Source: https://www.scribd.com/document/63837726/FHFA-Sues-BoA-Over-Fannie-Freddie-Mortgage-Losses
Timestamp: 2016-10-28 12:23:16
Document Index: 134446692

Matched Legal Cases: ['§ 77', '§ 77', '§ 4617', '§ 4617', '§ 1345', '§ 1331', '§ 77', '§ 77', '§ 1367', '§ 1367', '§ 77', '§ 1391', 'art. 140', '§ 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, -againstBANK OF AMERICA CORPORATION; BANK OF AMERICA, NATIONAL ASSOCIATION; MERRILL LYNCH, PIERCE, FENNER & SMITH, INC. (f/k/a BANC OF AMERICA SECURITIES LLC); ASSET BACKED FUNDING CORPORATION; BANC OF AMERICA MORTGAGE SECURITIES, INC.; BANC OF AMERICA FUNDING CORPORATION; GEORGE C. CARP; ROBERT CARUSO; GEORGE E. ELLISON; ADAM D. GLASSNER; DANIEL B. GOODWIN; JULIANA JOHNSON; AASHISH KAMAT; MICHAEL J. KULA; JAMES H. LUTHER; WILLIAM L. MAXWELL; MARK I. RYAN; AND ANTOINE SCHETRITT, Defendants.
TABLE OF CONTENTS Page NATURE OF ACTION ...................................................................................................................1 PARTIES .........................................................................................................................................6 The Plaintiff and the GSEs...................................................................................................6 The Defendants ....................................................................................................................7 The Non-Party Originators ................................................................................................10 JURISDICTION AND VENUE ....................................................................................................11 FACTUAL ALLEGATIONS ........................................................................................................12 I. THE SECURITIZATIONS................................................................................................12 A. B. C. Residential Mortgage-Backed Securitizations In General .....................................12 The Securitizations At Issue In This Case .............................................................13 The Securitization Process .....................................................................................15 1. 2. II. BOA National Groups Mortgage Loans in Special Purpose Trusts ..........15 The Trusts Issue Securities Backed by the Loans ......................................16 THE DEFENDANTS’ PARTICIPATION IN THE SECURITIZATION PROCESS ..........................................................................................................................20 A. The Role of Each of the Defendants ......................................................................20 1. 2. 3. 4. 5. 6. 7. BOA National ............................................................................................20 ABF Corp. ..................................................................................................22 BOA Mortgage...........................................................................................22 BOA Funding .............................................................................................23 MLPF&S, As Successor-in-Interest to BOA Securities ............................24 BOA Corporation .......................................................................................24 The Individual Defendants .........................................................................25 i
B. III. The Defendants’ Failure To Conduct Proper Due Diligence.................................27 THE REGISTRATION STATEMENTS AND THE PROSPECTUS SUPPLEMENTS................................................................................................................29 A. B. C. D. Compliance With Underwriting Guidelines ..........................................................29 Statements Regarding Occupancy Status of Borrower ..........................................31 Statements Regarding Loan-to-Value Ratios.........................................................33 Statements Regarding Credit Ratings ....................................................................36 IV. THE FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS ............................................................................38 A. The Statistical Data Provided in the Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False ....................................38 1. 2. B. Owner Occupancy Data Was Materially False ..........................................39 Loan-to-Value Data Was Materially False ................................................41 The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines .........................................................45 1. Government Investigations and Private Litigants Have Confirmed That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines .........45 The Collapse of the Certificates’ Credit Ratings Further Indicates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines .................................................................51 The Surge in Mortgage Delinquency and Default Further Demonstrates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines ....................................53 2. 3. V. FANNIE MAE’S AND FREDDIE MAC’S PURCHASES OF THE GSE CERTIFICATES AND THE RESULTING DAMAGES .................................................54 FIRST CAUSE OF ACTION ........................................................................................................57 SECOND CAUSE OF ACTION ...................................................................................................61 THIRD CAUSE OF ACTION .......................................................................................................65 FOURTH CAUSE OF ACTION ...................................................................................................68 ii
FIFTH CAUSE OF ACTION ........................................................................................................72 SIXTH CAUSE OF ACTION .......................................................................................................75 SEVENTH CAUSE OF ACTION .................................................................................................79 EIGHTH CAUSE OF ACTION ....................................................................................................83 PRAYER FOR RELIEF ................................................................................................................87 JURY TRIAL DEMANDED .........................................................................................................88 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 Bank of America Corporation (“BOA Corp.”); Bank of America, National Association (“BOA National”); Merrill Lynch, Pierce, Fenner & Smith, Inc. (“MLPF&S”), as successor-in-interest to Banc of America Securities, LLP (“BOA Securities”); Asset Backed Funding Corporation (“ABF Corp.”); Banc of America Mortgage Securities, Inc. (“BOA Mortgage”); Banc of America Funding Corporation (“BOA Funding”) (collectively, “BOA”); George C. Carp; Robert Caruso; George E. Ellison; Adam D. Glassner; Daniel B. Goodwin; Juliana Johnson; Aashish Kamat; Michael J. Kula; William L. Maxwell; Mark I. Ryan; James H. Luther; and Antoine Schetritt (the “Individual Defendants”) (together with BOA, 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 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, Sections 31-5606.05(a)(1)(B) and 311
Mac purchased over $6 billion in residential mortgage-backed securities (the “GSE Certificates”) issued in connection with 23 BOA-sponsored and/or BOA-underwritten securitizations.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 the date and amount of the purchases, are listed below in Table 11. The 23 securitizations at issue are: i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. xii. xiii.
