9. Defendants CS Securities (an underwriter), CSFB Mortgage Securities (a
depositor), Asset Backed Securities (a depositor), CSFB Mortgage Acceptance (a depositor), and the Individual Defendants are directly responsible for the misstatements and omissions of material fact contained in the Registration Statements because they prepared, signed, filed and/or used these documents to market and sell the Certificates to Fannie Mae and Freddie Mac.
7
10.
Defendants CS Holdings, CS USA, DLJ Mortgage Capital, and the Individual
Defendants are also responsible for the misstatements and omissions of material fact contained in the Registration Statements by virtue of their direction and control over Defendants CS Securities, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance. CS Holdings and CS USA directly participated in and exercised dominion and control over the business operations of CS Securities, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance. DLJ Mortgage Capital (the sponsor) directly participated in and exercised dominion and control over the business operations of Defendants CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance (collectively, “Depositor Defendants”). 11. Fannie Mae and Freddie Mac purchased over $14.1 billion of the Certificates
pursuant to the Registration Statements filed with the SEC. These documents contained misstatements and omissions of material facts concerning the quality of the underlying mortgage loans, the creditworthiness of the borrowers, and the practices used to originate such loans. As a result of Defendants’ misstatements and omissions of material fact, Fannie Mae and Freddie Mac have suffered substantial losses as the value of their holdings has significantly deteriorated. 12. FHFA, as Conservator of Fannie Mae and Freddie Mac, brings this action against
the Defendants for violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. §§ 77k, 77l(a)(2), 77o, Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, Sections 31-5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, and for common law negligent misrepresentation.
8
PARTIES The Plaintiff and the GSEs 13. The Federal Housing Finance Agency is a federal agency located at 1700 G
Street, NW in Washington, D.C. FHFA was created on July 30, 2008 pursuant to the Housing and Economic Recovery Act of 2008 (“HERA”), Pub. L. No. 110-289, 122 Stat. 2654 (2008) (codified at 12 U.S.C. § 4617), to oversee Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. On September 6, 2008, under HERA, the Director of FHFA placed Fannie Mae and Freddie Mac into conservatorship and appointed FHFA as conservator. In that capacity, FHFA has the authority to exercise all rights and remedies of the GSEs, including but not limited to, the authority to bring suits on behalf of and/or for the benefit of Fannie Mae and Freddie Mac. 12 U.S.C. § 4617(b)(2). 14. Fannie Mae and Freddie Mac are government-sponsored enterprises chartered by
Congress with a mission to provide liquidity, stability and affordability to the United States housing and mortgage markets. As part of this mission, Fannie Mae and Freddie Mac invested in residential mortgage-backed securities. Fannie Mae is located at 3900 Wisconsin Avenue, NW in Washington, D.C. Freddie Mac is located at 8200 Jones Branch Drive in McLean, Virginia. The Defendants 15. Defendant CS Holdings is a Delaware corporation with its principal place of
business in New York, New York. It is the direct parent corporation of CS USA and the indirect parent of CS Securities, DLJ Mortgage Capital, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance. 16. Defendant CS USA, formerly known as Credit Suisse First Boston (USA), Inc., is
a Delaware corporation with its principal place of business in New York, New York. It is
9
primarily engaged in the business of investment banking and is the direct subsidiary of CS Holdings and parent of CS Securities. 17. Defendant CS Securities, formerly known as Credit Suisse First Boston LLC
(“CSFB”), is a Delaware limited liability company with its principal place of business in New York, New York. It is an SEC-registered broker-dealer primarily engaged in the business of investment banking and is a wholly owned subsidiary of CS USA. It, or its predecessor, acted as the lead or co-lead underwriter for the Certificates at issue here. Fannie Mae and Freddie Mac purchased the GSE Certificates for 41 of the 43 Securitizations from CS Securities in its capacity as underwriter of the Securitizations. 18. Defendant DLJ Mortgage Capital is a Delaware corporation with its principal
place of business in New York, New York. It is a wholly owned subsidiary of CS Holdings, an affiliate of CS Securities and the Depositor Defendants, and is primarily engaged in the purchase of mortgage loans. DLJ Mortgage Capital acted as the sponsor for 33 of the 43 Securitizations. It also originated some of the Mortgage Loans underlying the HEMT 2006-6 Securitization, and acquired other Mortgage Loans underlying the Certificates from third-party originators. 19. Defendant CSFB Mortgage Securities is a Delaware corporation with its principal
place of business in New York, New York. It is a wholly owned subsidiary of CS Holdings and an affiliate of CS Securities and the other Depositor Defendants. CSFB Mortgage Securities acted as depositor in nineteen of the Securitizations. As depositor, it was also responsible for preparing and filing reports required under the Securities Exchange Act of 1934. 20. Defendant Asset Backed Securities is a Delaware corporation with its principal
place of business in New York, New York. It is a wholly owned subsidiary of CS Holdings and an affiliate of CS Securities and the other Depositor Defendants. Asset Backed Securities acted
10
as depositor in ten of the Securitizations. As depositor, it was also responsible for preparing and filing reports required under the Securities Exchange Act of 1934. 21. Defendant CSFB Mortgage Acceptance is a Delaware corporation with its
principal place of business in New York, New York. It is a wholly owned subsidiary of CS Holdings and an affiliate of CS Securities and the other Depositor Defendants. CSFB Mortgage Acceptance acted as depositor in three Securitizations. As depositor, it was also responsible for preparing and filing reports required under the Securities Exchange Act of 1934. 22. Defendant Andrew A. Kimura is an individual residing in Irvington, New York.
He served as President and Director of CSFB Mortgage Securities and CSFB Mortgage Acceptance. Mr. Kimura signed six of the Shelf Registration Statements and the amendments thereto. 23. Defendant Jeffrey A. Altabef is an individual residing in Chappaqua, New York.
He served as Vice President and Director of CSFB Mortgage Securities. Mr. Altabef signed five of the Shelf Registration Statements and the amendments thereto. 24. Defendant Evelyn Echevarria is an individual residing in Charlotte, North
Carolina. Ms. Echevarria served as Director of CSFB Mortgage Securities. Ms. Echevarria signed five of the Shelf Registration Statements and the amendments thereto. 25. Defendant Michael A. Marriott is an individual residing in New York, New York.
Mr. Marriott served as Director of CSFB Mortgage Securities. Mr. Marriott signed five of the Shelf Registration Statements and the amendments thereto. 26. Defendant Zev Kindler is an individual residing in Brooklyn, New York. Mr.
Kindler served as Treasurer of CSFB Mortgage Securities and CSFB Mortgage Acceptance. Mr. Kindler signed two of the Shelf Registration Statements and the amendments thereto.
11
27.
Defendant John P. Graham is an individual residing in New York, New York.
Mr. Graham served as Vice President of CSFB Mortgage Acceptance. Mr. Graham signed one of the Shelf Registration Statements and the amendment thereto. 28. Defendant Thomas E. Siegler served as Director of CSFB Mortgage Acceptance.
Mr. Siegler signed one of the Shelf Registration Statements and the amendment thereto. 29. Defendant Thomas Zingalli is an individual residing in Garden City, New York.
Mr. Zingalli served as Principal Accounting Officer and Comptroller of CSFB Mortgage Securities and CSFB Mortgage Acceptance. Mr. Zingalli also served as Vice President and Controller for Asset Backed Securities. Mr. Zingalli signed eight of the Shelf Registration Statements and the amendments thereto. 30. Defendant Carlos Onis served as a Director of CSFB Mortgage Securities. Mr.
Onis also served as Vice President and Director of Asset Backed Securities. Mr. Onis signed three of the Shelf Registration Statements and the amendments thereto. 31. Defendant Steven L. Kantor is an individual residing in New York, New York.
Mr. Kantor served as a Director of CSFB Mortgage Acceptance. He signed one of the Shelf Registration Statements and the amendment thereto. 32. Defendant Joseph M. Donovan is an individual residing in Armonk, New York.
Mr. Donovan served as President and Director of Asset Backed Securities. He signed two of the Shelf Registration Statements and the amendments thereto. 33. Defendant Juliana Johnson is an individual residing in Charlotte, North Carolina.
Ms. Johnson served as Director of Asset Backed Securities. Ms. Johnson signed two of the Shelf Registration Statements and the amendments thereto.
12
34.
Defendant Greg Richter is an individual residing in Bronxville, New York. Mr.
Richter served as Vice President of Asset Backed Securities. Mr. Richter signed two of the Shelf Registration Statements and the amendments thereto. The Non-Party Originators 35. The loans underlying the Certificates were acquired by the sponsor for each
Securitization from non-party mortgage originators,4 with the exception of 47.18 percent of the loans underlying the HEMT 2006-6 Securitization, which were originated by Defendant DLJ Mortgage Capital. The non-party originators responsible for the loans underlying the Certificates include Option One Mortgage Corporation (“Option One”), New Century Mortgage Corp. (“New Century”), Wells Fargo Bank, N.A. (“Wells Fargo”), and Ownit Mortgage Solutions, Inc. (“Ownit”), among others. JURISDICTION AND VENUE 36. Jurisdiction of this Court is founded upon 28 U.S.C. § 1345, which gives federal
courts original jurisdiction over claims brought by FHFA in its capacity as conservator of Fannie Mae and Freddie Mac. 37. Jurisdiction of this Court is also founded upon 28 U.S.C. § 1331 because the
Securities Act claims asserted herein arise under Sections 11, 12(a)(2), and 15 of the Securities Act, 15 U.S.C. §§ 77k, 77l(a)(2), 77o. This Court further has jurisdiction over the Securities Act claims pursuant to Section 22 of the Securities Act, 15 U.S.C. § 77v.
Defendant DLJ Mortgage Capital was the sponsor or co-sponsor for 33 of the 43 Securitizations. The remaining ten Securitizations were sponsored by non-parties. In particular, Ameriquest Mortgage Company, Fremont Investment and Loan, Fieldstone Investment Corporation, IndyMac Bank F.S.B., and New Century Mortgage Corporation each sponsored one or more of those ten Securitizations. 13
4
38.
This Court has jurisdiction over the statutory claims of violations of Sections
13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code and Sections 31-5606.05(a)(1)(B) and 315606.05(c) of the District of Columbia Code, pursuant to this Court’s supplemental jurisdiction under 28 U.S.C. § 1367(a). This Court also has jurisdiction over the common law claim of negligent misrepresentation pursuant to this Court’s supplemental jurisdiction under 28 U.S.C. § 1367(a). 39. Venue is proper in this district pursuant to Section 22 of the Securities Act, 15
U.S.C. § 77v, and 28 U.S.C. § 1391(b). All of the Credit Suisse Defendants are principally located in this district, several of the Individual Defendants reside in this district, and many of the acts and transactions alleged herein, including the preparation and dissemination of the Registration Statements, occurred in substantial part within this district. Defendants are also subject to personal jurisdiction in this district. FACTUAL ALLEGATIONS I. THE SECURITIZATIONS A. 40. Residential Mortgage-Backed Securitizations In General Asset-backed securitization distributes risk by pooling cash-producing financial
assets and issuing securities backed by those pools of assets. In residential mortgage-backed securitizations, the cash-producing financial assets are residential mortgage loans. 41. The most common form of securitization of mortgage loans involves a sponsor –
the entity that acquires or originates the mortgage loans and initiates the securitization – and the creation of a trust, to which the sponsor directly or indirectly transfers a portfolio of mortgage loans. The trust is established pursuant to a Pooling and Servicing Agreement entered into by, among others, the “depositor” for that securitization. In many instances, the transfer of assets to a trust “is a two-step process: the financial assets are transferred by the sponsor first to an 14
intermediate entity, often a limited purpose entity created by the sponsor . . . and commonly called a depositor, and then the depositor will transfer the assets to the [trust] for the particular asset-backed transactions.” Asset-Backed Securities, Securities Act Release No. 33-8518, Exchange Act Release No. 34-50905, 84 SEC Docket 1624 (Dec. 22, 2004). 42. Residential mortgage-backed securities are backed by the underlying mortgage
loans. Some residential mortgage-backed securitizations are created from more than one cohort of loans called collateral groups, in which case the trust issues securities backed by different groups. For example, a securitization may involve two groups of mortgages, with some securities backed primarily by the first group, and others primarily by the second group. Purchasers of the securities acquire an ownership interest in the assets of the trust, which in turn owns the loans. Within this framework, the purchasers of the securities acquire rights to the cash-flows from the designated mortgage group, such as homeowners’ payments of principal and interest on the mortgage loans held by the related trust. 43. Residential mortgage-backed securities are issued pursuant to registration
statements filed with the SEC. These registration statements include prospectuses, which explain the general structure of the investment, and prospectus supplements, which contain detailed descriptions of the mortgage groups underlying the certificates. Certificates are issued by the trust pursuant to the registration statement and the prospectus and prospectus supplement. Underwriters sell the certificates to investors. 44. A mortgage servicer is necessary to manage the collection of proceeds from the
mortgage loans. The servicer is responsible for collecting homeowners’ mortgage loan payments, which the servicer remits to the trustee after deducting a monthly servicing fee. The servicer’s duties include making collection efforts on delinquent loans, initiating foreclosure
15
proceedings, and determining when to charge off a loan by writing down its balance. The servicer is required to report key information about the loans to the trustee. The trustee (or trust administrator) administers the trust’s funds and delivers payments due each month on the certificates to the investors. B. 45. The Securitizations At Issue In This Case This case involves the 43 Securitizations listed in Table 1 below. CS Securities
served as lead or co-lead underwriter for all 43 of the Securitizations and sold the GSE Certificates to the GSEs for 41 of the Securitizations. In 33 of the Securitizations, DLJ Mortgage Capital served as the sponsor, and in 32 of those Securitizations, CSFB Mortgage Securities, Asset Backed Securities, or CSFB Mortgage Acceptance was the depositor and therefore the issuer and offeror of the Certificates. For each of the 43 Securitizations, the table below identifies (1) the sponsor, (2) the depositor, (3) the lead underwriter, (4) the principal amount issued for the tranches5 purchased by the GSEs, (5) the date of issuance, and (6) the loan group or groups backing the GSE Certificate for that Securitization (referred to as the “Supporting Loan Groups”). Table 1
Transaction Tranche Sponsor DLJ Mortgage Capital DLJ Mortgage Capital Depositor Asset Backed Securities Asset Backed Securities Lead Underwriter(s) CS Securities6 Principal Amount Issued ($) 185,074,000 Date of Issuance 10/28/2005 Supporting Loan Group(s) Group 1
A1 ABSHE 2005HE8 A1A
CS Securities
32,660,000
10/28/2005
Group 1
A tranche is one of a series of certificates or interests created and issued as part of the same transaction.
6
5
In this table, “CS Securities” refers to either CS Securities or its predecessor, CSFB. 16
Transaction
Tranche
Sponsor DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital Ameriquest Mortgage Company Ameriquest Mortgage Company
Depositor Asset Backed Securities Asset Backed Securities Asset Backed Securities Asset Backed Securities Asset Backed Securities Asset Backed Securities Asset Backed Securities Asset Backed Securities Asset Backed Securities Asset Backed Securities Asset Backed Securities
Lead Underwriter(s) CS Securities
Principal Amount Issued ($) 218,002,000
Date of Issuance 10/28/2005
Supporting Loan Group(s) Group 2
A2 ABSHE 2006HE1 ABSHE 2006HE2
A1
CS Securities
396,315,000
2/6/2006
Group 1
A1
CS Securities
298,145,000
3/24/2006
Group 1
A1 ABSHE 2006HE3 A2
CS Securities
192,683,000
4/17/2006
Group 1
CS Securities
187,698,000
4/17/2006
Group 2
A1 ABSHE 2006HE4 A2 ABSHE 2006HE5 ABSHE 2006HE6 ABSHE 2006HE7
CS Securities
153,485,000
4/28/2006
Group 1
CS Securities
173,090,000
4/28/2006
Group 2
A1
CS Securities
296,485,000
7/18/2006
Group 1
A1
CS Securities
178,248,000
11/30/2006
Group 1
A1
CS Securities
295,597,000
11/30/2006
Group 1
A1A ABSHE 2007HE1 A1B
CS Securities
71,333,000
2/6/2007
Group 1
Asset Backed Securities Asset Backed Securities American Home Mortgage Assets LLC Ameriquest Mortgage Securities Inc. Ameriquest Mortgage Securities Inc.
CS Securities
71,333,000
2/6/2007
Group 1
ABSHE 2007HE2
A1
CS Securities
107,228,000
5/31/2007
Group 1
AHMA 2005-1
3A21
CS Securities CS Securities (colead with Barclay Capital) CS Securities (colead with Deutsche Bank Securities Inc.)
100,470,000
10/31/2005
Group 3B
AMSI 2005-R8
A1
779,011,000
9/28/2005
Group 1
AMSI 2005-R11
A1
1,099,278,000
12/20/2005
Group 1
17
Transaction
Tranche
Sponsor Ameriquest Mortgage Company DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital Fremont Investment and Loan Fieldstone Investment Corp. Fieldstone Investment Corp. DLJ Mortgage Capital
Depositor Ameriquest Mortgage Securities Inc. CSFB Mortgage Securities CSFB Mortgage Securities CSFB Mortgage Acceptance CSFB Mortgage Securities CSFB Mortgage Acceptance CSFB Mortgage Acceptance CSFB Mortgage Securities CSFB Mortgage Securities CSFB Mortgage Securities CSFB Mortgage Securities CSFB Mortgage Securities CSFB Mortgage Securities Fremont Mortgage Securities Corp. Fieldstone Mortgage Investment Corp. Fieldstone Mortgage Investment Corp. CSFB Mortgage Securities
Lead Underwriter(s) CS Securities (colead with Morgan Stanley & Co. Inc.) CS Securities
Date of Issuance
AMSI 2006-R2
A1
3/29/2006
ARMT 2005-10
4A1
90,470,000
9/30/2005
Group 4
ARMT 2005-11
4A1
CS Securities
312,635,000
10/31/2005
Group 4
ARMT 2005-12
4A1
CS Securities
112,160,000
11/30/2005
Group 4
ARMT 2006-1
5A1
CS Securities
148,572,000
2/28/2006
Group 5
2A1 CSFB 2005-11 7A1
CS Securities
76,116,357
11/29/2005
Group 2
CS Securities
68,243,000
11/29/2005
Group 7
2A1
CS Securities
100,153,573
12/29/2005
Group 2
CSFB 2005-12
4A1
CS Securities
225,636,009
12/29/2005
Group 4
5A1
CS Securities
104,000,000 180,586,800
12/29/2005
Group 5
5A1 CSMC 2006-1 5A2 CSMC 2007NC1
CS Securities
1/30/2006
Group 5
CS Securities
20,065,200
1/30/2006
Group 5
1A1
CS Securities
286,133,341
8/31/2007
Group 1
FHLT 2005-E
1A1
CS Securities
728,502,000
12/20/2005
Group 1
FMIC 2005-3
1A
CS Securities
316,989,000
11/23/2005
Group 1
FMIC 2007-1
1A
CS Securities
124,711,000
4/12/2007
Group 1
HEAT 2005-7
1A1
CS Securities
250,000,000
10/3/2005
Group 1
18
Transaction
Tranche
Sponsor DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital DLJ Mortgage Capital IndyMac Bank, FSB IndyMac Bank, FSB IndyMac Bank, FSB IndyMac Bank, FSB IndyMac Bank, FSB New Century Mortgage Corp.
Depositor CSFB Mortgage Securities CSFB Mortgage Acceptance CSFB Mortgage Securities CSFB Mortgage Securities CSFB Mortgage Securities CSFB Mortgage Securities CSFB Mortgage Securities CSFB Mortgage Securities CSFB Mortgage Securities CSFB Mortgage Securities CSFB Mortgage Securities CSFB Mortgage Securities CSFB Mortgage Securities IndyMac ABS Inc. IndyMac ABS Inc. IndyMac ABS Inc. IndyMac ABS Inc. IndyMac ABS Inc. New Century Mortgage Securities LLC
Lead Underwriter(s) CS Securities
Date of Issuance 11/01/2005
HEAT 2005-8
1A1
HEAT 2005-9
1A1
CS Securities
240,000,000
12/1/2005
Group 1
HEAT 2006-1
1A1
CS Securities
255,000,000
1/3/2006
Group 1
HEAT 2006-3
1A1
CS Securities
525,000,000
3/30/2006
Group 1
HEAT 2006-4
1A1
CS Securities
500,000,000
5/1/2006
Group 1
HEAT 2006-5
1A1
CS Securities
300,000,000
7/5/2006
Group 1
HEAT 2006-6
1A1
CS Securities
307,500,000
8/1/2006
Group 1
HEAT 2006-7
1A1
CS Securities
340,000,000
10/3/2006
Group 1
HEAT 2006-8
1A1
CS Securities
385,000,000
12/1/2006
Group 1
HEAT 2007-1
1A1
CS Securities
350,000,000
2/1/2007
Group 1
HEAT 2007-2
1A1
CS Securities
460,000,000
4/2/2007
Group 1
HEAT 2007-3
1A1
CS Securities
212,250,000
5/1/2007
Group 1
HEMT 2006-6
1A1
CS Securities CS Securities (colead with Lehman Brothers Inc.) CS Securities (colead with Lehman Brothers Inc.) CS Securities CS Securities (colead with Lehman Brothers Inc.) CS Securities (colead with Lehman Brothers Inc.) CS Securities (colead with Deutsche Bank Securities Inc.)
27,000,000
12/29/2006
Group 1
1A1 INABS 2006-B 1A2 INABS 2006-C 2A 1A1 INABS 2006-E 1A2
152,932,000
3/14/2006
Group 1
152,932,000 153,334,000 192,789,000
3/14/2006 6/15/2006 12/8/2006
Group 1 Group 2 Group 1
192,789,000
12/8/2006
Group 1
NCHET 2006-1
A1
456,811,000
3/30/2006
Group 1
19
C.
The Securitization Process 1. DLJ Mortgage Capital Groups Mortgage Loans in Special Purpose Trusts
46.
