Sealink Funding v Bear EMC Mortgage 1 12

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SUPREME COURT OF THE STATE OF NEW YORKCOUNTY OF NEW YORK

SEALINK FUNDING LIMITED,

Plaintiff,

v.

BEAR, STEARNS & CO. INC., THE BEARSTEARNS COMPANIES, INC., BEARSTEARNS ASSET BACKED SECURITIES ILLC, EMC MORTGAGE LLC (f/k/a EMCMORTGAGE CORPORATION),STRUCTURED ASSET MORTGAGEINVESTMENTS II INC., J.P. MORGANACCEPTANCE CORPORATION I, J.P.

MORGAN MORTGAGE ACQUISITIONCORPORATION., J.P. MORGANSECURITIES LLC (f/k/a JPMORGANSECURITIES INC.), WAMU ASSETACCEPTANCE CORP., WAMU CAPITALCORP., JPMORGAN CHASE & CO., andJPMORGAN CHASE BANK, N.A.,

Defendants.

Index No. 652681/2011

AMENDED COMPLAINT

JURY TRIAL DEMANDED

FILED: NEW YORK COUNTY CLERK 01/27/2012NYSCEF DOC. NO. 3 RECEIV


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TABLE OF CONTENTS

I. PRELIMINARY STATEMENT .............................................................................II. JURISDICTION AND VENUE ..............................................................................III.THE PARTIES.........................................................................................................

A. Plaintiff ..............................................................................................................

B. Defendants .........................................................................................................

IV.BACKGROUND FACTS AND NATURE OF THE FRAUD ................................A. The Securitization Process .................................................................................

B. Defendants Unique and Non-Public Knowledge about the Securitized Mortg

1. Defendants Control and Unique Knowledge of the Loan Originators .......

2. Defendants Control and Unique Knowledge of the Loan Pools Backing t

C. Defendants Fraudulently Included Poor Quality Loans in the Securitizations ..

1. Bear Stearns .................................................................................................

2. Washington Mutual ......................................................................................

3. JPMorgan .....................................................................................................

D. Defendants Manipulated the RMBS Credit Ratings ..........................................

1. Defendants Knowingly Supplied False Information to the Rating Agencie

2. Defendants Exerted Improper Pressure over the Rating Agencies ..............

3. The RMBS Have All Been Downgraded to Junk ........................................

V. DEFENDANTS FALSE AND MISLEADING STATEMENTS ..........................A. False and Misleading Statements Concerning Loan Origination and Underwr

Standards ............................................................................................................


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2. Defendants False and Misleading Statements Concerning Occupancy Rat

3. Bear Stearns False and Misleading Statements Concerning Early Paymen

D. Defendants False and Misleading Statements Concerning the Value of the MCollateral ............................................................................................................

E. Defendants False and Misleading Statements Concerning the RMBS Credit R

VI. PLAINTIFF REASONABLY RELIED ON DEFENDANTS REPRESENTATIO

VII ADDITIONAL ALLEGATIONS DEMONSTRATING SCIENTER ...................

A. Defendants Are Securitization Experts Who Consciously Included Poor QualLoans in the Securitizations ...............................................................................

B. Numerous Confidential Witnesses Have Independently Confirmed that DefenWere Deliberately Securitizing Poor Quality Loans .........................................

C. Defendants Profited Enormously from their Fraud ...........................................

D. Bear Stearns Deliberately Purged Its Due Diligence Records ...........................

E. Defendants Disregarded their Obligation to Properly Transfer Title ................

VIII. PLAINTIFF SUFFERED LOSSES BECAUSE OF DEFENDANTS FRAUDUCONDUCT ..............................................................................................................

IX. CAUSES OF ACTION ............................................................................................

X. PRAYER FOR RELIEF ..........................................................................................


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Plaintiff Sealink Limited Funding (Plaintiff) hereby brings this amended

common law fraud, fraud in the inducement, aiding and abetting fraudulent inducem

misrepresentation, and successor liability (Complaint) against Bear, Stearns &

Bear Stearns Companies, Inc., Bear Stearns Asset Backed Securities I LLC, EMC

(f/k/a EMC Mortgage Corporation), Structured Asset Mortgage Investments II Inc

Acceptance Corporation I, J.P. Morgan Mortgage Acquisition Corporation I, JPMo

LLC (f/k/a JPMorgan Securities Inc.), WaMu Asset Acceptance Corp., WaMu

JPMorgan Chase & Co., and JPMorgan Chase Bank, N.A. (collectively, Defendant

The allegations herein are made on personal knowledge as to Plaintiffs ow

information and belief as to all other matters, such information and belief having

through the investigation conducted by, and under the supervision of, Plain

Bernstein Litowitz Berger & Grossmann LLP (counsel), the materials refe

Complaint, and counsels interviews and consultations with numerous former

Defendants and other percipient witnesses. Many of the facts related to Plaintiffs

known only by the Defendants named herein or are exclusively within their custo

Formal discovery, including document discovery and depositions of relevant

expected to provide additional evidentiary support for the allegations herein. B

counsel, Plaintiff alleges as follows:


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I. PRELIMINARY STATEMENT

1. This case concerns an egregious fraud perpetrated by Bear Stearns, Washington Mutual. For more than three years, Defendants created, issued and s

mortgage-backed securities (RMBS) from loans that they knew to be exceptiona

of which were originated by the Defendants themselveswhile giving the false i

making false statements asserting that their RMBS were prudent investments. Spe

Stearns quickly securitized loans before they suffered from early payment def

indication of mortgage fraud) to transfer default risks to investors, purposefully u

due diligence process to increase volume at the expense of mortgage quality, an

50% of the mortgages that its own due diligence vendor had marked as fat

JPMorgan similarly waived in51% of the mortgages that its due diligence vendor

fatally defective and securitized poor quality JPMorgan Chase mortgages after f

investors that they were very conservatively underwritten. Washington Mut

securitized fraudulent mortgages and off-loaded exceptionally poor loans from its

into securitizations afterdetermining that those mortgages were of exceptionally p

likely to default. In sum, Defendants knowingly included mortgages with a high

into the mortgage pools that they securitized, hid this course of conduct from inves

rating agencies, and falsely sold Plaintiff supposedly conservative RMBS.

2. Plaintiff purchased over $2.4 billion worth of Defendants RMBS between 2005 and 2007 (the Certificates). The Certificates gave Plaintiff an


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payments. Accordingly, the value of the RMBS depended on the quality of the m

designated pools, including the borrowers ability to make their mortgage payment

of the collateral supporting the mortgages.

3. The mortgage industry has developed various metrics for assessingmortgages and the related risks of default and loss. Among other things, lo

investment banks, credit rating agencies, and RMBS investors typically assess b

scores, loan-to-value ratios, level of early payment defaults (EPDs), level

documentation, and occupancy rates to assess the risk that borrowers will not make

payments on time, and the potential losses suffered by the mortgage pool in ca

default. The reliability of these metrics depends on the loan origination and

practices that were used to originate the mortgages in the mortgage pool. For

scores assessing the borrowers credit quality are only reliable if the loan files r

FICO scores. Loan-to-value ratios assessing the level of borrower equity in the

thereby, the risk that the mortgage pool suffers a loss in case of default, are only

mortgage appraisals in the loan files are accurate. For these reasons, strict adh

origination and underwriting standardsincluding verification of the borrower

incentives to make their mortgage payments, and the value of the collaterali

determining the quality and riskiness of the mortgage pool.

4. Undisclosed violations of loan origination and underwriting standdevastating consequences for investors. Investment bank executives know that cut


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underwriting guidelines are addressed in numerous federal regulations requ

institutions to adopt acceptable loan-to-value ratios and minimum FICO credit

investment banks that selected, purchased and securitized billions of dollars in m

each year were paid millions of dollars to ensure that the loan originators ad

origination and underwriting standards, and to reject mortgages that they dis

defective. This fraud action arises from Defendants scheme to do the exact opposi

5. Defendants are sophisticated financial institutions which collectiv$325 billion in mortgages from 2005 to 2007. Throughout this time, Defendants

every aspect of the mortgage securitization business, including loan origination and

creating, sponsoring and issuing RMBS, and underwriting and selling RMBS to

example, from 2005 to 2007, Bear Stearns was one of the largest underwriters of

country, and securitized at least $162 billion in loans. During this same time, W

securitized at least $103 billion in loans, while JPMorgan securitized at least $62 bil

6. As the creators and underwriters of the RMBS, Defendants had exclinformation about the quality of the mortgage pools that they created to support

including access to the loan files and the results of their own due diligence. By co

and other investors did not have access to the loan files or Defendants due diligen

could not perform similar due diligence themselves. Plaintiff therefore reason

Defendants disclosure of the quality of the mortgage pools backing the RMBS

2 S 12 C F R P t 34 b t D (Offi f th C t ll f C St


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registration statements, prospectuses, prospectus supplements, and marketing mate

free writing prospectuses, term sheets and draft prospectuses (the Offering Ma

Offering Materials contained numerous representations about the quality of mor

related risks of default and loss, including representations about borrower credit s

value ratios, level of EPDs, and occupancy rates. The Offering Materials

representations about the credit ratings of the RMBS. Defendants provided the Off

to Plaintiff to induce the purchase of the RMBS.