ABFC Trust, Series 2005-WMC1 (“ABFC 2005-WMC1”); ABFC Trust, Series 2006-HE1 (“ABFC 2006-HE1”); ABFC Trust, Series 2006-OPT1 (“ABFC 2006-OPT1”); ABFC Trust, Series 2006-OPT2 (“ABFC 2006-OPT2”); ABFC Trust, Series 2006-OPT3 (“ABFC 2006-OPT3”); ABFC Trust, Series 2007-WMC1 (“ABFC 2007-WMC1”); Banc of America Funding Trust, Series 2006-G (“BAFC 2006-G”); Banc of America Funding Trust, Series 2006-H (“BAFC 2006-H”); Banc of America Funding Trust, Series 2007-A (“BAFC 2007-A”); Banc of America Funding Trust, Series 2007-C (“BAFC 2007-C”); Banc of America Alternative Loan Trust, Series 2005-10 (“BOAA 2005-10”); Banc of America Alternative Loan Trust, Series 2005-11 (“BOAA 2005-11”); Banc of America Alternative Loan Trust, Series 2005-12 (“BOAA 2005-12”);
For purposes of this Complaint, the securities issued under the Registration Statements (as defined in note 2 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
Banc of America Alternative Loan Trust, Series 2006-1 (“BOAA 2006-1”); Banc of America Alternative Loan Trust, Series 2006-2 (“BOAA 2006-2”); Banc of America Alternative Loan Trust, Series 2006-3 (“BOAA 2006-3”); NationStar Home Equity Loan Asset-Backed Certificates, Series 2007-C (“NSTR 2007-C”); Option One Mortgage Loan Trust Asset-Backed Certificates, Series 2005-5 (“OOMLT 2005-5”); Option One Mortgage Loan Asset-Backed Certificates, Series 2007-2 (“OOMLT 2007-2”); Option One Mortgage Loan Trust Asset-Backed Certificates, Series 2007-6 (“OOMLT 2007-6”); Option One Mortgage Loan Trust Asset-Backed Certificates, Series 2007-FXD1 (“OOMLT 2007-FXD1”); Option One Mortgage Loan Trust Asset-Backed Certificates, Series 2007-HL1 (“OOMLT 2007-HL1”); SunTrust Alternative Loan Trust, Series 2005-1F (“STALT 2005-1F”);
(collectively, the “Securitizations”). 3. The Certificates were offered for sale pursuant to one of nine shelf registration
statements (the “Shelf Registration Statements”) filed with the Securities and Exchange Commission (the “SEC”). Defendants ABF Corp., BOA Mortgage, and BOA Funding filed six Shelf Registration Statements that pertained to seventeen of the Securitizations in this action. These six Shelf Registration Statements, and the amendments thereto, were signed by or on behalf of the Individual Defendants. With respect to all of the Securitizations, BOA Securities was the lead underwriter and the underwriter who sold the Certificates to the GSEs.
For each Securitization, a prospectus (“Prospectus”) and prospectus supplement
(“Prospectus Supplement”) were filed with the SEC as part of the Registration Statement2 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. The 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 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 also false and omitted material facts.