As the sponsor for 33 of the 43 Securitizations, Defendant DLJ Mortgage Capital
originated and purchased the mortgage loans underlying the Certificates for those 33 Securitizations after the loans were originated, either directly from the originators or through affiliates of the originators.7 47. DLJ Mortgage Capital8 then sold or co-sold the mortgage loans for 32 of the 33
Securitizations to one of the three Depositor Defendants: CSFB Mortgage Securities, Asset Backed Securities, or CSFB Mortgage Acceptance. With respect to one Securitization that DLJ Mortgage Capital sponsored, it sold the mortgage loan to a non-party depositor. With respect to the remaining ten Securitizations, non-party sponsors sold the mortgage loans to non-party depositors, as reflected in Table 1 at paragraph 45 above. Defendant CS Securities was the lead or co-lead underwriter for all eleven Securitizations in which the depositor is a non-party and the selling underwriter for nine of those eleven Securitizations. 48. The depositors for 32 of the Securitizations, Depositor Defendants CSFB
Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance were wholly owned, limited-purpose financial subsidiaries of CS Holdings and affiliates of DLJ Mortgage Capital and CS Securities. The sole purpose of the Depositor Defendants was to act as a conduit
Non-party sponsors Ameriquest Mortgage Company, Fremont Investment and Loan, Fieldstone Investment Corporation, IndyMac Bank F.S.B., and New Century Mortgage Corporation were each a sponsor of one or more of the remaining ten Securitizations. The sponsor for each Securitization is identified in Table 1 at paragraph 45 above. For the CSFB 2005-12 and CSMC 2006-1 Securitizations, GreenPoint Mortgage was the co-seller. 20
8
7
through which loans originated and acquired by DLJ Mortgage Capital could be securitized and sold to investors. 49. As part of each Securitization, DLJ Mortgage Capital or a non-party sponsor sold
the relevant mortgage loans to the depositor pursuant to a Mortgage Loan Purchase Agreement, Assignment and Assumption Agreement, or Pooling and Servicing Agreement that contained various representations and warranties regarding the mortgage loans. The depositor then conveyed the loans to a trust the depositor had established. 50. As part of each Securitization, the trustee, on behalf of the Certificateholders,
executed a Pooling and Servicing Agreement (“PSA”) with the relevant depositor and the parties responsible for monitoring and servicing the mortgage loans in that Securitization. The trust, administered by the trustee, held the mortgage loans pursuant to the related PSA and issued Certificates, including the GSE Certificates, backed by such loans. The GSEs purchased the GSE Certificates, through which they obtained an ownership interest in the assets of the trust, including the mortgage loans. 2. 51. The Trusts Issue Securities Backed by the Loans
Once the mortgage loans were transferred to the trusts in accordance with the
PSAs, each trust issued Certificates backed by the underlying mortgage loans. The Certificates were then sold to investors like Fannie Mae and Freddie Mac, which thereby acquired an ownership interest in the assets of the corresponding trust. Each Certificate entitles its holder to a specified portion of the cashflows from the underlying mortgages in the Supporting Loan Group. The level of risk inherent in the Certificates was a function of the capital structure of the related transaction and the credit quality of the underlying mortgages. 52. The Certificates were issued pursuant to one of seventeen Shelf Registration
Statements, filed with the SEC on Form S-3. The Shelf Registration Statements were amended 21
by one or more Forms S-3/A filed with the SEC. Each Individual Defendant signed one or more of the eight Shelf Registration Statements, including any amendments thereto, which were filed by the Depositor Defendants. The SEC filing number, registrants, signatories and filing dates for the seventeen Shelf Registration Statements and amendments thereto, as well as the Certificates covered by each Shelf Registration Statement, are reflected in Table 2 below. Table 2
SEC Filing No. Date of Filing Date(s) Amended Covered Certificates Signatories of Registration Statement and Amendment(s)
Andrew A. Kimura Jeffrey A. Altabef Evelyn Echevarria Michael A. Marriott Zev Kindler Thomas Zingalli John P. Graham Carlos Onis Steven L. Kantor Thomas E. Siegler Andrew A. Kimura Zev Kindler Thomas Zingalli John P. Grazer Adam J. Bass Andrew L. Stidd Murray L. Zoota Louis J. Rampino Wayne Bailey Thomas Hayes Patrick Lamb Michael Strauss Stephen Hozie Thomas McDonagh Alan Horn John C. Kendall Michael J. Sonnenfeld Teresa McDermott Greg Richter Joseph M. Donovan Thomas Zingalli Carlos Onis Juliana Johnson
Registrant
333-120966
12/3/2004
1/5/2005
CSFB Mortgage Securities
ARMT 2005-10 ARMT 2005-11 HEAT 2005-7 HEAT 2005-8 HEAT 2006-3
333-120962
12/3/2004
1/5/2005
CSFB Mortgage Acceptance
ARMT 2005-12 CSFB 2005-11 HEAT 2005-9
333-121781
12/30/2004
N/A
Ameriquest Mortgage Securities Inc. Fremont Mortgage Securities Corp.
AMSI 2005-R8 AMSI 2005-R11
333-125587
6/7/2005
N/A
FHLT 2005-E
333-125741
6/10/2005
7/29/2005
American Home Mortgage Assets LLC Fieldstone Mortgage Investment Corp. Asset Backed Securities
AHMA 2005-1
333-125910
6/17/2005
7/1/2005
FMIC 2005-3 FMIC 2007-1 ABSHE 2005-HE8 ABSHE 2006-HE1 ABSHE 2006-HE2
333-127230
8/5/2005
8/23/2005
22
SEC Filing No.
Date of Filing
Date(s) Amended
Registrant
New Century Mortgage Securities LLC
Signatories of Registration Statement and Amendment(s)
Brad A. Morrice Patrick J. Flanagan Patti Dodge S. Blair Abernathy John Olinski Samir Grover Lynette Antosh Victor Woodworth Andrew A. Kimura Jeffrey A. Altabef Evelyn Echevarria Michael A. Marriott Thomas Zingalli Andrew A. Kimura Jeffrey A. Altabef Evelyn Echevarria Michael A. Marriott Thomas Zingalli Greg Richter Joseph M. Donovan Thomas Zingalli Carlos Onis Juliana Johnson John P. Grazer Adam J. Bass Andrew L. Stidd John Olinski S. Blair Abernathy Raphael Bostic Samir Grover Victor Woodworth Simon Heyrick9 S. Blair Abernathy John Olinski Raphael Bostic Simon Heyrick Victor Woodworth Andrew A. Kimura Jeffrey A. Altabef Evelyn Echevarria Michael A. Marriott Thomas Zingalli
333-127237
8/5/2005
N/A
NCHET 2006-1
333-127617
8/17/2005
N/A
IndyMac ABS Inc.
INABS 2006-B
333-127872
8/26/2005
12/7/2005
ARMT 2006-1 CSFB 2005-12 CSMC 2006-1 HEAT 2006-1 HEAT 2006-4 HEAT 2006-5 HEAT 2006-6 ABSHE 2006-HE3 ABSHE 2006-HE4 ABSHE 2006-HE5 ABSHE 2006-HE6 ABSHE 2006-HE7 ABSHE 2007-HE1 ABSHE 2007-HE2 AMSI 2006-R2
333-130884
1/6/2006
2/17/2006
333-131465
2/1/2006
3/15/2006 4/3/2006
Asset Backed Securities
333-131452
2/1/2006
N/A
Ameriquest Mortgage Securities Inc.
333-132042
2/24/2006
3/29/2006 4/13/2006 6/05/2007
Indy Mac MBS Inc.
INABS 2006-C
333-134691
6/2/2006
8/23/2006 10/10/2006
IndyMac ABS Inc.
INABS 2006-E
333-135481
6/30/2006
7/14/2006
HEAT 2006-7 HEAT 2006-8 HEAT 2007-1 HEAT 2007-2 HEMT 2006-6
For this Shelf Registration Statement, Samir Grover did not sign any of the amendments, and Simon Heyrick did not sign the Registration Statement. 23
9
SEC Filing No.
Date of Filing
Date(s) Amended
Registrant
Signatories of Registration Statement and Amendment(s)
Andrew A. Kimura Jeffrey A. Altabef Evelyn Echevarria Michael A. Marriott Thomas Zingalli
333-140945
2/28/2007
4/16/2007
CSMC 2007-NC1 HEAT 2007-3
53.
The Prospectus Supplement for each Securitization describes the underwriting
guidelines that purportedly were used in connection with the origination of the underlying mortgage loans. In addition, the Prospectus Supplements purport to provide accurate statistics regarding the mortgage loans in each group, including the ranges of and weighted average FICO credit scores of the borrowers, the ranges of and weighted average loan-to-value ratios of the loans, the ranges of and weighted average outstanding principal balances of the loans, the debtto-income ratios, the geographic distribution of the loans, the extent to which the loans were for purchase or refinance purposes, information concerning whether the loans were secured by a property to be used as a primary residence, second home, or investment property, and information concerning whether the loans were delinquent. 54. The Prospectus Supplements associated with each Securitization were filed with
the SEC as part of the Registration Statements. In the case of each Securitization, the Form 8-K attaching the PSA associated with the Securitization was also filed with the SEC.10 The date on which the Prospectus Supplement and Form 8-K were filed for each Securitization, as well as the filing number of the Shelf Registration Statement related to each, are set forth in Table 3 below.
In the case of four Securitizations—ABSHE 2005-HE8, CSFB 2005-12, FMIC 20053, and FMIC 2007-1—the Form 8-K filing was not accompanied by the PSA.
10
24
Table 3
Transaction ABSHE 2005-HE8 ABSHE 2006-HE1 ABSHE 2006-HE2 ABSHE 2006-HE3 ABSHE 2006-HE4 ABSHE 2006-HE5 ABSHE 2006-HE6 ABSHE 2006-HE7 ABSHE 2007-HE1 ABSHE 2007-HE2 AHMA 2005-1 AMSI 2005-R8 AMSI 2005-R11 AMSI 2006-R2 ARMT 2005-10 ARMT 2005-11 ARMT 2005-12 ARMT 2006-1 CSFB 2005-11 CSFB 2005-12 CSMC 2006-1 CSMC 2007-NC1 FHLT 2005-E FMIC 2005-3 FMIC 2007-1 HEAT 2005-7 HEAT 2005-8 HEAT 2005-9 HEAT 2006-1 HEAT 2006-3 HEAT 2006-4 HEAT 2006-5 HEAT 2006-6 HEAT 2006-7 HEAT 2006-8 HEAT 2007-1 HEAT 2007-2 HEAT 2007-3 HEMT 2006-6 INABS 2006-B INABS 2006-C INABS 2006-E NCHET 2006-1 Date Prospectus Supplement Filed 10/28/2005 2/7/2006 3/23/2006 4/14/2006 5/1/2006 7/18/2006 12/1/2006 12/1/2006 2/6/2007 6/4/2007 10/31/2005 9/28/2005 12/19/2005 3/23/2006 9/30/2005 10/28/2005 11/29/2005 3/2/2006 12/2/2005 1/5/2006 2/1/2006 9/4/2007 12/20/2005 11/17/2005 4/12/2007 10/3/2005 11/2/2005 12/2/2005 1/4/2006 3/30/2006 5/1/2006 7/6/2006 8/1/2006 10/3/2006 12/4/2006 2/1/2007 4/2/2007 5/2/2007 12/29/2006 3/14/2006 6/15/2006 12/7/2006 3/29/2006 Date of Form 8-K Attaching PSA No PSA attached 2/21/2006 4/7/06 5/3/2006 5/12/2006 8/2/2006 12/15/2006 12/20/2006 2/21/2007 6/15/2007 11/15/2005 10/13/2005 1/5/2006 3/23/2006 10/14/2005 11/15/2005 12/15/2005 3/15/2006 12/23/2005 No PSA attached 2/14/2006 9/7/2007 1/4/2006 No PSA attached No PSA attached 10/18/2005 11/22/2005 12/19/2005 1/18/2006 4/14/2006 5/16/2006 7/20/2006 8/16/2006 10/18/2006 12/18/2006 2/16/2007 4/17/2007 5/16/2007 1/12/2006 3/29/2006 6/29/2006 2/26/2007 4/10/2006 Filing No. of Related Registration Statement 333-127230 333-127230 333-127230 333-131465 333-131465 333-131465 333-131465 333-131465 333-131465 333-131465 333-125741 333-121781 333-121781 333-131452 333-120966 333-120966 333-120962 333-127872 333-120962 333-127872 333-127872 333-140945 333-125587 333-125910 333-125910 333-120966 333-120966 333-120962 333-127872 333-120966 333-130884 333-130884 333-130884 333-135481 333-135481 333-135481 333-135481 333-140945 333-135481 333-127617 333-132042 333-134691 333-127237
55.
The Certificates were issued pursuant to the PSAs, and Defendant CS Securities
(or its predecessor CSFB) offered the GSE Certificates to Fannie Mae and Freddie Mac pursuant
25
to the Registration Statements, which, as noted previously, included the Prospectuses and Prospectus Supplements.11 In the case of 41 of the 43 Securitizations, Defendant CS Securities also sold the GSE Certificates to Fannie Mae and Freddie Mac. II. THE DEFENDANTS’ PARTICIPATION IN THE SECURITIZATION PROCESS A. 56. The Role of Each of the Defendants Each of the Defendants, including the Individual Defendants, had a role in the
securitization process and the marketing for most or all of the Certificates, which included purchasing the mortgage loans from the originators, arranging the Securitizations, selling the mortgage loans to the depositor, transferring the mortgage loans to the trustee on behalf of the Certificateholders, underwriting the public offering of the Certificates, structuring and issuing the Certificates, and marketing and selling the Certificates to investors such as Fannie Mae and Freddie Mac. 57. With respect to each Securitization, the depositor, underwriters, and Individual
Defendants who signed the Registration Statement, as well as the Defendants who exercised control over their activities, are liable, jointly and severally, as participants in the registration, issuance and offering of the Certificates, including issuing, causing, or making materially misleading statements in the Registration Statement, and omitting material facts required to be stated therein or necessary to make the statements contained therein not misleading. 1. 58. DLJ Mortgage Capital
Defendant DLJ Mortgage Capital has been involved in securitizations of various
assets since 1988 and was at all relevant times to this Complaint a leading sponsor of mortgage-
For the remaining two Securitizations, the selling underwriter was non-party Lehman Brothers. The selling underwriter for each Securitization is reflected at Tables 11 and 12 at paragraphs 179 and 180 below. 26
11
backed securities. As stated in the Prospectus Supplements, from 2003 to 2005, at the beginning of the period relevant to this Complaint, DLJ Mortgage Capital and its affiliates reported that they nearly doubled the value of residential mortgage loans they securitized, from more than $27 billion to approximately $50 billion. 59. Defendant DLJ Mortgage Capital acted as the sponsor of 33 of the 43
Securitizations. In that capacity, DLJ Mortgage Capital determined the structure of the Securitizations, initiated the Securitizations, originated and purchased the mortgage loans to be securitized, determined distribution of principal and interest, and provided data to the credit rating agencies to secure investment grade ratings for the GSE Certificates. For 32 of the 33 Securitizations, DLJ Mortgage Capital selected one of the Depositor Defendants—CSFB Mortgage Securities, Asset Backed Securities, or CSFB Mortgage Acceptance—as the special purpose vehicle that would be used to transfer the mortgage loans from DLJ Mortgage Capital to the trust.12 For each of the 33 of the Securitizations in which it acted as sponsor, DLJ Mortgage Capital selected CS Securities as the lead underwriter for the Securitizations. In its role as sponsor, DLJ Mortgage Capital knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing such loans would be issued by the relevant trusts. 60. Defendant DLJ Mortgage Capital also conveyed the mortgage loans to the
Depositor Defendants pursuant to a Mortgage Loan Purchase Agreement or Assignment and Assumption Agreement. In these agreements, DLJ Mortgage Capital made certain representations and warranties to the Depositor Defendants regarding the groups of loans
12
The sole exception is AHMA 2005-1, for which the depositor was American Home
Mortgage. 27
collateralizing the Certificates. These representations and warranties were assigned by the Depositor Defendants to the trustees for the benefit of the Certificateholders. 2. 61. CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance
Each of the Depositor Defendants was a special purpose entity formed solely for
the purpose of purchasing mortgage loans, filing registration statements with the SEC, forming issuing trusts, assigning mortgage loans and all of its rights and interests in such mortgage loans to the trustee for the benefit of the certificateholders, and depositing the underlying mortgage loans into the issuing trusts. 62. The Depositor Defendants were the depositors for 32 of the 43 Securitizations, as
identified in Table 1 at paragraph 45 above. In their capacity as depositors, each Depositor Defendant purchased mortgage loans from DLJ Mortgage Capital (as sponsor) pursuant to a Mortgage Loan Purchase Agreement or Assignment and Assumption Agreement, as applicable. Each Depositor Defendant then sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trust. The Depositor Defendants, along with the other Defendants, were also responsible for preparing and filing the Registration Statements pursuant to which the Certificates were offered for sale. The trusts in turn held the mortgage loans for the benefit of the Certificateholders, and issued the Certificates in public offerings for sale to investors such as Fannie Mae and Freddie Mac. 3. 63. CS Securities
Defendant CS Securities is an investment bank, and was, at all relevant times, a
registered broker/dealer and one of the leading underwriters of mortgage and other asset-backed securities in the United States.
28
64.
Defendant CS Securities (or its predecessor CSFB) was the lead or co-lead
underwriter for each of the 43 Securitizations. In that role, it was responsible for underwriting and managing the offer and sale of the Certificates to Fannie Mae and Freddie Mac and other investors. CS Securities was also obligated to conduct meaningful due diligence to ensure that the Registration Statements did not contain any material misstatements or omissions, including as to the manner in which the underlying mortgage loans were originated, transferred, and underwritten. 4. 65. CS USA
Defendant CS USA employed its wholly owned subsidiaries and affiliates CS
Securities, DLJ Mortgage Capital, and each of the Depositor Defendants, in the key steps of the securitization process. Unlike typical arms’ length securitizations, three-quarters of the Securitizations here involved various CS USA subsidiaries and affiliates at virtually each step in the chain—the sponsor was DLJ Mortgage Capital, the depositors were CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance. In each Securitization, the lead or co-lead underwriter was CS Securities. 66. As the corporate parent or affiliate of CS Securities, DLJ Mortgage Capital, and
the Depositor Defendants, CS USA had the practical ability to direct and control these Defendants’ actions related to the Securitizations, and in fact exercised such direction and control over their activities related to the issuance and sale of the Certificates. 5. 67. CS Holdings
Defendant CS Holdings wholly owns CS USA and is the ultimate U.S. parent of
CS Securities, DLJ Mortgage Capital, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance. As detailed above, the Securitizations involved Credit Suisse entities, including the aforementioned subsidiaries of CS Holdings, at virtually every step in the 29
process. CS Holdings profited substantially from this vertically integrated approach to mortgage-backed securitization. Furthermore, CS Holdings shares, and upon information and belief, shared, overlapping management with CS Securities. 6. 68. The Individual Defendants
Defendant Andrew A. Kimura was President and a Director of CSFB Mortgage
Capital and CSFB Mortgage Acceptance. In those capacities, Mr. Kimura signed five Shelf Registration Statements filed by CSFB Mortgage Securities and one Shelf Registration Statement filed by CSFB Mortgage Acceptance and the amendments thereto. These Shelf Registration Statements are applicable to 22 of the 43 Securitizations. 69. Defendant Jeffrey A. Altabef served as a Vice President and Director of CSFB
Mortgage Securities. In that capacity, Mr. Altabef signed five Shelf Registration Statements filed by CSFB Mortgage Securities and the amendments thereto. These Shelf Registration Statements are applicable to nineteen of the 43 Securitizations. 70. Defendant Evelyn Echevarria served as a Director of CSFB Mortgage Securities.
In that capacity, Ms. Echevarria signed five Shelf Registration Statements filed by CSFB Mortgage Securities and the amendments thereto. These Shelf Registration Statements are applicable to nineteen of the 43 Securitizations. 71. Defendant Michael A. Marriott served as Director of CSFB Mortgage Securities.
In that capacity, Mr. Marriott signed five Shelf Registration Statements filed by CSFB Mortgage Securities and the amendments thereto. These Shelf Registration Statements are applicable to nineteen of the 43 Securitizations. 72. Defendant Zev Kindler served as Treasurer of CSFB Mortgage Securities and
CSFB Mortgage Acceptance. In those capacities, Mr. Kindler signed one Shelf Registration Statement filed by CSFB Mortgage Securities and one Shelf Registration Statement filed by 30
CSFB Mortgage Acceptance and the amendments thereto. These Shelf Registration Statements are applicable to eight of the 43 Securitizations. 73. Defendant John P. Graham served as Vice President of CSFB Mortgage
Acceptance. In that capacity, Mr. Graham signed one Shelf Registration Statement filed by CSFB Mortgage Acceptance and the amendment thereto, applicable to three of the 43 Securitizations. 74. Defendant Thomas E. Siegler served as Director at CSFB Mortgage Acceptance.
In that capacity, Mr. Siegler signed one Shelf Registration Statement and the amendment thereto, applicable to three of the 43 Securitizations. 75. Defendant Thomas Zingalli served as Principal Accounting Officer and
Comptroller of CSFB Mortgage Securities and CSFB Mortgage Acceptance and also as Vice President and Controller for Asset Backed Securities. In those capacities, Mr. Zingalli signed five Shelf Registration Statements filed by CSFB Mortgage Securities, two filed by Asset Backed Securities, and one filed by CSFB Mortgage Acceptance and the amendments thereto. These Shelf Registration Statements are applicable to 32 of the 43 Securitizations. 76. Defendant Carlos Onis served as a Director of CSFB Mortgage Securities and
also as Vice President and Director of Asset Backed Securities. In those capacities, Mr. Onis signed one Shelf Registration Statement filed by CSFB Mortgage Securities and two Shelf Registration Statements filed by Asset Backed Securities and the amendments thereto. These Shelf Registration Statements are applicable to thirteen of the 43 Securitizations. 77. Defendant Steven L. Kantor served as a Director of CSFB Mortgage Acceptance.
In that capacity, Mr. Kantor signed one Shelf Registration Statement filed by CSFB Mortgage Acceptance and the amendment thereto, applicable to three of the 43 Securitizations.