7. Defendants representations about the quality of the mortgages inMaterials were false and misleading. The mortgage pools backing the RMBS

poorer quality, and the related risks of default and loss were much higher, th

because Defendants purposefully securitized fraudulent mortgages and other mortga

or recklessly disregarded to be of exceptionally poor quality.

8. Defendants Offering Materials also contained false and misleading about the RMBS credit ratings. Unbeknownst to Plaintiff, Defendants provided th

agencies with the same false information about the quality of the mortgage pools. D

bullied the credit rating agencies into providing favorable credit ratings, including

to withhold future business and targeting individual analysts who were not sufficie

Defendants demands. Gary Witt, former managing director at Moodys testif

National Commission on the Causes of the Financial and Economic Crisis in the

(the Financial Crisis Inquiry Commission or FCIC) that investment banks li


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were just going to go with Fitch and S&P. Defendants threats were succes

Michalek, former senior credit officer at Moodys, stated in his FCIC testimony th

of losing business to a competitor, even if not realized, absolutely tilted the balan

an independent arbiter of risk towardsa captive facilitator of risk transfer. He

used their power over the rating agencies to improperly transfer excessive mortga

loss risks to RMBS investors, including Plaintiff.

9. Defendants fraudulent conduct resulted in RMBS that were mucrepresented to investors, including the thirty-seven securitizations at issue here. De

this when they sold their RMBS to Plaintiff. As a former regional Vice-Presiden

explained to the New York Times: The bigwigs of the corporations knew this, bu

were going to make billions out of it, so who cares? The government is going to b

the problem loans will be out of here, maybe even overseas. Nicholas D. Kri

Speaks, With Regret, N.Y. Times (Nov. 30, 2011). By contrast, the full extent

scheme was not known, and could not have been known, to Plaintiff until the FCIC

findings of its investigation in January 2011 (the FCIC Report) and the U.S. Sen

Subcommittee on Investigations published its report titled, Wall Street and the Fi

Anatomy of a Financial Collapse (the Senate Investigations Report) on A

Together, these reports revealed for the first time that Defendants were creating and

backed by mortgage pools that they knew, or at the very least recklessly disregard

riskier than they represented to Plaintiff and other investors.


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JPMorgans CEO, Jamie Dimon, testified before the FCIC on January 13, 2010, n

underwritten mortgage products were a significant contributor [to the mortgage m

proved costly for consumers, the entire financial system and our economy. Defe

also contributed to the collapse of some of the investors who purchased the RMB

their subsequent takeover by Plaintiff. This action seeks to hold Defendants

hundreds of millions of dollars in damages caused by their fraud.

II. JURISDICTION AND VENUE

11. Jurisdiction is proper because a number of Defendants are domiciledCounty, as detailed below. This Court has jurisdiction over each of the n

Defendants because each of them regularly and systematically does business with

New York, each of them transacts business within the State of New York within

CPLR 302(a)(1), and each of them committed a tortious act inside the State of

outside the State of New York causing injury within the State of New York within

CPLR 302(a)(2) and 302(a)(3). The amount in controversy exceeds $150,000.

12. Venue is proper in this Court because a number of Defendants principal places of business in New York County, as detailed below.

III. THE PARTIES

A. Plaintiff13. Sealink Funding Limited Sealink is a company incorporated und

Ireland that was established to receive, hold and manage RMBS purchased by


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properties, revenues and rights of every description, were transferred to Sealink

Master Framework and Definitions Schedule and a series of Sale and Purchase Agr

June 7, 2008. Sealink Funding Limited and the SPVs are hereinafter collectively

Sealink or Plaintiff.

14. The claims asserted herein arise from the SPVs purchase of the RMon attached Exhibit A.

B. Defendants15. Defendant Bear, Stearns & Co. Inc. was at all relevant times an

broker-dealer incorporated in Delaware, with its principal place of business a

Avenue, New York, New York 10179. Bear, Stearns & Co. Inc. was a wholly-ow

of The Bear Stearns Companies, Inc., and served as the lead underwriter

securitizations at issue here. Bear, Stearns & Co. Inc. directed the activities of its

Mortgage LLC, Structured Asset Mortgage Investments II Inc. and Bear Stearns

Securities I LLC. On or about October 1, 2008, following the merger agreement d

2008, Bear, Stearns & Co. Inc. merged with J.P. Morgan Securities LLC. All alle

Bear, Stearns & Co. Inc. are also made against its successor-in-interest, J.P. Mor

LLC.

16. Defendant EMC Mortgage LLC (f/k/a EMC Mortgage Corporatirelevant times a Delaware corporation with its principal place of business at 27

Drive, Lewisville, Texas 75067. EMC Mortgage LLC (EMC Mortgage or EM


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Stearns Companies, Inc. and JPMorgan Chase & Co., EMC became a wholly owne

JPMorgan Chase & Co. All allegations against EMC are also made against its con

company, The Bear Stearns Companies, Inc., and against JPMorgan Chase & Co.

in-interest to The Bear Stearns Companies, Inc.)

17. Defendant Structured Asset Mortgage Investments II Inc. (SAMI relevant times a Delaware corporation with its principal place of business at 383 Ma

New York, New York 10179. SAMI II was a wholly-owned subsidiary of Th

Companies, Inc., and served as depositor for 11 of the securitizations at issue here.

the merger between The Bear Stearns Companies, Inc. and JPMorgan Chase &

became a wholly-owned subsidiary of JPMorgan Chase & Co. All allegations a

are also made against its controlling parent company, The Bear Stearns Compa

against JPMorgan Chase & Co. (as successor-in-interest to The Bear Stearns Compa

18. Defendant Bear Stearns Asset Backed Securities I LLC (BSABSrelevant times a Delaware limited liability company with its principal place of b

Madison Avenue, New York, New York 10179. BSABS I was a limited pu

subsidiary of The Bear Stearns Companies, Inc., and an affiliate of Bear, Stear

BSABS I served as the depositor for BSAB 2006-IM1. As a result of the merge

Bear Stearns Companies, Inc. and JPMorgan Chase & Co., BSABS I became a

subsidiary of JPMorgan Chase & Co. All allegations against BSABS I are also m

controlling parent company, The Bear Stearns Companies, Inc., and against JPMo


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19. The Bear Stearns Companies, Inc. was at all relevant times a Delawwith its principal place of business at 383 Madison Avenue, New York, New Yo

Bear Stearns Companies, Inc. was a holding company that provided invest

securities, and derivative trading services to its clients through its subsidiaries and

the securitizations at issue here, was the sole owner of Defendants Bear, Stearn

BSABS I, EMC Mortgage, and SAMI II. On March 16, 2008, The Bear Stearns C

entered into an agreement and plan of merger (the Merger) with JPMorgan

making The Bear Stearns Companies, Inc. a wholly-owned subsidiary of JPMorga

All allegations against The Bear Stearns Companies, Inc. are also made against it

interest JPMorgan Chase & Co.

20. Defendants Bear, Stearns & Co., EMC, SAMI II, BSABS, TheCompanies, Inc., J.P. Morgan Securities LLC (as successor-in-interest to Bear,

Inc.) are collectively hereinafter referred to as Bear Stearns or the Bear Stearns De

21. Defendant WaMu Capital Corporation (WaMu Capital) was at allan SEC-registered broker-dealer incorporated under Washington law, with its prin

business at 1301 Second Avenue, WMC 3501A, Seattle, Washington 98101. WaM

a wholly-owned subsidiary of Washington Mutual Bank, and served as the underwr

the securitizations at issue here. WaMu Capital is not currently affiliated wi

Mutual Bank and is now a wholly-owned subsidiary of JPMorgan Chase Bank, N.A

22. Defendant WaMu Asset Acceptance Corporation (WaMu Asse


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Washington 98101. WaMu Asset served as the depositor for four of the securitiz

here. WaMu Asset is not currently affiliated with Washington Mutual Bank and is

owned subsidiary of JPMorgan Chase Bank, N.A.

23. WaMu Capital Corporation, WaMu Asset Acceptance CorWashington Mutual Bank are collectively hereinafter referred to as WaMu. Def

Capital Corporation and WaMu Asset Acceptance Corporation are collective

referred to as the WaMu Defendants.

24. Defendant JPMorgan Chase & Co. is a financial holding companunder Delaware law with its principal place of business at 270 Park Avenue, Ne

York 10017. JPMorgan Chase & Co. is one of the largest banking institutions in th

and is the ultimate owner of Defendants JPMorgan Chase Bank, N.A., J.P. Mor

LLC (f/k/a J.P. Morgan Securities Inc.), J.P. Morgan Acceptance Corporation I, an

Mortgage Acquisition Corp. JPMorgan Chase & Co. is also the successor-in-intere

Stearns Companies, Inc.

25. Defendant JPMorgan Chase Bank, N.A. is a national banking subsidiary of JPMorgan Chase & Co., and the sole owner of J.P. Morgan Mortga

Corp. JP Morgan Chase Bank, N.A.s main office is located in Columbus, Ohio.

against JPMorgan Chase Bank, N.A. are also made against its controlling pa

JPMorgan Chase & Co.