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. 4
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. PARTIES The Plaintiff and the GSEs 12. 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). 6
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 14. Defendant BOA Corp. purports to be one of the world’s largest financial
institutions and delivers banking and financial services throughout the world. BOA Corp. is a Delaware corporation principally located in Charlotte, North Carolina. It maintains offices and conducts substantial business operations at the Bank of America Tower at One Bryant Park, New York, New York. BOA Corp. is the sole parent corporation of each of the other BOA Defendants: BOA National, BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding. 15. Defendant BOA National is one of the nation’s largest banks and a wholly-owned
dealer. It principally located at 4 World Financial Center, 250 Vesey Street, New York, New York and is a wholly-owned subsidiary of BOA Corp. MLPF&S is liable as successor-ininterest to BOA Securities, which was the lead underwriter for each of the Securitizations and intimately involved in the offerings. Fannie Mae and Freddie Mac also purchased all of the GSE Certificates from BOA Securities in its capacity as underwriter of the Securitizations. On November 1, 2010, BOA Securities – at the time a Delaware Corporation and wholly-owned 7
subsidiary of BOA Corp. – was merged with and into MLPF&S. This merger followed BOA Corp.’s acquisition in January 2009 of MLPF&S as part of its acquisition of Merrill Lynch & Co. Defendant MLPF&S is liable as a matter of law as successor to BOA Securities by virtue of its status as the surviving entity in its merger with BOA Securities. 17. Defendant ABF Corp. is a Delaware corporation with its principal place of
One Mortgage Corporation (“Option One”), 100 percent of the mortgage loans were originated
by Option One. As to six Securitizations in which it acted as sponsor, BOA National itself originated or acquired 100 percent of the mortgage loans underlying the Securitizations.3 JURISDICTION AND VENUE 33. 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. 34. 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. 35. 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). 36. 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). The BOA Defendants conduct business in this district, BOA Securities is principally located in this district, at least two of the Individual Defendants reside in this district, and many of the acts and transactions alleged herein, including
assets and issuing securities backed by those pools of assets. In residential mortgage-backed securitizations, the cash-producing financial assets are residential mortgage loans. 38. 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 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). 39. Residential mortgage-backed securities are backed by the underlying mortgage
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. 40. Residential mortgage-backed securities are issued pursuant to registration
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. 42. The Securitizations At Issue In This Case This case involves the 23 Securitizations listed in paragraph 2 above, sixteen of
lead underwriter; (4) the principal amount issued for the tranches4 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
sponsored to one of three depositors, all of which are BOA-affiliated entities: ABF Corp., BOA Mortgage, and BOA Funding (collectively, the “Depositor Defendants”). With respect to one of the remaining seven Securitizations, non-party SunTrust Asset Funding, LLC, as sponsor, sold
and BOA Funding transferred the relevant mortgage loans to the trusts. As part of each of the Securitizations, 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. 47. The Trusts Issue Securities Backed by the Loans
filed with the SEC on a Form S-3. The Shelf Registration Statements were amended by one or more Forms S-3/A filed with the SEC (the “Amendments”). Six of the Shelf Registration Statements and the Amendments were filed by ABF Corp., BOA Mortgage, and BOA Funding. Each Individual Defendant signed one or more of the six Shelf Registration Statements, including any amendments thereto, that were filed by ABF Corp., BOA Mortgage, and BOA Funding. The SEC filing number, registrants, signatories and filing dates for the nine Shelf Registration Statements with Amendments, as well as the Certificates covered by each Shelf Registration Statement, are reflected in Table 2 below. Table 2
Sal Mirran, Aashish Kamat, Juliana Johnson, Robert Caruso Mark I. Ryan, George C. Carp, George E. Ellison, William L. Maxwell, James H. Luther Robert E. Dubrish, Steven L. Nadon, William L. O’Neill Daniel B. Goodwin, George C. Carp, George E. Ellison, William L. Maxwell
Daniel B. Goodwin, George C. Carp, George E. Ellison, James H. Luther Mark I. Ryan, George C. Carp, George E. Ellison, James H. Luther Anthony H. Barone, Jesse K. Bray, Gerard A. Berrens, Leldon E. Echols Antoine Schetritt, Michael J. Kula, Juliana C. Johnson, Robert Caruso Robert E. Dubrish, Steven L. Nadon, William L. O’Neill
Daniel B. Goodwin, George C. Carp, George E. Ellison, James H. Luther Mark I. Ryan, George C. Carp, George E. Ellison, James H. Luther Anthony H. Barone, Jesse K. Bray, Gerard A. Berrens, Leldon E. Echols, Adam J. DeYoung Adam D. Glassner, Michael J. Kula, Juliana C. Johnson, Robert Caruso Robert E. Dubrish, Steven L. Nadon, William L. O’Neill
THE DEFENDANTS’ PARTICIPATION IN THE SECURITIZATION PROCESS A. 52. The Role of Each of the Defendants Each of the Defendants, including the Individual Defendants, had a role in the
BOA National is one of the nation’s largest banks and a leading sponsor of
mortgage-backed securities. BOA National is also the direct parent corporation of ABF Corp., BOA Mortgage, and BOA Funding. As stated in the Prospectus Supplement for the ABFC 2006-OPT3 Securitization, “[BOA National] and its affiliates have been active in the securitization market since inception.” The volume of loans originated and aggregated by BOA National made it possible for BOA Corp. to consistently securitize tens of billions of dollars worth of mortgage loans during the time period relevant here. In 2005, BOA Corp. securitized a
that capacity, BOA National determined the structure of the Securitizations, initiated the Securitizations, 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 Certificates. BOA National also selected the Depositor Defendants – ABF Corp., BOA Mortgage, or BOA Funding – as the special purpose vehicles that would be used to transfer the mortgage loans from BOA National to the trusts, and selected BOA Securities as the underwriter for the Securitizations. In its role as sponsor, BOA National 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. 56. For the sixteen Securitizations that it sponsored, BOA National also conveyed the