31
78.
Defendant Joseph M. Donovan served as President and Director of Asset Backed
Securities. In that capacity, Mr. Donovan signed two Shelf Registration Statements filed by Asset Backed Securities and the amendments thereto, applicable to ten of the 43 Securitizations. 79. Defendant Juliana Johnson served as Director of Asset Backed Securities. In that
capacity, Ms. Johnson signed two Shelf Registration Statements filed by Asset Backed Securities and the amendments thereto, applicable to ten of the 43 Securitizations. 80. Defendant Greg Richter served as Vice President of Asset Backed Securities. In
that capacity, Mr. Richter signed two Shelf Registration Statements filed by Asset Backed Securities, and the amendments thereto, applicable to ten of the 43 Securitizations. B. 81. The Defendants’ Failure To Conduct Proper Due Diligence The Defendants failed to conduct adequate and sufficient due diligence to ensure
that the mortgage loans underlying the Securitizations complied with the representations in the Registration Statements. 82. During the time period in which the Certificates were issued—approximately
2005 through 2007—Credit Suisse’s involvement in the mortgage-backed securitization market was rapidly expanding. The Defendants had enormous financial incentives to complete as many offerings as quickly as possible without regard to ensuring the accuracy or completeness of the Registration Statements, or conducting adequate and reasonable due diligence. For example, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance, as the depositors, were paid a percentage of the total dollar amount of the offerings upon completion of the Securitizations, and CS Securities, as the underwriter, was paid a commission based on the amount it received from the sale of the Certificates to the public. 83. The push to securitize large volumes of mortgage loans contributed to the absence
of controls needed to prevent the inclusion of untrue statements of material facts and omissions 32
of material facts in the Registration Statements. In particular, Defendants failed to conduct adequate diligence or otherwise to ensure the accuracy of the statements in the Registrations Statements pertaining to the Securitizations. 84. For instance, Credit Suisse retained third-parties, including Clayton Holdings, Inc.
(“Clayton”), to analyze the loans it was considering placing in its securitizations, but waived a significant number of loans into the Securitizations that these firms had recommended for exclusion, and did so without taking adequate steps to ensure that these loans had in fact been underwritten in accordance with applicable guidelines or had compensating factors that excused the loans’ non-compliance with those guidelines. On January 27, 2008, Clayton revealed that it had entered into an agreement with the New York Attorney General (the “NYAG”) to provide documents and testimony regarding its due diligence reports, including copies of the actual reports provided to its clients. According to The New York Times, as reported on January 27, 2008, Clayton told the NYAG “that starting in 2005, it saw a significant deterioration of lending standards and a parallel jump in lending expectations” and “some investment banks directed Clayton to halve the sample of loans it evaluated in each portfolio.” Just weeks after The New York Times reported on the shoddy lending standards of investment banks, on February 19, 2008, Credit Suisse announced write-downs of $2.8 billion in positions related to mortgage-backed securities and collateralized debt obligations. 85. Credit Suisse was negligent in allowing into the Securitizations a substantial
number of mortgage loans that, as reported to Credit Suisse by third-party due diligence firms, did not conform to the underwriting standards stated in the Registration Statements, including the Prospectuses and Prospectus Supplements. Even upon learning from the third-party due diligence firms that there were high percentages of defective or at least questionable loans in the
33
sample of loans reviewed by the third-party due diligence firms, Credit Suisse failed to take any additional steps to verify that the population of loans in the Securitizations did not include a similar percentage of defective and/or questionable loans. 86. Clayton’s trending reports revealed that in the period from the first quarter of
2006 to the second quarter of 2007, 32 percent of the mortgage loans Credit Suisse submitted to Clayton to review in residential mortgage-backed securities groups were rejected by Clayton as falling outside the applicable underwriting guidelines. Of the mortgage loans that Clayton found defective, one-third of the loans were subsequently waived in by Credit Suisse without proper consideration and analysis of compensating factors and included in securitizations such as the ones in which Fannie Mae and Freddie Mac invested here. See Clayton Trending Reports, available at http://fcic.law.stanford.edu/hearings/testimony/the-impact-of-the-financial-crisissacramento#documents. III. THE REGISTRATION STATEMENTS AND THE PROSPECTUS SUPPLEMENTS A. 87. Compliance With Underwriting Guidelines The Prospectus Supplements for each Securitization describe the mortgage loan
underwriting guidelines pursuant to which the mortgage loans underlying the related Securitizations were to have been originated. These guidelines were intended to assess the creditworthiness of the borrower, the ability of the borrower to repay the loan, and the adequacy of the mortgaged property as security for the loan. 88. The statements made in the Prospectus Supplements, which, as discussed, formed
part of the Registration Statement for each Securitization, were material to a reasonable investor’s decision to purchase and invest in the Certificates because the failure to originate a mortgage loan in accordance with the applicable guidelines creates a higher risk of delinquency 34
and default by the borrower, as well as a risk that losses upon liquidation will be higher, thus resulting in a greater economic risk to an investor. 89. The Prospectus Supplements for the Securitizations contained several key
statements with respect to the underwriting standards of the entities that originated the loans in the Securitizations. For example, the Prospectus Supplement for the HEAT 2007-1 Securitization, for which DLJ Mortgage Capital was the sponsor and CSFB Mortgage Securities was the depositor, stated that the “mortgage loans were originated or acquired generally in accordance with the underwriting guidelines described in this prospectus.” The underwriting guidelines referenced were those of Ownit, which originated 25.4 percent of the loans in the HEAT 2007-1 Securitization, as well as other originators who originated lesser percentages of the loans in the group, including EquiFirst Corporation (“EquiFirst”), Lime Financial Services Ltd., and AEGIS Mortgage Corporation. 90. The underwriting guidelines of Ownit, as described in the Prospectus Supplement,
in turn stated that they “were designed to be used as a guide in determining the credit worthiness of the borrower and his/her ability to repay.” 91. The Prospectus Supplement for the HEAT 2007-1 Securitization conditioned the
approval of any loan as an exception to the underwriting guidelines on the existence of compensating factors. It stated that: “[e]xceptions to the guidelines were made if the loan met the primary criteria of the RightLoan [a proprietary loan product of Ownit] and offered supporting compensating factors when a deviation occurred. In all cases, the exception(s) and compensating factor(s) were clearly documented in the file . . . .” 92. The Prospectus Supplement stated that in order to make this loan-by-loan
determination of the borrower’s ability to repay, the underwriter must have collected and utilized
35
specified information, including the credit report, loan application, asset verifications, appraisal and other documents relevant to determining credit worthiness and risk. The guidelines required the originator to have analyzed the borrower’s “capacity, credit and collateral,” where “capacity” meant “a proven, historical cash flow, which would support the requested loan amount”; “credit” was the “borrower’s willingness to repay his or her debts,” as demonstrated primarily by the borrower’s credit score; and “collateral” was “the asset pledged by the borrower to the lender,” as determined by an appraisal of the underlying property. The originator was required to conclude that “the collateral was sufficient to secure the mortgage,” in the event that the borrower’s “primary source of repayment,” his or her cash flow, turned out to be insufficient. 93. The Prospectus and Prospectus Supplement for each of the Securitizations had
similar representations to those quoted above. The relevant representations in the Prospectus and Prospectus Supplement pertaining to originating entity underwriting standards for each Securitization are reflected in Appendix A to this Complaint. As discussed below at paragraphs 121 through 178, in fact, the originators of the mortgage loans in the Supporting Loan Group for the Securitizations did not adhere to their stated underwriting guidelines, thus rendering the description of those guidelines in the Prospectuses and Prospectus Supplements false and misleading. 94. Further, for most of the Securitizations, the Prospectuses and Prospectus
Supplements described additional representations and warranties concerning the mortgage loans backing the Securitizations. Such representations and warranties, which are described more fully for each Securitization in Appendix A, included: (i) the mortgage loans were underwritten in accordance with the originator’s underwriting guidelines in effect at the time of origination,
36
subject to only limited exceptions; and (ii) any and all requirements of any federal, state or local law applicable to the origination and servicing of the mortgage loans had been complied with. 95. The inclusion of these representations in the Prospectuses and Prospectus
Supplements had the purpose and effect of providing additional assurances to investors regarding the quality of the mortgage collateral underlying the Securitizations and the compliance of that collateral with the underwriting guidelines described in the Prospectuses and Prospectus Supplements. These representations were material to a reasonable investor’s decision to purchase the Certificates. B. 96. Statements Regarding Occupancy Status of Borrower The Prospectus Supplements contained collateral group-level information about
the occupancy status of the borrowers of the loans in the Securitizations. Occupancy status refers to whether the property securing a mortgage is to be the primary residence of the borrower, a second home, or an investment property. The Prospectus Supplements for each of the Securitizations presented this information in tabular form, usually in a table entitled “Occupancy Status of the Mortgage Loans.” This table divided all the loans in the collateral group by occupancy status, e.g., into the following categories: (i) “Primary,” or “Owner Occupied”; (ii) “Second Home,” or “Secondary”; and (iii) “Investment” or “Non-Owner.” For each category, the table stated the number of loans in that category. Occupancy statistics for the Supporting Loan Groups for each Securitization were reported in the Prospectus Supplements as follows:13
Each Prospectus Supplement provides the total number of loans and the number of loans in the following categories: owner occupied, second home, and investor. These numbers have been converted to percentages. 37
13
Table 4
Transaction Supporting Loan Group
Group 1 Group 2 ABSHE 2006-HE1 ABSHE 2006-HE2 ABSHE 2006-HE3 Group 1 Group 1 Group 1 Group 2 ABSHE 2006-HE4 ABSHE 2006-HE5 ABSHE 2006-HE6 ABSHE 2006-HE7 ABSHE 2007-HE1 ABSHE 2007-HE2 AHMA 2005-1 AMSI 2005-R8 AMSI 2005-R11 AMSI 2006-R2 ARMT 2005-10 ARMT 2005-11 ARMT 2005-12 ARMT 2006-1 CSFB 2005-11 Group 1 Group 2 Group 1 Group 1 Group 1 Group 1 Group 1 Group 3B Group 1 Group 1 Group 1 Group 4 Group 4 Group 4 Group 5 Group 2 Group 7 Group 2 CSFB 2005-12 Group 4 Group 5 CSMC 2006-1 CSMC 2007-NC1 FHLT 2005-E FMIC 2005-3 FMIC 2007-1 HEAT 2005-7 HEAT 2005-8 HEAT 2005-9 HEAT 2006-1 HEAT 2006-3 HEAT 2006-4 HEAT 2006-5 HEAT 2006-6 Group 5 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1
Primary or Owner Occupied
89.19 91.04 95.17 88.45 90.31 88.81 90.74 88.44 92.86 82.42 86.38 93.74 96.23 68.51 97.21 95.57 95.15 73.08 84.37 64.43 69.12 0.00 86.99 100.00 83.98 63.58 62.54 86.18 84.47 95.26 94.82 94.88 94.51 89.94 95.28 95.62 90.84 86.19 93.39
Second Home/ Secondary
2.96 1.85 0.75 4.03 1.60 2.05 3.91 3.10 1.55 1.50 0.74 2.70 0.26 3.32 0.61 0.82 0.42 3.93 7.60 8.03 4.41 7.59 1.49 0.00 2.51 3.20 3.78 4.69 1.07 0.00 0.00 0.72 0.57 1.06 0.58 0.60 1.01 1.02 0.54
Investor
ABSHE 2005-HE8
7.85 7.11 4.09 7.52 8.08 9.14 5.34 8.46 5.59 16.08 12.88 3.56 3.51 28.16 2.18 3.61 4.43 22.99 8.03 27.54 26.47 92.41 11.51 0.00 13.51 33.22 33.68 9.13 14.47 4.74 5.18 4.40 4.92 9.00 4.13 3.78 8.15 12.78 6.07
38
Transaction
HEAT 2006-7 HEAT 2006-8 HEAT 2007-1 HEAT 2007-2 HEAT 2007-3 HEMT 2006-6 INABS 2006-B INABS 2006-C INABS 2006-E NCHET 2006-1
Supporting Loan Group
Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 2 Group 1 Group 1
Primary or Owner Occupied
94.12 94.75 94.01 91.67 94.01 100.00 88.09 90.60 90.70 85.31
Second Home/ Secondary
0.63 0.81 0.44 0.74 0.82 0.00 1.37 1.04 0.95 3.82
Investor
5.26 4.44 5.55 7.58 5.17 0.00 10.54 8.37 8.35 10.87
97.
As Table 4 makes clear, the Prospectus Supplements for each Securitization
reported that an overwhelming majority of the mortgage loans in the Supporting Loan Groups were owner occupied, while a small percentage were reported to be non-owner occupied (i.e., a second home or investor home).14 98. The statements about occupancy status were material to a reasonable investor’s
decision to invest in the Certificates. Information about occupancy status is an important factor in determining the credit risk associated with a mortgage loan and, therefore, the securitization that it collateralizes. Because borrowers who reside in mortgaged properties are less likely to default and are more likely to care for their primary residence than borrowers who purchase homes as second homes or investments and live elsewhere, the percentage of loans in the collateral group of a securitization that are secured by mortgage loans on owner-occupied residences is an important measure of the risk of the certificates sold in that securitization. 99. Other things being equal, the higher the percentage of loans not secured by
owner-occupied residences, the greater the risk of loss to the certificateholders. Even small differences in the percentages of primary/owner-occupied, second home/secondary, and The only exception is the mortgage loans in the Supporting Loan Group for tranche 2A1 of the CSFB 2005-11 Securitization, which contains 92.41 percent investor homes. 39
14
investment properties in the collateral group of a securitization can have a significant effect on the risk of each certificate sold in that securitization, and thus, are important to the decision of a reasonable investor whether to purchase any such certificate. As discussed below at paragraphs 111 to 114, the Registration Statement for each Securitization materially overstated the percentage of loans in the Supporting Loan Groups that were owner occupied, thereby misrepresenting the degree of risk of the GSE Certificates. C. 100. Statements Regarding Loan-to-Value Ratios The loan-to-value ratio of a mortgage loan, or LTV ratio, is the ratio of the
balance of the mortgage loan to the value of the mortgaged property when the loan is made. 101. The denominator in the LTV ratio is the value of the mortgaged property, and is
generally the lower of the purchase price or the appraised value of the property. In a refinancing or home-equity loan, there is no purchase price to use as the denominator, so the denominator is often equal to the appraised value at the time of the origination of the refinanced loan. Accordingly, an accurate appraisal is essential to an accurate LTV ratio. In particular, an inflated appraisal will understate, sometimes greatly, the credit risk associated with a given loan. 102. The Prospectus Supplements for each Securitization also contained group-level
information about the LTV ratio for the underlying group of loans as a whole. The percentage of loans with an LTV ratio at or less than 80 percent and the percentage of loans with an LTV ratio greater than 100 percent as reported in the Prospectus Supplements for the Supporting Loan Groups are reflected in Table 5 below.15
As used in this Complaint, “LTV” refers to the original loan-to-value ratio for first lien mortgages and for properties with second liens that are subordinate to the lien that was included in the securitization (i.e., only the securitized lien is included in the numerator of the LTV calculation). However, for second lien mortgages, where the securitized lien is junior to another loan, the more senior lien has been added to the securitized one to determine the numerator in the 40
15
Table 5
Percentage of loans, by aggregate principal balance, with LTV less than or equal to 80%
54.01 55.71 66.36 61.42 60.97 60.34 61.60 49.61 60.05 46.25 32.68 51.19 48.73 96.52 50.50 51.51 53.00 94.88 88.24 97.50 97.12 93.92 96.24 94.77 94.55 95.55 94.68 54.44 66.54 61.48 31.82 55.34 70.46 70.85 60.60
Transaction
Group 1
Percentage of loans, by aggregate principal balance, with LTV greater than 100%
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
ABSHE 2005-HE8 ABSHE 2006-HE1 ABSHE 2006-HE2 ABSHE 2006-HE3
Group 2 Group 1 Group 1 Group 1 Group 2 Group 1
ABSHE 2006-HE4 ABSHE 2006-HE5 ABSHE 2006-HE6 ABSHE 2006-HE7 ABSHE 2007-HE1 ABSHE 2007-HE2 AHMA 2005-1 AMSI 2005-R8 AMSI 2005-R11 AMSI 2006-R2 ARMT 2005-10 ARMT 2005-11 ARMT 2005-12 ARMT 2006-1 CSFB 2005-11
Group 2 Group 1 Group 1 Group 1 Group 1 Group 1 Group 3B Group 1 Group 1 Group 1 Group 4 Group 4 Group 4 Group 5 Group 2 Group 7 Group 2
CSFB 2005-12
Group 4 Group 5
CSMC 2006-1 CSMC 2007-NC1 FHLT 2005-E FMIC 2005-3 FMIC 2007-1 HEAT 2005-7 HEAT 2005-8 HEAT 2005-9 HEAT 2006-1
Group 5 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1
LTV calculation (this latter calculation is sometimes referred to as the combined-loan-to-value ratio, or “CLTV”). 41
Transaction
Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 2 Group 1 Group 1
Percentage of loans, by aggregate principal balance, with LTV less than or equal to 80%
55.66 58.61 66.70 67.62 61.27 59.78 57.97 54.70 58.09 8.76 57.37 59.54 41.80 56.28
Percentage of loans, by aggregate principal balance, with LTV greater than 100%
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
HEAT 2006-3 HEAT 2006-4 HEAT 2006-5 HEAT 2006-6 HEAT 2006-7 HEAT 2006-8 HEAT 2007-1 HEAT 2007-2 HEAT 2007-3 HEMT 2006-6 INABS 2006-B INABS 2006-C INABS 2006-E NCHET 2006-1
103.
As Table 5 makes clear, the Prospectus Supplement for nearly all of the
Securitizations reported that many or most of the mortgage loans in the Supporting Loan Groups had an LTV ratio of 80 percent or less,16 and the Prospectus Supplements for all of the Securitizations reported that zero mortgage loans in the Supporting Loan Group had an LTV ratio over 100 percent. 104. The LTV ratio is among the most important measures of the risk of a mortgage
loan, and thus, it is one of the most important indicators of the default risk of the mortgage loans underlying the Certificates. The lower the ratio, the less likely that a decline in the value of the property will wipe out an owner’s equity, and thereby give an owner an incentive to stop making mortgage payments and abandon the property. This ratio also predicts the severity of loss in the
The only exceptions are the ABSHE 2006-HE4 (Group 2), ABSHE 2006-HE6, ABSHE 2006-HE7, ABSHE 2007-HE2, FMIC 2007-1, HEMT 2006-6, and INABS 2006-E Securitizations, for which more than half of the mortgages were reported as having an LTV ratio greater than 80 percent and below 100 percent. 42
16
event of default. The lower the LTV, the greater the “equity cushion,” so the greater the likelihood that the proceeds of foreclosure will cover the unpaid balance of the mortgage loan. 105. Thus, LTV ratio is a material consideration to a reasonable investor in deciding
whether to purchase a certificate in a securitization of mortgage loans. Even small differences in the LTV ratios of the mortgage loans in the collateral group of a securitization have a significant effect on the likelihood that the collateral groups will generate sufficient funds to pay certificateholders in that securitization, and thus are material to the decision of a reasonable investor whether to purchase any such certificate. As discussed below at paragraphs 115 through 120, the Registration Statements for the Securitizations materially overstated the percentage of loans in the Supporting Loan Groups with an LTV ratio at or less than 80 percent, and materially understated the percentage of loans in the Supporting Loan Groups with an LTV ratio over 100 percent, thereby misrepresenting the degree of risk of the GSE Certificates.17 D. 106. Statements Regarding Credit Ratings Credit ratings are assigned to the tranches of mortgage-backed securitizations by
the credit rating agencies, including Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings. Each credit rating agency uses its own scale with letter designations to describe various levels of risk. In general, AAA or its equivalent ratings are at the top of the credit rating scale and are intended to designate the safest investments. C and D ratings are at the bottom of the scale and refer to investments that are currently in default and exhibit little or no prospect for recovery. At the time the GSEs purchased the GSE Certificates, investments with AAA or its equivalent ratings historically experienced a loss rate of less than .05 percent. Investments with
The lone exception is HEMT 2006-6, for which the Registration Statement understated the percentage of loans with an LTV ratio above 100 percent by 40 percent, but did not overstate the percentage of loans with an LTV ratio at or less than 80 percent. 43
17
a BBB rating, or its equivalent, historically experienced a loss rate of less than one percent. As a result, securities with credit ratings between AAA or its equivalent through BBB- or its equivalent were generally referred to as “investment grade.” 107. Rating agencies determine the credit rating for each tranche of a mortgage-backed
securitization by comparing the likelihood of contractual principal and interest repayment to the “credit enhancements” available to protect investors. Rating agencies determine the likelihood of repayment by estimating cashflows based on the quality of the underlying mortgages by using sponsor provided loan level data. Credit enhancements, such as subordination, represent the amount of “cushion” or protection from loss incorporated into a given securitization.18 This cushion is intended to improve the likelihood that holders of highly rated certificates receive the interest and principal to which they are contractually entitled. The level of credit enhancement offered is based on the make-up of the loans in the underlying collateral group and entire securitization. Riskier loans underlying the securitization necessitate higher levels of credit enhancement to insure payment to senior certificate holders. If the collateral within the deal is of a higher quality, then rating agencies require less credit enhancement for AAA or its equivalent rating. 108. Credit ratings have been an important tool to gauge risk when making investment
decisions. For almost a hundred years, investors like pension funds, municipalities, insurance companies, and university endowments have relied heavily on credit ratings to assist them in distinguishing between safe and risky investments. Fannie Mae and Freddie Mac’s respective
“Subordination” refers to the fact that the certificates for a mortgage-backed securitization are issued in a hierarchical structure, from senior to junior. The junior certificates are “subordinate” to the senior certificates in that, should the underlying mortgage loans become delinquent or default, the junior certificates suffer losses first. These subordinate certificates thus provide a degree of protection to the senior certificates from losses on the underlying loans. 44
18
internal policies limited their purchases of private label residential mortgage-backed securities to those rated AAA (or its equivalent), and in very limited instances, AA of A bonds (or its equivalent). 109. Each tranche of the Securitizations received a credit rating upon issuance, which
purported to describe the riskiness of that tranche. The Defendants reported the credit ratings for each tranche in the Prospectus Supplements. The credit rating provided for each of the GSE Certificates was “investment grade,” almost always AAA or its equivalent. The accuracy of these ratings was material to a reasonable investor’s decision to purchase the GSE Certificates. As set forth in Table 9, at paragraph 174 below, the ratings for the Securitizations were inflated as a result of Defendants’ provision of incorrect data concerning the attributes of the underlying mortgage collateral to the ratings agencies, and, as a result, Defendants sold and marketed the GSE Certificates as AAA (or its equivalent) when, in fact, they were not. IV. FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS A. 110. The Statistical Data Provided in the Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False A review of loan-level data was conducted in order to assess whether the
statistical information provided in the Prospectus Supplements was true and accurate. For each Securitization, the sample consisted of 1,000 randomly selected loans per Supporting Loan Group, or all of the loans in the group if there were fewer than 1,000 loans in the Supporting Loan Group. The sample data confirms, on a statistically-significant basis, material misrepresentations of underwriting standards and of certain key characteristics of the mortgage loans across the Securitizations. The data review demonstrates that the data concerning owner occupancy and LTV ratios was materially false and misleading.