26. Defendant JP Morgan Securities LLC (f/k/a J.P. Morgan Securi


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investment banking activities in the U.S., and served as the underwriter for the JP

RMBS securitization at issue here. All allegations against J.P. Morgan Securitie

made against its controlling parent company, JPMorgan Chase & Co.

27. Defendant J.P. Morgan Mortgage Acquisition Corporation iscorporation with its principal place of business at 270 Park Avenue, New York, Ne

J.P. Morgan Mortgage Acquisition Corporation is a direct, wholly-owned subsidiar

Chase Bank, N.A., and served as the sponsor for the JPALT 2007-A2 RMBS se

issue here. All allegations against J.P. Morgan Mortgage Acquisition Corporation

against its controlling parent company, JPMorgan Chase Bank, N.A.

28. Defendant J.P. Morgan Acceptance Corporation I, is a Delaware coits principal place of business at 270 Park Avenue, New York, New York 10017

Acceptance Corporation I is a direct, wholly-owned subsidiary of J.P. Morgan Secu

LLC which, in turn, is a direct, wholly-owned subsidiary of JPMorgan Chase & Co

Acceptance Corporation I served as the depositor for the JPALT 2007-A2 RMBS s

issue here. All allegations against J.P. Morgan Acceptance Corporation I are also m

ultimate controlling parent company JPMorgan Chase & Co.

29. Defendants JPMorgan Chase & Co., JPMorgan Chase Bank, N.ASecurities LLC, J.P. Morgan Mortgage Acquisition Corporation, and J.P. Morg

Corporation I are collectively hereinafter referred to as JPMorgan or th

Defendants.


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IV. BACKGROUND FACTS AND NATURE OF THE FRAUD

A.

The Securitization Process

30. Residential mortgage backed securities provide investors with an income generated by one or more designated pools of residential mortgages. The a

themselves represent an equity interest in an issuing trust that holds the design

pools. Payments from the underlying borrowers are collected by a loan servicer a

through the issuing trust, to holders of the certificates at regular distribution interv

the life of the loan pool. Accordingly, the value of the RMBS depends on the

mortgages in the designated pools, including the borrowers ability to make t

payments and the value of the collateral supporting the mortgages.

31. Although the structure and underlying collateral of the mortgages mtrust to trust, they all function in a similar manner: the cash flow from the borrow

interest and principal payments on their mortgages is passed through to certifica

Plaintiff. Accordingly, failure by borrowers to make their mortgage payments direc

value of the RMBS. Defaults that are not cured will result in foreclosure, causing t

possession or sell the collateral for the loan. Foreclosures will result in higher los

(and therefore to the RMBS investors) if the value of the collateral is lower than

example because the mortgage appraisals overstated the value of the collateral. For

proper loan origination and underwriting of the mortgages underlying the RM

verification of the borrowers ability and incentives to make their mortgage pay


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32. The process of securitizing mortgages into RMBS involves a nuFirst, a sponsor creates a loan pool from mortgages the sponsor has origin

mortgages the sponsor has purchased from other financial institutions. Prior to

mortgage pool from other financial institutions, sponsors generally will review a sa

compliance with the underwriting guidelines. The sponsors have the ability to rej

the pool before finalizing the purchase. In addition, the sponsor has the right to for

repurchase or replace loans that do not meet represented quality standards afte

mortgage pool.

33. Second, the sponsor transfers the loans to a depositor, which segmflows and risks in the loan pool among different levels of investment or tranche

cash flows from the payments by borrowers whose mortgages are in the loan pool

order of seniority, going first to the most senior tranches. In addition, any losses t

due to defaults, delinquencies, foreclosure or otherwise, are applied in reverse ord

and are applied first to the most junior tranches.

34. In the meantime, the sponsor provides information about the Rstructure, the expected cash flows from the designated mortgage pool, and th

collateral supporting the loans in the mortgage pool to credit rating agencies

Moodys and Standard & Poors. Certificates in the most senior tranches are oft

best quality or AAA. Junior tranches have subordinated rights to payment and ar

from risk, and therefore have lower credit ratings. The Plaintiffs RMBS were all


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35. Third, the depositor transfers the mortgage pool to the issuing trust sused as collateral for RMBS that will be issued and sold to investors. Once the m

deposited and the tranches are established, the issuing trust transfers RMBS in the

depositor as payment for the mortgages.

36. The depositor then passes the RMBS to the underwriters, whoinvestors in exchange for payment. After selling the RMBS to investors, the underw

payment back to the depositor, less any fees that are collected for serving as an und

securitization. At all relevant times, underwriters like Defendants typically collec

in discounts, concessions, or commissions for serving as an underwriter

securitization. On the securitizations at issue in this case, these commissions woul

Defendants at least $792 million in underwriting fees. By serving as a sponsor an

securitizations, Defendants earned even more. As the FCIC concluded in January

investigation of Bear Stearns role in the economic crisis: In mortgage secur

followed a vertically integrated model that made money at every step, from lo

through securitization and sale.

37. In sum, the steps in the securitization process can be depicted as follo


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B. Defendants Unique and Non-Public Knowledge about the SecuriMortgages

38. For twenty-four of the thirty-seven securitizations at issue, Defendthe sponsor, the depositor, and the underwriter. As a result, Defendants controlled e

securitization process for those RMBS, including: (i) the selection and acquisition

the pool; (ii) the creation of the securitization structure, including the segmentation

and risks into tranches; (iii) providing critical information about the quality of the

to the credit rating agencies as part of the process of obtaining investment grade cr

the RMBS; and (iv) the registration, underwriting and sale of the RMBS to Plain

providing critical information about the quality of the mortgages that was used b

decide whether to purchase the RMBS.

39. For the remaining thirteen securitizations, Defendants worked with the securitization as lead underwriter of the RMBS. Defendants had access to

diligence results and detailed borrower information, including loan files, had acce

responsible for creating the securitization, reviewed draft Offering Materials, a

Offering Materials to Plaintiff.

40. Because of their central role in creating, issuing and selling the RMBhad exclusive access to information about the highly risky nature of the design

poolsinformation that Defendants fraudulently withheld from Plaintiff and whi

not know, and could not have known.


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1. Defendants Control and Unique Knowledge of the Loan OrigPractices

41. Bear Stearns, WaMu and JPMorgan were central actors in securitization industry. From 2005 to 2007, Bear Stearns securitized more than

loans, WaMu securitized more than $103 billion in loans, and JPMorgan securiti

$62 billion in loans that they then sold to investors. The following table shows the

identified by the Offering Materials for each of the securitizations at issue:

Table 1

# Offering RMBSUnderwriter

Sponsor Originators >50

1 BALTA 2005-9 Bear Stearns EMC






7 BALTA 2007-2 Bear Stearns EMC Bear Stearns Resid

8 BALTA 2007-3 Bear Stearns EMC Bear Stearns Resi

9 BSMF 2006-AR2 Bear Stearns EMC Bear Stearns Resi






15 GPMF 2005 AR5 B S EMC G


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42. Defendants had unique access to senior management of the financithat originated the loans in the mortgage pools at issue. Defendants and their a

i i f 43% f h l b ki f h f i i

16 CARR 2006-OPT1 Bear Stearns EMC Optio

17 SAMI 2007-AR3 Bear Stearns EMC

18 SAMI 2006-AR8 Bear Stearns EMC Coun

19 BSABS 2006-HE3 Bear Stearns EMC

20 BSABS 2006-IM1 Bear Stearns EMC

21 IMSA 2006-5 Bear Stearns Impac



24 BMAT 2006-1A Bear Stearns Encore E

25 AABST 2005-5 Bear Stearns Aegis

26 AHM 2005-4 Bear Stearns American Home America

27 AHM 2006-3 Bear Stearns American Home American

28 LUM 2005-1 Bear Stearns Luminent

29 LUM 2006-7 Bear Stearns Luminent America

30 SGMS 2006-FRE2 Bear Stearns Socit Gnrale Fr

31 NHELI 2007-1 Bear Stearns Nomura First National Bank ofSilv

32 JPALT 2007-A1 JPMorgan JPMorgan Chase OrigGre

33 JPALT 2007-A2 JPMorgan JPMorgan Chase Orig

34 JPMAC 2006-FRE2 JPMorgan JPMorgan Fr

35 CWL 2005-AB4 JPMorgan Countrywide Count36 WAMU 2005-AR15 WaMu Capital WaMu Bank WaMu

37 WAMU 2007-OA1 WaMu Capital WaMu Bank WaMu

38 WMALT 2007-OA1 WaMu Capital WaMu MortgageSecurities Corp.

Alliance BCoun

39 WMHE 2007-HE1 WaMu Capital WaMu Bank Long

40 WMHE 2007-HE4 WaMu Capital WaMu Bank WaMu


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AR5, BSMF 2007-AR1, BSMF 2007-AR4, BSMF 2007-AR5, LUM 2005-1, JPA

JPALT 2007-A2, WAMU 2005-AR15, WAMU 2007-OA1, WMHE 2007-HE1,

2007-HE4. For each of these securitizations, Defendants and their affiliates origin

that were securitized and sold to Plaintiff. As a result, Defendants had unique, non-

into the loan origination and underwriting practices that were used for originat

included in these securitizations. As Bear Stearns reported in its 2006 Annual

Stearns vertically integrated franchise allows us access to every step of the mort

including origination, securitization, distribution and servicing.