mortgage loans to ABF Corp., BOA Mortgage, or BOA Funding as depositor, pursuant to an Assignment and Recognition Agreement or a Mortgage Loan Purchase Agreement. In these agreements, BOA National made certain representations and warranties to ABF Corp., BOA Mortgage, and BOA Funding regarding the groups of loans collateralizing the Certificates. “Agency” mortgage-backed securities are guaranteed by a government agency or government-sponsored enterprise such as Fannie Mae or Freddie Mac, while “non-agency” mortgage-backed securities are issued by banks and financial companies not associated with a government agency or government sponsored enterprise. 21
registered broker/dealer and one of the leading underwriters of mortgage and other asset-backed securities in the United States. 64. BOA Securities was one of the nation’s largest underwriters of asset-backed
process. Unlike typical arms’ length securitizations, sixteen of the 23 Securitizations here involved various BOA subsidiaries and affiliates at virtually each step in the chain. With respect to all but seven of the Securitizations, the sponsor was BOA National, the depositor was ABF Funding, BOA Mortgage, or BOA Funding, and the lead underwriter was BOA Securities. As to the remaining Securitizations, non-parties served as sponsor and depositor (except in one instance in which BOA Funding acted as depositor), and BOA Securities was the lead and selling underwriter. 68. As the sole corporate parent of BOA Securities, ABF Funding, BOA Mortgage,
The Defendants’ Failure To Conduct Proper Due Diligence Defendants failed to conduct adequate and sufficient due diligence to ensure that
2007, BOA’s involvement in the mortgage-backed securitization industry was substantial. Defendants indeed 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, ABF Corp., BOA Mortgage, and BOA Funding, as the depositors, were paid a percentage of the total dollar amount of the offerings upon completion of the Securitizations, and BOA Securities, as the underwriter, was paid a commission based on the amount it received from the sale of the Certificates to the public. 84. The push to securitize large volumes of mortgage loans contributed to the absence
(“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 27
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.” 86. BOA was negligent in allowing into the Securitizations a substantial number of
mortgage loans that, as reported to BOA 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 sample of loans reviewed by the third-party due diligence firms, BOA 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. 87. Clayton’s trending reports revealed that in the period from the first quarter of
practices of Bank of America. The New York Times reported on May 16, 2011, that the Attorney General had subpoenaed information “covering many aspects” of BOA’s “pooling operations” in connection with the “bundling” of home loans into securities. Upon information and belief, that investigation is ongoing. III. THE REGISTRATION STATEMENTS AND THE PROSPECTUS SUPPLEMENTS A. 89. Compliance With Underwriting Guidelines The Prospectus Supplements for each Securitization describe the mortgage loan
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. 91. 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 ABFC 2006-OPT3 Securitization, for which Option One was the originator, BOA National was the sponsor, BOA Securities was the underwriter, and ABF Corp. was the depositor, stated that: “All of the
mortgage loans were originally originated or acquired by Option One Mortgage Corporation in accordance with the underwriting guidelines described under ‘Underwriting Standards’ in this prospectus supplement” and that “the Option One Underwriting Guidelines are primarily intended to assess the value of the mortgaged property, to evaluate the adequacy of such property as collateral for the mortgage loan and to assess the applicant’s ability to repay the mortgage loan.” 92. The ABFC 2006-OPT3 Prospectus Supplement further stated that “exceptions to
the Option One Underwriting Guidelines” (including “a debt-to-income ratio exception, a pricing exception, a loan-to-value exception, a credit score exception or an exception from certain requirements of a particular risk category”) are made on a “case-by-case basis,” but only “where compensating factors exist.” 93. With respect to the information evaluated by the originator, the Prospectus
Supplement stated that: “Each mortgage loan applicant completes an application that includes information with respect to the applicant’s liabilities, income, credit history, employment history and personal information. The Option One Underwriting Guidelines require a credit report and, if available, a credit score on each applicant from a credit-reporting agency. The credit report typically contains information relating to such matters as credit history with local and national merchants and lenders, installment debt payments and any record of defaults, bankruptcies, repossessions or judgments.” 94. The ABFC 2006-OPT3 Prospectus Supplement further stated that: “The Option
Option One’s underwriters to be satisfied that the value of the property being financed, as indicated by an appraisal supports the loan balance.” 95. The Prospectus and Prospectus Supplements for each of the Securitizations had
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.
all or nearly all of the mortgage loans in the Supporting Loan Group were “Investment” or “NonOwner” properties. The Prospectus Supplements for the remaining seventeen Securitizations, however, 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). The occupancy statistics for the Supporting Loan Groups for the seventeen Securitizations were reported in the Prospectus Supplements as follows:8 Table 4
The statements about occupancy status were material to a reasonable investor’s
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”). 34
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. 105. Thus, LTV ratio is a material consideration to a reasonable investor in deciding
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 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.12 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 an AAA or its equivalent rating. 108. Credit ratings have been an important tool to gauge risk when making investment
“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. 37
companies, and university endowments have relied heavily on credit ratings to assist them in distinguishing between safe and risky investments. Fannie Mae’s 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). 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 8, below at paragraph 142, 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. THE 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
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 in the Supporting Loan Groups backing the
that all or nearly all of the mortgage loans in the Supporting Loan Group were “Investment” or “Non-Owner” properties. The Prospectus Supplements for the remaining seventeen Securitizations, however, 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). The occupancy statistics for the Supporting Loan Groups for the seventeen Securitizations were reported in the Prospectus Supplements as follows.