45
1. 111.
Owner Occupancy Data Was Materially False
The data review has revealed that the owner occupancy statistics reported in the
Prospectus Supplements were materially false and inflated. In fact, far fewer underlying properties were occupied by their owners than disclosed in the Prospectus Supplements, and more correspondingly were held as second homes or investment properties. 112. To determine whether a given borrower actually occupied the property as
claimed, a number of tests were conducted, including, inter alia, whether, months after the loan closed, the borrower’s tax bill was being mailed to the property or to a different address; whether the borrower had claimed a tax exemption on the property; and whether the mailing address of the property was reflected in the borrower’s credit reports, tax records, or lien records. Failing two or more of these tests is a strong indication that the borrower did not live at the mortgaged property and instead used it as a second home or an investment property, both of which make it much more likely that a borrower will not repay the loan. 113. A significant number of the loans failed two or more of these tests, indicating that
the owner occupancy statistics provided to Certificateholders, like Fannie Mae and Freddie Mac, were materially false and misleading. For example, for the HEAT 2007-1 Securitization, which was sponsored by DLJ Mortgage Capital and underwritten by CS Securities, the Prospectus Supplement stated that 5.99 percent of the underlying properties by loan count in the Supporting Loan Group were not owner-occupied. But the data review revealed that, for 13.54 percent of the properties represented as owner-occupied, the owners lived elsewhere, indicating that the true percentage of non-owner occupied properties was 18.72 percent, more than triple the percentage reported in the Prospectus Supplement.19
19
This conclusion is arrived at by summing: (a) the stated non-owner-occupied percentage in the Prospectus Supplement (here, 5.99 percent) and (b) the product of (i) the stated 46
114.
The data review revealed that for each Securitization, the Prospectus Supplement
misrepresented the percentage of non-owner occupied properties. (The sole exception is CSFB 2005-11(Group 2), which involved a loan group described in the Prospectus Supplement as constituted of 100 percent non-owner occupied properties.) The true percentage of non-owner occupied properties, as determined by the data review, versus the percentage stated in the Prospectus Supplement for each Securitization is reflected in Table 6 below. Table 6 demonstrates that the Prospectus Supplements for each Securitization, with the sole exception of CSFB 2005-11(Group 2), understated the percentage of non-owner occupied properties by at least 4.85 percent, and for more than half of the Supporting Loan Groups by 10 percent or more. Table 6
Reported Percentage of Non-Owner Occupied Properties
10.81 8.96 4.83 11.55 9.69 11.19 9.26 11.56 7.14 17.58 13.62 6.26 3.77 31.49 2.79 4.43 4.85
Transaction
Group 1 Group 2 Group 1 Group 1 Group 1 Group 2 Group 1 Group 2 Group 1 Group 1 Group 1 Group 1 Group 1 Group 3B Group 1 Group 1 Group 1
Percentage of Properties Reported as Owner-Occupied With Strong Indication of NonOwner Occupancy20
10.57 11.24 10.47 13.55 9.35 9.48 11.80 10.29 11.15 10.97 11.52 9.72 10.90 17.55 9.99 9.42 9.32
Actual Percentage of Non-Owner Occupied Properties
20.23 19.20 14.79 23.53 18.13 19.61 19.96 20.66 17.50 26.62 23.57 15.38 14.25 43.51 12.50 13.42 13.72
Prospectus Understatement of Non-Owner Occupied Properties
9.42 10.24 9.96 11.98 8.44 8.42 10.70 9.10 10.36 9.04 9.95 9.12 10.49 12.02 9.71 9.00 8.87
ABSHE 2005-HE8 ABSHE 2006-HE1 ABSHE 2006-HE2 ABSHE 2006-HE3 ABSHE 2006-HE4 ABSHE 2006-HE5 ABSHE 2006-HE6 ABSHE 2006-HE7 ABSHE 2007-HE1 ABSHE 2007-HE2 AHMA 2005-1 AMSI 2005-R8 AMSI 2005-R11 AMSI 2006-R2
owner-occupied percentage (here, 94.01 percent) and (ii) the percentage of the properties represented as owner-occupied in the sample that showed strong indications that their owners in fact lived elsewhere (here, 13.54 percent). As described more fully in paragraph 112, failing two or more tests of owneroccupancy is a strong indication that the borrower did not live at the mortgaged property and instead used it as a second home or an investment property. 47
20
Transaction
Group 4 Group 4 Group 4 Group 5 Group 2 Group 7 Group 2 Group 4 Group 5 Group 5 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 2 Group 1 Group 1
Reported Percentage of Non-Owner Occupied Properties
26.92 15.63 35.57 30.88 100 13.01 0.00 16.02 36.42 37.46 13.82 15.53 4.74 5.18 5.12 5.49 10.06 4.72 4.38 9.16 13.81 6.61 5.88 5.25 5.99 8.33 5.99 0.00 11.91 9.40 9.30 14.69
Percentage of Properties Reported as Owner-Occupied With Strong Indication of NonOwner Occupancy20
16.77 17.27 12.50 15.27 0.00 16.47 17.46 11.06 16.97 17.92 9.62 14.99 12.77 11.00 11.26 10.40 11.62 10.75 11.89 11.71 9.28 11.41 13.85 10.98 13.54 11.81 10.26 4.85 14.27 10.50 12.07 12.90
Actual Percentage of Non-Owner Occupied Properties
39.17 30.20 43.63 41.44 100.00 27.33 17.46 25.31 47.21 48.67 22.11 28.20 16.90 15.61 15.80 15.32 20.51 14.96 15.74 19.80 21.80 17.26 18.92 15.65 18.72 19.15 15.63 4.85 24.48 18.92 20.25 25.69
Prospectus Understatement of Non-Owner Occupied Properties
12.25 14.57 8.06 10.56 0.00 14.33 17.46 9.29 10.79 11.21 8.29 12.66 12.16 10.43 10.68 9.83 10.45 10.24 11.37 10.64 8.00 10.65 13.04 10.40 12.73 10.82 9.65 4.85 12.57 9.52 10.95 11.00
ARMT 2005-10 ARMT 2005-11 ARMT 2005-12 ARMT 2006-1 CSFB 2005-11 CSFB 2005-12 CSMC 2006-1 CSMC 2007-NC1 FHLT 2005-E FMIC 2005-3 FMIC 2007-1 HEAT 2005-7 HEAT 2005-8 HEAT 2005-9 HEAT 2006-1 HEAT 2006-3 HEAT 2006-4 HEAT 2006-5 HEAT 2006-6 HEAT 2006-7 HEAT 2006-8 HEAT 2007-1 HEAT 2007-2 HEAT 2007-3 HEMT 2006-6 INABS 2006-B INABS 2006-C INABS 2006-E NCHET 2006-1
2. 115.
Loan-to-Value Data Was Materially False
The data review has further revealed that the LTV ratios disclosed in the
Prospectus Supplements were materially false and understated, as more specifically set out below. For each of the sampled loans, an industry standard automated valuation model (“AVM”) was used to calculate the value of the underlying property at the time the mortgage loan was originated. AVMs are routinely used in the industry as a way of valuing properties during prequalification, origination, portfolio review and servicing. AVMs rely upon similar data as appraisers—primarily county assessor records, tax rolls, and data on comparable 48
properties. AVMs produce independent, statistically-derived valuation estimates by applying modeling techniques to this data. 116. Applying the AVM to the available data for the properties securing the sampled
loans shows that the appraised value given to such properties was significantly higher than the actual value of such properties. The result of this overstatement of property values is a material understatement of LTV ratio. That is, if a property’s true value is significantly less than the value used in the loan underwriting, then the loan represents a significantly higher percentage of the property’s value. This, of course, increases the risk a borrower will not repay the loan and the risk of greater losses in the event of a default. As stated in the Prospectus Supplement for ABS 2005-HE8: “Mortgage loans with high loan-to-value ratios may present a greater risk of loss than mortgage loans with lower loan-to-value ratios.” 117. For example, for the HEAT 2007-1 Securitization, which was sponsored by DLJ
Mortgage Capital and underwritten by CS Securities, the Prospectus Supplement stated that no loans in the Supporting Loan Group had LTV ratios above 100 percent. In fact, 19.21 percent of the sample of loans included in the data review, based on total principal balance, had LTV ratios above 100 percent. In addition, the Prospectus Supplement stated that 57.97 percent of the loans had LTV ratios at or below 80 percent. The data review indicated that only 36.90 percent of the loans had LTV ratios at or below 80 percent. 118. The data review revealed that for each Securitization, the Prospectus Supplement
misrepresented the percentage of loans with an LTV ratio that were above 100 percent, as well the percentage of loans that had an LTV ratio at or below 80 percent. Table 7 reflects: (i) the true percentage of mortgages in the Supporting Loan Group with LTV ratios above 100 percent, versus the percentage reported in the Prospectus Supplement; and (ii) the true percentage of
49
mortgages in the Supporting Loan Group with LTV ratios at or below 80 percent, versus the percentage reported in the Prospectus Supplement. The percentages listed in Table 7 were calculated by aggregated principal balance. Table 7
PROSPECTUS Percentage of Loans Reported to Have LTV Ratio At Or Less Than 80%
54.01 55.71 66.36 61.42 60.97 60.34 61.60 49.61 60.05 46.25 32.68 51.19 48.73 96.52 50.50 51.51 53.00 94.88 88.24 97.50 97.12 93.92 96.24 94.77 94.55 95.55 94.68 54.44 66.54 61.48 31.82 55.34 70.46 70.85 60.60 55.66 58.61 66.70 67.62
Transaction
DATA REVIEW True Percentage of Loans With LTV Ratio At Or Less Than 80%
40.83 44.62 43.77 36.41 44.98 42.76 42.70 33.40 43.07 32.45 22.96 34.42 29.13 76.11 42.03 41.26 41.38 59.67 51.62 54.97 55.66 76.05 67.22 51.91 59.38 84.04 66.47 30.49 41.75 38.30 24.75 40.64 40.11 47.81 45.65 37.65 42.88 40.53 44.13
PROSPECTUS Percentage of Loans Reported to Have LTV Ratio Over 100%
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
DATA REVIEW True Percentage of Loans With LTV Ratio Over 100%
16.14 12.71 14.43 17.49 17.45 15.39 16.53 17.85 13.72 20.71 27.03 21.22 30.33 3.36 13.61 14.05 16.19 7.48 8.14 7.16 7.45 4.15 6.68 10.20 5.58 2.25 5.44 20.02 16.16 12.10 19.39 11.83 13.77 12.46 13.23 16.27 15.09 16.47 14.22
ABSHE 2005-HE8 ABSHE 2006-HE1 ABSHE 2006-HE2 ABSHE 2006-HE3 ABSHE 2006-HE4 ABSHE 2006-HE5 ABSHE 2006-HE6 ABSHE 2006-HE7 ABSHE 2007-HE1 ABSHE 2007-HE2 AHMA 2005-1 AMSI 2005-R8 AMSI 2005-R11 AMSI 2006-R2 ARMT 2005-10 ARMT 2005-11 ARMT 2005-12 ARMT 2006-1 CSFB 2005-11
CSFB 2005-12 CSMC 2006-1 CSMC 2007-NC1 FHLT 2005-E FMIC 2005-3 FMIC 2007-1 HEAT 2005-7 HEAT 2005-8 HEAT 2005-9 HEAT 2006-1 HEAT 2006-3 HEAT 2006-4 HEAT 2006-5 HEAT 2006-6
Group 1 Group 2 Group 1 Group 1 Group 1 Group 2 Group 1 Group 2 Group 1 Group 1 Group 1 Group 1 Group 1 Group 3B Group 1 Group 1 Group 1 Group 4 Group 4 Group 4 Group 5 Group 2 Group 7 Group 2 Group 4 Group 5 Group 5 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1
50
PROSPECTUS Percentage of Loans Reported to Have LTV Ratio At Or Less Than 80%
61.27 59.78 57.97 54.70 58.09 8.76 57.37 59.54 41.80 56.28
Transaction
DATA REVIEW True Percentage of Loans With LTV Ratio At Or Less Than 80%
38.89 36.53 36.90 30.94 34.09 9.06 39.83 45.35 21.78 43.04
PROSPECTUS Percentage of Loans Reported to Have LTV Ratio Over 100%
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
DATA REVIEW True Percentage of Loans With LTV Ratio Over 100%
16.82 17.78 19.21 26.79 20.48 40.52 14.47 13.90 25.06 14.87
HEAT 2006-7 HEAT 2006-8 HEAT 2007-1 HEAT 2007-2 HEAT 2007-3 HEMT 2006-6 INABS 2006-B INABS 2006-C INABS 2006-E NCHET 2006-1
Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 2 Group 1 Group 1
119.
As Table 7 demonstrates, the Prospectus Supplements for all of the
Securitizations reported that none of the mortgage loans in the Supporting Loan Groups had an LTV ratio over 100 percent. In contrast, the data review revealed that at least 2.25 percent of the mortgage loans for each Securitization had an LTV ratio over 100 percent, and for most Securitizations this figure was much larger. Indeed, for 39 of the Supporting Loan Groups, the data review revealed that more than 10 percent of the mortgages in the Supporting Loan Group had a true LTV ratio over 100 percent. For nine of the Supporting Loan Groups, the data review revealed that more than 20 percent of the mortgages in the Supporting Loan Group had a true LTV ratio over 100 percent. For one Supporting Loan Group, HEMT 2006-6 (Group 1), the data review revealed that more than 40 percent of the mortgages in the Supporting Loan Group had a true LTV ratio over 100 percent. 120. These inaccuracies with respect to reported LTV ratios also indicate that the
representations in the Registration Statements relating to appraisal practices were false, and that the appraisers themselves, in many instances, furnished appraisals that they understood were inaccurate and that they knew bore no reasonable relationship to the actual value of the underlying properties. Indeed, independent appraisers following proper practices, and providing 51
genuine estimates as to valuation, would not systematically generate appraisals that deviate so significantly (and so consistently upward) from the true values of the appraised properties. This conclusion is further confirmed by the findings of the Financial Crisis Inquiry Commission (the “FCIC”), which identified “inflated appraisals” as a pervasive problem during the period of the Securitizations, and determined through its investigation that appraisers were often pressured by mortgage originators, among others, to produce inflated results. See Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (2011) (the “FCIC Report”). B. 121. The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines The Registration Statements contained material misstatements and omissions
regarding compliance with underwriting guidelines. Indeed, the originators for the loans underlying the Securitizations systematically disregarded their respective underwriting guidelines in order to increase production and profits derived from their mortgage lending businesses. This is confirmed by the systematically misreported owner occupancy and LTV statistics, discussed above, and by: (1) a forensic review of nearly 2,000 loan files in the underlying loan groups of the HEAT 2007-1 and HEAT 2007-2 Securitizations; (2) government and other investigations into the originators’ underwriting practices, which revealed widespread abandonment of originators’ reported underwriting guidelines during the relevant period; (3) findings from the FCIC and others that Credit Suisse routinely included in securitizations loans that did not meet underwriting standards; (4) investigations by other plaintiffs who have sued Defendants for making misrepresentations in connection with other, similar securitizations that mortgage loans were originated in compliance with underwriting guidelines; (5) the collapse of
52
the Certificates’ credit ratings; and (6) the surge in delinquency and default in the mortgages in the Securitizations. 1. 122. A Forensic Review of Loan Files Has Revealed Pervasive Failure to Adhere to Underwriting Guidelines
A forensic review of 453 loans from the HEAT 2007-1 Securitization and 1,489
loans from the HEAT 2007-2 Securitization, for which DLJ Mortgage Capital served as the sponsor, CSFB Mortgage Securities as the depositor, and CS Securities as lead underwriter, has revealed that approximately 67 percent and 73 percent of the reviewed loans, respectively, were not underwritten in accordance with the underwriting guidelines. The forensic review consisted of an analysis of the loan file for each loan, including the documents submitted by the individual borrowers in support of their loan applications, as well as an analysis of information extrinsic to each loan file, such as the borrower’s filings in bankruptcy proceedings or the borrower’s motor vehicle registration or other documentation with pertinent information indicating a borrower’s assets or residence. 123. The mortgage loans in the HEAT 2007-1 and HEAT 2007-2 Securitizations were
originated by Ownit, EquiFirst, Lime Financial Services, ResMAE Mortgage Corp. (“ResMAE”), among others. The Prospectus Supplements for the HEAT 2007-1 and HEAT 2007-2 Securitizations stated that the mortgage loans underlying the Securitizations were originated generally in accordance with the originator’s underwriting guidelines. The results of the forensic review demonstrate, however, that the disclosures in the Registration Statements, stating that the mortgage loans were underwritten in accordance with the guidelines described in the Prospectus Supplements, were materially false. 124. The Prospectus Supplements for HEAT 2007-1 and HEAT 2007-2 Securitizations
stated that the originator’s underwriting guidelines were primarily intended to assess the 53
likelihood that a borrower would be able to repay the loan based on an analysis of the applicant’s source of income and cash flow, a review of the applicant’s credit history and the asset or property pledged. Thus, the underwriting guidelines that were breached were designed to assess the likelihood a borrower would be able to repay the loan. The forensic review revealed breaches including the following types:   failure to test the reasonableness of the borrower’s stated income contributing to material misrepresentations of income; failure to investigate properly the borrower’s intention to occupy the subject properties when red flags surfaced in the origination process that should have alerted the underwriter that the property was not intended as a primary residence; failure to calculate properly the borrower’s outstanding debt causing the debt-toincome ratio (“DTI”) to exceed the maximum allowed under the underwriting guidelines; and failure to investigate properly red flags on the borrower’s credit reports that should have alerted the underwriter to potential misrepresentations of outstanding debt. The results of the forensic review demonstrate that the disclosures in the


125.
Registration Statements, stating the mortgage loans were underwritten in accordance with applicable underwriting guidelines described in the Prospectus Supplements, were materially false. Moreover, although the Prospectus Supplements state that there may be compensating factors to warrant an exception to the applicable guidelines on a case-by-case basis, none of the loan files reflecting a breach of underwriting guidelines evidenced sufficient compensating factors to justify or support such an exception. In any event, breach rates of 67 percent and 73 percent for each of two Securitizations, respectively, could not possibly be explained by the proper application of any such exceptions. 126. The below examples from the forensic review of the HEAT 2007-1 and HEAT
2007-2 Securitizations illustrate the types of breaches discussed above that pervade the loan 54
groups for the Securitizations. These are examples of violations of the underwriting guidelines and are not a complete list of all the findings. (a) 127. Stated Income Was Not Reasonable
It is standard in the industry for underwriting guidelines to require a verification
of employment or reasonableness of stated income in the loan application. For example, as stated in the Prospectus Supplement for the HEAT 2007-1 and HEAT 2007-2 Securitizations, EquiFirst’s underwriting guidelines require underwriters “[to] verify the income of each applicant” and in the case of stated income loans to determine that the “income stated [is] reasonable and customary for the applicant’s line of work.” The Prospectus Supplement for the HEAT 2007-2 Securitization stated that ResMAE’s underwriting guidelines required that, “[u]nder all programs, the income stated must be reasonable and customary for the applicant’s line of work.” The originator Ownit, according to the Prospectus Supplement for the HEAT 2007-1 Securitization, required verification of employment for all loan programs. 128. The following examples from the forensic review of the HEAT 2007-1 and HEAT
2007-2 Securitizations reveal instances where there was no evidence that the underwriter of the mortgages tested the reasonableness of the borrower’s stated income for the employment listed on the application as required by the recognized industry standard guidelines. Additionally, the forensic review verified the borrower actually misrepresented his or her income on the loan application. This misrepresentation resulted in a miscalculation of the borrower’s DTI. Had the loan underwriter performed a reasonableness test as required by the recognized industry standard guidelines, the unreasonableness of the borrower’s stated income would have been evident.  A loan that closed in December 2006, in the principal amount of $366,300, was originated as a stated income loan. The final loan application stated that the borrower was employed as an estimating manager for an auto repair business and earned $7,840 monthly. The initial loan application, however, specified the borrower’s monthly income to be $5,000. The borrower’s 2006 W-2 Form 55
provided after closing verified that the borrower actually earned $49,452 per year, or $4,120 per month. The DTI at that salary would have been 90.56%, rather than 47.04%, and would have exceeded the guideline maximum of 50%. The loan defaulted, and the property was liquidated in a foreclosure sale, resulting in a loss of $207,209, which is over 56% of the original loan amount.  A loan that closed in September 2006, in the principal amount of $303,600, was originated as a stated income loan. The application stated that the borrower was making $7,900 per month as a fork lift driver in California. According to Payscale.com, the average monthly salary at the 75th percentile for this same position in the same geographic region was $2,905. In addition, the borrower submitted 2006 income tax documents after closing that established his monthly income to be $3,172. A recalculation of DTI based on monthly verified income of $3,172 yields a DTI of 125.08%, which grossly exceeds the guideline maximum of 50%. The loan defaulted, and the property was liquidated in a foreclosure sale, resulting in a loss of $113,849, which is over 37% of the original loan amount. A loan that closed in January 2007, in the principal amount of $348,000, was approved as a stated income loan. As reported in the loan application, the borrower was employed as a restaurant manager for eight years earning $7,955 per month. The file contained no evidence that the underwriter assessed the reasonableness of the stated income. Salary.com reported the monthly salary at the 75th percentile for this position in the same geographic region as $5,395. The borrower’s recalculated DTI using the more reasonable income is 73.53%, instead of 48.89%, and exceeds the guideline maximum of 50%. The loan defaulted, and the property was liquidated in a foreclosure sale, resulting in a loss of $346,637, which is over 99% of the original loan amount. A loan that closed in October 2006, in the principal amount of $175,900, was approved as a stated income loan. The borrower stated on her loan application that she was a cashier with monthly income of $3,500. Research conducted through CBSalary.com revealed the average monthly salary at the 75th percentile for a cashier in the same geographic region as the borrower was $2,060. The borrower subsequently declared bankruptcy and in her bankruptcy filings stated that her monthly income in 2006 was $2,278. A recalculation of DTI based on the borrower’s true income yields an increase in the DTI from 46.06% to 70.75%, which exceeds the guideline maximum of 50%. The loan defaulted, and the property was liquidated in a foreclosure sale, resulting in a loss of $118,733, which is over 67% of the original loan amount. The results of the forensic review demonstrate that the statements in the


129.
