Source: https://www.scribd.com/doc/63849125/FHFA-v-Barclays
Timestamp: 2016-10-28 01:58:27
Document Index: 213940534

Matched Legal Cases: ['§ 77', '§ 77', '§ 4617', '§ 4617', '§ 1345', '§ 1331', '§ 77', '§ 77', '§ 1367', '§ 1367', '§ 77', '§ 1391', 'art 4', 'art 4', 'art. 104', '§ 77', '§ 77', '§ 4617', '§ 4617', '§77', '§ 4617', '§ 4617', '§ 4617', '§ 4617', '§ 4617', '§ 4617']

BrowseBrowseInterestsBiography & MemoirBusiness & LeadershipFiction & LiteraturePolitics & EconomyHealth & WellnessSociety & CultureHappiness & Self-HelpMystery, Thriller & CrimeHistoryYoung AdultBrowse byBooksAudiobooksComicsSheet MusicBrowse allUploadSign inJoinBooksAudiobooksComicsSheet MusicUNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK FEDERAL HOUSING FINANCE AGENCY, AS CONSERVATOR FOR THEFEDERAL NATIONAL MORTGAGE ASSOCIATION AND THE FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff, -againstBARCLAYS BANK PLC; BARCLAYS CAPITAL INC.; SECURITIZED ASSET BACKED RECEIVABLES LLC; MICHAEL WADE; JOHN CARROLL; and PAUL MENEFEE, Defendants.
TABLE OF CONTENTS NATURE OF ACTION ...................................................................................................................1 PARTIES .........................................................................................................................................5 The Plaintiff and the GSEs ..................................................................................................5 The Defendants ....................................................................................................................6 JURISDICTION AND VENUE ......................................................................................................7 FACTUAL ALLEGATIONS ..........................................................................................................8 I. THE SECURITIZATIONS..................................................................................................8 A. B. C. Residential Mortgage-Backed Securitizations In General .......................................8 The Securitizations At Issue In This Case .............................................................10 The Securitization Process .....................................................................................11 1. 2. II. Mortgage Loans Are Grouped in Special Purpose Trusts .........................11 The Trusts Issue Securities Backed by the Loans ......................................12 THE DEFENDANTS’ PARTICIPATION IN THE SECURITIZATION PROCESS ..........................................................................................................................14 A. The Role of Each of the Defendants ......................................................................14 1. 2. 3. 4. B. SABR .........................................................................................................15 Barclays Capital .........................................................................................16 Barclays Bank ............................................................................................16 The Individual Defendants .........................................................................17 Defendants’ Failure To Conduct Proper Due Diligence ........................................17 III. THE REGISTRATION STATEMENTS AND THE PROSPECTUS SUPPLEMENTS................................................................................................................18 A. B. C. Compliance With Underwriting Guidelines ..........................................................18 Statements Regarding Occupancy Status of Borrower ..........................................21 Statements Regarding Loan-to-Value Ratios.........................................................23 i
D. IV. Statements Regarding Credit Ratings ....................................................................25 FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS......................................................................................27 A. The Statistical Data Provided in the Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False ....................................27 1. 2. B. Owner Occupancy Data Was Materially False ..........................................28 Loan-to-Value Data Was Materially False ................................................30 The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines .........................................................32 1. Government Investigations Have Confirmed That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines ..............................................................33 The Collapse of the Certificates’ Credit Ratings Further Indicates that the Mortgage Loans were not Originated in Adherence to the Stated Underwriting Guidelines. ................................................................37 The Surge in Mortgage Delinquency and Default Further Indicates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines .................................................................38 2. 3. V. FANNIE MAE’S AND FREDDIE MAC’S PURCHASES OF THE GSE CERTIFICATES AND THE RESULTING DAMAGES .................................................40 FIRST CAUSE OF ACTION ........................................................................................................41 SECOND CAUSE OF ACTION ...................................................................................................45 THIRD CAUSE OF ACTION .......................................................................................................48 FOURTH CAUSE OF ACTION ...................................................................................................51 FIFTH CAUSE OF ACTION ........................................................................................................54 SIXTH CAUSE OF ACTION .......................................................................................................57 SEVENTH CAUSE OF ACTION .................................................................................................60 EIGHTH CAUSE OF ACTION ....................................................................................................62 PRAYER FOR RELIEF ................................................................................................................66 JURY TRIAL DEMANDED .........................................................................................................67 ii