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 properties. AVMs produce independent, statistically-derived valuation estimates by applying modeling techniques to this data. 117. 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 the 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 as well as the risk of greater losses in the event of a default. 118. For example, for the BAFC 2006-G Securitization, which was sponsored by BOA
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). In the BAFC 2006-H and BOAA 2006-3 Securitizations, the percentage of mortgage loans with a reported LTV ratio over 100 percent was .08 and .14 percent, respectively. 44
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) investigations into originators’ underwriting practices by government officials and private litigants, 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. 1. Government Investigations and Private Litigants Have Confirmed That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines
comprise approximately 59 percent of Fannie Mae’s and Freddie Mac’s $6 billion worth of purchases of the 23 Securitizations. 125. In November 2008, the Office of the Comptroller of the Currency (the “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. The worst originators were defined as those with the largest number of non-prime mortgage foreclosures for 20052007 originations. Option One, which originated many of the loans for the Securitizations at issue here, was on that list. See “Worst Ten in the Worst Ten,” Office of the Comptroller of the Currency Press Release, November 13, 2008. 126. Option One has 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 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. 127. 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. 128. On November 24, 2008, the Superior Court of Massachusetts granted a
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 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. 130. BOA also departed from its own underwriting standards as a consequence of
low- and moderate-income (“LMI”) communities through consumer loans and other programs. FCIC Report at 97; see also BOA Press Release, “Bank of America Community Development Lending Exceeds $85 Billion,” May 22, 2006. Pursuant to this initiative, in 2005 alone, BOA provided more than $33.2 billion in mortgage loans to LMI borrowers and made “more than $40 million in loans and investments every business hour.” Id. As disclosed to the FCIC in June 2010, almost 17 percent of the LMI loans originated by Bank of America between 2004 and 2007 were delinquent at some point for 90 days or more. See 6/16/10 BOA letter to FCIC, Schedule 2.5. Bank of America retained only about 50 percent of those LMI loans on its balance sheet and either sold or securitized the rest. Id. 131. The FCIC reports that, in 2005, examiners from the Federal Reserve and other
agencies conducted a confidential “peer group” study of mortgage practices at six companies, including BOA. According to Sabeth Siddique, then head of credit risk at the Federal Reserve Board’s Division of Banking Supervision and Regulation, the study “showed a very rapid increase in the volume of these irresponsible loans, very risky loans.” The study also showed that “[a] large percentage of their loans issued were subprime and Alt-A mortgages, and the underwriting standards for these products had deteriorated.” FCIC Report at 172. 132. BOA was one of the most aggressive competitors in the mortgage origination
market. Even the top executives of Countrywide Financial Corp., the notorious mortgage lender singled out by the FCIC for having originated high-risk loans destined to bring “financial and reputational catastrophe,” FCIC Report at xxii, complained to each other at the time that BOA’s appetite for risky products was greater than that of Countywide. In a June 13, 2005 e-mail Countrywide CEO Angelo Mozilo wrote to President and COO David Sambol: “This is the third deal in the last 10 days that BoA has offered that is impossible to beat. In fact the other two
were substantially worse than this one. It appears to me that BofA is making an aggressive move into mortgages once again.” (Emphasis added). 133. BOA also participated in “warehouse lending” – extending a line of credit to a
third-party loan originator to fund mortgage loans – to ensure that it had access to a steady stream of mortgage loans to securitize and sell to investors. In 2001, BOA sold EquiCredit, the division of BOA that, at the time, was primarily responsible for making subprime loans. In order to guarantee that it could obtain sufficient mortgages to pool into its residential mortgage-backed securities securitizations, BOA began to directly fund originating banks, including Countrywide and New Century Mortgage Corporation. According to Inside Mortgage Funding, BOA was the leading participant in the warehouse lending channel, with nearly 26 percent market share by 2009. See BOA press release, “Bank of America Exits First Mortgage Wholesale Channel,” October 5, 2010. 134. In addition, BOA sought to expand its share of the mortgage securities market by
confirmed that Bank of America routinely originated loans that failed to comply with its guidelines. In its recently filed action alleging that BOA National and BOA Securities, among others, engaged in common law fraud and violated the Securities Act of 1933, the insurer American International Group, Inc. (“AIG”), has described that after managing to obtain the loan files relating to a 2007 securitization of mortgage-backed securities (OOMLT 2007-FXD2), AIG arranged for a third-party consultant to review a sample of the files to assess whether the loans
met stated underwriting guidelines. See Complaint, Am. Int’l Group, Inc. v. Bank of Am. Corp., et al., CV No. 652199/2011 (NY Sup. August 8, 2011) at 128-29. 136. The results of that review confirmed what the publicly available data already