43. Defendants had very close relationships with the financial insoriginated a majority of the loans backing the other nineteen securitizations:

GreenPoint, Option One, Aegis, Encore, Impac, American Home, Fremont, First Nat

Nevada, and Silver State. In November 2008, the Office of the Comptroller of

(OCCpart of the US Treasury Department), issued an Index to the Wo

Originators, based on the number of foreclosures on 2005-2007 loan originations in

metropolitan areas, which included Countrywide, GreenPoint, Option One, Aeg

Home, and Fremont (the OCC Index to the Worst Subprime Originators).5

44. Between 2005 and 2007, Bear Stearns securitized more than $Countrywide originated loans. During the same time, JPMorgan securitized nearly

Countrywide originated loans. JPMorgan also assisted Countrywide with raising cap

5Available at http://www occ treas gov/news issuances/news releases/2009/nr occ 2009 11


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as a lead underwriter in Countrywides bond issuances, and served as managing a

agent to material credit agreements for Countrywide, including a $2.64 billion rev

facility. In these capacities, Bear Stearns and JPMorgan obtained unique access to

public information about Countrywides operations, including its loan origina

underwriting practices, loan quality and performance, and reserve metho

nonperforming loans.

45. Between 2005 and 2007, Countrywide was one of the worst loan origcountry. Countrywide ranked as the eighth worst mortgage originator on the OCC

Worst Subprime Originators. Counsels investigation has shown that from the begin

Countrywide used three levels of loan origination and underwriting exceptions to gen

of dollars in defective mortgages. First, if Countrywides automated underw

discovered problems with a mortgage application because it failed to meet one of

underwriting criteria, including criteria used to assess borrower quality and collate

application would be sent to a loan officer for manual underwriting in Countrywide

Processing System. If the loan officer could not approve the application, the loan

rejected. Rather the loan officer would request an exception from the guidelin

senior underwriters at Countrywides loan production structured lending desk

SLD), otherwise known as the exception desk. The Production SLD grant

pursuant to Countrywides matching policy, also known as the shadow gui

mortgage application would be approved if it matched the most aggressive mort


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policy of any loan origination competitor, even if the mortgage violated Country

underwriting guidelines. Finally, if a mortgage application was still not approved p

shadow guidelines, it was sent to rge secondary markets structured lending desk (th

Markets SLD) which would accept any loan regardless of the risk level or likelih

as long as the loan could be resold for securitization. As Countrywides chief fin

David Sambol, stated in a February 13, 2005 email, Countrywide should be wi

virtuallyany loan that we reasonably believe we can sell/securitize without losing m

other lenders cant or wont do thedeal.

46. Countrywide managing director for secondary markets, Joshua Adlduring his deposition in an SEC enforcement action that Countrywide used diffe

exceptions and shadow guidelines to approve non-compliant loans in the ordina

business, and that Secondary Markets SLD did not review mortgages from an unde

of view, but only from their potential for securitization:

Q. Do you know whether Countrywide sometimes originated loans that considered to be exceptions to its underwriting guidelines?

A. We did.

Q. To your knowledge, was there a process by which such loans were approv

* * *

A. There generally was, yes.

Q. And what is your understanding of that process?

A. Well, I was -- I was at the tail end of that process. There was -- wed l h d k d f d l d h h d h h


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guidelines, which were the kind of the second tier guideline, if you will.then there was this third tier which would come to me.

But essentially there were -- the tiering of guidelines related to the kind oexception process. And there was an underwriting, they called it, StructLoan Desk process in the divisions where loans would get referred toStructured Loan Desk if they were outside, I believe, of kind of the guidelines. And then if those loans were outside of even the sh guidelines, then they would be referred to Secondary Marketindetermine if the loan could be sold given the exception that was being afor.

* * *

Q. Was one of the criteria for granting exceptions at the Secondary Loan Din Secondary Marketing whether or not the loan could be sold intosecondary market?

A. That was the only criteria that we followed.

47. The same was true for Silver Statethe largest private mortgage banIn 2008, a former employee, Mike Garner, explained this on National Public Radio as

My boss had been in the business for 25 years. And he hated those loans. Heto rant and just say, it makes me sick to my stomach, the kind of loans that wAnd you know, he fought the owners and the sales force tooth and neck a

these guidelines. And we got the same answer every time.Nope, other peoploffering it, were going to offer it too, and were going to get more market sthis way.

48. JPMorgan and Bear Stearns were also among Fremonts key busiTogether JPMorgan and Bear Stearns securitized more than $4.7 billion of Fremo

loans between 2005 and 2007with JPMorgan responsible for the securitization of$

49. Fremont ranked as the fifth worst mortgage originator on the OCCWorst Subprime Originators. Fremont was one of the countrys largest and


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subprime mortgage lenders until it was closed down by the Federal Deposit Insuranc

(FDIC) in March 2008. For example, on March 7, 2007, the FDIC issued an O

Fremont Investment & Loan Brea, California, Docket No. FDIC-07-035b, requirin

cease and desist from a number of unsafe and unsound banking practices and vio

law and/or regulations including: operating with inadequate underwriting criteria and excessive risk in rel

to the kind and quality of assets held by the Bank;

engaging in unsatisfactory lending practices; making mortgage loans without adequately considering the borrowers ab

to repay the mortgage according to its terms.

marketing and extending adjustable-rate mortgage (ARM) producsubprime borrowers in an unsafe and unsound manner that greatly increthe risk that borrowers will default on the loans or otherwise cause lossthe Bank, including ARM products with one or more of the follocharacteristics:

(i) qualifying borrowers for loans with low initial payments based ointroductory or start rate that will expire after an initial period, wit

an adequate analysis of the borrowers ability to repay the debt afully-indexed rate;

(ii) approving borrowers without considering appropriate documentand/or verification of their income;

(vi) approving borrowers for loans with inadequate debt-to-income anathat do not properly consider the borrowers ability to meet their ovlevel of indebtedness and common housing expenses; and/or

(vii) approving loans or piggyback loan arrangements with loan-to-vratios approaching or exceeding 100 percent of the value of the collatand


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50. Fremonts former regulatory compliance and risk manager, Roginformed the FCIC on September 2, 2010 that Fremont repeatedly attempted to p

loans into pools of mortgages that were to be sold to investors until they were rejecte

During his testimony before the FCIC, Claytons former president and chief ope

Keith Johnson, referred to this practice as the three strikes, youre out rule.51. Bear Stearns was one of GreenPoints largest investors and source

Between 2005 and 2007, Bear Stearns securitized more than$3.7 billion of GreenPo

loans. During the same time, JPMorgan securitized more than$1.6 billion GreenPo

loans. Former GreenPoint executive vice-president, Kevin Hughes, has testified th

executives were in daily contact with large investors such as Bear Stearns, JPMorg

them with extensive loan level data on the mortgages that GreenPoint was originating

52. GreenPoint ranked as the thirteenth worst mortgage originator on the Othe Worst Subprime Originators. According to a review of documentation in conn

lawsuit against GreenPoint based on the failures in GreenPoints origination and

practices, 93% of the GreenPoint loans suffered from serious defects.6

Disco

included:

pervasive misrepresentations and/or negligence with respect tstatement of income, assets, or employment of the borrower;

6See U.S. Bank Natl Assn, et al. v. GreenPoint Mortgage Funding, Inc., New York Sup. Ct(Feb. 5, 2009);Bank of America, N.A. v. GreenPoint Mortgage Fundint, Inc., No. 3:09-cv-00

Feb 26 2009)


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misrepresentations of the borrowers intent to occupy the property aborrowers residence and subsequent failure to so occupy the property

inflated and fraudulent appraisal values; and pervasive violations of GreenPoints own underwriting guideline

prudent mortgage-lending practices, including loans made to borrowewho made unreasonable claims as to their income, (ii) with multunverified social-security numbers, (iii) with credit scores belowrequired minimum, (iv) with debt-to-income and/or loan-to-value rabove the allowed maximum or (v) with relationships to GreenPoi

other non-arms-length relationships.

53. The review of GreenPoint documents also determined that two yclosing of the securitized transaction, approximately 29% of the loans in the origi

was either completely written off or severely delinquent. Another lawsuitbrough

senior GreenPoint underwriteralleged that GreenPoint forced underwriters to appr

loan applications containing fraudulent information.7

54. Bear Stearns also had very close relationships with American Homeeleventh worst mortgage originator on the OCC Index to the Worst Subprime Orig

Impac Mortgage. Between 2005 and 2007, Bear Stearns securitized more than $

Impac originated loans and more than $350 million of American Home originat

addition, between 2005 and 2007, Bear Stearns provided a $2.5 billion credit facility

Home and approximately $300 million in loans to Impac, thereby allowing th

originators to originate and fund new mortgages that Bear Stearns could securitiz

investors. In these capacities, and to protect its own interests, Bear Stearns c

7Steinmetz v GreenPoint Mortgage Funding Inc No 08 cv 5367 (S D N Y June 12 2008


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diligence and reviewed material, non-public information about American Homes

loan origination and underwriting practices, loan quality and performance,

methodologies for nonperforming loans. As a major creditor of American Home an

Stearns had the power to cut off hundreds of millions of dollars of operational fun

ensuring that Bear Stearns had continuing access to material non-public information

times. After Bear Stearns declared Impac to be in default of its loan obligations a

payment of $286 million in September 2007, Impac mortgage discontinued substant

mortgage and warehouse lending operations.