Registration Statements concerning the reasonableness of the borrower’s stated income were
56
materially false and misleading. In particular, a significant number of mortgage loans were made on the basis of “stated incomes” that were patently unreasonable. (b) 130. Evidence of Occupancy Misrepresentations
The following examples from the forensic review are instances where the loan
underwriters did not adequately question the borrower’s intended occupancy of the subject property. Although the Prospectus Supplements for the HEAT 2007-1 and HEAT 2007-2 Securitizations reported that 94.01 percent and 91.67 percent, respectively, of the loans in the Supporting Loan Group were for owner-occupied properties, a significant number of the loan files that were reviewed indicated facts or circumstances that would have put a reasonable loan underwriter on notice of potential occupancy misrepresentations. The lack of compliance with the underwriting process in this regard materially increased the credit risk of the loan and the portfolio as investment and second home properties generally have a higher rate of default and higher loss severities than an owner-occupied primary residence.  A loan that closed in December 2006 as a cash-out refinance, in the principal amount of $385,000, was originated under a full documentation loan program. The property was represented to be owner occupied. However, income and asset documentation, including paystubs, W-2 forms, and rental income reflect an address other than the subject property as the current address. The origination credit report also associated the borrower to a property other than the subject property. The borrower provided an electric bill prior to closing to support occupancy; however, the electric usage was a minimal bill and did not support occupancy. No evidence in the file indicates that the underwriting process addressed these inconsistencies. The loan defaulted, and the property is in the process of being liquidated in foreclosure proceedings. A loan that closed in August 2006, in the principal amount of $71,600, was originated under a no ratio loan program. The property was represented to be owner occupied. The subject property was located in Jacksonville, FL; however, at the time of origination, the loan file contained bank statements, a payoff letter from the previous mortgage holder, and the Articles of Incorporation for the borrower’s business, all of which indicated the borrower’s mailing address was in Coral Springs, FL. No evidence in the file indicates that the underwriter addressed these inconsistencies. The loan defaulted and the property was liquidated in a foreclosure sale, resulting in a loss of $70,912, which is 99% of the original loan amount. 57


A loan that closed in December 2006, in the principal amount of $220,000, was originated as a full documentation income loan. The property was represented to be owner occupied. However, the hazard insurance binder in the loan file reflected rental loss coverage, a red flag that the property was instead an investment property. Utility records obtained through Accurint associated the borrowers to another address from April 1997 to January 2011. The loan defaulted, and the property was liquidated in a foreclosure sale, resulting in a loss of $184,033, which is over 83% of the original loan amount. The results of the forensic review demonstrate that the statements in the
131.
Registration Statements concerning the borrowers’ occupancy status were materially false. In particular, the Prospectus Supplements materially understated the proportion of loans secured by non-owner occupied properties. (c) 132. Debts Incorrectly Calculated
Failure to incorporate all of a borrower’s monthly obligations precludes the lender
from properly evaluating the borrower’s ability to repay the loan. The HEAT 2007-1 Prospectus Supplement specified that originator Ownit applied maximum DTI ratios of “45% or 50% depending on credit score, LTV, documentation type and if the borrower was a first time home buyer.” The same Ownit guidelines set forth that the DTI limit could be increased, but in no event to greater than 55 percent, where the borrower met a “minimum disposable income requirement.” 133. The following are examples of instances in which it was confirmed through the
forensic review that the underwriting process failed to incorporate all of the borrower’s debt. When properly calculated, the borrower’s actual DTI ratio exceeded the 55 percent limit stated in the Prospectus Supplements. The failure to properly calculate debt led to material misstatements regarding the credit risk of the securitized loans:  A loan that closed in July 2006, in the principal amount of $244,500, was originated under a full documentation loan program. The origination credit report dated July 5, 2006 revealed a first mortgage in the amount of $165,600 and a second mortgage of $41,400, neither of which had been taken into account in calculating the borrower’s 58
DTI. An Accurint search confirmed that the borrower purchased the property on May 26, 2006, prior to the closing of the subject loan. Recalculating the borrower’s DTI based on the undisclosed monthly payments of $1,505 increases the DTI from 49.30% to 70.83%, a figure that exceeds the 55% guideline maximum. The loan defaulted and the property was liquidated in a foreclosure sale, resulting in a loss of $228,088.79, which is over 93% of the original loan amount.  A loan that closed in December 2006, in the principal amount of $102,600 was originated under a full documentation loan program. Per public records, there was an undisclosed mortgage on the subject property opened on September 30, 2006 in the amount of $207,000, with a monthly payment of $2,043. Also, according to the origination credit report, on October 6, 2006, the borrower purchased a commercial property in the amount of $89,425 with a monthly payment of $1,013 that had not been included in the initial DTI calculation. A recalculation of DTI resulted in an increase from 53.29% to 74.43%, which exceeds the guideline maximum of 55%. The loan defaulted, and the property was liquidated in a foreclosure sale, resulting in a loss of $56,062, which is over 54% of the original loan amount. (d) 134. Credit Inquiries That Indicated Misrepresentation of Debt
It is a standard underwriting requirement that where several recent credit inquiries
are listed on the credit report obtained by the loan underwriter as part of evaluating the loan application, the underwriter should confirm that the inquiries were not the result of additional undisclosed debt. The following are examples of some of the instances where the borrowers’ credit reports indicated numerous credit inquiries that should have put the loan underwriters on notice for potential misrepresentations of debt obligations to be included in the borrowers’ DTI. In each case, there was no evidence in the origination loan file that the loan underwriter researched these credit inquiries or took any action to verify that such inquiries were not indicative of undisclosed liabilities of the borrower.  A loan that closed in November 2006, in the principal amount of $84,000, was originated under a full documentation loan program. There was no evidence in the file that the originator requested or obtained an explanation from the borrower for the eight inquiries the borrower made from September 11, 2006 through November 7, 2006. A search of public records revealed three undisclosed mortgages securing two properties and obtained in the month prior to the subject transaction. On October 12, 2006, an unidentified lender closed a loan for the borrower in the amount of $71,250.00. In addition, on October 27, 2006, the borrower obtained two mortgages totaling $173,000. The recalculated DTI is 59
79.02%, instead of 40.85%, and exceeds the guideline maximum of 50%. The loan defaulted, and the property was liquidated in a foreclosure sale, resulting in a loss of $82,466.62, which is over 98% of the original loan amount.  A loan that closed in December 2006, in the principal amount of $35,440, was originated under a full documentation loan program. There was no evidence in the file that the originator requested or obtained an explanation from the borrowers for the thirteen inquiries from November 7, 2006 through December 27, 2006 that were listed on the origination credit reports dated December 27, 2006. A review of the servicer’s credit report revealed that an undisclosed property was purchased on the same date as the subject closing, December 28, 2006. The recalculated DTI is 57.32%, instead of 42.67%, and exceeds the guideline maximum of 50%. The loan defaulted, and the property was liquidated in a foreclosure sale, resulting in a loss of $35,146, which is over 99% of the original loan amount. A loan that closed in November 2006, in the principal amount of $252,000, was originated as a stated income loan. There was no evidence in the file that the underwriter requested or obtained an explanation from the borrower for the four inquiries, dated from September 6, 2006 through October 11, 2006, listed on the origination credit report dated October 11, 2006. Had this red flag been investigated, the underwriter would have discovered that the borrower financed the purchase of another property on August 7, 2006 with a $178,200 first mortgage and a $44,600 second mortgage. The recalculated DTI is 148.73%, not 35.21%, and exceeds the guideline maximum of 50%. The loan defaulted, and the property was liquidated in a foreclosure sale, resulting in a loss of $223,901, which is over 88% of the original loan amount. Had the loan underwriting for each of these loans been conducted properly, as

135.
well as for the other loans in the Supporting Loan Group with these same fatal flaws, the credit inquiries would have been identified and the undisclosed liabilities would have been discovered. In each example, moreover, a recalculation of DTI based on the borrower’s undisclosed debt yielded a DTI that exceeded the applicable underwriting guideline maximum. Failure to investigate these issues prevented the loan underwriting process from appropriately qualifying the loan and evaluating the borrower’s “ability to repay.”
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2.
Government Investigations and Other Evidence Have Confirmed That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines
136.
The abandonment of underwriting guidelines is further confirmed by government
and other reporting that have described rampant underwriting failures throughout the period of the Securitizations and, more specifically, underwriting failures by the very originators whose loans were included by the Defendants in the Securitizations. 137. For instance, in November 2008, the Office of the Comptroller of the Currency
(“OCC”), an office within the United States Department of the Treasury, issued a report identifying the “Worst Ten” mortgage originators in the “Worst Ten” metropolitan areas. See OCC Press Release, “Worst Ten in the Worst Ten,” Nov. 13, 2008. The worst originators were defined as those with the largest number of non-prime mortgage foreclosures for 2005-2007 originations. The following entities that originated loans underlying the Securitizations, according to information made available in the Prospectus Supplements, are all on the “Worst Ten” list in at least one of the metropolitan areas identified in the report: Table 8 Originator Securitizations for which loans were originated21 ABSHE 2006-HE1 ABSHE 2007-HE1 HEAT 2006-4 HEAT 2007-1 CSMC 2006-1 AHMA 2005-1 ABSHE 2006-HE6 ABSHE 2006-HE7 ABSHE 2007-HE2 AMSI 2005-R8 AMSI 2005-R11 AMSI 2006-R2
Aegis Mortgage Corp.
American Home Mortgage
Ameriquest Mortgage Company
21
Some Securitizations had more than one originator. 61
Originator Argent Mortgage Company LLC Countrywide Home Loans, Inc. Decision One Mortgage Company, LLC Fieldstone Mortgage Company Fremont Investment and Loan IndyMac Bank F.S.B.
New Century Mortgage Corp.
Option One Mortgage Corp.
Ownit Mortgage Solutions, Inc.
People’s Choice Financial Corp. ResMAE Mortgage Corp. Wells Fargo Bank, N.A.
Securitizations for which loans were originated21 ABSHE 2006-HE6 ABSHE 2006-HE7 ABSHE 2007-HE2 ARMT 2006-1 HEAT 2006-3 HEAT 2006-6 HEAT 2006-8 HEAT 2007-3 FMIC 2005-3 FMIC 2007-1 FHLT 2005-E INABS 2006-B INABS 2006-C INABS 2006-E ABSHE 2005-HE8 ABSHE 2006-HE2 ABSHE 2006-HE4 CSMC 2007-NC1 NCHET 2006-1 ABSHE 2006-HE3 ABSHE 2006-HE5 HEAT 2006-5 HEAT 2006-6 HEAT 2006-7 HEAT 2006-8 HEAT 2007-1 ABSHE 2007-HE1 HEAT 2007-2 CSMC 2006-1 HEAT 2006-3 HEAT 2006-4
138.
As far as can be discerned from the Prospectus Supplements, four prominent
originators of loans in the Loan Groups supporting the Certificates are Ownit, New Century, Option One, and Wells Fargo.22 139. Ownit, which originated loans for at least five of the Securitizations, was a
mortgage lender based in Agoura Hills, California. In September 2005, the investment bank The Prospectus Supplements do not often identify all of the originators of the mortgage loans in the groups, or even the most significant originators. 62
22
Merrill Lynch & Co. (“Merrill Lynch”) acquired a 20 percent stake in the company. According to Ownit’s founder and chief executive, William D. Dallas, after Merrill Lynch acquired that stake, it instructed Ownit to loosen underwriting standards and originate more stated income loans. Andrews, Edmund L., Busted: Life Inside the Great Mortgage Meltdown, W.W. Norton & Company, New York: 2009, at 158. As a result, the number of stated income loans jumped from near zero to over 30 percent. Id. at 155, 162. Ownit also lowered the credit scores it required from borrowers. Id. at 162. Ownit thus abandoned its underwriting standards in order to originate more loans. 140. New Century originated all of the loans for at least another five Securitizations.
As stated in the Prospectus Supplement for the ABSHE 2006-HE4 Securitization, “[f]or the year ending December 31, 2005, New Century Financial Corporation originated $56.1 billion in mortgage loans.” By the end of 2006, New Century Financial Corp., the parent of New Century, was the third largest subprime mortgage loan originator in the United States, with a loan production volume that year of $51.6 billion. And before its collapse in the first half of 2007, New Century Financial Corp. was one of the largest subprime lenders in the country. 141. In 2010, the OCC identified New Century as the worst subprime lender in the
country based on the delinquency rates of the mortgages it originated in the ten metropolitan areas between 2005 and 2007 with the highest rates of delinquency. See OCC Press Release, “Worst Ten in the Worst Ten: Update,” March 22, 2010. Further, in January 2011, the FCIC issued its final report, which detailed, among other things, the collapse of mortgage underwriting standards and subsequent collapse of the mortgage market and wider economy. The FCIC Report singled out New Century Financial Corp. for its role: New Century—once the nation’s second-largest subprime lender—ignored early warnings that its own loan quality was deteriorating and stripped power from two 63
risk-control departments that had noted the evidence. In a June 2004 presentation, the Quality Assurance staff reported they had found severe underwriting errors, including evidence of predatory lending, federal and state violations, and credit issues, in 25% of the loans they audited in November and December 2003. In 2004, Chief Operating Officer and later CEO Brad Morrice recommended these results be removed from the statistical tools used to track loan performance, and in 2005, the department was dissolved and its personnel terminated. The same year, the Internal Audit department identified numerous deficiencies in loan files; out of nine reviews it conducted in 2005, it gave the company’s loan production department “unsatisfactory” ratings seven times. Patrick Flanagan, president of New Century’s mortgage-originating subsidiary, cut the department’s budget, saying in a memo that the “group was out of control and tries to dictate business practices instead of audit.” FCIC Report at 157. 142. On February 29, 2008, after an extensive document review and conducting over
100 interviews, Michael J. Missal, the Bankruptcy Court Examiner for New Century Financial Corp., issued a detailed report on the various deficiencies at the company, including lax mortgage standards and a failure to follow its own underwriting guidelines. Among his findings, the Examiner reported:  “New Century had a brazen obsession with increasing loan originations, without due regard to the risks associated with that business strategy…. Although a primary goal of any mortgage banking company is to make more loans, New Century did so in an aggressive manner that elevated the risks to dangerous and ultimately fatal levels.” New Century also made frequent exceptions to its underwriting guidelines for borrowers who might not otherwise qualify for a particular loan. A senior officer of New Century warned in 2004 that the “number one issue is exceptions to the guidelines.” Moreover, many of the appraisals used to value the homes that secured the mortgages had deficiencies. “New Century … layered the risks of loan products upon the risks of loose underwriting standards in its loan originations to high risk borrowers.”
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
Final Report of Michael J. Missal, Bankruptcy Examiner, In re New Century TRS Holdings, Inc., No. 07-10416 (KJC) (Bankr. Del. Feb. 29, 2008), available at http://graphics8.nytimes.com/packages/pdf/business/Final_Report_New_Century.pdf. 64
143.
On December 9, 2009, the SEC charged three of New Century Financial Corp.’s
top officers with violations of federal securities laws. The SEC’s complaint details how New Century Financial Corp.’s representations regarding its underwriting guidelines, e.g., that it was committed to “adher[ing] to high origination standards in order to sell [its] loan products in the secondary market” and “only approv[ing] subprime loan applications that evidence a borrower’s ability to repay the loan,” were blatantly false. See Complaint, S.E.C. v. Morrice et al., No. SACV 09-01426 (C.D. Cal. Dec. 9, 2009). 144. Patricia Lindsay, a former Vice President of Corporate Risk at New Century
Financial Corp., testified before the FCIC in April 2010 that, beginning in 2004, underwriting guidelines had been all but abandoned at New Century. Ms. Lindsay further testified that New Century systematically approved loans with 100 percent financing to borrowers with extremely low credit scores and no supporting proof of income. See Written Testimony of Patricia Lindsay for the FCIC Hearing, April 7, 2010 (“Lindsay Testimony”), http://fcicstatic.law.stanford.edu/cdn-media/fcic.testimony/2010-0407-Lindsay.pdf, at 3. 145. Option One originated all of the 2,704 mortgage loans in the Supporting Loan
Groups in the ABSHE 2006-HE3 Securitization and all of the 2,058 mortgage loans in the ABSHE 2006-HE5 Securitization. Option One has also been identified through multiple reports and investigations for its faulty underwriting. On June 3, 2008, for instance, the Attorney General for the Commonwealth of Massachusetts filed an action against Option One (the “Option One Complaint”), and its past and present parent companies, for their unfair and deceptive origination and servicing of mortgage loans. See Complaint, Commonwealth v. H&R Block, Inc., CV NO. 08-2474-BLS (Mass. Super. Ct. June 3, 2008). According to the Massachusetts Attorney General, since 2004, Option One had “increasingly disregarded
65
underwriting standards … and originated thousands of loans that [Option One] knew or should have known the borrowers would be unable to pay, all in an effort to increase loan origination volume so as to profit from the practice of packaging and selling the vast majority of [Option One’s] residential subprime loans to the secondary market.” See Option One Complaint. 146. The Massachusetts Attorney General alleged that Option One’s agents and
brokers “frequently overstated an applicant’s income and/or ability to pay, and inflated the appraised value of the applicant’s home,” and that Option One “avoided implementing reasonable measures that would have prevented or limited these fraudulent practices.” Option One’s “origination policies … employed from 2004 through 2007 have resulted in an explosion of foreclosures.” Id. at 1. 147. On November 24, 2008, the Superior Court of Massachusetts granted a
preliminary injunction that prevented Option One from foreclosing on thousands of its loans issued to Massachusetts residents. Commonwealth v. H&R Block, Inc., No. 08-2474-BLS1, 2008 WL 5970550 (Mass. Super. Ct. Nov. 24, 2008). On October 29, 2009, the Appeals Court of Massachusetts affirmed the preliminary injunction. See Commonwealth v. Option One Mortgage Co., No. 09-P-134, 2009 WL 3460373 (Mass. App. Ct. Oct. 29, 2009). 148. On August 9, 2011, the Massachusetts Attorney General announced that H&R
Block, Inc., Option One’s parent company, had agreed to settle the suit for approximately $125 million. See Massachusetts Attorney General Press Release, “H&R Block Mortgage Company Will Provide $125 Million in Loan Modifications and Restitutions,” Aug. 9, 2011. Media reports noted that the suit was being settled amidst ongoing discussions among multiple states’ attorneys general, federal authorities, and five major mortgage servicers, aimed at resolving investigations of the lenders’ foreclosure and mortgage-servicing practices. The Massachusetts
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Attorney General released a statement saying that no settlement should include a release for conduct relating to the lenders’ packaging of mortgages into securitizations. See, e.g., Bloomberg.com, H&R Block, “Massachusetts Reach $125 Million Accord in State Mortgage Suit,” Aug. 9, 2011. 149. Wells Fargo originated 44.5 percent, 32.9 percent, and 21.9 percent of the loans
underlying the HEAT 2006-3, HEAT 2006-4, and CSMC 2006-1 Securitizations, respectively. Admissions, government investigations, and statements provided by insiders confirm that Wells Fargo was routinely approving loans that failed to meet its underwriting standards. 150. In March 2009, residential mortgage-backed securities investors filed suit against
Wells Fargo, alleging that it had misrepresented its underwriting guidelines and loan quality. See In re Wells Fargo Mortgage-Backed Certificates Litig., No. 09-CV-01376 (N.D. Cal. 2009). In denying in part a motion to dismiss, the court found that plaintiffs had adequately pled that “variance from the stated [underwriting] standards was essentially [Wells Fargo’s] norm” and that this conduct “infected the entire underwriting process.” In re Wells Fargo Mortgage-Backed Certificates Litig., 712 F. Supp. 2d 958, 972 (N.D. Cal. 2010). Wells Fargo agreed to settle the investors’ claims. 151. Further, a number of government actors have announced investigations of Wells
Fargo’s lending practices. In July 2009, the Attorney General of Illinois filed a lawsuit, People v. Wells Fargo & Co., No. 09-CH-26434 (Ill. Cir. Ct. 2009), alleging that Wells Fargo “engaged in deceptive practices by misleading Illinois borrowers about their mortgage terms.” The complaint details that borrowers were placed into loans that were “unaffordable and unsuitable,” and that Wells Fargo “failed to maintain proper controls.”
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152.