showed: that BOA’s mortgage pools contain loans rife with violations of BOA’s representations and its underwriting guidelines. AIG’s review of 100 loan files from OOMLT 2007-FXD2 revealed violations of underwriting guidelines in 82 percent of the loans, including violations of guidelines relating to income, employment, and owner-occupancy. Id. 137. 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]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. 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. 140. 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 information that BOA 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 51
Transaction ABFC 2005-WMC1 ABFC 2006-HE1 ABFC 2006-OPT1 ABFC 2006-OPT2 ABFC 2006-OPT3 ABFC 2007-WMC1 BAFC 2006-G BAFC 2006-H BAFC 2007-A BAFC 2007-C BOAA 2005-10 BOAA 2005-11 BOAA 2005-12 BOAA 2006-1 BOAA 2006-2 BOAA 2006-3 NSTR 2007-C OOMLT 2005-5 OOMLT 2007-2 Tranche A1 A1 A2 A1 A2 A1 A2 A1 A1A 1A1 5A1 1A1 6A1 2CB1 2CB1 2CB1 1CB1 3CB1 1CB1 3CB1 5CB1 1AV1 A1 IIA1 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/-Rating at July 31, 2011 (Moody’s/S&P/Fitch) Aaa/AAA/AAA Caa3/CCC/C Caa1/A/CCC Caa1/A/CCC Caa2/BB-/CC Caa3/B+/CC Caa2/-/C Caa2/--/C --/CCC/C Caa2/BB/-Caa3/CCC/-Caa3/CCC/C Caa1/BB/CCC Caa2/--/C Caa2/--/C Caa2/--/C Caa1/--/CC Caa2/--/C Caa1/--/CC Caa3/--/C Caa3/--/C Caa3/CCC/-Aa3/AAA/BBB Caa3/CCC/--
Applicable ratings are shown in sequential order separated by forward slashes: Moody’s/S&P/Fitch. The hyphens between forward slashes indicate that the relevant agency did not provide a rating at issuance. 52
Rating at Issuance (Moody’s/S&P/Fitch) Aaa/AAA/-Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/-Aaa/AAA/--
Rating at July 31, 2011 (Moody’s/S&P/Fitch) Caa3/CCC/-Caa3/CCC/-Ca/CC/WD Ca/CC/WD Ca/CCC/-Ca/D/--
confirmed systematic underwriting failures by the originators responsible for the mortgage loans across the Securitizations, and the extraordinary drop in credit rating 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 146. In total, between September 30, 2005 and November 5, 2007, Fannie Mae and
connection with the Securitizations. Table 10 reflects each of Freddie Mac’s purchases of the Certificates.19 Table 10
Table 11 reflects each of Fannie Mae’s purchases of the Certificates:
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. 149. 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. 150. 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. 151. BOA’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 purchases of the GSE Certificates. Based upon sales of the Certificates or
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 MLPF&S (as successor-in-interest to BOA Securities) with respect to each of the Registration Statements. This claim is also brought against (i) Defendants ABF Corp., BOA Mortgage, and BOA Funding, and (ii) Defendants George C. Carp, Robert Caruso, George E. Ellison, Adam D. Glassner, Daniel B. Goodwin, Juliana Johnson, Aashish Kamat, Michael J. Kula, Mark I. Ryan, James H. Luther, and Antoine Schetritt (collectively, the “Section 11 Individual Defendants”), each with respect to the Registration Statements filed by ABF Corp., BOA Mortgage, or BOA Funding that registered securities that were bona fide offered to the public on or after September 6, 2005. 154. This claim is predicated upon the strict liability of Defendant MLPF&S (as
the Registration Statements, under which seventeen of the 23 securitizations were carried out. As depositors, ABF Corp., BOA Mortgage, and BOA Funding 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, they are liable under Section 11 of the Securities Act for the misstatements and omissions in those three Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005. 157. At the time Depositor Defendants ABF Corp., BOA Mortgage, and BOA Funding
of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae, BOA Corp., BOA Securities, BOA Mortgage, BOA National, and BOA Funding. 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)(12). 165. By reason of the conduct herein alleged, BOA Securities, ABF Corp., BOA
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. 168. This claim is predicated upon BOA 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 the Securitizations listed in paragraph 2. As discussed above at paragraph 16, MLPF&S is liable as successor-ininterest to BOA Securities, which was merged into it in November 2010. Depositor Defendants ABF Corp., BOA Mortgage, and BOA Funding acted negligently in making false and materially misleading statements in the Prospectuses for the Securitizations carried out under the six Registration Statements they filed, which are applicable to seventeen of the Securitizations. 169. BOA Securities is prominently identified in the Prospectuses, the primary
documents that it used to sell the GSE Certificates. BOA Securities offered the Certificates publicly, including selling to Fannie Mae and Freddie Mac their GSE Certificates, as set forth in the “Plan of Distribution” or “Underwriting” sections of the Prospectuses. 170. BOA Securities offered and sold the GSE Certificates to Fannie Mae and Freddie
under which they were made, not misleading. BOA Securities reviewed and participated in drafting the Prospectuses. 171. BOA Securities successfully solicited Fannie Mae’s and Freddie Mac’s purchases
participated in the solicitation of the GSEs’ purchase of the GSE Certificates, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates. 177. Each of the Prospectuses contained material misstatements of fact and omitted
of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae, BOA Corp., BOA Securities, BOA Mortgage, BOA National, and BOA Funding. 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)(12).