55. Bear Stearns also had unique, non-public insight into loan oriunderwriting practices of Option One and Aegis, respectively ranked as the sixth

worst mortgage originators on the OCC Index to the Worst Subprime Originators. B

and 2007, Bear Stearns securitized more than $455 million of Aegis loans and m

million of Option One loans. In addition, senior Option One executives with direct

Option Ones loan origination and underwriting practices joined Bear Stearns and

subsidiary EMC Mortgage. For example, John Vella was Option Ones chief st

before becoming president, chief operating officer and chief executive officer of EMC

56. After securitizing more than$2.2 billion of Encore Mortgage originatStearns purchased Encore in October 2006. Following the acquisition, Bear St

Encore with another affiliate, Bear Stearns Residential Mortgage. As a major busine

future owner of the firm, Bear Stearns had daily contact with Encore executives, c


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diligence, and reviewed material, non-public information about Encore Mor

origination and underwriting practices, loan quality and performance, and reserve m

for nonperforming loans.

57. Bear Stearns had unique, non-public insight into loan origination andpractices of First National Bank of Nevada (FNBN). The loans First National Ban

underwriting standards were designed to originate as many mortgage loans as pos

regard to the ability of the borrower to repay such mortgages. Here, Numerous

included in the NHELI 2007-1 Offering were originated by FNBNs affiliate the First Na

Arizona (FNBA). On July 25, 2008, the OCC closed FNBN and FNBA, and named

receiver, after finding that the bank was undercapitalized and had experience

dissipation of assets and earnings due to unsafe and unsound lending practices. In

lawsuit against the CEO, Gary A. Dorris, and EVP, Philip A. Lamb, for losses arisin

management, the FDIC described FNBAs origination practices as follows:

It underwrote its loans to standards provided by potential investors rather relying on the Banks own analysis of credit risks--risks the directorsofficers were well aware of.

These loans were destined to failure because they were not based on safetysoundness standards, such as an evaluation of borrowers ability to repayloans or the value of the collateral to support the credit .

58.

In September 2011, Dorris and Lamb each agreed to pay $20 millio

FDICs claims.

59. On March 16, 2011, the FDIC filed a similar lawsuit against the C


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loans, despite knowing that the bank did not have good underwriting and monitor

and controls. In December 2011, the defendants agreed to a $64.7 million settlemen

2. Defendants Control and Unique Knowledge of the Loan PoolsRMBS

60. Defendants utilized three methods to securitize the mortgages into Rto investors. Specifically, Defendants either: (1) acted as sponsor, depositor and u

RMBS backed by mortgages that their own affiliates had originated; (2) acted

depositor and underwriter of RMBS backed by mortgages that they had selected a

from other loan originators; or (3) acted as underwriter for RMBS backed by mortga

securitized by other financial institutions.

61. Defendants acted as sponsor, depositor and underwriter for twentyforty RMBS at issue: BALTA 2005-9, BALTA 2006-1, BALTA 2006-3, BA

BALTA 2006-5, BALTA 2006-8, BALTA 2007-2, BALTA 2007-3, BSMF 2006

2006-AR3, BSMF 2006-AR5, BSMF 2007-AR1, BSMF 2007-AR4, BSMF 2007

2005-AR5, CARR 2006-OPT1, SAMI 2007-AR3, BSABS 2006-HE3, BSABS 200

2006-AR8, JPALT 2007-A1, JPALT 2007-A2, JPMAC 2006-FRE2, WAMU

WAMU 2007-OA1, WMALT 2007-OA1, WMHE 2007-HE1, and WMHE 2007-H

twenty-eight securitizations, Defendants had exclusive control over the selection of

pools. In addition, for twenty of the twenty-seven securitizations, Defendants and

also originated at least 39% of the mortgages backing the RMBS. See Table 1, supr

these twenty securitizations Defendants also had exclusive control over the loan o


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loan underwriting practicesDefendants own personnel originated the loans a

compliance with loan underwriting guidelines. Unlike Plaintiff, Defendants had acc

borrower information, including the individual loan files and delinquency inform

loans backing these twenty-five securitizations before securitizing them.

62. Defendants acted as lead underwriter for the remaining twelve RMBS5, IMSA 2007-2, IMSA 2007-3, BMAT 2006-1A, AABST 2005-5, AHM 2005-4, A

LUM 2005-1, LUM 2006-7, SGMS 2006-FRE2, NHELI 2007-1, and CWL 2005-A

underwriter, and unlike Plaintiff, Defendants had access to the personnel that

securitizations as well as detailed due diligence results for the loans backing these s

Moreover, because of their close relationships with the originators of the loans

securitizations, Defendants had unique, non-public knowledge of the loan or

underwriting standards that were used to originate the mortgages backing these RM

61% of the mortgages backing LUM 2005-1 were originated by Defendant and

affiliate EMC Mortgage. See Table 1, supra at 41.

63. Before purchasing loans, Defendants performed due diligence on the mpools by examining three areascredit, compliance, and valuation. Credit due dilig

examining a sample of the individual loans to assess their quality and complia

originators loan underwriting guidelines, and is a critical tool for evaluating the

borrowers of the mortgages in the pool will not make their mortgage paym

Compliance diligence focused on whether the loans were originated in complian


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federal and local laws, including predatory lending and truth-in-lending statute

diligence used automated valuation models (AVMs) to verify the accuracy

valuations of the collateral backing the mortgages in the pool. The value of th

critical for determining the amount of equity a borrower has in the collaterala k

determining whether the borrower will continue to make the mortgage payments and

recovery in case of default.

64. Defendants routinely used outside third-party due diligence proviClayton Holdings, Inc. (Clayton), the Bohan Group (Bohan), and Watterson P

perform due diligence on the mortgage pools they would purchase for securitizatio

this due diligence, the vendor calculated important data points, such as LTV ratios

income ratios, and provided detailed quantitative and qualitative findings to Defenda

a score for each loan. For example, John Mongelluzzo, a former Bear Stearns

manager, acknowledged in testimony before the FCIC that Bear Stearns received in

summary reports on a daily basis. Bear Stearns also received tracking reports show

of exceptions that were commonly discovered for Defendants top loan originato

senior vice president, Vicki Beal, testified before the FCIC that in developing

Clayton received a lot of feedback from Bear Stearns of things that would be help

Confidential witness (CW) 1, a former EMC Associate Vice-President who w

company in various due diligence and compliance roles from 1998 through 2008 i

Texas, confirmed that Bear Stearns knew the intimate details of each loan that wa


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the due diligence process. Defendants did not extrapolate the due diligence results fo

reviewed by the due diligence vendors to the mortgage pools they purchased.

65. Defendants due diligence efforts and access to the individual loan fimaterial, non-public knowledge about the loans that were included in the securitiza

Defendants due diligence efforts and access to the loan files also provided comfo

that Defendants only securitized mortgage pools which conformed to the stated lo

and underwriting standards. Investors did not have access to the loan files or De

diligence information, and could not conduct similar due diligence themselves. Plai

relied on Defendants disclosure of the quality of the mortgage pools backing the R

Attorney General for the State of Massachusetts explained, there are two related

asymmetries that arise from the RMBS structure:

First, investment banks, through their diligence process, may discover that have poorer quantifiable criteria than present on the loan tape (for example, i banks review calls into question the quality of the appraisals underlyincalculation of the loan-to-value ratios). Second, investment banks may disc

concentrations of otherwise unquantifiable risks like fraud.

Letter from Attorney General for the State of Massachusetts to the SEC dated Au

regarding Proposed Rule Concerning Asset-Backed Securities, SEC Release Nos.

61858; File number S7-08-10. These information asymmetries were even more p

case of securitizations that were created, sponsored and underwritten by Defendant

by mortgages that Defendants had originated.


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C. Defendants Fraudulently Included Poor Quality Loans in the Secu1. Bear Stearns

66. Defendant EMC Mortgage was established to facilitate the purchase of whole loan portfolios. Since its inception in 1990, EMC had purchased over $

residential loans and servicing rights. As stated in the BALTA 2006-1 Prospectus

when EMC purchased loans, it was with the ultimate strategy of securitization in

Bear Stearns securitizations. From 2003 to 2006, EMC securitized nearly $2

residential mortgage loans.

67. EMC Mortgage was the sponsor for twenty of the Bear Stearns secissue. EMC Mortgage was also the originator for 33% or more of the loans back

those securitizations, with Bear Stearns Residential Mortgage, Encore Mortgage,

Impac, Greenpoint, Option One, and Aegis originating the vast majority of the rem

that EMC Mortgage selected for those securitizations.