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 Barclays Bank PLC (“Barclays Bank”), Barclays Capital Inc. (“Barclays Capital”), and Securitized Asset Backed Receivables LLC (“SABR”) (collectively, “Barclays”), Michael Wade, John Carroll, and Paul Menefee (collectively, the “Individual Defendants,” and together with Barclays, 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
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 13.1-522(C) of the Virginia Code, Sections 315606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, and constitutes negligent misrepresentation. 2. Between October 28, 2005 and February 28, 2007, Fannie Mae and Freddie Mac
Certificates”) issued in connection with eight Barclays-underwritten securitizations.1
Argent Securities Inc., Asset-Backed Pass-Through Certificates, Series 2005-W3 (“ARSI 2005-W3”); Fremont Home Loan Trust, Mortgage-Backed Certificates, Series 2005-D (“FHLT 2005-D”); Ameriquest Mortgages Securities Inc., Asset-Backed Pass-Through Certificates, Series 2005-R10 (“AMSI 2005-R10”); Argent Securities Inc., Asset-Backed Pass-Through Certificates, Series 2006-W5 (“ARSI 2006-W5”); Securitized Asset Backed Receivables LLC Trust, C-Bass Mortgage Loan AssetBacked Certificates, Series 2006-CB1 (“CBASS 2006-CB1”); Argent Securities Inc., Asset-Backed Pass-Through Certificates, Series 2006-W2 (“ARSI 2006-W2”) Fremont Home Loan Trust, Mortgage-Backed Certificates, Series 2006-C (“FHLT 2006-C”); Securitized Asset Backed Receivables LLC Trust, C-Bass Mortgage Loan AssetBacked Certificates, Series 2007-CB2 (“CBASS 2007-CB2”);
(collectively, the “Securitizations”). 3. Each Certificate was offered for sale pursuant to one of seven shelf registration
statements (the “Shelf Registration Statements”) filed with the Securities and Exchange Commission (the “SEC”).
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.”
“SABR Shelf Registration Statements”) that pertained to two of the Securitizations – CBASS 2006-CB1 and CBASS 2007-CB2 (the “SABR Securitizations”). The Individual Defendants
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
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 Unbeknownst
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.
mortgage loans in each Securitization, such as the percentage of loans secured by owneroccupied properties and the percentage of the loan group’s aggregate principal balance with loan-to-value 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 false and omitted material facts due to inflated property values and misstatements of other key characteristics of the mortgage loans. 7. For example, the percentage of owner-occupied properties is a material risk factor
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
the Defendants for violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. §§ 77k, 77(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. PARTIES The Plaintiff and the GSEs 12. The Federal Housing Finance Agency is a federal agency located at 1700 G 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
authority to bring suits on behalf of and/or for the benefit of Fannie Mae and Freddie Mac. U.S.C. § 4617(b)(2). 13.
for the loans underlying the Certificates were Argent Mortgage Company, L.L.C. (“Argent”), Fremont Investment & Loan (“Fremont”), Ameriquest Mortgage Company (“Ameriquest”), HSBC Consumer Lending (USA) Inc. (“HSBC”), and Lime Financial Inc. (“Lime”). JURISDICTION AND VENUE 21. 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. 22. Jurisdiction of this Court is also founded upon 28 U.S.C. § 1331 because the
The Securitizations were all sponsored by non-parties. In particular, Ameriquest, Fremont, and Credit-Based Asset Servicing and Securitization (“C-BASS”) each sponsored one or more of the eight Securitizations.
Act of 1933, 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 of 1933, 15 U.S.C. § 77v. 23. 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). 24. Venue is proper in this district pursuant to Section 22 of the Securities Act of
1933, 15 U.S.C. § 77v, and 28 U.S.C. § 1391(b). Barclays Capital and SABR are principally located in this district. Barclays Bank maintains a branch in this district. Many of the acts and transactions alleged herein, including the preparation and dissemination of the Registration Statements, occurred in substantial part within this district. The Individual Defendants signed the Registration Statements in this district. in this District. FACTUAL ALLEGATIONS I. THE SECURITIZATIONS A. 25. Residential Mortgage-Backed Securitizations In General Asset-backed securitization distributes risk by pooling cash-producing financial Defendants are also subject to personal jurisdiction
assets and issuing securities backed by those pools of assets. In residential mortgage-backed securitizations, the cash-producing financial assets are residential mortgage loans. 26. 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
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). 27. loans. Residential mortgage-backed securities are backed by the underlying mortgage
cash-flows from the designated mortgage group, such as homeowners’ payments of principal and interest on the mortgage loans held by the related trust. 28. Residential mortgage-backed securities are issued pursuant to registration These registration statements include prospectuses, which
A mortgage servicer is necessary to manage the collection of proceeds from the The servicer is responsible for collecting homeowners’ mortgage loan The
payments, which the servicer remits to the trustee after deducting a monthly servicing fee. 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.