§77o (“Section 15”), against BOA Corp., BOA National, 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. 188. The Individual Defendants at all relevant times participated in the operation and
management of ABF Corp., BOA Mortgage, and/or BOA Funding and their related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of ABF Corp.’s, BOA Mortgage’s, and/or BOA Funding’s business affairs. Defendant George C. Carp was Treasurer, Chief Accounting Officer, and Chief Financial Officer of ABF Corp. and BOA Funding. Defendant Robert Caruso was a Director of BOA Mortgage. Defendant George E. Ellison was a Director of ABF Corp. and BOA Funding. Defendant Daniel B. Goodwin was President and Chief Executive Officer of ABF Corp. Defendant Juliana Johnson was a Director of BOA Mortgage. Defendant Adam D. Glassner was President, Chief Executive Officer, and Chairman of the Board of BOA Mortgage. Defendant Aashish Kamat was a Director of BOA Mortgage. Defendant Michael J. Kula was a Director of BOA Mortgage. Defendant James H. Luther was a Director of ABF Corp. and BOA Funding. Defendant William L. Maxwell was a director of ABF Corp. Defendant Mark I. Ryan was President and Chief Executive Officer of BOA Funding. Defendant Antoine Schetritt was President, Chief Executive Officer, and Chairman of the Board of BOA Mortgage.
Depositor Defendants ABF Corp., BOA Mortgage, and BOA Funding. As the sole corporate parent of BOA Securities and ABF Corp., BOA Mortgage, and BOA Funding, BOA Corp. had the practical ability to direct and control the actions of ABF Corp., BOA Mortgage, BOA Funding, and BOA Securities in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding in connection with the issuance and sale of the Certificates. 193. BOA Corp.’s push to securitize large volumes of mortgage loans contributed to
forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans’ characteristics in the Registration Statements and establish special-purpose financial entities such as ABF Corp., BOA Mortgage, BOA Funding, and the issuing trusts to serve as conduits for the mortgage loans. 195. BOA Corp., BOA National, and the Individual Defendants are controlling persons
of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae, BOA Corp., BOA Securities, BOA Mortgage, BOA National, and BOA Funding. 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)(12). FOURTH CAUSE OF ACTION Violation of Section 13.1-522(A)(ii) of the Virginia Code (Against MLPF&S, ABF Corp., BOA Mortgage, and BOA Funding) 200. Plaintiff realleges each allegation above as if fully set forth herein, except to the
cause of action pertain to only those GSE Certificates identified in Table 10 above that were purchased by Freddie Mac on or after September 6, 2006. 202. This claim is predicated upon BOA Securities’ negligence for making false and
documents that it used to sell the GSE Certificates. BOA Securities offered the Certificates publicly, including selling to Freddie Mac its GSE Certificates, as set forth in the “Plan of Distribution” or “Underwriting” sections of the Prospectuses. 204. BOA 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. BOA Securities reviewed and participated in drafting the Prospectuses. 205. BOA Securities successfully solicited Freddie Mac’s purchases of the GSE
participated in the solicitation of Freddie Mac’s purchase of the GSE Certificates, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates. 210. Each of the Prospectuses contained material misstatements of fact and omitted
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 BOA Corp., BOA National, and the Individual Defendants) 218. Plaintiff realleges each allegation above as if fully set forth herein, except to the
management of ABF Corp., BOA Mortgage, and/or BOA Funding and their related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of ABF Corp.’s, BOA Mortgage’s, and/or BOA Funding’s business affairs. Defendant George C. Carp was Treasurer, Chief Accounting Officer, and Chief Financial Officer of ABF Corp. and BOA Funding. Defendant Robert Caruso was a Director of BOA Mortgage. Defendant George E. Ellison was a Director of ABF Corp. and BOA Funding. Defendant Daniel B. Goodwin was President and Chief Executive Officer of ABF Corp. Defendant Juliana Johnson was a Director of BOA Mortgage. Defendant Adam D. Glassner was President, Chief Executive Officer, and Chairman of the Board of BOA Mortgage. Defendant Aashish Kamat was a Director of BOA Mortgage.
Depositor Defendants ABF Corp., BOA Mortgage, and BOA Funding. As the sole corporate parent of BOA Securities and ABF Corp., BOA Mortgage, and BOA Funding, BOA Corp. had the practical ability to direct and control the actions of ABF Corp., BOA Mortgage, BOA Funding, and BOA Securities in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding in connection with the issuance and sale of the Certificates. 225. BOA Corp.’s push to securitize large volumes of mortgage loans contributed to
forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans’ characteristics in the Registration Statements and establish special-purpose financial entities such as ABF Corp., BOA Mortgage, BOA Funding, and the issuing trusts to serve as conduits for the mortgage loans.