In April 2010, the City of Memphis filed its First Amended Complaint in
Memphis v. Wells Fargo Bank, No. 09-CV-02857 (W.D. Tenn. 2009), alleging that Wells Fargo “failed to underwrite African-American borrowers properly.” A similar lawsuit was filed by the City of Baltimore, Mayor and City Council of Baltimore v. Wells Fargo Bank, N.A., No. 08-CV00062 (D. Md. 2008). The City of Memphis and City of Baltimore complaints include sworn declarations from many former Wells Fargo employees, which provide evidence of predatory lending and abandonment of underwriting guidelines. 153. For instance, Camille Thomas, a loan processor at Wells Fargo from January 2004
to January 2008, stated under oath that loans were granted based on inflated appraisals, which allowed borrowers to get larger loans than they could afford due to the impact on the LTV calculation and some loans were even granted based on falsified income documents. Similarly, another affidavit by Doris Dancy, a credit manager at Wells Fargo from July 2007 to January 2008, stated that managers put pressure on employees to convince people to apply for loans, even if the person could not afford the loan or did not qualify for it. She was also aware that loan applications contained false data, used to get customers to qualify for loans. 154. The FCIC interviewed Darcy Parmer, a former employee of Wells Fargo, who
worked as an underwriter and a quality assurance analyst from 2001 until 2007. Ms. Parmer confirmed that, during her tenure, Wells Fargo’s underwriting standards were loosening, adding that they were being applied “on the fly” and that “[p]eople were making it up as they went.” She also told the FCIC that 99 percent of the loans she would review in a day would get approved, and that, even though she later became a “fraud analyst,” she never received any training in detecting fraud. The FCIC Report described how “hundreds and hundreds and hundreds of fraud cases” that Ms. Palmer knew were identified within Wells Fargo’s home
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equity loan division were not reported to FinCEN.23 In addition, according to Ms. Palmer, at least half the loans she flagged for fraud were nevertheless funded, over her objections. 155. In July 2011, the Federal Reserve Board issued a consent cease and desist order
and assessed an $85 million civil money penalty against Wells Fargo & Co. and Wells Fargo Financial, Inc. According to the Federal Reserve’s press release, the order addressed in part allegations that “Wells Fargo Financial sales personnel falsified information about borrowers’ incomes to make it appear that the borrowers qualified for loans when they would not have qualified based on their actual incomes.” The Federal Reserve Board also found that the poor practices of Wells Fargo were fostered by Wells Fargo Financial’s incentive compensation and sales quota programs, and the lack of adequate controls to manage the risks resulting from these programs. 156. The originators of the mortgage loans underlying the Securitizations also went
beyond the systematic disregard of their own underwriting guidelines. The FCIC “reviewed millions of pages of documents, interviewed more than 700 witnesses, and held 19 days of public hearings in New York, Washington, D.C., and communities across the country,” as a means of examining the “causes of the current financial and economic crisis in the United States.” FCIC Report at xi. The FCIC confirmed that mortgage originators throughout the industry pressured appraisers, during the period of the Securitizations, to issue inflated appraisals that met or exceeded the amount needed for the subject loans to be approved, regardless of the accuracy of such appraisals, and especially when the originators aimed at putting the mortgages into a package of mortgages that would be sold for securitization. This resulted in lower LTV ratios, discussed above, which in turn made the loans appear to the investors less risky than they were. FinCEN is the Financial Crimes Enforcement Network, a bureau within the Treasury Department that collects and analyzes information regarding financial fraud. 69
23
157.
As described by Patricia Lindsay, the former wholesale lender who testified
before the FCIC in April 2010, appraisers “fear[ed]” for their “livelihoods,” and therefore cherry-picked data “that would help support the needed value rather than finding the best comparables to come up with the most accurate value.” See Lindsay Test. at 5. Likewise, Jim Amorin, President of the Appraisal Institute, confirmed in his testimony that “[i]n many cases, appraisers are ordered or severely pressured to doctor their reports and to convey a particular, higher value for a property, or else never see work from those parties again …. [T]oo often state licensed and certified appraisers are forced into making a ‘Hobson’s Choice.’” See Testimony of Jim Amorin to the FCIC, available at www.appraisalinstitute.org/newsadvocacy/downloads/ltrs_tstmny/2009/AI-ASA-ASFMRANAIFATestimonyonMortgageReform042309final.pdf. Faced with this choice, appraisers systematically abandoned applicable guidelines and over-valued properties in order to facilitate the issuance of mortgages that could then be collateralized into mortgage-backed securitizations. 3. 158. Credit Suisse Routinely Included in Securitizations Mortgage Loans That Failed to Meet Underwriting Standards
Credit Suisse itself has also been the subject of government investigations and
reports that have described and documented Credit Suisse’s failure to ensure that the mortgage loans it securitized were originated in compliance with applicable underwriting guidelines. 159. MBIA Insurance Corp. (“MBIA”), which has sued Credit Suisse Securities and
DLJ Mortgage Capital for breach of contract and fraud in connection with residential mortgagebacked securities securitizations for which MBIA provided financial guaranty insurance, reported at the end of April 2011 that the SEC has commenced an investigation of Credit Suisse and has subpoenaed from Credit Suisse documentation relating to the standards under which
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loans securitized by Credit Suisse were originated. See Bloomberg.com, “SEC Subpoenas Credit Suisse Over Mortgages, MBIA Says,” May 5, 2011. 160. The Clayton trending reports described at paragraph 86 above, and summarized
by the FCIC, have also documented that Credit Suisse routinely “waived” into loan groups mortgage loans that did not comply with underwriting guidelines and without adequate consideration of compensating factors. The FCIC regarded Clayton, the firm Credit Suisse retained to analyze loans it placed in its securitizations, to have a “unique inside view of the underwriting standards that originators were actually applying” because of the volume of loans it examined “during the housing boom.” FCIC Report at 166, 167. 161. Clayton gave loans one of three grades – Grade 3 loans “failed to meet guidelines
and were not approved,” while Grade 1 loans “met guidelines.” Id. at 166. Clayton also “critically” analyzed whether, to the extent a loan was deficient, any “compensating factors” existed. Id. Tellingly, only 54 percent of the nearly one-million loans reviewed by Clayton “met guidelines,” a number that its former president indicated signified “there [was] a quality control issue in the factory” for mortgage-backed securities. Id. 162. As related at paragraph 86 above, internal Clayton documents show that, contrary
to Defendants’ representations, a startlingly high percentage of loans reviewed by Clayton for Credit Suisse were defective, but were nonetheless included by the Defendants in loan groups sold to investors. According to a trending report made public in September 2010, Clayton found that 32 percent of the 56,300 loans that it reviewed for Defendants received the worst possible grade, i.e., they failed to conform to standards. Id. at 167. Credit Suisse “waived” into its groups one-third of those toxic loans that Clayton had identified as being outside the guidelines.
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163.
The FCIC concluded that the “waiver” of rejected loans that were not subject to
any compensating factors rendered Defendants’ disclosures regarding their underwriting and due diligence processes even more misleading. The report concluded: [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 (emphasis added). 4. Credit Suisse’s Own Insurers Have Found That Loan Groups Securitized by Credit Suisse Are Full of Loans Originated in Violation of Underwriting Guidelines
164.
MBIA and Ambac Assurance Corporation (“Ambac”) provided financial guaranty
insurance on Credit Suisse’s securitizations in 2007. In connection with lawsuits they commenced against CS Securities and DLJ Mortgage Capital, MBIA and Ambac, who had contractual rights to obtain the loan files for the securitizations they insured, have disclosed the results of their own re-underwriting of loan files. The findings of these insurers reinforce the results of the forensic review conducted by Plaintiff FHFA of nearly 2,000 files relating to loans backing the HEAT 2007-1 and HEAT 2007-2 Securitizations. Specifically, they demonstrate that the essential characteristics of the mortgage loans underlying the Certificates sold to the GSEs were misrepresented and that the problems with the underwriting practices used to originate the mortgage loans were systemic. 72
165.
MBIA and Ambac are monoline insurers that wrote financial guaranty insurance
on HEMT 2007-2 and HEMT 2007-1, respectively. According to complaints filed in December 2009 and January 2010, MBIA and Ambac began investigating the quality of the underwriting used to originate the loans underlying the securitizations for which they provided insurance after the poor performance of the loans in the pools triggered their obligation to pay claims. The HEMT shelf is common to HEMT 2006-6, the offering from which Freddie Mac purchased Certificates. The parties, type of collateral, structure, timing, and disclosures made in connection with HEMT 2007-2 and 2007-1 were substantially similar to those present in the Securitizations. 166. As discussed in the complaint in the action entitled MBIA v. Credit Suisse Sec. et
al., No. 603751/09 (N.Y. Sup. Ct. Dec. 14, 2009), MBIA reviewed the loan origination files of 1,798 loans in the pool underlying HEMT 2007-2, of which 477 were selected at random. In its review, MBIA found that 85 percent of the loans contained breaches of DLJ Mortgage Capital’s contractual representations and warranties to MBIA that the loans had been originated in compliance with underwriting guidelines. MBIA has alleged that these findings demonstrated “a complete abandonment of applicable guidelines and prudent practices such that the loans were (i) made to numerous borrowers who were not eligible for the reduced documentation loan programs through which their loans were made, and (ii) originated in a manner that systematically ignored the borrowers’ inability to repay the loans.” 167. MBIA also found “pervasive violations of the originators’ actual underwriting
standards, and prudent and customary origination and underwriting practices, including (i) qualifying borrowers under reduced documentation programs who were ineligible for those programs; (ii) systemic failure to conduct the required income-reasonableness analysis for stated income loans, resulting in the rampant origination of loans to borrowers who made unreasonable
73
claims as to their income; and (iii) lending to borrowers with debt-to-income and loan-to-value ratios above the allowed maximums.” 168. As described in the complaint in the action entitled Ambac v. DLJ Mortgage
Capital et al., No. 600070/2010 (N.Y. Sup. Ct. Jan. 22, 2010), Ambac reviewed the loan origination files of 1,134 loans in the pool underlying HEMT 2007-1, of which 390 were randomly selected. In its review, Ambac found that 80 percent of the loans breached DLJ Mortgage Capital’s contractual representations and warranties to Ambac that the loans had been originated in compliance with underwriting guidelines. Ambac’s findings as to the nature of the failure to comply with underwriting guidelines were similar to those of MBIA, described above. 169. MBIA has also recently filed briefing in which it states that Credit Suisse has
produced internal emails that prove that as early as February 2006, Credit Suisse itself had become aware that the mortgage loans that it was pooling for securitizations had been originated in violation of the applicable underwriting guidelines. According to MBIA, when faced with alarming early payment default rates on loans that it planned to securitize, Credit Suisse employees sought to obtain “quality control” reports. Those reports showed that substantial percentages of the delinquencies had been caused by substandard underwriting, misstated incomes, and undisclosed debts. See Pl.’s Mem. in Further Supp. of Mot. to Compel at 9, MBIA v. Credit Suisse Sec., No. 600070/2010 (N.Y. Sup. Ct. May 5, 2011) (Doc. No. 113). 170. The findings of MBIA and Ambac—including that over 80 percent of the loans in
the pools underlying securitizations sponsored and underwritten by Credit Suisse entities were not originated in compliance with the applicable underwriting guidelines—fully corroborate FHFA’s analysis of the Securitizations, as described above in Sections IV.A and IV.B.1.
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5.
The Collapse of the Certificates’ Credit Ratings Further Indicates That the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines
171.
The total collapse in the credit ratings of the GSE Certificates, typically from
AAA or its equivalent to non-investment speculative grade, is further evidence of the originators’ systematic disregard of underwriting guidelines, indicating that the GSE Certificates were impaired from the start. 172. The GSE Certificates that Fannie Mae and Freddie Mac purchased were originally
assigned credit ratings of AAA or its equivalent, which purportedly reflected the description of the mortgage loan collateral and underwriting practices set forth in the Registration Statements. These ratings were artificially inflated, however, as a result of the very same misrepresentations that the Defendants made to investors in the Prospectus Supplements. 173. Credit Suisse provided loan-level information to the rating agencies that they
relied upon in order to calculate the Certificates’ assigned ratings, including the borrower’s LTV ratio, debt-to-income ratio, owner occupancy status, and other loan-level information described in aggregation reports in the Prospectus Supplements. Because the information that Credit Suisse provided was false, the ratings were inflated and the level of subordination that the rating agencies required for the sale of AAA (or its equivalent) certificates was inadequate to provide investors with the level of protection that those ratings signified. As a result, the GSEs paid Defendants inflated prices for purported AAA (or its equivalent) Certificates, unaware that those Certificates actually carried a severe risk of loss and carried inadequate credit enhancement. 174. Since the issuance of the Certificates, the ratings agencies have dramatically
downgraded their ratings to reflect the revelations regarding the true underwriting practices used
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to originate the mortgage loans, and the true value and credit quality of the mortgage loans. Table 9 details the extent of the downgrades.8 Table 9
Transaction Tranche A1 ABSHE 2005-HE8 ABSHE 2006-HE1 ABSHE 2006-HE2 ABSHE 2006-HE3 ABSHE 2006-HE4 ABSHE 2006-HE5 ABSHE 2006-HE6 ABSHE 2006-HE7 ABSHE 2007-HE1 ABSHE 2007-HE2 AHMA 2005-1 AMSI 2005-R8 AMSI 2005-R11 AMSI 2006-R2 ARMT 2005-10 ARMT 2005-11 ARMT 2005-12 ARMT 2006-1 CSFB 2005-11 A1A A2 A1 A1 A1 A2 A1 A2 A1 A1 A1 A1A A1B A1 3A21 A1 A1 A1 4A1 4A1 4A1 5A1 2A1 7A1 2A1 CSFB 2005-12 CSMC 2006-1
8
Rating at Issuance (Moody’s/S&P/Fitch) Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/AAA
Rating at July 31, 2011 (Moody’s/S&P/Fitch) Aa2/AAA/-Aa3/AAA/-A2/AAA/-Ba2/AAA/CCC Caa1/BBB/CCC B1/AAA/CCC B1/AAA/CCC Ba1/AAA/CCC B1/AAA/CC Ba1/A/CCC Ba3/CCC/CC Caa3/B-/C Caa3/CCC/CC Caa3/CCC/CC Caa3/B/C Caa3/BB-/CCC Aa1/AAA/A A1/AAA/BB A3/AAA/B Caa3/CCC/-Ca/CCC/-Ca/CCC/-Ca/D/-Caa2/D/-Caa3/CCC/-Ca/D/-Caa3/D/-B3/B/-Caa2/CC/C
4A1 5A1 5A1
Applicable ratings are shown in sequential order separated by forward slashes: Moody’s/S&P/Fitch. A hyphen between forward slashes indicates that the relevant agency did not provide a rating at issuance. 76
Transaction
Tranche 5A2
Rating at Issuance (Moody’s/S&P/Fitch) Aaa/AAA/AAA --/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA
Rating at July 31, 2011 (Moody’s/S&P/Fitch) C/CC/C --/CCC/CCC Ba3/AA-/CCC B1/A/B Caa2/B+/-Aa2/AAA/A Baa2/AAA/BB A2/AAA/BBB Aa2/AAA/BB B3/AAA/CCC Caa2/B-/CC Caa3/B-/C Ca/B-/C Ca/CCC/C Ca/CCC/C Ca/CCC/C Ca/CCC/C Ca/CCC/C Ca/CC/-Caa3/CCC/CC Caa3/CCC/CC Caa3/CCC/C Ca/CCC/C Ca/CCC/C Caa3/AAA/CC
CSMC 2007-NC1 FHLT 2005-E FMIC 2005-3 FMIC 2007-1 HEAT 2005-7 HEAT 2005-8 HEAT 2005-9 HEAT 2006-1 HEAT 2006-3 HEAT 2006-4 HEAT 2006-5 HEAT 2006-6 HEAT 2006-7 HEAT 2006-8 HEAT 2007-1 HEAT 2007-2 HEAT 2007-3 HEMT 2006-6 INABS 2006-B INABS 2006-C INABS 2006-E NCHET 2006-1
1A1 1A1 1A 1A 1A1 1A1 1A1 1A1 1A1 1A1 1A1 1A1 1A1 1A1 1A1 1A1 1A1 1A1 1A1 1A2 2A 1A1 1A2 A1
175.
According to a May 13, 2010 Reuters news article, the New York Attorney
General is conducting “an investigation into whether eight banks, including [Credit Suisse], misled rating agencies with regard to mortgage-derivative deals.” 6. The Surge in Mortgage Delinquency and Default Further Demonstrates That the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines
176.
Even though the Certificates purchased by Fannie Mae and Freddie Mac were
supposed to represent long-term, stable investments, a significant percentage of the mortgage
77
loans backing the Certificates have defaulted, have been foreclosed upon, or are delinquent, resulting in massive losses to the Certificateholders. The overall poor performance of the mortgage loans is a direct consequence of the fact that they were not underwritten in accordance with applicable underwriting guidelines as represented in the Registration Statements. 177. Loan groups that were properly underwritten and contained loans with the
characteristics represented in the Registration Statements would have experienced substantially fewer payment problems and substantially lower percentages of defaults, foreclosures, and delinquencies than occurred here. Table 10 reflects the percentage of loans in the Supporting Loan Groups that are in default, have been foreclosed upon, or are delinquent as of July 2011. Table 10
Loan Group 1 ABSHE 2005-HE8 Loan Group 2 ABSHE 2006-HE1 ABSHE 2006-HE2 ABSHE 2006-HE3 Loan Group 2 Loan Group 1 ABSHE 2006-HE4 Loan Group 2 ABSHE 2006-HE5 ABSHE 2006-HE6 ABSHE 2006-HE7 ABSHE 2007-HE1 ABSHE 2007-HE2 AHMA 2005-1 AMSI 2005-R8 AMSI 2005-R11 AMSI 2006-R2 ARMT 2005-10 ARMT 2005-11 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 3B Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 4 Loan Group 4 37.5 45.2 34.3 32.7 35.6 45.0 36.0 37.1 32.4 37.0 22.0 46.9 44.8 37.6 Loan Group 1 Loan Group 1 Loan Group 1 36.5 37.2 38.1 37.5
Transaction
Percentage of Delinquent/Defaulted/Foreclosed Loans
32.2
78
Transaction
ARMT 2005-12 ARMT 2006-1 CSFB 2005-11
Loan Group 4 Loan Group 5 Loan Group 2 Loan Group 7 Loan Group 2
Percentage of Delinquent/Defaulted/Foreclosed Loans
31.7 47.9 15.9 28.3 31.4 32.4 10.2 28.8 39.5 56.5 48.8 37.8 40.4 40.1 37.6 36.3 33.9 44.3 49.8 51.1 46.3 43.8 42.4 40.5 38.7 10.6 48.7 54.9 49.9 44.3
CSFB 2005-12
Loan Group 4 Loan Group 5
CSMC 2006-1 CSMC 2007-NC1 FHLT 2005-E FMIC 2005-3 FMIC 2007-1 HEAT 2005-7 HEAT 2005-8 HEAT 2005-9 HEAT 2006-1 HEAT 2006-3 HEAT 2006-4 HEAT 2006-5 HEAT 2006-6 HEAT 2006-7 HEAT 2006-8 HEAT 2007-1 HEAT 2007-2 HEAT 2007-3 HEMT 2006-6 INABS 2006-B INABS 2006-C INABS 2006-E NCHET 2006-1
Loan Group 5 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 2 Loan Group 1 Loan Group 1
178.
The confirmed misstatements concerning owner occupancy and LTV ratios, the
review of nearly 2,000 loan files for two of the Securitizations, the confirmed systematic underwriting failures by the originators responsible for the mortgage loans across the 79
Securitizations, the findings of the FCIC and others regarding Credit Suisse’s routine inclusion in securitizations of loans failing to conform to underwriting guidelines, the investigations, allegations of misconduct, and analyses of Credit Suisse by its own financial guaranty insurers, the extraordinary drop in credit ratings and rise in delinquencies across those Securitizations, all confirm that the mortgage loans in the Supporting Loan Groups, contrary to the representations in the Registration Statements, were not originated in accordance with the stated underwriting guidelines. V. FANNIE MAE’S AND FREDDIE MAC’S PURCHASES OF THE GSE CERTIFICATES AND THE RESULTING DAMAGES 179. In total, between September 28, 2005 and November 23, 2007, Fannie Mae and
Freddie Mac purchased over $14.1 billion in residential mortgage-backed securities issued in connection with the Securitizations. Table 11 reflects each of Freddie Mac’s purchases of the Certificates.24 Table 11
Settlement Date of Purchase by Freddie Mac 10/28/2005 2/6/2006 4/17/2006 4/28/2006 7/18/2006 11/30/2006 11/30/2006 Initial Unpaid Principal Balance 218,002,000 396,315,000 187,698,000 173,090,000 296,485,000 178,248,000 295,597,000 Purchase Price (% of Par) 100 100 100 100 100 100 100
Transaction
Tranche
CUSIP
Seller to Freddie Mac CS Securities25 CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities
ABSHE 2005HE8 ABSHE 2006HE1 ABSHE 2006HE3 ABSHE 2006HE4 ABSHE 2006HE5 ABSHE 2006HE6 ABSHE 2006HE7
A2 A1 A2 A2 A1 A1 A1
04541GUZ3 04541GVG4 04541GWZ1 04544GAC3 04544PAA7 04544NAA2 04544QAA5
Purchased securities in Tables 11 and 12 are stated in terms of unpaid principal balance of the relevant Certificates. Purchase prices are stated in terms of percentage of par.