administrator) administers the trust’s funds and delivers payments due each month on the certificates to the investors. B. 30. The Securitizations At Issue In This Case This case involves the eight Securitizations listed in Table 1 below. Barclays
the sponsor; (2) the depositor; (3) the lead underwriter; (4) the principal amount issued for the tranches4 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 Groups”). Table 1
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 The
333‐ 112237 Date Registration Statement Filed
1/27/2004 Date(s) Amended Registration Statement Filed
Not applicable Registrants
Adam J. Bass; John P. Grazer; Andrew L. Stidd Murray L. Zoota; Louis J. Rampino; Wayne R. Bailey; Thomas W. Hayes; Patrick Lamb Adam J. Bass; John P. Grazer; Andrew L. Stidd Adam J. Bass; John P. Grazer; Andrew L. Stidd Michael Wade; John Carroll; Paul Menefee Signatories of Amendments
Argent Securities Inc. Fremont Mortgage Securities Corporation Ameriquest Mortgage Securities Inc. Argent Securities Inc. Securitized Asset Backed Receivables LLC ARSI 2005‐W3 Not applicable 333‐ 125587 6/7/2005 Not applicable FHLT 2005‐D Not applicable 333‐ 121781 333‐ 121782 333‐ 123990 12/30/2004 Not applicable AMSI 2005‐R10 ARSI 2005‐W5; ARSI 2006‐W2 CBASS 2006‐CB1 Not applicable Adam J. Bass; John P. Grazer; Andrew L. Stidd Michael Wade John Carroll; Paul Menefee 5/16 Am. Murray L. Zoota; Louis J. Rampino; Wayne R. Bailey; Thomas W. Hayes; Donald Puglisi; Patrick E. Lamb; Alan Faigin; 6/23 Am. Kyle W. Walker; Louis J. Rampino; Murray L. Zoota; Wayne R. Bailey; Thomas W. Hayes; Donald Puglisi; Ronald S. Nicolas; Alan Faigin John Carroll; Michael Wade; Paul Menefee 12/30/2004 1/12/2006 4/11/2005 12/7/2005 333‐ 132540 3/17/2006 5/16/2006, 6/23/2006 Fremont Mortgage Securities Corporation FHLT 2006‐C Murray L. Zoota; Louis J. Rampino; Wayne R. Bailey; Thomas W. Hayes; Donald Puglisi; Kyle R. Walker; Ronald Nicolas, Jr. 333‐ 130543 12/20/2005 2/9/2006 Securitized Asset Backed Receivables LLC CBASS 2007‐CB2 Michael Wade; John Carroll; Paul Menefee 38.
Capital offered and sold the GSE Certificates to Fannie Mae and Freddie Mac pursuant to the Registration Statements, which, as noted previously, included the Prospectuses and Prospectus Supplements. II. THE DEFENDANTS’ PARTICIPATION IN THE SECURITIZATION PROCESS A. 41. The Role of Each of the Defendants Each of the Defendants, including the Individual Defendants, had a role in the
that the mortgage loans underlying the Securitizations complied with the representations in the Registration Statements. 53. During the time period in which the Certificates were issued—approximately
2005 through 2007—Barclays was extensively involved in the subprime mortgage market. In 2005, Barclays Capital securitized $27.1 billion in mortgage-backed securities, putting it in the top ten banks in this category. In June 2006, Barclays Bank acquired mortgage servicer In April 2007, Barclays Bank
acquired EquiFirst Corporation (“EquiFirst”), the non-prime mortgage origination business of Regions Financial Corporation for $76 million. EquiFirst made $24.4 billion of high interest loans between 2005 and 2007. Barclays Bank stated that EquiFirst was to be combined with
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
Securitization, for which Ameriquest was the originator, Barclays Capital was the underwriter and Ameriquest Mortgage Securities, Inc. was the depositor, stated that: “All mortgage loans to
be included in a trust fund will have been subject to underwriting standards acceptable to the depositor and applied as described in the following paragraph. Each mortgage loan seller, or another party on its behalf, will represent and warrant that mortgage loans purchased by or on behalf of the depositor from it have been originated by the related originators in accordance with these guidelines.” It also stated that “the Underwriting Guidelines are primarily intended to
evaluate: (1) the applicant’s credit standing and repayment ability and (2) the value and adequacy of the mortgaged property as collateral.” 59. The AMSI 2005-R10 Prospectus Supplement stated that the originator may
determine that a loan applicant, not strictly qualifying under an enumerated risk factor warrants an exception to the requirements set forth in the Underwriting Guidelines, but emphasized that the exceptions were made on “a case-by-case basis.” 60. With respect to the information evaluated by the originator, the Prospectus
Supplement stated that: “Each loan application package has an application completed by the applicant that includes information with respect to the applicant’s liabilities, income, credit history and employment history, as well as certain other personal information. The Originator
the applicant explaining all late payments on mortgage debt and, generally, consumer (i.e. nonmortgage) debt.” 61. The Prospectus and Prospectus Supplement for each of the Securitizations had The relevant representations in the 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
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 “OwnerOccupied;” (ii) ”Secondary” or “Second Home”; and (iii) ”Investor” or “Non-Owner.” each category, the table stated the number of loans in that category. For
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/non-owner property). 66. The statements about occupancy status were material to a reasonable investor’s Information about occupancy status is an important factor
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”).