Table 2

# Offering Sponsor Underwriter Loan Orig

1 BALTA 2005-9 EMC Bear Stearns



4 BALTA 2006-4 EMC Bear Stearns.

5 BALTA 2006-5 EMC Bear Stearns. 6 BALTA 2006-8 EMC Bear Stearns


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7 BALTA 2007-2 EMC Bear Stearns Bear Stearns Res


Bear Stearns Re9 BSMF 2006-AR2 EMC Bear Stearns

Bear Stearns Re

10 BSMF 2006-AR3 EMC Bear Stearns Bear Stearns Re





15 BSABS 2006-IM1 EMC Bear Stearns

16 GPMF 2005-AR5 EMC Bear Stearns Gr

17 CARR 2006-OPT1 EMC Bear Stearns Option One M

18 SAMI 2007-AR3 EMC Bear Stearns Aegis

19 SAMI 2006-AR8 EMC Bear Stearns Cou

20 BSABS 2006-HE3 EMC Bear Stearns

68. Although identified as originator of the loans in fourteen of these s

EMC Mortgage did not originate any of the loans in the securitizations at issue.

Mortgage purchased loans from unidentified financial institutions while repres

Offering Materials that those loans were originated in accordance with the

guidelines established by [EMC]. Former senior managing director and co-head of

mortgage finance, Mary Haggerty, confirmed in testimony before the FCIC that EM

did not originate loans, explaining that EMC Mortgage only purchased loans whi


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underwriting guidelines available to financial institutions that wanted to sell loans to

EMC was a purchaser and seller of loans. EMC did not originate itself.

a. Bear Stearns Undisclosed Policy to Securitize Loanbefore Expiration of the EPD Period

69. Until 2005, Bear Stearns had a policy preventing the securitization before expiration of the early payment default (EPD) period. If a loan defaulted d

periodtypically between 30 and 90 days after Bear Stearns purchased the

originatorBear Stearns could force the originator to repurchase the loan, to replac

to provide alternative compensation. Early payment defaults are recognized in

industry as an indicator of mortgage fraud and borrower inability to pay.

70. To increase the volume of its securitization business and overall profStearns changed its EPD policy in 2005 to allow for securitization of loans before ex

EPD period. Bear Stearns revised EPD policy greatly increased the default and lo

mortgage pools backing Bear Stearns RMBS. At the same time, the revised

transferred the default and loss risks from Bear Stearns to investors, like Plaintiff, w

that Bear Stearns could continue to collect the sponsor, depositor and underwriting

securitization. This change created a strong financial incentive for Bear Stearns to

many securitizations as possible, regardless of the quality of the supporting mortgage

71. After changing the EPD policy, senior Bear Stearns executives prStearns personnel to securitize acquired loans as quickly as possible regardless of

and in any event before expiration of the EPD period For example a June 13 200


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senior managing director and head of whole loan trading, Jeffrey L. Verschleiser, re

Stearns personnel of the need to be certain we can securitize the loans with 1 mon

the epd period expires. When his directive was not followed, Verschleiser

explanation as to why loans were dropped from deals and not securitized before th

expired. Similarly, a May 5, 2007 email from managing director Keith Lind deman

why we are taking losses on 2nd lien loans from 2005 when they could

securitized????? These emails are consistent with the account of former EMC ana

Leeuwen, reported in The Atlantic on May 14, 2010, that:

Bear traders pushed EMC analysts to get loan analysis done in only one to days. That way, Bear could sell them off fast to eager investors and didnt hacarry the cost of holding these loans on their books.

72. Bear Stearns did not disclose to Plaintiff and other investors that it hdeliberate policy to securitize loans before expiration of the EPD period or that it w

its employees to quickly securitize mortgages regardless of loan quality. It was fo

investors who purchased Bear Stearns RMBS would suffer losses as a result.

b. Bear Stearns Deliberately Undermined the DueDiligence Process

73. As the sponsor, EMC Mortgage was responsible for selecting and emortgage pools for each of the Bear Stearns securitizations at issue. EMC Mort

under the strict supervision and control of Bear Stearns. CW 2, an assistant underwr

at EMC from June 2006 through May 2008 in Carrollton, Texas, stated that the EM

loan selection process was closely overseen by Bear Stearns, noting that EMC w


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sub-company of Bear Stearns in New York, and of course they had a day to day in

what was being purchased from the various sellers. CW 2 further stated that

decisions and such were made out of New York. CW 3, a Senior Underwriter at

EMC and JPMorgan March 2000 through February 2009 in Dallas, Texas,

confirmed CW 2s account, stating that Bear Stearns made all the decisions. That

ship right there. Theyre the ones who ran the show.

74. In addition to reducing its exposure to poor quality loans by changpolicy, Bear Stearns undermined the due diligence process, which was now merely

its securitizations machine. Specifically, Bear Stearns implemented a due diligenc

was designed to maximize the number of Bear Stearns securitizations regardless of

the loans in the designated mortgage pools. CW 4, an auditor and senior product gui

at EMC Mortgage from August 2005 through October 2007 in Lewisville, Tex

headquarters, stated that the Bear Stearns mindset was The more volume, the more

75.

Bear Stearns ensured the loan volume for its securitizations in a num

First, Bear Stearns pressured its employees to purchase loans regardless of the q

mortgage pools. For example, on April 4, 2006, EMC senior vice president Jo-Ka

informed her staff that she would hold them personally accountable if EMC Mor

meet Bear Stearns loan acquisition targets, stating:

I refuse to receive any more emails from [senior managing director and heawhole loan trading, Jeffrey L. Verschleiser] (or anyone else) questioning were not funding more loans each day. Im holding each of you responsiblmaking sure we fund at least 500 each and every day


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[I]f we have 500+ loans in this office we MUST find a way to underwrite tand buy them. . . . I was not happy when I saw the funding numbers and I kthat NY would NOT BE HAPPY. I expect to see 500+ each day. . . . I

whatever is necessary to make sure youre successful in meeting this objectiv

76. Second, EMC Mortgage conducted no credit and compliance due loans that were originated by Bear Stearns Residential Mortgage (BSRM), incl

eight securitizations in which BSRM mortgages constituted a substantial portion of

pools: BALTA 2007-2, BALTA 2007-3, BSMF 2006-AR2, BSMF 2006-AR3, BSM

BSMF 2007-AR1, BSMF 2007-AR4, and BSMF 2007-AR5.

77. Third, Bear Stearns limited the due diligence for subprime loan orwere selling Bear Stearns large volumes of loans, such as Countrywide, GreenPoin

On February 11, 2005, Bear Stearns associate director Biff Rogers forwarded an em

diligence manager John Mongelluzo to Bear Stearns analysts, stating that the am

diligence on subprime loans would be reduced in order to make us more competitiv

larger sub-prime sellers. Bear Stearns senior managing director and co-head of mo

Baron Silverstein similarly testified that, Bear Stearns would evaluate our due dilig

depending upon who the seller was

78. CW 2, an assistant underwriting manager at EMC Mortgage fromthrough May 2008, explained how this worked in practice, stating that there were

lenders and very few of those loans were audited, they were just reviewed in bulk.

CW 2, EMC Mortgage limited the due diligence sample for such major lenders to 10

pool Moreover CW 2 stated that EMC Mortgage would not conduct credit due d


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of the loans in the 10% sample, using part of the sample only for a valuation

collateral. CW 2s statements were confirmed by internal Bear Stearns audit rep

which concluded that Bear Stearns had reduced the number of loans in the loan samp

reviewed as part of the due diligence process, was conducting due diligence only a

were processed (post-closing due diligence), had eliminated internal reports on de

and was conducting no due diligence if such due diligence would interfere with m

being securitized. In combination with Bear Stearns revised EPD policy, this m

instances that Bear Stearns conducted no due diligence before securitizing and sellin

Plaintiff and other investors.

79. Finally, Bear Stearns pressured its due diligence vendors to limit tloans that were identified as defective. CW 5, a due diligence underwriter at Clayt

from June 2005 through January 2008 in Stamford, Connecticut and Irvine, Californ

Bear Stearns pressured Clayton and Bohan to be more lenient with their credit and co

diligence, stating that Bear Stearns exerted downward pressure to ensure that mor

be approved. For example, in an April 5, 2007 email, an EMC assistant manag

control underwriting and vendor management instructed Bear Stearns due diligence

review appraisals, not to verify occupancy status of the residence and employmen

identify misrepresentations regarding the occupancy of the property to Bear Stearns,

Effective immediately, in addition to not ordering occupancy inspecand review appraisals, DO NOT PERFORM REVERIFICATIONSRETRIVE CREDIT REPORTS ON THE SECURITIZATION BREAAUDITS


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Do not make phone calls on employment, and Occupancy misrep is not a securitization breach.

80. Bear Stearns never disclosed to investors that it pressured its persodiligence vendors to approve loans regardless of credit quality, that it encouraged f

information, that it limited the due diligence for numerous loan originators, or th

conduct any due diligence on loans originated by BSRM.

c. Bear Stearns Knowingly Included Poor Quality Loain Its Securitizations

81. Bear Stearns knew that numerous loans that it included in securitizatmeet the stated loan origination and underwriting standards, and were based on infl

values. For example, CW 4, an auditor at EMC Mortgage from August 2005 thr

2007, reviewed many loan files in which the stated income was way overstated an

values were way overinflatedcausing both the borrowers ability to pay and th

collateral to be overstated. EMC Mortgage would nevertheless approve and purchas

As CW 4 stated, as long as it was not totally ridiculous, we took it.