25
24
Transaction
Tranche
CUSIP
Settlement Date of Purchase by Freddie Mac 2/6/2007 5/31/2007 9/28/2005 12/20/2005 3/29/2006 12/1/2005 12/30/2005 1/31/2006 1/31/2006 11/23/2007 12/20/2005 11/23/2005 4/12/2007 10/4/2005 11/2/2005 12/2/2005 1/4/2006 3/30/2006 5/1/2006 7/5/2006 8/1/2006 10/3/2006 12/1/2006 2/1/2007 4/2/2007 5/1/2007 12/29/2006 3/14/2006 12/8/2006 3/30/2006
Initial Unpaid Principal Balance 71,333,000 107,228,000 779,011,000 1,099,278,000 525,819,000 68,243,000 104,000,000 180,586,800 20,065,200 286,133,341.35 728,502,000 316,989,000 124,711,000 250,000,000 500,000,000 240,000,000 255,000,000 525,000,000 500,000,000 300,000,000 307,500,000 340,000,000 385,000,000 350,000,000 460,000,000 212,250,000 27,000,000 152,932,000 192,789,000 456,811,000
Purchase Price (% of Par) 100 100 100 100 100 100.08 96.57 100.70 100.70 94.5 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100.11 100 100 100 100
Seller to Freddie Mac
ABSHE 2007HE1 ABSHE 2007HE2 AMSI 2005-R8 AMSI 2005R11 AMSI 2006-R2 CSFB 2005-11 CSFB 2005-12 CSMC 2006-1 CSMC 2007NC1 FHLT 2005-E FMIC 2005-3 FMIC 2007-1 HEAT 2005-7 HEAT 2005-8 HEAT 2005-9 HEAT 2006-1 HEAT 2006-3 HEAT 2006-4 HEAT 2006-5 HEAT 2006-6 HEAT 2006-7 HEAT 2006-8 HEAT 2007-1 HEAT 2007-2 HEAT 2007-3 HEMT 2006-6 INABS 2006-B INABS 2006-E NCHET 2006-1
A1A A1 A1 A1 A1 7A1 5A1 5A1 5A2 1A1 1A1 1A 1A 1A1 1A1 1A1 1A1 1A1 1A1 1A1 1A1 1A1 1A1 1A1 1A1 1A1 1A1 1A2 1A1 A1
04544RAR6 04544TAA9 03072SN43 03072SU45 03072SZ32 2254W0PC3 225470RW5 225470WC3 225470WD1 12638LAR9 35729PMY3 31659TEE1 31659YAA2 437084NT9 437084PS9 437084QR0 437084RQ1 437084UK0 437084VJ2 437096AA8 437097AA6 43709NAA1 43709QAA4 43710LAA2 43710KAA4 43710TAA5 43709YAA7 456606KW1 43709XAA9 64352VQP9
CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities Lehman Brothers Lehman Brothers CS Securities
180.
Table 12 reflects each of Fannie Mae’s purchases of the Certificates.
Table 12
Settlement Date of Purchase by Fannie Mae 10/28/2005 10/28/2005 Initial Unpaid Principal Balance 185,074,000 32,660,000 Purchase Price (% of Par) 100 100
Transaction
Tranche
CUSIP
Seller to Fannie Mae CS Securities26 CS Securities
A1 ABSHE 2005-HE8 A1A
04541GUX8 04541GUY6
26
Transaction
Tranche
CUSIP
ABSHE 2006-HE2 ABSHE 2006-HE3 ABSHE 2006-HE4 ABSHE 2007-HE1 AHMA 2005-1 ARMT 2005-10 ARMT 2005-11 ARMT 2005-12 ARMT 2006-1 CSFB 2005-11 CSFB 2005-12 INABS 2006-B INABS 2006-C INABS 2006-E
A1 A1 A1 A1B 3A21 4A1 4A1 4A1 5A1 2A1 2A1 4A1 1A1 2A 1A2
04541GWB4 04541GWY4 04544GAA7 04544RAS4 02660VAG3 007036TK2 007036VG8 2254W0MK8 225470B77 2254W0NF8 225470RT2 225470RV7 456606KV3 43709BAB5 43709XAB7
Settlement Date of Purchase by Fannie Mae 3/24/2006 4/17/2006 4/28/2006 2/6/2007 10/31/2005 9/30/2005 10/31/2005 11/30/2005 2/28/2006 11/30/2005 12/30/2005 12/30/2005 3/14/2006 6/15/2006 12/8/2006
Initial Unpaid Principal Balance 298,145,000 192,683,000 153,485,000 71,333,000 100,470,000 80,470,000 312,635,000 112,160,000 74,286,000 76,116,357 100,153,573 225,636,009 152,932,000 153,334,000 192,789,000
Purchase Price (% of Par) 100 100 100 100 100 100.93 100.52 100.71 101.02 100.75 101.80 99.59 100 100 100
Seller to Fannie Mae CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities CS Securities Lehman Brothers CS Securities Lehman Brothers
181.
The statements and assurances in the Registration Statements regarding the credit
quality and characteristics of the mortgage loans underlying the GSE Certificates, and the origination and underwriting practices pursuant to which the mortgage loans were originated, which were summarized in such documents, were material to a reasonable investor’s decision to purchase the GSE Certificates. 182. The false statements of material facts and omissions of material facts in the
Registration Statements, including the Prospectuses and Prospectus Supplements, directly caused Fannie Mae and Freddie Mac to suffer billions of dollars in damages, including without limitation depreciation in the value of the securities. The mortgage loans underlying the GSE Certificates experienced defaults and delinquencies at a much higher rate than they would have had the loan originators adhered to the underwriting guidelines set forth in the Registration Statements, and the payments to the trusts were therefore much lower than they would have been had the loans been underwritten as described in the Registration Statements.
82
183.
Fannie Mae’s and Freddie Mac’s losses have been much greater than they would
have been if the mortgage loans had the credit quality represented in the Registration Statements. 184. Credit Suisse’s misstatements and omissions in the Registration Statements
regarding the true characteristics of the loans were the proximate cause of Fannie Mae’s and Freddie Mac’s losses relating to their purchase of the GSE Certificates. Based upon sales of the Certificates or similar certificates in the secondary market, Credit Suisse proximately caused billions of dollars in damages to Fannie Mae and Freddie Mac in an amount to be determined at trial. FIRST CAUSE OF ACTION Violation of Section 11 of the Securities Act of 1933 (Against Defendants CS Securities, CSFB Mortgage Securities, Asset Backed Securities, Andrew A. Kimura, Jeffrey A. Altabef, Evelyn Echevarria, Michael A. Marriott, Thomas Zingalli, Carlos Onis, Joseph M. Donovan, Juliana Johnson, and Greg Richter) 185. Plaintiff repeats and realleges each and every allegation above as if fully set forth
herein, except to the extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 186. This claim is brought by Plaintiff pursuant to Section 11 of the Securities Act of
1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements. This claim is brought against Defendant CS Securities with respect to each of the Registration Statements. This claim is brought against (i) Defendant CSFB Mortgage Securities, (ii) Defendant Asset Backed Securities, and (iii) Defendants Andrew A. Kimura, Jeffrey A. Altabef, Evelyn Echevarria, Michael A. Marriott, Thomas Zingalli, Carlos Onis, Joseph M. Donovan, Juliana Johnson, and Greg Richter (the foregoing Individual Defendants collectively referred to as the “Section 11 Individual Defendants”), each with respect to the Registration Statements filed by CSFB
83
Mortgage Securities or Asset Backed Securities that registered securities that were bona fide offered to the public on or after September 6, 2005. 187. This claim is predicated upon the strict liability of Defendant CS Securities for
making false and materially misleading statements in each of the Registration Statements for the Securitizations and for omitting facts necessary to make the facts stated therein not misleading. Defendants CSFB Mortgage Securities, Asset Backed Securities, and the Section 11 Individual Defendants are strictly liable for making false and materially misleading statements in the Registration Statements filed by CSFB Mortgage Securities and Asset Backed Securities that registered securities that were bona fide offered to the public on or after September 6, 2005, which are applicable to 24 of the 43 Securitizations (as specified in Tables 1 and 2 above), including the related Prospectus Supplements, and for omitting facts necessary to make the facts stated therein not misleading. 188. Defendant CS Securities served as underwriter of each of the Securitizations, and
as such, is liable for the misstatements and omissions in the Registration Statements under Section 11 of the Securities Act. 189. Defendants CSFB Mortgage Securities and Asset Backed Securities filed
Registration Statements under which 29 of the 43 Securitizations were carried out. As depositors in those Securitizations, Defendants CSFB Mortgage Securities and Asset Backed Securities are issuers of the GSE Certificates issued pursuant to the Registration Statements they filed within the meaning of Section 2(a)(4) of the Securities Act, 15 U.S.C. § 77b(a)(4), and in accordance with Section 11(a), 15 U.S.C. § 77k(a). As such, these defendants are liable under Section 11 of the Securities Act for the misstatements and omissions in those six Registration Statements that
84
registered securities that were bona fide offered to the public on or after September 6, 2005 and applicable to 24 of the 43 Securitizations. 190. At the time Defendants CSFB Mortgage Securities and Asset Backed Securities
filed the Registration Statements applicable to 29 of the Securitizations, the Section 11 Individual Defendants were officers or directors of CSFB Mortgage Securities and Asset Backed Securities. In addition, the Section 11 Individual Defendants signed those Registration Statements and either signed or authorized another to sign on their behalf the amendments to those Registration Statements. As such, the Section 11 Individual Defendants are liable under Section 11 of the Securities Act for the misstatements and omissions in those Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005. 191. At the time that they became effective, each of the Registration Statements
contained material misstatements of fact and omitted information necessary to make the facts stated therein not misleading, as set forth above. The facts misstated or omitted were material to a reasonable investor reviewing the Registration Statements. 192. The untrue statements of material facts and omissions of material fact in the
Registration Statements are set forth above in Section IV and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, debt-to-income ratios, and credit ratings. 193. Fannie Mae and Freddie Mac purchased or otherwise acquired the GSE
Certificates pursuant to the false and misleading Registration Statements. Fannie Mae and Freddie Mac made these purchases in the primary market. At the time they purchased the GSE Certificates, Fannie Mae and Freddie Mac did not know of the facts concerning the false and
85
misleading statements and omissions alleged herein, and if the GSEs would have known those facts, they would not have purchased the GSE Certificates. 194. CS Securities owed to Fannie Mae, Freddie Mac, and other investors a duty to
make a reasonable and diligent investigation of the statements contained in each of the Registration Statements at the time they became effective to ensure that such statements were true and correct and that there were no omissions of material facts required to be stated in order to make the statements contained therein not misleading. The Section 11 Individual Defendants owed the same duty with respect to the Registration Statements that they signed that registered securities that were bona fide offered to the public on or after September 6, 2005, which are applicable to 24 of the Securitizations. 195. CS Securities and the Section 11 Individual Defendants did not exercise such due
diligence and failed to conduct a reasonable investigation. In the exercise of reasonable care, these Defendants should have known of the false statements and omissions contained in or omitted from the Registration Statements filed in connection with the Securitizations, as set forth herein. In addition, CSFB Mortgage Securities and Asset Backed Securities, though subject to strict liability without regard to whether they performed diligence, also failed to take reasonable steps to ensure the accuracy of the representations. 196. Fannie Mae and Freddie Mac sustained substantial damages as a result of the
misstatements and omissions in the Registration Statements. 197. The time period from July 29, 2011 through August 29, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between FHFA, Freddie Mac, Fannie Mae, CS USA, CS Securities, DLJ Mortgage Capital, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance. In addition, this action is
86
brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. § 4617(b)(2). 198. By reason of the conduct herein alleged, CS Securities, CSFB Mortgage
Securities, Asset Backed Securities, and the Section 11 Individual Defendants are jointly and severally liable for their wrongdoing. SECOND CAUSE OF ACTION Violation of Section 12(a)(2) of the Securities Act of 1933 (Against CS Securities, CSFB Mortgage Securities, Asset Backed Securities, CSFB Mortgage Acceptance) 199. Plaintiff repeats and realleges each and every allegation above as if fully set forth
herein, except to the extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 200. This claim is brought by Plaintiff pursuant to Section 12(a)(2) of the Securities
Act of 1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements in the Securitizations listed in paragraph 2 above. 201. This claim is predicated upon Defendant CS Securities’ negligence for making
false and materially misleading statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as “Prospectuses”) for each of the Securitizations other than the INABS 2006-B and INABS 2006-E Securitizations, for which CS Securities was not the selling underwriter. Defendants CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance acted negligently in making false and materially misleading statements in the Prospectuses for the 32 Securitizations carried out under the Registration Statements filed by the Depositor Defendants, as specified in Table 2 at paragraph 52 above. 87
202.
CS Securities is prominently identified in the Prospectuses, the primary
documents it used to sell the GSE Certificates. CS Securities offered the Certificates publicly, including selling to Fannie Mae and Freddie Mac their GSE Certificates, as set forth in the Prospectuses, including in the “Method of Distribution” section. 203. CS Securities offered and sold the GSE Certificates to Fannie Mae and Freddie
Mac by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. CS Securities reviewed and participated in drafting the Prospectuses. 204. CS Securities successfully solicited Fannie Mae’s and Freddie Mac’s purchases of
the GSE Certificates. As underwriter, CS Securities obtained substantial commissions based upon the amount received from the sale of the Certificates to the public. 205. CS Securities offered the GSE Certificates for sale, sold them, and distributed
them by the use of means or instruments of transportation and communication in interstate commerce, including communications between its representatives in New York and representatives of Fannie Mae in the District of Columbia and Freddie Mac in McLean, Virginia. 206. CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage
Acceptance are prominently identified in the Prospectuses for the Securitizations carried out under the eight Registration Statements that they filed. These Prospectuses were the primary documents each used to sell Certificates registered on those Registration Statements (the “Depositor Defendant Registration Statements”). CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance offered the Certificates publicly, including selling to Fannie Mae and Freddie Mac the GSE Certificates.
88
207.
CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage
Acceptance offered and sold the GSE Certificates offered pursuant to the Depositor Defendant Registration Statements to Fannie Mae and Freddie Mac by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. Upon information and belief, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance reviewed and participated in drafting the Prospectuses. 208. CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage
Acceptance successfully solicited Fannie Mae’s and Freddie Mac’s purchases of the GSE Certificates. CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance were paid a percentage of the total dollar value of each Securitization in which they participated. 209. CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage
Acceptance offered the GSE Certificates for sale, sold them, and distributed them by the use of means or instruments of transportation and communication in interstate commerce, including communications between its representatives in New York and representatives of Fannie Mae in the District of Columbia and Freddie Mac in McLean, Virginia. 210. Each of the Prospectuses contained material misstatements of fact and omitted
facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectuses. 211. The untrue statements of material facts and omissions of material fact in the
Registration Statements, which include the Prospectuses, are set forth above in Section IV, and
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pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and credit ratings. 212. CS Securities, CSFB Mortgage Securities, Asset Backed Securities, and CSFB
Mortgage Acceptance offered and sold the GSE Certificates offered pursuant to the Depositor Defendant Registration Statements directly to Fannie Mae and Freddie Mac pursuant to the materially false, misleading, and incomplete Prospectuses. 213. CS Securities owed to Fannie Mae and Freddie Mac, as well as to other investors
in these trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance owed the same duty with respect to the Prospectuses for the Securitizations carried out under the Registration Statements they filed. 214. CS Securities, CSFB Mortgage Securities, Asset Backed Securities, and CSFB
Mortgage Acceptance failed to exercise such reasonable care. These Defendants, in the exercise of reasonable care, should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations, as set forth above. 215. In contrast, Fannie Mae and Freddie Mac did not know of the untruths and
omissions contained in the Prospectuses at the time they purchased the GSE Certificates. If the GSEs would have known of those untruths and omissions, they would not have purchased the GSE Certificates.
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216.
Fannie Mae and Freddie Mac acquired the GSE Certificates in the primary market
pursuant to the Prospectuses. 217. Fannie Mae and Freddie Mac sustained substantial damages in connection with
their investments in the GSE Certificates and have the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 218. The time period from July 29, 2011 through August 29, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between FHFA, Freddie Mac, Fannie Mae, CS USA, CS Securities, DLJ Mortgage Capital, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. § 4617(b)(2). THIRD CAUSE OF ACTION Violation of Section 15 of the Securities Act of 1933 (Against CS Holdings, CS USA, DLJ Mortgage Capital, and the Individual Defendants) 219. Plaintiff repeats and realleges each and every allegation above as if fully set forth
herein, except to the extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 220. This claim is brought under Section 15 of the Securities Act of 1933, 15 U.S.C.
§77o (“Section 15”), against CS Holdings, CS USA, DLJ Mortgage Capital, and the Individual Defendants for controlling-person liability with regard to the Section 11 and Section 12(a)(2) causes of actions set forth above. 221. The Individual Defendants at all relevant times participated in the operation and
management of CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance, and conducted and participated, directly and indirectly, in the conduct of CSFB
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Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance’s business affairs. Defendant Andrew A. Kimura was the President and Director of Defendant CSFB Mortgage Securities and CSFB Mortgage Acceptance. Defendant Jeffrey A. Altabef was Vice President and Director of Defendant CSFB Mortgage Securities. Defendant Evelyn Echevarria was Director of CSFB Mortgage Securities, and Defendant Michael A. Marriott was Director of CSFB Mortgage Securities. Defendant Zev Kindler was Treasurer of CSFB Mortgage Securities and CSFB Mortgage Acceptance. Defendant John P. Graham was Vice President of CSFB Mortgage Acceptance. Defendant Thomas E. Siegler was Director at CSFB Mortgage Acceptance. Defendant Thomas Zingalli was Principal Accounting Officer and Comptroller of CSFB Mortgage Securities and CSFB Mortgage Acceptance and also was Vice President and Controller for Asset Backed Securities. Defendant Carlos Onis was Director of CSFB Mortgage Securities and Vice President and Director of Asset Backed Securities. Defendant Steven L. Kantor was Director of CSFB Mortgage Acceptance. Defendant Joseph M. Donovan was President and Director of Asset Backed Securities. Defendant Juliana Johnson was Director of Asset Backed Securities. Defendant Greg Richter was Vice President of Asset Backed Securities. 222. Defendant DLJ Mortgage Capital was the sponsor for all 32 of the Securitizations
carried out under the Depositor Defendant Registration Statements, and culpably participated in the violations of Sections 11 and 12(a)(2) set forth above with respect to the offering of the GSE Certificates, by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance as the special purpose vehicle, and selecting CS Securities as underwriter. In its role as sponsor, with respect to the same securitizations, DLJ
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Mortgage Capital knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 223. Defendant DLJ Mortgage Capital also acted as the seller of the mortgage loans for
the Securitizations carried out under the Depositor Defendant Registration Statements, in that it conveyed such mortgage loans to the Depositor Defendants pursuant to a Mortgage Loan Purchase Agreement or Assignment and Assumption Agreement. 224. Defendant DLJ Mortgage Capital also controlled all aspects of the business of
Defendants CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance, as the Depositor Defendants were merely special purpose entities created for the purpose of acting as a pass-through for the issuance of the Certificates. Because of its position as sponsor, DLJ Mortgage Capital was able to, and did in fact, control the contents of the Depositor Defendant Registration Statements, including the Prospectuses and Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 225. Defendant CS USA wholly owns Defendant CS Securities and controls its
business operations. As the sole corporate parent, CS USA had the practical ability to direct and control the actions of CS Securities in issuing and selling the Certificates in connection with the issuance and sale of the Certificates. 226. Defendant CS Holdings wholly owns CS USA and is the ultimate U.S. parent of
CS Securities, DLJ Mortgage Capital, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance. CS Holdings culpably participated in the violations of Section 11 and 12(a)(2) set forth above. Upon information and belief, the officers and directors of CS
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Holdings overlapped with those of CS Securities. CS Holdings also oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans’ characteristics in the Registration Statements and established special-purpose financial entities such as CSFB Mortgage Securities, Asset Backed Securities, CSFB Mortgage Acceptance, and the issuing trusts to serve as conduits for the mortgage loans. 227. DLJ Mortgage Capital and the Individual Defendants are controlling persons
within the meaning of Section 15 by virtue of their actual power over, control of, ownership of, and/or directorship of CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Depositor Defendant Registration Statements. 228. CS USA is a controlling person within the meaning of Section 15 by virtue of its,
actual power over, control of, ownership of, or directorship of Defendant CS Securities at the time of the wrongs alleged herein and as set forth herein, including its control over the content of each of the Registration Statements. 229. CS Holdings is a controlling person within the meaning of Section 15 by virtue of
its actual power over, control of, ownership of, or directorship of CS Securities, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance at the time of the wrongs alleged herein and as set forth herein, including its control over the content of each of the Registration Statements. 230. Fannie Mae and Freddie Mac purchased in the primary market Certificates issued
pursuant to the Registration Statements, including the Prospectuses and Prospectus Supplements, which, at the time they became effective, contained material misstatements of fact and omitted
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facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements. 231. Fannie Mae and Freddie Mac did not know of the misstatements and omissions in
the Registration Statements; had the GSEs known of those misstatements and omissions, they would not have purchased the GSE Certificates. 232. Fannie Mae and Freddie Mac have sustained damages as a result of the
misstatements and omissions in the Registration Statements, for which they are entitled to compensation. 233. The time period from July 29, 2011 through August 29, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between FHFA, Freddie Mac, Fannie Mae, CS USA, CS Securities, DLJ Mortgage Capital, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. § 4617(b)(2). FOURTH CAUSE OF ACTION Violation of Section 13.1-522(A)(ii) of the Virginia Code (Against CS Securities, CSFB Mortgage Securities, Asset Backed Securities, CSFB Mortgage Acceptance) 234. Plaintiff repeats and realleges each and every allegation above as if fully set forth
herein, except to the extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 235. This claim is brought by Plaintiff pursuant to Section 13.1-522(A)(ii) of the
Virginia Code and is asserted on behalf of Freddie Mac. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 11 above that were purchased by Freddie Mac on or after September 6, 2006. 95
236.
This claim is predicated upon Defendant CS Securities’ negligence for making
false and materially misleading statements in the Prospectuses for each of the Securitizations other than the INABS 2006-B and INABS 2006-E Securitizations, for which CS Securities was not the selling underwriter. Defendants CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance acted negligently in making false and materially misleading statements in the Prospectuses for the 32 Securitizations carried out under the Depositor Defendant Registration Statements. 237. CS Securities is prominently identified in the Prospectuses, the primary
documents it used to sell the GSE Certificates. CS Securities offered the Certificates publicly, including selling to Freddie Mac the GSE Certificates, as set forth in the Prospectuses, including in the “Method of Distribution” section. 238. CS Securities offered and sold the GSE Certificates to Freddie Mac by means of
the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. CS Securities reviewed and participated in drafting the Prospectuses. 239. CS Securities successfully solicited Freddie Mac’s purchases of the GSE
Certificates. As underwriter, CS Securities obtained substantial commissions based upon the amount received from the sale of the Certificates to the public. 240. CS Securities offered the GSE Certificates for sale, sold them, and distributed
them to Freddie Mac in the State of Virginia. 241. CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage
Acceptance are prominently identified in the Prospectuses for the Securitizations carried out
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under the Depositor Defendant Registration Statements. These Prospectuses were the primary documents each used to sell Certificates registered on those Registration Statements. CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance offered the Certificates publicly, including selling to Freddie Mac the GSE Certificates. 242. CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage
Acceptance offered and sold the GSE Certificates offered pursuant to the Depositor Defendant Registration Statements to Freddie Mac by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. Upon information and belief, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance reviewed and participated in drafting the Prospectuses. 243. CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage
Acceptance successfully solicited Freddie Mac’s purchases of the GSE Certificates. CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance were paid a percentage of the total dollar value of each Securitization in which they participated. 244. Each of the Prospectuses contained material misstatements of fact and omitted
Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and credit ratings.