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, the greater the “equity cushion,” so the greater the
the credit rating agencies, including Moody’s Investors Service, Standard & Poor’s, Fitch Ratings, and DBRS. Each credit rating agency uses its own scale with letter designations to In general, AAA or its equivalent ratings are at the top of the C and D ratings are at
BBB- or its equivalent were generally referred to as “investment grade.” 75. 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
the amount of “cushion” or protection from loss incorporated into a given securitization.7
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
“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 notes 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.
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,” 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, infra at paragraph 105, 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) in fact, they were not. IV. FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS A. 79. 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
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. 82. A significant number of the loans failed two or more of these tests, indicating that
(“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 AVMs rely upon similar
data as appraisers—primarily county assessor records, tax rolls, and data on comparable properties. AVMs produce independent, statistically-derived valuation estimates by applying modeling techniques to this data. 86. Applying the AVM to the available data for the properties securing the sampled
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
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 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 FCIC, Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (January 2011). B. 91. The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines The Registration Statements contained material misstatements and omissions 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) 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 Certificates’ credit ratings; and (3) the surge in delinquency and default in the mortgages in the Securitizations.
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
loans for the Securitizations at issue here, were all on that list. See “Worst Ten in the Worst Ten,” Office of the Comptroller of the Currency Press Release, November 13, 2008. 94. The originators of the mortgage loans underlying the Securitizations went beyond
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 Written Testimony of Patricia Lindsay to the FCIC, April 7, 2010, at 5. Likewise, Jim Amorin, President of the Appraisal Institute, confirmed in
his testimony that “[i]in 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
General, brought an enforcement action against Fremont, which originated loans for two of the Securitizations, for an array of “unfair and deceptive business conduct,” “on a broad scale.” See Complaint, Commonwealth v. Fremont Investment & Loan and Fremont General Corp., No. 07-4373 (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 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. 97. On December 9, 2008, the Supreme Judicial Court of Massachusetts affirmed a
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. 98. Argent originated loans for three of the Securitizations. According to a
December 7, 2008 article in the Miami Herald, employees of Argent Mortgage had a practice of actively assisting brokers to falsify information on loan applications. “tutor[]…mortgage brokers in the art of fraud.” They would
credit reports, coached them to inflate [borrower] income on loan applications, and helped them invent phantom jobs for borrowers” so that loans could be approved. “Borrowers Betrayed, Part 4,” Miami Herald, Dec. 7, 2008. 99. Orson Benn, a former Argent Vice President who went to prison for his role in
facilitating mortgage fraud, has stated that at Argent “the accuracy of loan applications was not a priority.” “Borrowers Betrayed, Part 4,” Miami Herald, Dec. 7, 2008. Mr. Benn was the head
the 18 defendants charged in the Argent ring, 16 have been convicted or pled guilty, FCIC Report at 164, including Mr. Benn, who was sentenced to 18 years in prison, “Ex-Argent Mortgage VP Sentenced For Fraud,” North Country Gazette, Sept. 5, 2008. 100. Other jurisdictions have also investigated Argent for its mortgage origination
investigated by the Cuyahoga County Mortgage Fraud Task Force, alleges that the employees helped coach mortgage brokers about how to falsify loan documents to misstate the source or existence of down payments, as well as a borrower’s income and assets. Argent was Cleveland’s number one lender in 2004, and originated over 10,000 loans during the time span 2002 through 2005. This was the first time in Ohio, and one of few instances nationwide, that a
mortgage fraud investigation has led to criminal charges against employees of a subprime lender. Mark Gillespie, “Former employees of subprime mortgage lender indicted by Cuyahoga County grand jury,” The Plain Dealer, June 23, 2011. 101. Indeed, Jacquelyn Fishwick, who worked for more than two years at an Argent
loan processing center near Chicago as an underwriter and account manager, noted that “some Argent employees played fast and loose with the rules.” She “personally saw some stuff [she]
didn’t agree with,” such as “[Argent] account managers remove documents from files and create documents by cutting and pasting them.” “The Subprime House of Cards,” Cleveland Plain Dealer, May 11, 2008.