82. In the individual asset summary and trending reports, Clayton reportenumerous defective loans in the mortgage samples that Clayton reviewed for Bear

example, Clayton reported to the FCIC that, during the 18 months that ended Jun

rated only 54% of all reviewed loans as meeting the stated underwriting guidelines

time, Clayton further determined that 18% of the loans did not meet the underwriti

but had compensating factors, and that 28% of the loans were fatally defective and


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purchased. Discussing this data during his testimony before the FCIC, Claytons for

and Chief Operating Officer, Keith Johnson, said: That 54% to me says there [w

control issue in the factory for mortgage-backed securities. Bear Stearns was one

largest customers and no exception to the quality control issues in the factory.

83. Bear Stearns routinely overruled of its due diligence vendors andmaterially defective loans. Claytons data showed for the 18 months that ended J

that EMC Mortgage waived in 50% of the loans that failed to meet credit an

underwriting standardsone of the highest waiver rates in the industry. Johnson exp

a June 8, 2010 interview with FCIC investigators that, of all the RMBS issuers,Bea

the worst on exceptions.

84. Loan traders, whose compensation depended in large measure on tloans that Bear Stearns purchased and securitized, made the decision to waive in de

CW 2, assistant underwriting manager at EMC Mortgage, stated that the decision

materially defective loans was made by Bear Stearns traders in New York, stati

would be contacted as to whether an exception would be made. Between 2005 an

Stearns securitized more than $14 billion of Countrywide loans, and its loan trad

willing to jeopardize this lucrative business relationship (and their bonuses) by re

defective loans for due diligence reasons.

85. Bear Stearns also had strong incentives to waive in many defectwere originated by GreenPoint, Impac, Encore, and Aegis. Between 2005 and 2007


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securitized more than $3.7 billion of GreenPoint originated loans, more than $

Encore originated mortgages, more than $1.4 billion of Impac Mortgage loans, a

$455 million of Aegis originated loans. In addition, Bear Stearns extended hundre

of dollars in credit to Impac. Claytons Keith Johnson explained to the FCIC that t

waiving in defective loans was particularly prevalent among investment banks,

Stearns, that extended warehouse lines of credit. To explain why, Johnson offered

showing that these securitizers had a conflict of interest: eitherthe securitizer could

and force the loan originator to take it backresulting in a loss because the reject

financed with the warehouse line of credit extended by the securitizeror the sec

waive the loan into the pool and pass the loss on to the RMBS investor. As Johnson

if Bob was originating for me as the client and I had a warehouse line to Bthink what happened is a conflict of interest. That if I put back loans to youand you dont have the financial capability to honor those, then Im kincaught; right? [] Im going to take a loss on the warehouse line.

86. As a result, Bear Stearns included a startlingly high percentage of defeloan pools that were securitized and sold to Plaintiff and other investors. Bear

disclosedand investors did not know, and could not have knownthat Bear

diligence vendors reported numerous defective loans in the loan pools that Bear Stea

for securitization, or that Bear Stearns waived in 50% of the loans that failed to m

credit and compliance standards.


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d. Bear Stearns Kept Hundreds of Millions of Dollars Payments for the Poor Quality Loans That It Sold toInvestors

87. In 2006, Bear Stearns developed a new reporting system to identmortgages that were suffering from EPDs. CW 1, a former EMC associate vice p

worked at the company in various due diligence and compliance roles from 1998 to

Worth, Texas, stated that Bear Stearns had hired vice president Robert Glenny to

technology, and that the reporting system was very innovative. CW 1 further s

system would generate report cards for the loan sellers, and that this report card was

a host of people, including to senior managing director and co-head of Bear Stear

finance Mary Haggerty. According to CW 1, these report cards were also used durin

discuss delinquent loans.

88. Over the course of 2006 and 2007, Bear Stearns noticed that increasinthe loans it purchased and securitized were experiencing early payment defaults.

notified loan originators that their loans were suffering from EPDs. Bear Stearns d

the originators that the loans had already been securitized, or that it was seeking

behalf of the securitization. Instead of demanding that the loan originator repurcha

replace the loan in the securitization at full value, Bear Stearns pretended to accomm

originators by requesting payment of a fraction of the purchase price to reflect th

value caused by the EPDa so-called down bid.

89. Bear Stearns received hundreds of millions of dollars in down bids


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litigation show, for example, that between April 2006 and April 2007, Bear Stearns

billion in EPD claims against loan originators, and that the largest percentage of tho

were settlements. Bear Stearns fraudulently pocketed the down bids, and neve

Plaintiff and other investors that it received payments from loan originators for d

that it had securitized and sold. Bear Stearns fraudulently kept hundreds of million

recoveries for itself rather than crediting the trusts holding the defective mortgages f

of Plaintiff and other certificate holders.

e. Bear Stearns Reckless RMBS Sales Practices90. Bear Stearns routinely acted as lead underwriter for RMBS that we

other financial institutions, including Impac, American Home and Encore. Bear

Plaintiff the RMBS set forth in the table below:

Table 3

# Offering Lead Underwriter Sponsor Originators >50%

1 IMSA 2006-5 Bear Stearns Impac Im



4 AHM 2005-4 Bear Stearns American Home American H

5 AHM 2006-3 Bear Stearns American Home American Ho

6 LUM 2005-1 Bear Stearns Luminent EM

7 LUM 2006-7 Bear Stearns Luminent American H

8 AABST 2005-5 Bear Stearns Aegis Aegis Mortg

9 BMAT 2006-1A Bear Stearns Encore Enc


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91. Bear Stearns knew, or at the very least recklessly disregarded, the pthe mortgages backing the securitizations in Table 3. As lead underwriter and re

partner of the mortgage originators and the sponsors, Bear Stearns had access to: (i)

public information concerning the quality of the mortgages backing the securitizatio

detailed loan information and due diligence results; and (ii) personnel responsible f

and underwriting the mortgages; and (iii) personnel responsible for selecting the m

creating the securitizations. Moreover, Defendant BSABS I was the depositor for A

Defendant SAMI II was the depositor for LUM 2005-1, and Bear Stearns affiliate EM

originated a majority of the mortgages backing LUM-2005-1.

92. Bear Stearns had strong financial incentives to ignore the toxic mortgages backing the securitizations listed above in 90, and to sell them as suppo

investments to Plaintiff and other investors. Bear Stearns obtained at least$191 mill

underwriting these securitizations. Moreover, Bear Stearns was not willing to

lucrative business relationships with the mortgage originators by sharing the

knowledge about the toxic nature of the mortgages backing the securitizations wit

other investors.

10 NHELI 2007-1 Bear Stearns Nomura First National Bank of NeSilver S

11 SGMS 2006-FRE2

Bear Stearns SocitGnrale

Frem

f B S Mi d H d D i I


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f. Bear Stearns Misconduct Had a Devastating ImpacPerformance of the RMBS Mortgage Pools

93.

The Bear Stearns Defendants misconduct dramatically affected the m

underlying the RMBS purchased by Plaintiff. As of December 2011, on average, m

of the mortgage loans backing the Bear Stearns Certificates were over 60- or 90-day

in foreclosure, bankruptcy, or repossession, as reflected in the table below:

Collateral Performance of Securities Underwritten by Bear StearnsSerious Delinquencies in % of mortgage pools (60 Day + 90 Day + Foreclosu+ REO + Bankruptcy)

# Offering 1Yr.

2Yrs.

3Yrs.

4Yrs.

1 AABST 2005-5 14.47 32.13 33.90 40.97 3

2 AHM 2005-4 1.21 6.30 20.41 30.03 2

3 AHM 2006-3 9.73 25.90 35.52 31.38 2

4 BALTA 2005-9 2.81 8.42 20.32 31.30 3

5 BALTA 2006-1 6.50 18.34 26.27 37.15 3

6 BALTA 2006-3 8.60 22.44 32.66 41.68 4

7 BALTA 2006-4 10.72 28.82 41.90 49.04 4

8 BALTA 2006-5 16.30 35.68 48.05 49.46 4

9 BALTA 2006-8 18.97 36.26 48.25 45.76 4

10 BALTA 2007-2 22.71 40.33 52.94 49.33 4

11 BALTA 2007-3 25.98 46.98 56.78 53.87 5

12 BMAT 2006-1A -- 44.72 44.83 38.40 3

13 BSABS 2006-HE3 16.53 39.71 51.78 59.90 5

14 BSABS 2006-IM1 7.96 30.35 42.69 45.13

15 BSMF 2006-AR2 6.81 28.92 48.63 47.37 5

16 BSMF 2006-AR3 6.89 32.93 51.64 48.73 5

17 BSMF 2006-AR5 9.56 33.12 51.99 48.64 5

18 BSMF 2007-AR1 11.96 34.59 51.48 48.63

19 BSMF 2007-AR4 11.30 36.26 53.83 54.11

20 BSMF 2007-AR5 8.93 32.61 43.12 47.24 5

22 GPMF 2005 AR5 83 9 20 36 65 47 55 4


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22 GPMF 2005-AR5 .83 9.20 36.65 47.55 4