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 MLPF&S, ABF Corp., BOA Mortgage, and BOA Funding) 232. Plaintiff realleges each allegation above as if fully set forth herein, except to the
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, which were purchased by Fannie Mae. 234. This claim is predicated upon BOA Securities’ negligence for making false and
documents that it used to sell the GSE Certificates. BOA Securities offered the Certificates publicly, including selling to Fannie Mae its GSE Certificates, as set forth in the “Plan of Distribution” or “Underwriting” sections of the Prospectuses. 236. BOA 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. BOA Securities reviewed and participated in drafting the Prospectuses. 237. BOA Securities successfully solicited Fannie Mae’s purchases of the GSE
participated in the solicitation of Fannie Mae’s purchase of the GSE Certificates, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates. 242. Each of the Prospectuses contained material misstatements of fact and omitted
of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae, BOA Corp., BOA Securities, BOA Mortgage, BOA National, and BOA Funding. 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)(12). SEVENTH CAUSE OF ACTION Violation of Section 31-5606.05(c) of the District of Columbia Code (Against BOA Corp., BOA National, and the Individual Defendants) 250. Plaintiff realleges each allegation above as if fully set forth herein, except to the
management of ABF Corp., BOA Mortgage, and/or BOA Funding and their related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of ABF Corp.’s, BOA Mortgage’s, and/or BOA Funding’s business affairs. Defendant George C. Carp was Treasurer, Chief Accounting Officer, and Chief Financial Officer of ABF Corp. and BOA Funding.
Depositor Defendants ABF Corp., BOA Mortgage, and BOA Funding. As the sole corporate parent of BOA Securities and ABF Corp., BOA Mortgage, and BOA Funding, BOA Corp. had the practical ability to direct and control the actions of ABF Corp., BOA Mortgage, BOA Funding, and BOA Securities in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding in connection with the issuance and sale of the Certificates. 257. BOA Corp.’s push to securitize large volumes of mortgage loans contributed to
set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans’ characteristics in the Registration Statements and establish special-purpose financial entities such as ABF Corp., BOA Mortgage, BOA Funding, and the issuing trusts to serve as conduits for the mortgage loans. 259. BOA Corp., BOA National, and the Individual Defendants are controlling persons
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)(12). EIGHTH CAUSE OF ACTION Common Law Negligent Misrepresentation (Against MLPF&S, ABF Corp., BOA Mortgage, and BOA Funding) 264. Plaintiff realleges each allegation above as if fully set forth herein, except to the
Corp., BOA Mortgage, and BOA Funding sold the GSE Certificates to the GSEs as described above. Because ABF Corp., BOA Mortgage, and BOA Funding owned and then conveyed the underlying mortgage loans that collateralized the Securitizations for which they served as depositors, ABF Corp., BOA Mortgage, and BOA Funding had unique, exclusive, and special knowledge about the mortgage loans in the Securitizations through its possession of the loan files and other documentation. 267. Likewise, as underwriter for the Securitizations, BOA Securities was obligated –
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 – BOA Securities had unique, exclusive, and special knowledge about the underlying mortgage loans in the Securitizations. As discussed above at paragraph 16, MLPF&S is liable as successor-in-interest to BOA Securities, which was merged into it in November 2010. 268. BOA Securities also had unique, exclusive, and special knowledge of the work of
third-party due diligence providers, such as Clayton, which identified significant failures by 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 BOA Securities’ knowledge and their express representations made prior to the closing of the Securitizations regarding the underlying mortgage loans. 269. BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding were aware that
the GSEs reasonably relied on BOA Securities’, ABF Corp.’s, BOA Mortgage’s, and BOA Funding’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 degree to which the underlying mortgage loans were actually originated in compliance with the underwriting guidelines was known to these Defendants and was not known, and could not be determined, by the GSEs prior to the closing of the Securitizations. 270. Based upon their unique, exclusive, and special knowledge and expertise about
the Securitizations and the facts bearing on the riskiness of the Certificates, BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding had a duty to correct misimpressions left by their statements, including with respect to any “half truths.” The GSEs were entitled to rely upon BOA Securities’, ABF Corp.’s, BOA Mortgage’s, and BOA Funding’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. 272. Fannie Mae and Freddie Mac purchased the GSE Certificates based upon the
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 ABF Corp., BOA Mortgage, BOA Funding, and BOA Securities 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. 274. Detailed information about the underlying collateral and structure of each
Securitization was provided to the credit rating agencies by, upon information and belief, BOA National. The credit rating agencies based their ratings on the information provided to them by BOA, 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 BOA’s representations in the term sheets and Prospectus Supplements. 275. 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.
In purchasing the GSE Certificates, the GSEs justifiably relied on BOA’s false
proximate, and foreseeable result of the Depositor Defendants’ and BOA Securities’ misrepresentations, including any half truths. 279. The time period from July 13, 2009 through August 30, 2011 is tolled for statute
of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae, BOA Corp., BOA Securities, BOA Mortgage, BOA National, and BOA Funding. 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)(12). PRAYER FOR RELIEF WHEREFORE Plaintiff prays for relief as follows: 280. An award in favor of Plaintiff against all Defendants, jointly and severally, for all
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