“Silencing the Whistle-blowers,” The Investigative Fund, May 10, 2010. 2. The Collapse of the Certificates’ Credit Ratings Further Indicates that the Mortgage Loans were not Originated in Adherence to the Stated Underwriting Guidelines.
AAA or its equivalent to non-investment speculative grade, is further evidence of the originators’ systematic disregard of underwriting guidelines, amplifying that the GSE Certificates were impaired from the start. 104. The GSE Certificates that Fannie Mae and Freddie Mac purchased were originally
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
Applicable ratings are shown in sequential order separated by forward slashes: Moody’s/S&P/Fitch/DBRS. A hyphen between forward slashes indicates that the relevant agency did not provide a rating at issuance.
FANNIE MAE’S AND FREDDIE MAC’S PURCHASES OF THE GSE CERTIFICATES AND THE RESULTING DAMAGES 110. In total, between October 28, 2005 and February 28, 2007, Fannie Mae and
Table 11 reflects Fannie Mae’s purchase of the Certificates: Table 11
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. 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.
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. 114. 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. 115. Barclays’ 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. 116. Barclays’ 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
also brought against (i) Defendant SABR and (ii) the Individual Defendants, each with respect to the SABR Shelf Registration Statements filed by SABR in connection with the SABR Securitizations. 119. This claim is predicated upon Defendants Barclays Capital’s strict liability for
of the eight Securitizations were carried out. As depositor, Defendant SABR 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. § 77(b)(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
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). 130. By reason of the conduct herein alleged, Barclays Capital, SABR, and the
statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as “Prospectuses”) for each Securitization. Defendant SABR negligently made false and materially misleading statements in the Prospectuses for the SABR Securitizations effected under the SABR Shelf Registration Statements it filed in connection with the SABR Securitizations. 134. Barclays Capital is prominently identified in the Prospectuses, the primary Barclays Capital offered the Certificates
publicly, including selling to Fannie Mae and Freddie Mac the GSE Certificates, as set forth in the “Plan of Distribution” or “Underwriting” sections of the Prospectuses. 135. Barclays Capital offered and sold the GSE Certificates to Fannie Mae and Freddie
omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. Barclays Capital reviewed and participated in drafting the Prospectuses. 136. Barclays Capital successfully solicited Fannie Mae’s and Freddie Mac’s
transportation and communication in interstate commerce. 141. Barclays and SABR actively participated in the solicitation of the GSEs’ purchase Such solicitation included
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). THIRD CAUSE OF ACTION Violation of Section 15 of the Securities Act of 1933 (Against Barclays Bank and the Individual Defendants) 151. Plaintiff realleges each allegation above as if fully set forth herein, except to the
§77o, against Barclays Bank 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. 153. The Individual Defendants at all relevant times participated in the operation and
management of SABR, and conducted and participated, directly and indirectly, in the conduct of SABR’s business affairs. Defendant Michael Wade was President and Chief Executive Officer of SABR. Defendant John Carroll was Vice President and Chief Financial Officer of SABR.