23 IMSA 2006-5 9.57 22.98 25.45 21.70 2

24 IMSA 2007-2 13.08 31.55 30.13 24.11 2

25 IMSA 2007-3 15.56 33.01 35.89 30.19 326 LUM 2005-1 3.32 8.92 17.85 33.83 2

27 LUM 2006-7 5.81 26.77 42.90 39.97 3

28 NHELI 2007-1 21.03 38.90 50.38 46.39 4

29 SAMI 2006-AR8 6.18 31.49 50.73 55.20 5

30 SAMI 2007-AR3 15.92 45.03 56.57 59.08

31 SGMS 2006-FRE2 24.91 50.16 63.32 56.90 5

Averages 5.88 29.25 40.56 42.57 4

2. Washington Mutual94. Defendant WaMu Asset Acceptance Corporation (WaMu Ass

depositor of four securitizations at issue. Its affiliate, Defendant WaMu Capita

(WaMu Capital) was the securitization arm of Washington Mutual Bank (WaM

acted as the underwriter for the RMBS. WaMu Bank was the sponsor of the secur

originated all of the loans for the following Offerings:

# Offering Sponsor Depositor Underwriter Loan O1 WAMU 2005-AR15

WaMu Bank WaMu Asset WaMu Capital WaMu Ban

2 WAMU 2007-OA1


3 WMALT2007-OA1

WaMu MortgageSecurities Corp.

WaMu Asset WaMu Capital Alliance BCountrywi

4 WMHE 2007-HE1

WaMu Bank WaMu Asset WaMu Capital Long Beac

5 WMHE 2007-HE4


a WaMus High Risk Lending Strategy Ignored


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a. WaMu s High Risk Lending Strategy IgnoredNecessary Controls

95. In 2004, WaMu launched a five year strategic plan to dramatically grrevenues and profits. In a June 1, 2004 memorandum that was first publicly discl

Senate Investigations Report in April 2011, WaMus Chief Executive Officer, Ke

stated that WaMus financial targets for the next five years would be to grow our a

revenues by approximately 10% per year while limiting our expense growth to a

order to achieve an average [return on equity] of at least 18% and average [earnin

growth of at least 13%.

96. WaMu understood that it would undertake significant new risks to meambitious goals. As Killingers June 1, 2004 memorandum stated: It is importa

focus on growth initiatives and risk taking. Above average creation of shareholder

significant risk taking. In this regard, Killingers memorandum identified residen

and adjustable rate mortgages as key drivers for achieving WaMus financial targe

there is a good opportunity to expand the origination of non-prime residential fir

mortgages through both our consumer banking and home loan stores.

97. On January 18, 2005, WaMus board of directors approved WaMuLending Strategy. WaMu implemented the High Risk Lending Strategy and imme

to accelerate the origination and securitization of subprime and adjustable rat

WaMus subprime mortgage subsidiary, the Long Beach Mortgage Company (L

was instrumental in realizing the expansion WaMus financial targets required L


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was instrumental in realizing the expansion. WaMu s financial targets required L

originate $30 billion in subprime mortgages in 2005 and $36 billion in 2006.

98. As WaMu aggressively expanded the origination of highly risky loaneffort to implement adequate oversight over its loan origination and underwriting

fact, WaMu reduced its investment in loan underwriting. As Killinger explained

2004 memorandum, WaMu would need to significantly reduce mortgage origin

WaMu was to meet its ambitious financial targets, stating:

We must significantly reduce the cost of originating mortgages by adop automated underwriting and other loan fulfillment processes. Our muorigination platforms have led to very poor efficiency. Our goal is to incrautomated underwriting to 80% or more, which we expect to have a poseffect on the cost of origination.

99. As a result, WaMu lost its ability to properly originate and underwriFor example, WaMus Chief Credit Officer warned Killinger in June 2005 that WaM

was growing so fast that it could not catch up and quantify the risk. This was pa

for the increased origination of subprime mortgages by Long Beach. An intern

September 21, 2005 (publicly disclosed in April 2011 with the Senate Investiga

noted serious problems in Long Beachs loan underwriting practices, including:

Underwriting guidelines established to mitigate the risk of unsound cdecisions were not always followed, and the decisioning methodologynot always fully documented.

The majority of exceptions resulted from using unverified income ounsupported exclusion of debt items in the debt-to-income calculation

Controls within the loan origination system can be overridden to a


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Controls within the loan origination system can be overridden to aemployees without documented authority to approve loans.

The loan approval forms documenting the clearing of conditions werfully completed in 60%of the files reviewed.

100. WaMu never addressed Long Beachs inadequate loan acquisition pinternal audit dated September 28, 2007 (publicly disclosed in April 2011 wi

Investigations Report) continued to note serious problems in Long Beachs su

underwriting practices, stating:

The overall system of risk management and internal controls has deficierelated to multiple, critical origination and underwriting processes.

* * *

Repeat IssueUnderwriting guidelines established to mitigate the risunsound underwriting are not always followed. [] Improvement in condesigned to ensure adherence to Exception Oversight Policy and Procedurrequired [] Accurate reporting and tracking of exceptions to policy doeexist.

b. WaMu Incentivized Employees to Originate High RLoans Regardless of Loan Quality

101. WaMu employees in charge of originating mortgages were paid volume, regardless of loan quality. In fact, WaMu employees received higher com

originating riskier loans. As CW 6, a senior underwriter, credit risk manager and

manager at WaMu from April 2003 through February 2008 in Bellevue, Washington

more you slammed out, the more you made. In its March 16, 2011 complaint ag

senior management, the FDIC similarly remarked that Wamus compensation stru

officers was based on the volume of loans originated, thus loan originators were in


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o ce s was based o t e vo u e o oa s o g ated, t us loan o iginato s we e in

push as many loans through the system as possible

102. WaMus sales message was reinforced from the top. In late 2006, Loans President David Schneider gave a presentation to thousands of WaMu employ

loan underwriters and risk managers, emphasizing the importance of sales to WaMu

presentation included the following slide:

103. Schneider testified before the Senate Investigations Subcommittee ALL in Sales was an appropriate message, including for WaMus risk managers.

104. The Senate Investigations Report documents how WaMus pervasiveambitious financial targets, and lack of risk controls resulted in shoddy lending p

produced billions of dollars in poor quality loans. WaMus lending practices include

high risk borrowers large loans; (ii) steering borrowers to higher risk loans; (iii) a

applications without verifying the borrowers income; (iv) using loans with low t

entice borrowers to take out larger loans; and (v) promoting negative amortization lo


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g ; ( ) p g g

to many borrowers increasing rather than paying down their debt over time

confidential witnesses who worked at WaMu during the relevant time period

findings. For example:

CW 7, a senior loan consultant at WaMu from September 2005 throu2007 in Riverside, California, stated that WaMus commission guidelorigination personnel contained extra commissions for teaser rate loans

recalled emails about commission specials that granted increased comriskier non-conforming or subprime loans.

CW 8, a WaMu loan closing coordinator from June 2003 through July 2Park, Pennsylvania, stated that mortgages were not explained properly tothey didnt know the [interest] rate was going to go up.

CW 9, a senior loan coordinator at WaMu from November 2006 throuSan Antonio, Texas, reported tremendous pressure from the sales guyloans and that, with the involvement of WaMu management, even questusually got taken care of one way or another. CW 9 further explainedloan sales personnel and managers were above [WaMus] loan protherefore WaMus loan processors were supposed to yield to whatevewere.

CW 10, a senior underwriter at WaMu/Long Beach from November April 2007 in Dallas, Texas, stated that WaMu routinely issued mortgageswithout establishing their credit score if they provided three alternativeAn alternative trade line was anything that did not appear on the borreport, including documentation of car insurance payments, verificpayment, or a note from a person claiming the borrower had repaid a pCW [0 stated that by the end of 2006 these mortgages constituted a ma payment defaultsloans on which the borrower failed to make paymentand that It was just a disaster.

CW 15, a senior loan coordinator and mortgage processor at WaMu romthrough September 2011 in Jacksonville, Florida, stated that WaMus culture required employees to do whatever it took to get loans closed.

CW 11, a senior mortgage underwriter at WaMu from April 2004 throu


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g g p2007 in Illinois, stated that There really were no restrictions to approveexample, according to CW 11, WaMu allowed salespeople to give

exceptions to borrowers to push loans through. CW 11 stated that exceptions were ridiculous, and some really bad loans went throughat WaMu was push, push, pushBasically, sales is what ran Long Beait wasnt the Operations part.

CW 12, a mortgage underwriter at Long Beach from 2003 through DeceLake Oswego, Oregon, stated that there was always a sense of underwriting guidelines to close loans, rather than to mitigate credit risk

that there was simply an environment to approve, approve, approve exception that was needed to approve a loan was not only done, but was CW 12 felt that Long Beach consistently pressured its underwriters to make it work.

CW 13, a senior underwrit

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