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246.
CS Securities, CSFB Mortgage Securities, Asset Backed Securities, and CSFB
Mortgage Acceptance offered and sold the GSE Certificates offered pursuant to the Depositor Defendant Registration Statements directly to Freddie Mac, pursuant to the materially false, misleading, and incomplete Prospectuses. 247. CS Securities owed to Freddie Mac, as well as to other investors in these trusts, a
duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance owed the same duty with respect to the Prospectuses for the Securitizations carried out under the Registration Statements they filed. 248. CS Securities, CSFB Mortgage Securities, Asset Backed Securities, and CSFB
Mortgage Acceptance failed to exercise such reasonable care. These Defendants, in the exercise of reasonable care, should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations, as set forth above. 249. In contrast, Freddie Mac did not know of the untruths and omissions contained in
the Prospectuses at the time it purchased the GSE Certificates. If Freddie Mac would have known of those untruths and omissions, it would not have purchased the GSE Certificates. 250. Freddie Mac sustained substantial damages in connection with its investments in
the GSE Certificates and has the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon.
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251.
The time period from July 29, 2011 through August 29, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between FHFA, Freddie Mac, Fannie Mae, CS USA, CS Securities, DLJ Mortgage Capital, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. § 4617(b)(2). FIFTH CAUSE OF ACTION Violation of Section 13.1-522(C) of the Virginia Code (Against CS Holdings, CS USA, DLJ Mortgage Capital, and the Individual Defendants) 252. Plaintiff repeats and realleges each and every allegation above as if fully set forth
herein, except to the extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 253. This claim is brought under Section 13.1-522(C) of the Virginia Code and is
asserted on behalf of Freddie Mac. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 11 above that were purchased by Freddie Mac on or after September 6, 2006. This claim is brought against CS Holdings, CS USA, DLJ Mortgage Capital, and the Individual Defendants for controlling-person liability with regard to the Fourth Cause of Action set forth above. 254. The Individual Defendants at all relevant times participated in the operation and
management of CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance, and conducted and participated, directly and indirectly, in the conduct of CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance’s business affairs. Defendant Andrew A. Kimura was the President and Director of Defendant CSFB Mortgage Securities and CSFB Mortgage Acceptance. Defendant Jeffrey A. Altabef was Vice
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President and Director of Defendant CSFB Mortgage Securities. Defendant Evelyn Echevarria was Director of CSFB Mortgage Securities, and Defendant Michael A. Marriott was Director of CSFB Mortgage Securities. Defendant Zev Kindler was Treasurer of CSFB Mortgage Securities and CSFB Mortgage Acceptance. Defendant John P. Graham was Vice President of CSFB Mortgage Acceptance. Defendant Thomas E. Siegler was Director at CSFB Mortgage Acceptance. Defendant Thomas Zingalli was Principal Accounting Officer and Comptroller of CSFB Mortgage Securities and CSFB Mortgage Acceptance and also was Vice President and Controller for Asset Backed Securities. Defendant Carlos Onis was Director of CSFB Mortgage Securities and Vice President and Director of Asset Backed Securities. Defendant Steven L. Kantor was Director of CSFB Mortgage Acceptance. Defendant Joseph M. Donovan was President and Director of Asset Backed Securities. Defendant Juliana Johnson was Director of Asset Backed Securities. Defendant Greg Richter was Vice President of Asset Backed Securities. 255. Defendant DLJ Mortgage Capital was the sponsor for all 32 of the Securitizations
carried out under the Depositor Defendant Registration Statements, and culpably participated in the violations of Section 13.1-522(A)(ii) of the Virginia Code set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance as the special purpose vehicles, and selecting CS Securities as underwriter. In its role as sponsor, with respect to the same securitizations, DLJ Mortgage Capital knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates
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representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 256. Defendant DLJ Mortgage Capital also acted as the seller of the mortgage loans for
CS Securities, DLJ Mortgage Capital, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance. CS Holdings culpably participated in the violations of Section 13.1-522(A)(ii) of the Virginia Code set forth above. Upon information and belief, the officers and directors of CS Holdings overlapped with those of CS Securities. CS Holdings also oversaw
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the actions of its subsidiaries and allowed them to misrepresent the mortgage loans’ characteristics in the Registration Statements and established special-purpose financial entities such as CSFB Mortgage Securities, Asset Backed Securities, CSFB Mortgage Acceptance, and the issuing trusts to serve as conduits for the mortgage loans. 260. DLJ Mortgage Capital and the Individual Defendants are controlling persons
within the meaning of Section 13.1-522(C) of the Virginia Code by virtue of their actual power over, control of, ownership of, and/or directorship of CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Depositor Defendant Registration Statements. 261. CS USA is a controlling person within the meaning of Section 13.1-522(C) of the
Virginia Code by virtue of its, actual power over, control of, ownership of, or directorship of Defendant CS Securities at the time of the wrongs alleged herein and as set forth herein, including its control over the content of each of the Registration Statements. 262. CS Holdings is a controlling person within the meaning of Section 13.1-522(C) of
the Virginia Code by virtue of its actual power over, control of, ownership of, or directorship of CS Securities, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance at the time of the wrongs alleged herein and as set forth herein, including its control over the content of each of the Registration Statements. 263. Freddie Mac purchased the GSE Certificates issued pursuant to the Registration
Statements, including the Prospectuses and Prospectus Supplements, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make
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the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements. 264. Freddie Mac did not know of the misstatements and omissions in the Registration
Statements; had Freddie Mac known of those misstatements and omissions, it would not have purchased the GSE Certificates. 265. Freddie Mac has sustained damages as a result of the misstatements and
omissions in the Registration Statements, for which it is entitled to compensation. 266. The time period from July 29, 2011 through August 29, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between FHFA, Freddie Mac, Fannie Mae, CS USA, CS Securities, DLJ Mortgage Capital, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance. This action is brought within three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. § 4617(b)(12). SIXTH CAUSE OF ACTION Violation of Section 31-5606.05(a)(1)(B) of the District of Columbia Code (Against CS Securities, CSFB Mortgage Securities, Asset Backed Securities, CSFB Mortgage Acceptance) 267. Plaintiff repeats and realleges each and every allegation above as if fully set forth
herein, except to the extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 268. This claim is brought by Plaintiff pursuant to Section 31-5606.05(a)(1)(B) of the
District of Columbia Code and is asserted on behalf of Fannie Mae. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 12 above that were purchased by Fannie Mae.
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269.
This claim is predicated upon Defendant CS Securities’ negligence for making
false and materially misleading statements in the Prospectuses for each of the Securitizations other than the INABS 2006-B and INABS 2006-E Securitizations, for which CS Securities was not the selling underwriter. Defendants CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance acted negligently in making false and materially misleading statements in the Prospectuses for the 32 Securitizations carried out under the Depositor Defendant Registration Statements. 270. CS Securities is prominently identified in the Prospectuses, the primary
documents it used to sell the GSE Certificates. CS Securities offered the Certificates publicly, including selling to Fannie Mae the GSE Certificates, as set forth in the Prospectuses, including in the “Method of Distribution” section. 271. CS Securities offered and sold the GSE Certificates to Fannie Mae by means of
the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. CS Securities reviewed and participated in drafting the Prospectuses. 272. CS Securities successfully solicited Fannie Mae’s purchases of the GSE
Certificates. As underwriter, CS Securities obtained substantial commissions based upon the amount received from the sale of the Certificates to the public. 273. CS Securities offered the GSE Certificates for sale, sold them, and distributed
them to Fannie Mae in the District of Columbia. 274. CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage
Acceptance are prominently identified in the Prospectuses for the Securitizations carried out
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under the Depositor Defendant Registration Statements. These Prospectuses were the primary documents each used to sell Certificates registered on those Registration Statements. CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance offered the Certificates publicly, including selling to Fannie Mae the GSE Certificates. 275. CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage
Acceptance offered and sold the GSE Certificates offered pursuant to the Depositor Defendant Registration Statements to Fannie Mae by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. Upon information and belief, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance reviewed and participated in drafting the Prospectuses. 276. CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage
Acceptance successfully solicited Fannie Mae’s purchases of the GSE Certificates. CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance were paid a percentage of the total dollar value of each Securitization in which they participated. 277. Each of the Prospectuses contained material misstatements of fact and omitted
Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and credit ratings.
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279.
CS Securities, CSFB Mortgage Securities, Asset Backed Securities, and CSFB
Mortgage Acceptance offered and sold the GSE Certificates offered pursuant to the Depositor Defendant Registration Statements directly to Fannie Mae, pursuant to the materially false, misleading, and incomplete Prospectuses. 280. CS Securities owed to Fannie Mae, as well as to other investors in these trusts, a
duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance owed the same duty with respect to the Prospectuses for the Securitizations carried out under the Registration Statements they filed. 281. CS Securities, CSFB Mortgage Securities, Asset Backed Securities, and CSFB
Mortgage Acceptance failed to exercise such reasonable care. These Defendants, in the exercise of reasonable care, should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations, as set forth above. 282. In contrast, Fannie Mae did not know of the untruths and omissions contained in
the Prospectuses at the time it purchased the GSE Certificates. If Fannie Mae would have known of those untruths and omissions, it would not have purchased the GSE Certificates. 283. Fannie Mae sustained substantial damages in connection with its investments in
the GSE Certificates and has the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon.
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284.
The time period from July 29, 2011 through August 29, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between FHFA, Freddie Mac, Fannie Mae, CS USA, CS Securities, DLJ Mortgage Capital, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance. This action is brought within three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. § 4617(b)(12). SEVENTH CAUSE OF ACTION Violation of Section 31-5606.05(c) of the District of Columbia Code (Against CS Holdings, CS USA, DLJ Mortgage Capital, and the Individual Defendants) 285. Plaintiff repeats and realleges each and every allegation above as if fully set forth
herein, except to the extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 286. This claim is brought under Section 31-5606.05(c) of the District of Columbia
Code and is asserted on behalf of Fannie Mae. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 12 above that were purchased by Fannie Mae. This claim is brought against CS Holdings, CS USA, DLJ Mortgage Capital, and the Individual Defendants for controlling-person liability with regard to the Sixth Cause of Action set forth above. 287. The Individual Defendants at all relevant times participated in the operation and
management of CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance, and conducted and participated, directly and indirectly, in the conduct of CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance’s business affairs. Defendant Andrew A. Kimura was the President and Director of Defendant CSFB Mortgage Securities and CSFB Mortgage Acceptance. Defendant Jeffrey A. Altabef was Vice
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President and Director of Defendant CSFB Mortgage Securities. Defendant Evelyn Echevarria was Director of CSFB Mortgage Securities, and Defendant Michael A. Marriott was Director of CSFB Mortgage Securities. Defendant Zev Kindler was Treasurer of CSFB Mortgage Securities and CSFB Mortgage Acceptance. Defendant John P. Graham was Vice President of CSFB Mortgage Acceptance. Defendant Thomas E. Siegler was Director at CSFB Mortgage Acceptance. Defendant Thomas Zingalli was Principal Accounting Officer and Comptroller of CSFB Mortgage Securities and CSFB Mortgage Acceptance and also was Vice President and Controller for Asset Backed Securities. Defendant Carlos Onis was Director of CSFB Mortgage Securities and Vice President and Director of Asset Backed Securities. Defendant Steven L. Kantor was Director of CSFB Mortgage Acceptance. Defendant Joseph M. Donovan was President and Director of Asset Backed Securities. Defendant Juliana Johnson was Director of Asset Backed Securities. Defendant Greg Richter was Vice President of Asset Backed Securities. 288. Defendant DLJ Mortgage Capital was the sponsor for all 32 of the Securitizations
carried out under the Depositor Defendant Registration Statements, and culpably participated in the violations of Section 31-5606.05(a)(1)(B) of the District of Columbia Code set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance as the special purpose vehicles, and selecting CS Securities as underwriter. In its role as sponsor, with respect to the same securitizations, DLJ Mortgage Capital knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that
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certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 289. Defendant DLJ Mortgage Capital also acted as the seller of the mortgage loans for
CS Securities, DLJ Mortgage Capital, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance. CS Holdings culpably participated in the violations of Section 315606.05(a)(1)(B) of the District of Columbia Code set forth above. Upon information and belief, the officers and directors of CS Holdings overlapped with those of CS Securities. CS Holdings
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also oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans’ characteristics in the Registration Statements and established special-purpose financial entities such as CSFB Mortgage Securities, Asset Backed Securities, CSFB Mortgage Acceptance, and the issuing trusts to serve as conduits for the mortgage loans. 293. DLJ Mortgage Capital and the Individual Defendants are controlling persons
within the meaning of Section 31-5606.05(c) of the District of Columbia Code by virtue of their actual power over, control of, ownership of, and/or directorship of CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Depositor Defendant Registration Statements. 294. CS USA is a controlling person within the meaning of Section 31-5606.05(c) of
the District of Columbia Code by virtue of its, actual power over, control of, ownership of, or directorship of Defendant CS Securities at the time of the wrongs alleged herein and as set forth herein, including its control over the content of each of the Registration Statements. 295. CS Holdings is a controlling person within the meaning of Section 31-5606.05(c)
of the District of Columbia Code by virtue of its actual power over, control of, ownership of, or directorship of CS Securities, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance at the time of the wrongs alleged herein and as set forth herein, including its control over the content of each of the Registration Statements. 296. Fannie Mae purchased the GSE Certificates issued pursuant to the Registration
Statements, including the Prospectuses and Prospectus Supplements, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make
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the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements. 297. Fannie Mae did not know of the misstatements and omissions in the Registration
Statements; had Fannie Mae known of those misstatements and omissions, it would not have purchased the GSE Certificates. 298. Fannie Mae has sustained damages as a result of the misstatements and omissions
in the Registration Statements, for which it is entitled to compensation. 299. The time period from July 29, 2011 through August 29, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between FHFA, Freddie Mac, Fannie Mae, CS USA, CS Securities, DLJ Mortgage Capital, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance. This action is brought within three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. § 4617(b)(12). EIGHTH CAUSE OF ACTION Common Law Negligent Misrepresentation (Against CS Securities, CSFB Mortgage Securities, Asset Backed Securities, CSFB Mortgage Acceptance) 300. Plaintiff repeats and realleges each and every allegation above as if fully set forth
herein, except to the extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 301. This is a claim for common law negligent misrepresentation against Defendants
CS Securities, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance. 302. Between September 28, 2005 and November 23, 2007, CS Securities, CSFB
Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance sold the GSE 111
Certificates to the GSEs as described above. Because CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance owned and then conveyed the underlying mortgage loans that collateralized the Securitizations for which they served as depositor, the Depositor Defendants had unique, exclusive, and special knowledge about the mortgage loans in the Securitizations through their possession of the loan files and other documentation. 303. Likewise, as lead or co-lead underwriter for all of the Securitizations, CS
Securities was obligated—and had the opportunity—to perform sufficient due diligence to ensure that the Registration Statements, including without limitation the corresponding Prospectus Supplements, did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. As a result of this privileged position as underwriter—which gave it access to loan file information and obligated it to perform adequate due diligence to ensure the accuracy of the Registration Statements—CS Securities had unique, exclusive, and special knowledge about the underlying mortgage loans in the Securitizations. 304. CS Securities also had unique, exclusive, and special knowledge of the work of
third-party due diligence providers, such as Clayton, who identified significant failures of originators to adhere to the underwriting standards represented in the Registration Statements. The GSEs, like other investors, had no access to borrower loan files prior to the closing of the Securitizations and their purchase of the Certificates. Accordingly, when determining whether to purchase the GSE Certificates, the GSEs could not evaluate the underwriting quality or the servicing practices of the mortgage loans in the Securitizations on a loan-by-loan basis. The GSEs therefore reasonably relied on CS Securities’ knowledge and its express representations made prior to the closing of the Securitizations regarding the underlying mortgage loans.
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305.
The Depositor Defendants and CS Securities were aware that the GSEs
reasonably relied on the Depositor Defendants’ and CS Securities’ reputations and unique, exclusive, and special expertise and experience, as well as their express representations made prior to the closing of the Securitizations, and that the GSEs depended upon these Defendants for complete, accurate, and timely information. The standards under which the underlying mortgage loans were actually originated were known to these Defendants and were not known, and could not be determined, by the GSEs prior to the closing of the Securitizations. 306. Based upon their unique, exclusive, and special knowledge and expertise about
the loans held by the trusts in the Securitizations, the Depositor Defendants and CS Securities had a duty to provide the GSEs complete, accurate, and timely information regarding the mortgage loans and the Securitizations. The Depositor Defendants and CS Securities negligently breached their duty to provide such information to the GSEs by instead making to the GSEs untrue statements of material facts in the Securitizations, or otherwise misrepresenting to the GSEs material facts about the Securitizations. The misrepresentations are set forth in Section IV above, and include misrepresentations as to the accuracy of the represented credit ratings, compliance with underwriting guidelines for the mortgage loans, and the accuracy of the owneroccupancy statistics and the loan-to-value ratios applicable to the Securitizations, as disclosed in the term sheets and Prospectus Supplements. 307. In addition, having made actual representations about the underlying collateral in
the Securitizations and the facts bearing on the riskiness of the Certificates, the Depositor Defendants and CS Securities had a duty to correct misimpressions left by their statements, including with respect to any “half truths.” The GSEs were entitled to rely upon the Depositor Defendants’ and CS Securities’ representations about the Securitizations, and these Defendants
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failed to correct in a timely manner any of their misstatements or half truths, including misrepresentations as to compliance with underwriting guidelines for the mortgage loans. 308. Fannie Mae and Freddie Mac purchased the GSE Certificates based upon the
representations by Credit Suisse as the sponsor, depositor, and lead and selling underwriter in 32 Credit Suisse-sponsored Securitizations. The GSEs received term sheets containing critical data as to the Securitizations, including with respect to anticipated credit ratings by the credit rating agencies, loan-to-value and combined loan-to-value ratios for the underlying collateral, and owner occupancy statistics, which term sheets were delivered, upon information and belief, by CS Securities. This data was subsequently incorporated into Prospectus Supplements that were received by the GSEs upon the close of each Securitization. 309. The GSEs relied upon the accuracy of the data transmitted to them and
subsequently reflected in the Prospectus Supplements. In particular, the GSEs relied upon the credit ratings that the credit rating agencies indicated they would bestow on the Certificates based on the information provided by Credit Suisse relating to the collateral quality of the underlying loans and the structure of the Securitization. These credit ratings represented a determination by the credit rating agencies that the GSE Certificates were “AAA” quality (or its equivalent)—meaning the Certificates had an extremely strong capacity to meet the payment obligations described in the respective PSAs. 310. Detailed information about the underlying collateral and structure of each
Securitization was provided or caused to be provided to the credit rating agencies by, upon information and belief, DLJ Mortgage Capital. The credit reporting agencies based their ratings on this information, and the agencies’ anticipated ratings of the Certificates were dependent on the accuracy of that information. The GSEs relied on the accuracy of the anticipated credit
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ratings and the actual credit ratings assigned to the Certificates by the credit rating agencies, and upon the accuracy of Credit Suisse’s representations in the term sheets and Prospectus Supplements. 311. In addition, the GSEs relied on the fact that the originators of the mortgage loans
in the Securitizations had acted in conformity with their underwriting guidelines, which were described in the Prospectus Supplements. Compliance with underwriting guidelines was a precondition to the GSE’s purchase of the GSE Certificates in that the GSEs’ decision to purchase the Certificates was directly premised on their reasonable belief that the originators complied with applicable underwriting guidelines and standards. 312. In purchasing the GSE Certificates, the GSEs justifiably relied on Credit Suisse’s
false representations and omissions of material fact detailed above, including the misstatements and omissions in the term sheets about the underlying collateral, which were reflected in the Prospectus Supplements. 313. But for the above misrepresentations and omissions, the GSEs would not have
purchased or acquired the Certificates as they ultimately did, because those representations and omissions were material to their decision to acquire the GSE Certificates, as described above. 314. The GSEs were damaged in an amount to be determined at trial as a direct,
proximate, and foreseeable result of the Depositor Defendants’ and CS Securities’ misrepresentations, including any half truths. 315. The time period from July 29, 2011 through August 29, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between FHFA, Freddie Mac, Fannie Mae, CS USA, CS Securities, DLJ Mortgage Capital, CSFB Mortgage Securities, Asset Backed Securities, and CSFB Mortgage Acceptance. In addition, this action is
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brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. § 4617(b)(2).
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PRAYER FOR RELIEF WHEREFORE Plaintiff prays for relief as follows: 316. An award 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, but including: a. Rescission and recovery of the consideration paid for the GSE Certificates, with
interest thereon; b. Each GSE’s monetary losses, including any diminution in value of the GSE
Certificates, as well as lost principal and lost interest payments thereon; c. d. e. Attorneys’ fees and costs; Prejudgment interest at the maximum legal rate; and Such other and further relief as the Court may deem just and proper.
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ΜΗΝΥΣΗ 02/09/2011 ΚΑΤΑ GOLDMAN SACHS ΑΠΟ ΤΟΝ ΕΘΝΙΚΟ ΟΡΓΑΝΙΣΜΟ ΣΤΕΓΑΣΤΙΚΗΣ ΠΙΣΤΗΣ ΤΩΝ ΗΠΑ (FHFA)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK FEDERAL HOUSING FINANCE AGENCY, AS CONSERVATOR FOR THE

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