Bank 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 SABR and the issuing trusts to serve as conduits for the mortgage loans. 158. Barclays Bank and the Individual Defendants are controlling persons within the
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 Violation of Section 13.1-522(A)(ii) of the Virginia Code (Against Barclays Capital and SABR) 163. Plaintiff realleges each allegation above as if fully set forth herein, except to the
cause of action pertain only to the GSE Certificates issued in connection with the CBASS 2007CB2 Securitization (the “CBASS 2007-CB2 Certificates”). 165. This claim is predicated upon Barclays Capital’s and SABR’s negligence in
making materially false and misleading statements in the Prospectus (as supplemented by the Prospectus Supplement, hereinafter referred to in this Section as “Prospectus”) for the CBASS
CBASS 2007-CB2 Securitization publicly, including selling the CBASS 2007-CB2 Certificates to Freddie Mac, as set forth in the “Underwriting” section of the Prospectus. 167. Barclays Capital and SABR offered and sold the CBASS 2007-CB2 Certificates
to Freddie Mac by means of a Prospectus, 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. Barclays Capital and SABR reviewed and participated in drafting the Prospectus. 168. Barclays Capital and SABR successfully solicited Freddie Mac’s purchase of the
Mac’s purchase of the CBASS 2007-CB2 Certificates, and did so in order to benefit themselves.
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). FIFTH CAUSE OF ACTION Violation of Section 13.1-522(C) of the Virginia Code (Against Barclays Bank and the Individual Defendants) 179. Plaintiff realleges each allegation above as if fully set forth herein, except to the
SABR’s business affairs. Defendant Michael Wade was President and Chief Executive Officer of SABR. Defendant John Carroll was Vice President and Chief Financial Officer of SABR.
Bank 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 Statement filed in connection with the CBASS 2007-CB2 Securitization and established special-purpose financial entities such as SABR and the issuing trust to serve as conduits for the mortgage loans. 186. Barclays Bank and the Individual Defendants are controlling persons within the
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 Barclays Capital) 191. Plaintiff realleges each allegation above as if fully set forth herein, except to the
below in this cause of action pertain only to the GSE Certificates issued in connection with the FHLT 2006-C Securitization (the “FHLT 2006-C Certificates”). 193. This claim is predicated upon Barclays Capital’s negligence in making materially
false and misleading statements in the Prospectus (as supplemented by the Prospectus Supplement, hereinafter referred to in this Section as “Prospectus”) for the FHLT 2006-C Securitization that Barclays Capital sold. 194. Barclays Capital is prominently identified in the Prospectus for the FHLT 2006-C Barclays
publicly, including selling the FHLT 2006-C Certificates to Fannie Mae, as set forth in the “Method of Distribution” section of the Prospectus. 195. Barclays Capital offered and sold the FHLT 2006-C Certificates to Fannie Mae by
means of a Prospectus, 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. Prospectus. 196. C Certificates. Barclays Capital successfully solicited Fannie Mae’s purchase of the FHLT 2006As underwriter, Barclays Capital obtained a substantial commission based upon Barclays Capital reviewed and participated in drafting the
sold them, and distributed them to Fannie Mae in the District of Columbia. 198. Barclays Capital actively participated in the solicitation of Fannie Mae’s purchase Such solicitation
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 Barclays Bank) 207. Plaintiff realleges each allegation above as if fully set forth herein, except to the
mortgage loans’ characteristics in the Registration Statement filed in connection with the FHLT 2006-C Securitization. 211. Barclays Bank is a controlling person within the meaning of Section 31-
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 SABR and Barclays Capital) 216. 217. Plaintiff realleges each allegation above as if fully set forth herein. This is a claim for common law negligent misrepresentation against Defendants
to—and had the opportunity to—perform sufficient due diligence to ensure that the Registration Statements for those Securitizations, 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—Barclays Capital had unique, exclusive, and special knowledge about the underlying mortgage loans in the Securitizations. 220. The GSEs, like other investors, had no access to borrower loan files prior to the 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 SABR’s and Barclays Capital’s
SABR’s and Barclays Capital’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 that the GSEs depended upon these Defendants for complete, accurate, and timely information. The standards under which the underlying mortgage loans were actually
the Securitizations and the facts bearing on the riskiness of the Certificates, SABR and Barclays Capital had a duty to correct misimpressions left by their statements, including with respect to any “half truths.” The GSEs were entitled to rely upon SABR’s and Barclays Capital’s
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. 226. Detailed information about the underlying collateral and structure of each
Securitization was provided or caused to be provided to the credit rating agencies by Barclays Capital and/or the sponsor. The credit rating agencies based their ratings on the information provided to them, 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
precondition to the GSEs’ 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. 228. In purchasing the GSE Certificates, the GSEs justifiably relied on SABR’s and
Barclays Capital’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. 229. But for the above misrepresentations and omissions, the GSEs would not have
proximate, and foreseeable result of SABR’s and Barclays Capital’s misrepresentations, including any half truths. 231. The time period since July 29, 2011 is tolled for statute of limitations purposes by
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: 232. An award in favor of Plaintiff against all Defendants, jointly and severally, for all
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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